TMG Liquidation Company et al et al v. National Patent Development Corporation et al

Filing 11

ORDER denying 1 Motion to Withdraw Reference. The Clerk is directed to close this case. When any proposed findings of fact and conclusions of law are ready for review by the district court or the claims are ready for trial, a new case may be opened in the district court at that time. Signed by Honorable Timothy M Cain on 6/4/12.(gpre, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
SPARTANBURG DIVISION
In re:

National Patent Development

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Corporation; Jay Baker;

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Caleb C. Fort; and

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E. Fort W olfe, Jr.,

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TMG Liquidation Company, et. al.,
Debtors,

Official Committee
of Unsecured Creditors;
and JH Cohn, LLP,

Plaintiffs,
v.

C/A No. 7:12-629-TMC

OPINION & ORDER

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Defendants.

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This matter is before the Court on Defendants Jay Baker, E. Fort W olfe, Jr., and
Caleb C. Fort’s (“Individual Defendants’”) Motion to W ithdraw Reference to the Bankruptcy
Court. (Dkt. # 1).1 Plaintiffs oppose the motion.2

The court denies the motion for the

reasons discussed below.

1

On February 29, 2012, Defendant National Patent Development Corporation
(“National Patent”) filed its Response to the Individual Defendants’ Motion to Withdraw
the Reference in which it stated it supported the Individual Defendants’ Motion to
Withdraw Reference.
2

The parties dispute whether the Plan Administrator has been properly substituted
as a Plaintiff in the Adversary Proceeding. The court’s inclusion of the Plan Administrator
as a plaintiff in the caption of this order merely reflects the docket in this case in this court
and is not a ruling on this issue.

Background
This bankruptcy action involves an allegedly fraudulent transfer that occurred when
TMG Liquidation Company, et. al. (“Debtors”), purchased the “Five Star Companies” from
Defendant National Patent within two years of the date on which the Debtors filed for
bankruptcy. Count I asserts a claim against National Patent for the recovery of the
purchase price paid for Five Star’s stock. Count II alleges a breach of fiduciary duties
under state law against the Individual Defendants. Individual Defendants have filed a jury
demand on non-core matters. Individual Defendants filed the instant motion seeking a
withdrawal of reference to the bankruptcy court pursuant to 28 U.S.C. § 157(d) and Stern
v. Marshall,

U.S.

, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
Discussion

United States District Courts have original jurisdiction over all bankruptcy matters
and related proceedings. 28 U.S.C. §§ 1334(a), (b). Section 157(a) allows district courts
to refer bankruptcy cases to the bankruptcy court. 28 U.S.C. § 157(a). This district has
referred all bankruptcy cases to its bankruptcy court.
Under 28 U.S.C. § 157(d):
The district court may withdraw, in whole or in part, any case or proceeding
referred under this section, on its own motion or on timely motion of any
party, for cause shown. The district court shall, on timely motion of a party,
so withdraw a proceeding if the court determines that resolution of the
proceeding requires consideration of both title 11 and other laws of the
United States regulating organizations or activities affecting interstate
commerce.
Thus, § 157(d) contains both a permissive and mandatory component.

In re Marine

Energy Systems Corp., 2010 W L 680328 (D.S.C. 2010)(unpublished).
The Bankruptcy Code specifically provides that a bankruptcy court may hear and

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“submit proposed findings of fact and conclusions of law to the district court,” subject to de
novo review, in a proceeding “that is not a core proceeding.” 28 U.S.C. § 157(c)(1)
(emphasis added). However, when the claims are core matters, there is no explicit
comparable authority to follow a similar procedure.
Recently, in Stern v. Marshall, the Supreme Court held bankruptcy courts do not
have the constitutional authority to enter final judgments in certain “core proceedings.”
131 S.Ct. 2594. In Stern, the Supreme Court held that, while a bankruptcy judge has the
statutory authority to enter a final judgment on a debtor's counterclaim pursuant to the
plain language of 28 U.S.C. § 157(b)(2)(C), it is unconstitutional for a bankruptcy judge to
enter a final judgment on a debtor's state law counterclaim that is not resolved in the
process of ruling on a creditor's proof of claim. 131 S.Ct. at 2620.
Individual Defendants contend that regardless of whether the claims are core or
non-core, pursuant to Stern, the bankruptcy court lacks the constitutional authority to
decide the state law breach of fiduciary duty claim asserted in this action. W hile pursuant
to Stern, the bankruptcy court cannot enter a final judgment on certain state law claims,
the court does not believe that Stern precludes the court from allowing the pretrial
proceedings to be handled by the bankruptcy court.

Further, the Court also finds the

bankruptcy court has authority to enter proposed findings of fact and conclusions of law on
dispositive motions in regard to these state law claims, and thus, withdrawal of the
reference is not required at this time pursuant to Stern.
Following Stern, at least one bankruptcy court initially determined that it had “no
statutory authority to render findings of fact and conclusions of law for core proceedings
that it may not constitutionally hear.” Samson v. Blixseth (In re Blixseth), 2011 W L

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3274042, at *12 (Bankr. D. Mont. Aug. 1, 2011) (holding it had no authority to enter
proposed findings of fact and conclusions of law on a “core” fraudulent conveyance
claim).3 However, this court joins the majority of courts that have since concluded that
Stern did not eliminate the ability of bankruptcy courts to issue proposed findings and
conclusions of law. See McCarthy v. Wells (In re El–Atari), 2011 W L 5828013, at *3
(E.D.Va. Nov.18, 2011) (holding in core matters related to a case under title 11 the
bankruptcy court retains the authority to submit proposed findings of fact and conclusions
of law to the district court); Field v. Lindell (In re Mortg. Store, Inc.), 2011 W L 5056990, at
*5–6 (D.Hawai'i Oct. 5, 2011) (holding “that Congress, if faced with the prospect that
bankruptcy courts could not enter final judgments on certain ‘core’ proceedings, would
have intended them to fall within 28 U.S.C. § 157(c)(1) granting bankruptcy courts
authority to enter findings and recommendations.”); Paloian v. Am. Express Co (In re
Canopy Fin., Inc.), 2011 W L 3911082, at *3–4 (N.D.Ill. Sept. 1, 2011) (holding “the [Stern]
Court at least implied that the effect of its decision was to ‘remove’ certain claims from
‘core bankruptcy jurisdiction,’ and to relegate them to the category of claims that are
merely ‘related to’ bankruptcy proceedings and thus subject to being heard, but not finally
decided, by bankruptcy courts.”); JustMed, Inc. v. Bryce (In re Byce), 2011 W L 6210938,
at *4 (D.Idaho Dec.14, 2011) (stating “[a] majority of district courts considering the issue
hold that the bankruptcy courts retain the power to enter proposed findings and

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Recently, the bankruptcy court amended its earlier ruling in In re Blixseth. In re
Blixeth, 2012 W L 10193, at *8–10 (Bankr.D.Mont. Jan. 3, 2012) (“The Court sua sponte
amends its August 1, 2011, Memorandum of Decision and Order. . . . [S]everal courts
have recently concluded that Stern v. Marshall does not deprive bankruptcy courts of
subject matter jurisdiction . . . . [B]ecause the United States District Court for the District of
Montana would have the requisite subject-matter jurisdiction to adjudicate the claims in
this Adversary Proceeding, so too does this Court.”).

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recommendations.”); Levey v. Hanson’s Window & Constr., Inc. (In re Republic Windows &
Doors, LLC), 460 B.R. 511, 2011 W L 6157342 (Bankr.N.D.Ill. Dec.12, 2011) (noting that
“[n]othing in [the Stern] decision can be read to preclude this Court from submitting
proposed findings of fact and conclusions of law to the district court.”); D&B Swine Farms,
Inc v. Murphy-Brown, LLC (In re D&B Swine Farms, Inc.), 2011 W L 6013218, at *2
(Bankr.E.D.N.C. Dec.2, 2011) (rejecting Blixseth holding that bankruptcy court has no
statutory authority to render proposed findings and conclusions); Reed v. Linehan (In re
Soporex), 2011 W L 5911674, at *5 (Bankr.N.D.Tex Nov. 28, 2011)(holding that “Stern did
not strip the bankruptcy courts of the authority to hear these types of claims and to
propose findings of fact and conclusions of law to the district court for de novo review.”);
Goldstein v. Eby-Brown, Inc.

(In re Universal Mktg., Inc.), 459 B.R. 573, 578

(Bankr.E.D.Pa. 2011) (declining to follow Blixseth); Heller Ehrman, LLP, v. Arnold & Porter
(In re Heller Ehrman, LLP), 2011 W L 4542512, at *6 (Bankr.N.D.Cal. Sept. 28, 2011).4
Even where the parties have a right to a jury trial, immediate withdrawal is not
required.
[T]he mere fact that the district court must conduct a jury trial in an adversary
proceeding does not mean that the bankruptcy court immediately loses
jurisdiction of the entire matter or that the district court cannot delegate to
the bankruptcy court the responsibility for supervising discovery, conducting
pre-trial conferences, and other matters short of the jury selection and trial.

In re El-Atari,

2011 W L 5828013 * 6 (internal citations omitted).

“Stern creates no

impediment to so doing . . . and the reference can readily be withdrawn when the case is

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Additionally, the court notes that at least three districts, the Southern District of
New York, the Southern District of Florida and the District of Delaware, recently issued
standing orders giving bankruptcy courts explicit authority to issue proposed findings and
conclusions of law in connection with core matters that are found to fall within the Stern
holding.

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trial-ready if the parties still do not consent to allow the bankruptcy Court to preside at trial.
In this sense, the district court would be using the Article I Bankruptcy Judge in the same
manner as it routinely employs Article I Magistrate Judges: to supervise discovery, rule on
non-dispositive motions, and report and recommend on dispositive motions.”

Dev.

Specialists, Inc., v. Orrick, Herrington & Sutcliffe, LLP, 2011 W L 6780600 * 4 (S.D. N.Y.
Dec. 23, 2011)(internal citation omitted).
Individual Defendants also argue the court should exercise its discretion to
withdraw the reference (i.e. permissive withdrawal).

Permissive withdrawal of the

reference to the bankruptcy judge is within the sound discretion of the district court and is
predicated upon cause shown on a case-by-case basis. In considering whether to grant
permissive withdrawal of a reference, district courts have considered the following factors:
(1) whether the proceeding is core or non-core; (2) the uniform administration of
bankruptcy proceedings; (3) expediting the bankruptcy process and promoting judicial
economy; (4) the efficient use of debtors' and creditors' resources; (5) the reduction of
forum shopping; and (6) the preservation of the right to a jury trial. Vieira v. AGM, II, LLC,
366 B.R. 532, 538 (D.S.C. 2007)(citing In re U.S. Airways Group, Inc., 296 B.R. 673, 681
(E.D.Va. 2003).

Here, given the bankruptcy court's familiarity with the case and her

expertise on bankruptcy issues, the court declines to exercise its discretion to withdraw the
reference at this time. Additionally, any right to a jury trial will be preserved on these claims
as discussed above.
Conclusion
Based on the foregoing, the reference of this adversary proceeding shall remain
with the bankruptcy court as to all pretrial matters, including dispositive motions, such as

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motions for summary judgment, which the bankruptcy court may handle by submitting
proposed findings of fact and conclusions of law to the district court. The bankruptcy court
is to decide whether any defendant has right to a jury trial and, if a defendant is ultimately
found to have such a right, that defendant may move to withdraw the reference once the
case is ready for trial.
Accordingly, Defendants’ Motion to W ithdraw Reference to the Bankruptcy Court
(Dkt. # 1) is DENIED.

The Clerk is directed to close this case. W hen any proposed

findings of fact and conclusions of law are ready for review by the district court or the
claims are ready for trial, a new case may be opened in the district court at that time.
IT IS SO ORDERED.

s/Timothy M. Cain
United States District Judge
Greenville, South Carolina
June 4, 2012

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