Kingdom Fresh Produce, Inc. et al v. Delta Produce, LP et al

Filing 14

ORDER Denying Plaintiffs' Motion to Withdraw the Reference re 1 Bankruptcy Reference, filed by I. Kunik Company, Inc., Rio Bravo Produce, LTD LLC, Five Brothers Jalisco Produce Co., Inc., Kingdom Fresh Produce, Inc., G.R. Produce, Inc. Signed by Judge David A. Ezra. (aej)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
KINGDOM FRESH PRODUCE, INC. §
et al.,
§
§
Plaintiffs,
§
§
v.
§
§
DELTA PRODUCE, LP et al.,
§
§
Defendants.
§
________________________________

CV NO. 5:14-MC-899-DAE

ORDER DENYING PLAINTIFFS’ MOTION TO WITHDRAW THE
REFERENCE
Before the Court is a Motion to Withdraw the Reference (Dkt. # 1 at
2) filed by Plaintiffs Kingdom Fresh Produce, Inc., I. Kunik Company, Inc.; Five
Brothers Jalisco Produce Co. Inc. d/b/a Bonanza 2011; Rio Bravo Produce
Limited, LLC; and G.R. Produce, Inc. (collectively, “Kingdom Fresh” or
“Plaintiffs”). The Court held a hearing on the motion on February 26, 2015. At
the hearing, Scott E. Hillison, Esq., represented Plaintiffs; Mark C.H. Mandell and
Maurleen W. Cobb, Esqs., represented Craig Stokes, Special PACA Trust Counsel
(“Special Counsel”). Upon careful consideration of the arguments asserted in the
supporting and opposing memoranda, as well as the arguments presented at the

1

hearing, the Court DENIES Plaintiffs’ Motion to Withdraw the Reference (Dkt.
# 1 at 2).
BACKGROUND
This matter arises out of the enforcement of a trust under the
Perishable Agricultural Commodities Act of 1930 (“PACA”), 7 U.S.C.
§ 499(a)–(t). This matter incorporates three PACA lawsuits that were filed in the
United States District Court for the Western District of Texas against Delta
Produce LP (“Delta Produce”), a local produce company.
On January 3, 2012, Delta Produce filed for Chapter 11 bankruptcy.
(Dkt. # 1 at 8.) That month, the PACA claimants in the three PACA lawsuits
consented to referral to the bankruptcy court for resolution of their PACA claims.
(Id. at 45.) The bankruptcy court then appointed the Special Counsel to adjudicate
the PACA claims. (See id. at 10.) Over the next two years, the Special Counsel
submitted three separate applications for fees, all of which the bankruptcy court
granted. (Id. at 10–26.) Kingdom Fresh appealed the three orders to this Court.
(Id. at 45–46.)
On September 27, 2013, this Court affirmed in part and vacated in
part the bankruptcy court’s order granting Special Counsel’s First Interim Fee
Application, which, per the parties’ agreement, was also binding on the appeal of
the Second Interim Fee Application. Order, In re Delta Produce, No. 5:12-CV2

1127, Dkt. # 23 (W.D. Tex. Sept. 27, 2013); Order, In re Delta Produce, No. 5:13CV-131, Dkt. # 7 (W.D. Tex. Mar. 12, 2013). Special Counsel moved for
reconsideration on October 11, 2013, which this Court denied on September 9,
2014. Motion for Hearing, In re Delta Produce, No. 5:12-CV-1127, Dkt. # 24
(W.D. Tex. Oct. 11, 2013); Order, In re Delta Produce, No. 5:12-CV-1127, Dkt.
# 42 (W.D. Tex. Sept. 9, 2014). On September 22, 2014, this Court vacated the
bankruptcy court’s order granting Special Counsel’s Third and Final Fee
Application. Memorandum Opinion and Order, In re Delta Produce, No. 5:14-CV22, Dkt. # 15 (W.D. Tex. Sept. 22, 2014). Special Counsel has appealed both
rulings to the Fifth Circuit and is currently awaiting a decision. In sum, funds in
the amount of $380,409.99 are in controversy. (Dkt. # 1 at 2.)
On September 24, 2014, Kingdom Fresh filed the instant Motion to
Withdraw the Reference. (Id.) On September 26, 2014, the Trustee of the
Bankruptcy Estate filed a Response to the Motion. (Id. at 39.) On October 7,
2014, Defendants filed their Response opposing the Motion. (Id. at 44.) On
October 9, 2014, the bankruptcy court transmitted the reference to this Court for
adjudication. (Id. at 1.)
Meanwhile, on October 7, 2014, the bankruptcy court issued an order
that allowed the trustee to close the bankruptcy estate with the right to reopen if
any funds were realized from Delta Produce’s interest in an abstract of judgment
3

on a property. Agreed Order, In re Delta Produce, No. 12-50073-CAG, Dkt. # 663
at 1 (Bankr. W.D. Tex. Oct. 7, 2014). The order specifically excluded from
closure the controversy regarding the non-estate PACA trust assets and the
recovery and disposition of the non-estate PACA trust assets. (Id. at 2.)
DISCUSSION
Plaintiffs argue that withdrawal from bankruptcy court is appropriate
because the Trustee has requested to close the bankruptcy estate and the only
remaining controversy involves non-estate property and non-code federal law.
(Dkt. # 1 at 3.) Plaintiffs do not specify whether they invoke mandatory or
permissive withdrawal. Defendants counter that withdrawal is inappropriate
because (1) Plaintiffs have waived any request for withdrawal; (2) there are no
further issues regarding the Special Counsel’s fees except for those currently
pending before the Fifth Circuit; (3) the purpose of the motion is forum shopping;
and (4) the motion is untimely. (Id. at 47–50.) The Trustee is opposed to the
extent that the relief requested would require the closure of the bankruptcy estate in
another court, but is not opposed to the extent that the relief requested does not
impose any further burdens on the trustee or estate. (Id. at 41.)
I.

Applicable Law
28 U.S.C. § 157(d) provides for two types of withdrawal from

bankruptcy court: mandatory withdrawal and permissive withdrawal. A district
4

court must withdraw on timely motion of a party if the resolution of the proceeding
requires consideration of both Title 11 and other laws regulating organizations or
activities affecting interstate commerce. 28 U.S.C. § 157(d). However, a district
court may withdraw, either upon timely motion of a party or its own motion, “for
cause shown.” Id. Courts generally interpret the withdrawal statute restrictively so
as to avoid turning the statute into an “escape hatch” from bankruptcy court to
district court. Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21,
24 (Bankr. E.D. La. 1993).
II.

Waiver
Defendants first argue that Plaintiffs consented to the district court’s

original referral of the PACA claims to bankruptcy court and, accordingly, “any
request for withdrawal has been waived.” (Dkt. # 1 at 47.) Defendants provide no
authority in support of this position.
Although the Fifth Circuit has not addressed waiver in this context,
the bankruptcy court of the Southern District of Texas has commented:
[T]he [plaintiffs’] consent [to bankruptcy court jurisdiction] does not
serve as a complete bar to withdrawal. The [plaintiffs’] motion to
refer waived any constitutional objection to a final adjudication by the
Bankruptcy Court. . . . However, Congress has provided an outlet for
parties like the [plaintiffs] who originally consent to adjudication in an
adjunct court, but later seek trial in the district court. . . . [A] party
who consents to final adjudication by the Bankruptcy Court must file
a motion to withdraw the reference.

5

Veldekens v. GE HFS Holdings, Inc., 362 B.R. 762, 769–770 (Bankr. S.D. Tex.
2007) (citations omitted) (citing Carter v. Sea Land Servs., Inc., 816 F.2d 1018,
1021 (5th Cir. 1987)).
The plain text of § 157(d) supports such a reading. The statute
permits the district court to withdraw any proceeding “referred under this section.”
One basis for referral under § 157 is the consent of the parties. 28 U.S.C. § 157(c).
The argument that, by consenting to the bankruptcy court’s jurisdiction, Plaintiffs
waived their right to file a motion to withdraw clearly contravenes the text of the
statute. Accordingly, the Court finds that Plaintiffs’ consent to the bankruptcy
court’s jurisdiction did not waive their ability to withdraw the proceedings to
district court. The Court therefore considers whether withdrawal is mandatory or
permissible.
III.

Mandatory Withdrawal
To trigger mandatory withdrawal, (1) the proceeding must involve a

“substantial and material question of both title 11 and non-Bankruptcy Code
federal law”; (2) “the non-Bankruptcy Code federal law [must have] more than a
de minimis effect on interstate commerce”; and (3) “the motion for withdrawal
[must be] timely filed.” Lifemark Hosps., 161 B.R. at 24 (citing United States v.
Gypsum Co. (In re Nat’l Gypsum Co.), 145 B.R. 539, 541 (Bankr. N.D. Tex.
1992)).
6

“To find that a claim involves ‘substantial and material consideration’
of non-bankruptcy federal law, the court must find the claim will involve an
interpretation of the federal law rather than the mere application of well-settled
law. Withdrawal is thus mandatory ‘when the court must undertake analysis of
significant open and unresolved issues regarding the non-title 11 law.’” Rodriguez
v. Countrywide Home Loans, Inc., 421 B.R. 341, 348 (Bankr. S.D. Tex. 2009);
accord Lifemark Hosps., 161 B.R. at 24.
Although the proceedings do involve significant open and unresolved
issues arising under PACA, both the bankruptcy court and this Court have already
adjudicated those claims. The Court no longer needs to interpret or undertake
analysis of any non-Bankruptcy Code claims that are not currently pending before
the Fifth Circuit. Accordingly, withdrawal is not mandatory under §157(d).
IV.

Permissive Withdrawal
Courts consider six factors in assessing whether permissive

withdrawal is appropriate: (1) whether the nature of the proceedings are core or
non-core; (2) whether withdrawal promotes the economical use of the parties’
resources; (3) whether withdrawal will promote uniformity in bankruptcy
administration; (4) whether withdrawal motivates forum-shopping; (5) whether
withdrawal will expedite the bankruptcy process; and (6) whether a party has
demanded a jury trial. Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992,
7

999 (5th Cir. 1985). Although a court can elect to withdraw the reference sua
sponte, motions to withdraw must be “timely filed” by the party seeking to
withdraw. 28 U.S.C. § 157(d).
A.

Nature of the Proceedings
Although § 157 does not explicitly define “core proceeding,” § 157(b)

provides a non-exhaustive, comprehensive list of matters considered core
proceedings. Extrapolating from this list, the Fifth Circuit defines core
proceedings as those that “involve[] a right created by the federal bankruptcy law”
or that “would arise only in bankruptcy.” Matter of Wood, 825 F.2d 90, 97 (5th
Cir. 1987). “If the proceeding does not invoke a substantive right created by the
federal bankruptcy law and is one that could exist outside of bankruptcy it is not a
core proceeding; it may be related to the bankruptcy because of its potential effect,
but under section 157(c)(1) it is an ‘otherwise related’ or non-core proceeding.”
Id.
The claims at issue, including the fee controversy currently before the
Fifth Circuit, all arise out of PACA. They do not arise out of the Bankruptcy
Code, and they are not the type of claims that arise only in bankruptcy. Although
the claims were related to the bankruptcy proceedings and were therefore properly
referred to the bankruptcy court, they can nevertheless exist outside of bankruptcy.
Accordingly, the claims are non-core.
8

Nevertheless, Plaintiffs’ consent to adjudication in bankruptcy court
weighs in favor of denial of the motion to withdraw reference. The Holland
America court’s concern about the nature of proceedings is whether the bankruptcy
court has full adjudicatory jurisdiction over the claims or whether it has a
restricted, magistrate-type role that requires district court approval on dispositive
issues. E.g., Mirant Corp. v. S. Co., 337 B.R. 107, 115–16 (Bankr. N.D. Tex.
2006). Because the parties consented to the bankruptcy court’s jurisdiction in
adjudicating this case, the bankruptcy court is able to make final decisions on
dispositive issues arising out of the PACA claims. See In re OCA, Inc., 551 F.3d
359, 368 (5th Cir. 2008) (“In a non-core proceeding, the parties may consent to
have a bankruptcy court ‘enter appropriate orders and judgments.’ Such consent
may be express or implied. Failure to object in the bankruptcy court may
constitute implied consent.”). In fact, the bankruptcy court has already made those
determinations, which are pending resolution at the Fifth Circuit. Therefore, the
preference for withdrawing the reference in non-core proceedings is inapplicable to
this case; instead, in light of its rationale, the factor weighs in favor of denial.
B.

Forum Shopping
“Motions to withdraw pose significant risks of forum shopping

because a party can first observe the bankruptcy judge’ rulings, and then decide
whether to bring the motion.” City Bank v. Compass Bank, No. EP-11-MC-3729

KC, 2011 WL 5442092, at *6 (W.D. Tex. Nov. 9, 2011). Accordingly, when the
bankruptcy court has full jurisdiction to decide the matters at issue, the district
court must be careful to assess the movant’s intent in seeking withdrawal to the
district court. See In re EbaseOne Corp., No. 01-31527-H4-7, 2006 WL 2405732,
at *4 (Bankr. S.D. Tex. June 14, 2006) (finding that there was no concern of forum
shopping when the bankruptcy court would not have had adjudicatory jurisdiction
over the issue and would only submit recommended findings of fact and
conclusions of law to the district court).
Defendant argues that Plaintiffs’ Motion is motivated by forum
shopping and that Plaintiffs merely attempt “to move the case to the Court which
has ruled in its favor.” (Dkt. # 1 at 48.) Although the Court recognizes the risk of
forum shopping motivating the request, the changed circumstances tend to negate
the inference. At the time that Plaintiffs moved for transfer to the bankruptcy
court, active administration of the bankruptcy estate necessitated resolution of the
PACA claims. Motion to Stay Case, Muller Trading Co., Inc. v. Delta Produce,
No. 5:12-CV-46, Dkt. # 24 at 4 (W.D. Tex. Jan. 5, 2012). Had the PACA claims
remained in federal court, the Court would have needed to grant all creditors the
right to intervene in the proceedings, effectively duplicating much of what would
already be done in the bankruptcy court. (Id.)
At present, the bankruptcy estate is in the process of closing. The
10

concern that prompted Plaintiffs to consent to the bankruptcy court’s jurisdiction
no longer exists in the litigation. Accordingly, the Court finds the forum shopping
factor neutral.
C.

Efficiency Considerations: Use of Resources, Uniformity in
Proceedings, and Expediting the Bankruptcy Process
“When a debtor, or trustee administering the bankruptcy estate, needs

to bring quick resolution to the matters at bar, and the bankruptcy court is familiar
with the parties, the factual background, and the legal issues involved, the goals of
judicial efficiency and economical use of the parties’ resources are best met by
allowing the suit to remain in the bankruptcy court.” In re EbaseOne Corp., 2006
WL 2405732, at *5. Here, the bankruptcy court is intimately familiar with the
parties and the background of the case, given its pendency in the bankruptcy court
for the past two years.
At the time of filing, the Trustee indicated that the only open matters
in the bankruptcy case were (1) entry of order on trustee’s application and agreed
order, which was submitted; (2) filing of final report and US Trustee review;
(3) notice of final report and opportunity for hearing; (4) post-distribution audit by
US Trustee; and (5) closure of case. (Dkt. # 1 at 41.) At present, all but the final
two steps have been completed. In re Delta Produce, No. 12-50073-CAG (Bankr.
W.D. Tex.). However, the bankruptcy court has explicitly excluded the

11

controversy regarding the non-estate PACA Trust assets and the recovery and
distribution of those assets from the closure. (Id., Dkt. # 663.) Given the Special
Counsel’s familiarity with the PACA claimants and the proceedings and the fact
that the claims remain open in bankruptcy court, efficiency considerations weigh in
favor of denying the withdrawal.
D.

Jury Demand
Because the PACA claims issues have already been decided and are

merely pending resolution on appeal, jury demand is not an issue in this case.
Accordingly, the weight of the Holland America factors balance
against withdrawal of the reference in this case. The Court therefore DENIES
Plaintiffs’ Motion. 1
CONCLUSION
For the foregoing reasons, the Court DENIES Plaintiffs’ Motion to
Withdraw Reference (Dkt. # 1 at 2).

1

The final consideration in a motion to withdraw is timeliness. See 28 U.S.C.
§ 157(d). Because the Court finds that the Holland America factors weigh in favor
of denying withdrawal, the Court need not reach the question of whether Plaintiffs
have met § 157(d)’s timeliness requirement.
12

IT IS SO ORDERED.
DATED: San Antonio, Texas, February 27, 2015.

_____________________________________
David Alan Ezra
Senior United States Distict Judge

13