Tow v. Park Lake Communities et al

Filing 5

MEMORANDUM AND ORDER entered DENYING 3 MOTION to Withdraw Reference as to Bankruptcy Case No. 17-3322, Case terminated on 1/4/18.(Signed by Chief Judge Lee H Rosenthal) Parties notified.(leddins, 4)

United States District Court
Southern District of Texas

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
RODNEY TOW, TRUSTEE
Plaintiff,
VS.
PARK LAKE COMMUNITIES, LP,,
Defendant.

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ENTERED
January 04, 2018
David J. Bradley, Clerk

CIVIL ACTION NO. H-17-3364

MEMORANDUM & ORDER DENYING THE DEFENDANT’S MOTION TO
WITHDRAW REFERENCE
In September 2017, the court denied John Speer’s emergency motion to declare the trustee,
Rodney Tow, in civil contempt for violating the parties’ settlement agreement by seeking to recover
assets from the defendant, Park Lake. (See Civil Action No. H-11-3700, Docket Entry No. 491).
The parties returned to bankruptcy court to address the motion pending in Tow’s adversary action,
(No. 17-03322), to recover assets from Park Lake. Tow asserts a claim under 11 U.S.C. § 542(b),
requesting the court to order Park Lake to pay down its debt by remitting proceeds from the
Montgomery County Municipal Utility District Reimbursement it recently received.
Park Lake asked the bankruptcy court to recommend that the district court withdraw the
reference. The trustee “vigorously” opposed withdrawing the reference. (Docket Entry No. 1). The
bankruptcy court held a hearing on October 18, 2017 and issued a Report and Recommendation
recommending against withdrawal. Park Lake moved this court to withdraw and filed objections
to the Report and Recommendation on November 3, 2017. Tow did not respond.
Withdrawal may be either mandatory or permissive. “Courts generally interpret the
mandatory withdrawal provision restrictively, granting withdrawal of the reference when the claim

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and defense entail material and substantial consideration of non-Bankruptcy Code federal law.”
Levine v. M&A Custom Home Builder & Developer, LLC, 400 B.R. 200, 203 (S.D. Tex. 2008)
(citing Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21, 24 (E.D. La.1993)
(withdrawing reference when the case necessarily involved determining antitrust claims); U.S.
Gypsum Co. v. Nat'l Gypsum Co., 145 B.R. 539, 541 (N.D. Tex.1992) (withdrawing reference when
the case necessarily involved determining patent claims); In re Johns-Manville Corp., 63 B.R. 600,
603 (S.D.N.Y.1986) (withdrawing reference when the case necessarily involved determining
CERCLA claims); In re White Motor Corp., 42 B. R. 693, 704 (N.D. Ohio 1984) (no withdrawal
of reference based on speculation about issues under ERISA and Internal Revenue Code that might
or might not be germane to the core proceeding)).
There are no causes of action in this case based in federal law other than the Bankruptcy
Code. The only claim is based on § 524(b). Mandatory withdrawal is inapplicable.
“The permissive withdrawal provision of § 157(d) provides: ‘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.’” In re Morrison, 409 B.R. 384 (S.D. Tex. 2009)
(citing 28 U.S.C. § 157(d)). “The party seeking withdrawal of the reference bears the burden of
establishing grounds for permissive withdrawal.” Id. “Cause for withdrawal can exist only if
premised upon a sound articulated foundation.” Id. (citing Vela v. Enron Oil & Gas Co., 2007 U.S.
Dist. LEXIS 38997, 2007 WL 1564562 at * 2 (S.D. Tex. May 29, 2007)). “Permissive withdrawal
for cause shown requires a court to examine the following factors: is the matter core or noncore? Do
the proceedings involve a jury demand? Would withdrawal further uniformity in bankruptcy
administration? Would withdrawal reduce forum-shopping and confusion? Would withdrawal foster

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economical use of resources? Would withdrawal expedite the bankruptcy process?” Levine, 400
B.R. at 203 (citing Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th
Cir.1985)). The Bankruptcy Court analyzed the permissive-withdrawal factors and concluded that
withdrawal was inappropriate. The court agrees.
Each factor is discussed below.
A.

Core Proceeding

Title 28 U.S.C. § 157(b)(2)(E) provides that “[c]ore proceedings include, but are not limited
to—(E) orders to turn over property of the estate.” Park Lake argues that this case is a non-core
proceeding because it is based on state collection law. The Bankruptcy Court acknowledged a line
of trial-court cases supporting this argument. These cases hold “that an action by a trustee to recover
an account receivable based on state contract law does not fall within the scope of turnover actions
contemplated by § 542(b) and 28 U.S.C. § 157(b)(2)(E), and therefore such an action is a non-core
proceeding.” (Docket Entry No. 1 at 12); see, e.g., In re Satelco, Inc., 58 B.R. 781, 789 Bankr. N.D.
Tex. 1986) (“[T]his Court holds that actions to collect accounts receivable based upon state law
contract principles do not fall within the scope of turnover actions as contemplated by § 542 and
§ 157(b)(2)(E), absent a final judgment from a court of competent jurisdiction, a stipulation, or some
other binding determination of liability.”). But the Bankruptcy Court correctly identified a second
line of cases, including circuit-court precedent, standing for the opposite proposition. See, e.g., In
re Willington Convalescent Home, Inc., 850 F.2d 50, 52 n.2 (2d Cir. 1988) (“Although ‘actions on
account and debt and contract generally arise under state law,’ § 542(b) ‘sufficient[ly] . . .
arrogate[s] the general law concepts and transform[s] them into bankruptcy law.’ ‘The mere fact
that’ Connecticut denies that it owes the matured debt for Willington’s services because of a

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recoupment right ‘does not take the trustee’s action outside the scope of section 542(b).’”).
The account receivable at issue is property owed to the estate that the trustee seeks to collect
through this turnover suit. This claim is expressly covered by § 157(b)(2)(E) of the Bankruptcy
Code, making this a core proceeding.
And, as the Bankruptcy Court explained, this result is consistent with Stern v. Marshall, 564
U.S. 462 (2011). In Stern, the Court held that certain “core” claims may not be adjudicated in
bankruptcy court when they are “in no way derived from or dependent upon bankruptcy law.” Id.
at 499. The claim at issue in Stern was a counterclaim based solely on state law. The Court
determined that it could not be adjudicated by the bankruptcy court, despite the fact that it was
otherwise a “core claim” under § 157(b)(2)(C). Here, by contrast, Tow’s only claim is under a
specific Code provision, not state law. Unlike in Stern, this claim has a sufficient nexus to the
resolution of the Chapter 7 case and therefore can be adjudicated fully by the Bankruptcy Court.

The first factor—that this is a core proceeding—weighs against withdrawal.
B.

Uniform Administration of the Bankruptcy Code

The Bankruptcy Court explained that because it has already spent substantial time reviewing
the pleadings and holding hearings in this case, it is very familiar with the facts, legal arguments,
and applicable law. The Bankruptcy Court is in the best position to quickly and efficiently
adjudicate the case, which will promote uniformity in bankruptcy administration. The court agrees.
This factor weighs against withdrawal.
C.

Confusion and Forum Shopping

The Bankruptcy Court noted that nothing in the record indicates improper forum shopping.

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This case has such a long history in both the Bankruptcy Court and District Court that both are
familiar with the facts and law, except that the Bankruptcy Court is more familiar with the extensive
recent filings in the case. This factor weighs slightly against withdrawal.
D.

Economical Use of Resources

Because this case has been pending since 2009, the Bankruptcy Court stated—and this court
agrees—the speedier the resolution, the better for all. An expedited resolution will be best achieved
if the Bankruptcy Court hears this case, which it can do within 45 days. This factor weighs against
withdrawal.
E.

Expedited Process

The Bankruptcy Court can try the case within 45 days, which will expedite resolution. That
will in turn expedite the Chapter 7 case because the MUD asset is one of the last remaining assets
needing liquidating for the trustee to begin paying claims. The court agrees that this factor weighs
against withdrawal.
F.

Jury Demand

Park Lake primarily focuses on this factor, arguing that it is entitled to a jury trial, which a
bankruptcy judge may not conduct without the parties’ express. See 28 U.S.C. § 157(e) (“If the right
to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge,
the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction
by the district court and with the express consent of all the parties.”); see also In re Blake, 400 B.R.
200, 205 (S.D. Tex. 2008) (“The Fifth Circuit holds that without consent of the parties, a bankruptcy
judge lacks the authority to conduct a jury trial.” (citing In re Clay, 35 F.3d 190, 196-97 (5th Cir.
1994)). Park Lake does not consent to a jury trial in the Bankruptcy Court.

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The Bankruptcy Court noted that this is “an extremely important factor.” (Docket Entry No.
1 at 23). The Bankruptcy Court, however, disagreed with Park Lake that its claim is a “legal action
to recover monetary damages.” (Id.). Instead, the Bankruptcy Court explained, a turnover action
is not a legal action for monetary damages, but an action to recover property belonging to the estate.
The action sounds in equity. The Bankruptcy Court based this conclusion on recent precedent across
other circuits. See, e.g., Braunstein v. McCabe, 571 F.3d 108, 122 (1st Cir. 2009); In re M & L Bus.
Mach. Co., Inc., 59 F.3d 1078, 1082 (10th Cir. 1995). The Bankruptcy Court found that this
weighed heavily against withdrawal. This court agrees.
Park Lake maintains that its action is legal, not equitable, and that it is entitled to a jury trial.
Park Lake relies on Gecker v. Marathon Financial Insurance Co., Inc., 389 B.R. 621, 626 (Bankr.
N.D. Ill. 2008), in which the court explained that “even if a claim historically was equitable in
nature, the actual remedy sought on each count will determine whether it is legal or equitable for
purposes of the Seventh Amendment. If the plaintiff seeks only purely equitable relief (e.g., setting
aside the conveyance of land in trust), the action is considered equitable in nature. If the plaintiff
seeks a money judgment based on an equitable claim, the claim is generally considered legal in
nature.” (citations omitted). Therefore, Park Lake argues, because the Trustee seeks to collect a
disputed debt—the remedy for which is money—the action is legal in nature.
“The Seventh Amendment provides the right to a jury trial in cases in which the value in
controversy exceeds twenty dollars and the cause of action is to enforce statutory rights that are at
least analogous to one which was tried at law in the late 18th century English courts.” In re Blake,
400 B.R. at 205 (citing City of Monterey v. Del Monte Dunes, 526 U.S. 687, 708 (1999); Lorillard
v. Pons, 434 U.S. 575 (1978)). “Suits ‘at law’ refers to ‘suits in which legal rights were to be

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ascertained and determined’ as opposed to ‘those where equitable rights alone were recognized and
equitable remedies were administered.” Id. (citing Granfinanciera, S. A. v. Nordberg, 492 U.S. 33,
41 (1989). “This analysis requires two steps: (1) a comparison of the ‘statutory action to 18th
century actions brought in the courts of England prior to the merger of the courts of law and equity’;
and (2) whether the remedy sought is ‘legal or equitable in nature.’” Id. (citing Granfinanciera,
S.A., 492 U.S. at 42).
“A turnover action ‘invokes the court’s most basic equitable powers to gather and manage
property of the estate.’” 5-542 COLLIER

ON

BANKRUPTCY P 542.01 (16th ed. 2017) (quoting

Braunstein, 571 F.3d at 122). “Most courts agree that because a turnover action is equitable in
nature and seeks an equitable remedy, there is no constitutional Seventh Amendment right to a jury
trial when the turnover of estate property is sought.” Id. (collecting cases). The leading case, and
the one on which the Bankruptcy Court relies, is Braunstein. The circuit court noted that no circuit
had previously addressed whether a § 542 turnover action was legal or equitable in nature. 571 F.3d
at 115. The court looked, in part, to Granfinanciera as a guidepost, but found that it did not fully
answer the question. After tracing the history of turnover actions and the types of remedies
involved, the court determined that turnover actions were equitable and did not entitle the parties
to a Seventh Amendment jury right. The Braunstein court rejected the argument Park Lake makes
now, that because the remedy sought is monetary, it is legal in nature. “The McCabes argue that,
because the district court’s judgment was framed in monetary terms, the remedy was legal, not
equitable. That the turnover remedy sought was in the form of monetary relief is not determinative
of the jury trial issue.” Id. at 122 (citing Chauffeurs, Teamsters, and Helpers, Local No. 391 v.

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Terry, 494 U.S. 558, 570 (1990)). Contrary to what Park Lake contends, the monetary nature of the
remedy does not make the action legal in nature.
This court has recognized a § 542 action as legal in nature in a case that is distinguishable.
In re Blake, 400 B.R. at 205 (“Trustee Cage’s §§ 541, 542, 548, and 550 claims against Medina are
suits at law for which the 7th Amendment right to a jury trial applies. . . . Moreover, [the Trustee]
seeks to recover money. Defendants have a 7th Amendment right to a jury trial of such claims.”).
In Blake, the collection focused on recovering preferential and fraudulent transfers, which the
Supreme Court has held are legal actions. See Granfinanciera, S.A., 492 U.S. at 43, 47. In In re
Parkway Sales & Leasing, Inc., 411 B.R. 337, 351 (Bankr. E.D. Tex. 2009), the court distinguished
between an action to recover alleged preferential transfers—a suit at law—and a Chapter 7 turnover
claim—a suit in equity. “The Chapter 7 trustee’s turnover claim is an equitable claim to which the
Seventh Amendment right to jury trial does not attach.” Id.
The weight of the circuit authority supports the Bankruptcy Court’s conclusion that a
turnover action is equitable, not legal. See, e.g., Braunstein, 571 F.3d at 121 (“A turnover action
is not an action to recover damages for the taking of estate property but an action to recover
possession of property belonging to the estate at the time of the filing.” (quoting 5-542 COLLIER ON
BANKRUPTCY P 542.01)). Because Park Lake is not entitled to a jury trial and because the remaining
factors weigh against withdrawal, Park Lake’s motion to withdraw the bankruptcy reference is
denied.
SIGNED on January 4, 2018, at Houston, Texas.

______________________________________
Lee H. Rosenthal

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Chief United States District Judge

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