Peoples Bank v. Johnson

Filing 5

MEMORANDUM OPINION AND ORDER denying Movant Dennis Ray Johnson, II's 1 MOTION to Withdraw Bankruptcy Reference and Consolidate With District Court Civil Action; directing that the Adversary Proceeding REMAINS REFERRED to the Bankruptcy Court; further directing the Clerk to REMOVE case 3:17-mc-180 from this Court's docket. Signed by Judge Robert C. Chambers on 5/1/2018. (cc: counsel of record; any unrepresented parties) (jsa)

IN THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF WEST VIRGINIA
HUNTINGTON DIVISION

IN RE:
DENNIS RAY JOHNSON, II
Debtor-in-Possession
PEOPLES BANK, N.A.,
Plaintiff,
v.

CIVIL ACTION NO. 3:17-mc-180

DENNIS RAY JOHNSON, II,
Defendants.
MEMORANDUM OPINION AND ORDER
Pending before the Court is Movant Dennis Ray Johnson, II’s (“Johnson” or “Movant”)
Motion to Withdraw Bankruptcy Reference and Consolidate With District Court Civil Action
(“Motion to Withdraw”) (ECF No. 1). Movant requests that this Court withdraw the bankruptcy
reference of an adversary proceeding between Plaintiff Peoples Bank N.A. (“Peoples Bank”) and
Defendant Johnson, Adversary Proceeding No. 16-3020 (the “Adversary Proceeding”) in the
United States Bankruptcy Court for the Southern District of West Virginia. Additionally, Movant
requests that the Adversary Proceeding be consolidated with a civil action currently pending before
this Court, Case No. 17-4220 (the “Civil Action”), filed by the Trustee for Johnson’s estate and
the estates of a group of business debtors owned wholly, or in substantial part, by Johnson (the
“Coal Group”). The Adversary Proceeding occurred within the context of the bankruptcy
proceedings for Johnson and the Coal Group. Peoples Bank opposes the withdrawal of the

reference, and contends that the Adversary Proceeding should properly remain with the bankruptcy
judge. As explained below, the Court DENIES Johnson’s Motion to Withdraw (ECF No. 1). The
Adversary Proceeding REMAINS REFERRED to the Bankruptcy Court.
The facts of this case are neither simple, nor straightforward. The bankruptcy, Adversary
Proceeding, and the Civil Action all arise out of a series of business deals gone wrong. Relevant
to this motion, Johnson and Peoples Bank entered into a series of loan agreements. The central gist
of these agreements was that Peoples Bank would loan Johnson millions of dollars to enter into,
and expand his presence in the coal industry. Over the period of a few years, Peoples Bank lent
Johnson and various Coal Group entities somewhere in the ballpark of $20,000,000. See Peoples
Bank Resp., ECF No. 2, at 3-4. Of course, as is common with loan arrangements, Johnson promised
to pay back the money over time. However, the investments apparently did not flourish as the
parties had likely expected, and Johnson eventually filed for bankruptcy protection.
Although Johnson and Peoples Bank had previously dealt with each other frequently, and
had a close working and business relationship, the relationship between them hardened with the
failure of the Coal Group and related investments. On December 30, 2016, Peoples Bank filed the
Adversary Proceeding with the bankruptcy court. In that action, Peoples Bank objected to the
discharge, and requested that the bankruptcy judge find that the debts owed by Johnson to Peoples
Bank were non-dischargeable due to allegedly fraudulent actions taken by Johnson.1 Ex. 1 to Mot.
to Withdraw, ECF No. 1-3, at 1.

Despite the parties’ argument over the relative similarity, or lack thereof, between the
Adversary Proceeding and the Civil Action, neither party attached the Adversary Proceeding
Complaint or Answer to a filing before this Court. However, the Court takes judicial notice of the
Adversary Proceeding Complaint, as is permitted. See Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d
176, 180 (4th Cir. 2009) (“In reviewing a Rule 12(b)(6) dismissal, we may properly take judicial
notice of matters of public record.”).
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Similarly, the Civil Action filed by the Trustee, on Johnson’s behalf, blames the failure of
the Coal Group on Peoples Bank and other parties with which the bank worked. In the Complaint,
the Trustee essentially claims that Peoples Bank fraudulently induced Johnson into entering into a
forbearance agreement by withholding an appraisal and other information, thus precipitating the
failure of the Coal Group. See Johnson’s Mem. in Supp. of Mot. to Withdraw, ECF No. 2, at 4. In
essence, the respective sides have placed the blame for the failure upon the allegedly wrongful and
deceptive acts of the other party.
Upon those facts, Johnson argues that the withdrawal of the bankruptcy reference and
consolidation with the Civil Action will promote judicial economy, prevent the potential for
inconsistent results, and foster the economical use of both parties’ resources. See Johnson’s Mem.
in Supp. of Mot. to Withdrawal, at 4; Johnson’s Reply, ECF No. 4, at 1-2. At the heart of his
argument, Johnson stresses the amount of factual and legal overlap involved in this case. Id. at 89. To illustrate the entanglement of the matters, Johnson has informed the Court that he “asserted
in his Answer to the Complaint in the Adversary Proceeding that claims held by the Trustee [in
the Civil Action] . . . constitute defenses to the Adversary Proceeding Complaint.”2 Id. at 4.
In its response, Peoples Bank largely glazes over the apparent overlap between the
Adversary Proceeding and the Civil Action. Instead, Peoples Bank explains the insufficiency of
Johnson’s showing regarding the six factors adopted by courts in this District to determine whether
to withdraw a bankruptcy reference. See generally Peoples Bank Resp. In doing so, Peoples Bank
argues that withdrawal would hinder the judicial efficiency inherent in having the bankruptcy court
consider matters within its expertise, such as the determination of whether Johnson’s debt to
Peoples Bank is properly dischargeable under the Bankruptcy Code.

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The Court, however, cannot confirm this assertion. See supra note 1.
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These two actions have sprouted from the same series of business transactions, and thus
overlap in various ways. The Court recognizes that this Motion presents a close call. However, the
Court agrees with Peoples Bank that the Adversary Proceeding will require legal determinations
within the bankruptcy judge’s expertise, upon facts with which the he is quite familiar. As is further
explained below, Johnson’s Motion to Withdraw (ECF No. 1) is, therefore, DENIED.
In establishing Bankruptcy Code, Congress gave district courts original and exclusive
jurisdiction over “all cases under [Title 11 of the United States Code, the Bankruptcy Code].” 28
U.S.C. § 1334(a). District courts also have original, but not exclusive, jurisdiction over “all civil
proceedings arising under title 11, or arising in or related to cases under title 11.” Id. § 1334(b).
Although entrusted with that jurisdictional purview, district courts may permissibly refer
bankruptcy matters to non-Article III bankruptcy judges automatically. Id. § 157(a). Indeed,
district courts within this district automatically refer bankruptcy matters. See LR Civ P 83.13.
However, this referral is not unalterable.
Just as it drew the jurisdictional boundaries for district courts concerning bankruptcy
matters, Congress also provided a mechanism by which district courts could withdraw a reference
to a bankruptcy court. “The district court may withdraw, in whole or in part, any case or proceeding
referred [to a bankruptcy court], on its own motion or on timely motion of any party, for cause
shown.” 28 U.S.C. 157(d). Under this provision, so-called “permissive withdrawal,” the district
court may exercise its discretion in determining the appropriateness of withdrawal.3 See Mooring
Capital Fund, LLC v. Sullivan, No. 3:16-CV-74, 2016 WL 4628572, at *4 (N.D.W. Va. Sept. 6,

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The second sentence of 28 U.S.C. § 157(d) provides for conditions under which a district
court must withdraw the reference from a bankruptcy court. See Allen v. Nat’l City Mortg., No.
2:04-CV-188, 2006 WL 3899997, at *1 (S.D.W. Va. July 13, 2006) (Goodwin, J.). Because neither
party examined or argued for the applicability of mandatory withdrawal, the Court does not address
it.
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2016). But courts have cautioned that this discretion should be afforded judicious and restrained
use. Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 224 (D. Haw. 2006) (providing
that the discretion to withdraw should be “employ[ed] [ ] judiciously in order to prevent
[withdrawal] from becoming just another litigation tactic for parties eager to find a way out of
bankruptcy court” (internal alterations original, but internal quotation marks omitted) (quoting
Kenai Corp. v. Nat’l Union Fire Ins. Co., 136 B.R. 59, 61 (S.D.N.Y. 1992))).
Although Congress permitted district courts to withdraw bankruptcy court references, it
did not provide guidance on what satisfies the “cause shown” standard. So too, the Fourth Circuit
has yet to clarify the practical requirements for that malleable two word phrase. See Dwyer v. First
Nat’l Bank (In re O’Brien), 414 B.R. 92, 97 (S.D.W. Va. 2009) (Goodwin, J.). But courts in this
District have applied a six-factor framework, gleaned from a survey of other circuits, when
deciding whether the “cause shown” standard has been met. Id. Those six factors are:
(1) whether the proceeding is core or noncore; (2) the uniform
administration of bankruptcy law; (3) the promotion of judicial economy;
(4) the efficient use of the parties’ resources; (5) the reduction of forum
shopping; and (6) the preservation of the right to jury trial.
Standish v. Jackson (In re Albertson), 535 B.R. 662, 667 (S.D.W. Va. 2015) (Goodwin, J.) (citation
omitted). Generally, the most important factor is whether the matter is a core or noncore
proceeding, but it is not determinative. See id. (citing In re Coe-Truman Techs., Inc., 214 B.R.
183, 187 (N.D. Ill. 1997)). The movant bears the burden for demonstrating the requisite “cause”
for permissive withdrawal under the six-factor framework. Id. (citing Blue Cross & Blue Shield of
N.C. v. Jemsek Clinic, P.A., 506 B.R. 694, 697 (W.D.N.C. 2014)).
Applying this analysis, the Court believes the factors, on balance, weigh against
withdrawing the reference of the Adversary Proceeding. Concerning the first factor, the Court
finds that Peoples Bank’s claims, to the extent that the parties explained them to the Court, likely
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constitute core proceedings. Generally, a bankruptcy judge has the duty to determine whether
claims or issues before him or her fall within the core or noncore designation. In re Minor Family
Hotels, LLC, No. 3:10-MC-00052, 2010 WL 5141342, at *3 (W.D. Va. Dec. 10, 2010). Despite
Congress’s identification of sixteen, non-exhaustive, categories of proceedings that are “core,” the
analysis for determining whether a proceeding is “core” is often fraught with nuance and
complexity. See Stern v. Marshall, 564 U.S. 462, 474-78 (2011) (identifying that Congress
designated categories of core proceedings, and engaging in the relevant analysis); see also In re
O’Brien, 414 B.R. at 98, 102-03 (“The distinction between core and non-core issues is not always
clear, especially in cases where state-law claims are precipitated by the financial dealings of a
bankrupt debtor.”). Cognizant of these potential difficulties, the Court believes that the bankruptcy
judge would likely find that Peoples Bank’s claims comfortably fit within the non-exhaustive list
of core proceedings identified by Congress. Peoples Bank contends that all of its claims in the
Adversary Proceeding request a determination that Johnson’s debt is not dischargeable. See
Peoples Bank Resp., at 1. This fits neatly within one of the designated “core proceeding”
categories. 28 U.S.C. § 157(b)(2)(I) (listing as one of the core proceedings, “determinations as to
the dischargeability of particular debts”). Thus, the first factor weighs in favor of denying the
withdrawal request.
The second factor, the uniform administration of bankruptcy law, also supports the denial
of withdrawal request. Bankruptcy courts have the expertise and experience relevant to the
determination of questions unique to bankruptcy law, such as the dischargeability of a debt. See In
re Albertson, 535 B.R. at 668. Johnson correctly notes that, if successful, the claims pursued by
the Trustee in the Civil Action constitute “the single largest potential asset [in the estate].”
Johnson’s Reply, at 3. However, that the Civil Action may significantly affect the assets in the

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estate, and thus the later administration of bankruptcies, does not outweigh the benefits of having
the bankruptcy judge decide the dischargeability of the entirety of Johnson’s and the Coal Group’s
debt.
The third and fourth factors only slightly weigh in favor of withdrawing the reference, if at
all. Withdrawal might promote some semblance of judicial economy, and may more efficiently
utilize the parties’ resources due to the streamlining of the factual development. It might also allow
for simultaneous adjudication of the two sides of a substantially related transactional narrative.
Certainly, keeping the Adversary Proceeding and the Civil Action separate may result in the
duplication of discovery efforts and litigation expenses. However, some unnecessary costs would
also occur if the Adversary Proceeding was withdrawn and the actions consolidated. It appears
that the Civil Action, brought on behalf of roughly ten entities, against multiple defendants,
involves more parties than the more limited Adversary Proceeding. Additionally, the Adversary
Proceeding covers a lengthier factual period, and involves a broader transactional scope than that
of the Civil Action Complaint. Thus, the consolidation of the two actions would likely require
some non-involved parties to be a part of the Adversary Proceeding claims and issues. Also, the
Adversary Proceeding was filed in December 2016. See Ex. 3 to Johnson’s Mot. to Withdraw, at
1. Given that the Civil Action involves multiple parties, and complex causes of action, the Civil
Action will likely necessitate an extended period to sort out. With the Adversary Proceeding
already pending for a year and a half, the Court believes that withdrawing the reference would
unduly delay the adjudication of the issues. On the whole, notwithstanding some potential,
additional cost associated with withdrawal and consolidation, the third and fourth factors weigh
slightly in favor of granting Johnson’s request to withdraw the reference.

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The Court has found no evidence of forum shopping, and thus that factor is irrelevant to
this case.
Finally, the sixth, and last, factor, supports the bankruptcy judge’s retention of the
Adversary Proceeding. As mentioned, Peoples Bank’s claims concern the dischargeability of
certain debts owed by Johnson. This type of dischargeability determination claim does not entail
the right to jury trial. See M.C. Construction, Inc. v. Fink (In re Fink), 294 B.R. 657, 659
(W.D.N.C. 2003) (“After making the inquiry required by the Granfinanciera case, it is apparent
that plaintiffs bringing dischargeability actions do not have the right to a jury trial with respect to
any common law claims on which their claim of nondischargeability is based.”); see also Matter
of Hallahan, 936 F.2d 1496, 1505 (7th Cir. 1991) (generally explaining that dischargeability
questions do not provide a debtor a right to a jury trial, and declining to permit a jury trial).
Therefore, because no right to jury trial is affected, this factor weighs in favor of not withdrawing
the reference.
Ultimately, the “decision whether or not to withdraw the referral immediately is frequently
more [of] a pragmatic question of efficient case administration than a strictly legal decision.” In re
Albertson, 535 B.R. at 670 (internal quotation marks omitted) (quoting Official Comm. Of
Unsecured Creditors v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122, 128 (4th
Cir. 1993)). As a matter of pragmatism, and informed by the six-factor analysis, the Court will not
permit the withdrawal of the Adversary Proceeding. Although Johnson’s Motion to Withdraw does
present viable reasons for withdrawal, the Court finds that, in this case, permitting the bankruptcy
judge to determine Peoples Bank’s dischargeability claims will permit the most efficient resolution
to those claims. See In re Pilipovic, No. 4:15-CV-861-ERW, 2015 WL 7273325, at *3 (E.D. Mo.
Nov. 18, 2015) (“In this case, it will preserve judicial resources and promote judicial economy if

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the Bankruptcy Court has an opportunity to promulgate an opinion regarding whether [the
creditor’s] claims against [the debtor] have been discharged by the debtor’s bankruptcy.”)
Accordingly, the Court DENIES Johnson’s Motion to Withdraw (ECF No. 1), and DIRECTS the
Clerk to REMOVE this case (No. 3:17-mc-180) from this Court’s docket.
The Court DIRECTS the Clerk to send a copy of this Order to counsel of record and any
unrepresented parties.
ENTER:

May 1, 2018

ROBERT C. CHAMBERS
UNITED STATES DISTRICT JUDGE

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