IN RE DON'S MAKING MONEY, LLP

Full title: In re: Don's Making Money, LLP, Tropical Beaches, Inc., New Strategies…

Court: United States District Court, D. Arizona

Date published: May 1, 2007

No. CV 07-319-PHX-MHM (D. Ariz. May. 1, 2007)

Opinion

No. CV 07-319-PHX-MHM.

May 1, 2007

ORDER

MARY MURGUIA, District Judge

At present, this case has four pending motions. The motions are as follows. Defendants have filed a Motion to Withdraw the Reference of this case to the United States Bankruptcy Court (Doc. 2). Plaintiff has filed a Motion to Compel Disclosure and Motion for Sanctions (Doc. 4). Both of these Motions are fully briefed. Also pending are Plaintiff's Motion to Accelerate the Ruling on Defendants' Motion to Withdraw the Reference (Doc. 9) and Defendants' Motion for Judgment on the Pleadings (Doc. 10). After considering the papers submitted, the Court issues the following Order.

BACKGROUND

Defendants, the Estate of Joseph A. Deihl, Sari Deihl, Universal Business Strategies, Inc. ("UBS"), Mayor Pharmaceutical Laboratories, Inc., Karemore International, Inc., Vitamist, Inc., Regency Medical Group, Ltd. ("Regency"), Liberty Group International, Ltd., Creative Personnel Resources, Inc., Left Field Productions, Inc., Spoiled Brat, Ltd. ("Defendants") have filed a Motion to Withdraw the Reference to the Bankruptcy Court pursuant to 28 U.S.C. § 157. Plaintiff Charles L. Riley, Jr. ("Plaintiff"), opposes Defendants' Motion.

The relevant facts of this case are as follows. In the early 1990s, Don Lapre started an infomercial business called "Don's Making Money." In 1991, "Don's Making Money" filed for Chapter 11 bankruptcy protection. Through the bankruptcy proceeding, Regency Medical Group, Ltd. ("Regency") purchased the "Don's Making Money" infomercial business. The purchase agreement provided for Regency to pay $750,000 in cash and additional payments of $2 million. The sale was approved by the Bankruptcy Court and the assets, including an account of $1,719,075.91, were transferred to Regency. Regency made the initial payment of $750,000 but failed to make any other payments.

Regency was owned and controlled by Defendants Joseph Deihl and Sari Deihl. In 2001, the rights and obligations of Regency, including the assets of "Don's Making Money," were assigned to UBS, another entity owned and controlled by Defendants Mr. and Mrs. Deihl. UBS filed a Chapter 11 bankruptcy petition in 2003. In relation to UBS's bankruptcy proceeding, Plaintiff, the bankruptcy trustee for "Don's Making Money," obtained a judgment against UBS for $2,320,000 plus interest. In an effort to collect the judgment, Plaintiff filed the instant complaint on or about November 2, 2005.

The instant case is an adversary proceeding initiated in Bankruptcy Court. Federal jurisdiction in this case is premised on 28 U.S.C. § 1334, the statute vesting in federal district courts jurisdiction in bankruptcy cases and related proceedings. In his Complaint, Plaintiff has asserted seven causes of action. The causes of action are as follows: alter ego/piercing the corporate veil (Count I); fraudulent transfer (Count II); common law fraud (Count III); negligent misrepresentation (Count IV); Arizona RICO claim pursuant to A.R.S. § 13-2414.04 (Count V); violation of corporate trust fund doctrine (Count VI); and unjust enrichment (Count VII).

In Defendants' instant Motion to Withdraw the Reference to the Bankruptcy Court, Defendants assert that the pending adversary proceeding involves the assertion of non-core claims. Defendants claim that the case requires mandatory withdrawal to this Court because of Defendants' Seventh Amendment right to a jury trial and that withdrawing the reference would aid judicial efficiency and no prejudice would result.

Plaintiff opposes Defendants' Motion to Withdraw the Reference. Plaintiff assert that Defendants' Motion to Withdraw is untimely and not warranted because this case involves non-core claims. Plaintiff further asserts that the bankruptcy judge must determine whether the claims are core or non-core before a withdrawal of reference motion is appropriate in this Court.

LEGAL STANDARD

Title 28 of the United States Code, § 157 explains the procedure for returning a case to District Court:

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.

28 U.S.C. § 157(d). This language "contains two distinct provisions: the first sentence [for cause shown] allows permissive withdrawal, while the second sentence [U.S. laws affecting interstate commerce] requires mandatory withdrawal in certain situations." In re Coe-Truman Technologies, Inc., 214 B.R. 183, 185 (N.D.Ill. 1997). The movant has the burden of persuasion as to both mandatory and discretionary withdrawal.Hawaiian Airlines, Inc. v. Nesa Air Group, Inc., 355 B.R. 214 (D.Haw. 2006). Any motion to withdraw must be timely. FTC v. First Alliance Mortg. Co., 282 B.R. 894, 902 n. 6 (C.D.Cal. 2001).

The Ninth Circuit has stated in dictum that mandatory withdrawal of the reference hinges "on the presence of substantial and material questions of federal law." Security Farms v. International Bhd. of Teamsters, Chauffeurs, Warehousemen Helpers, 124 F.3d 999, 1008 n. 4 (9^th Cir. 1997). To date, no Ninth Circuit case that has dealt directly with the mandatory withdrawal standard. The "substantial and material consideration" standard has received criticism because of the obvious ambiguity of what constitutes "substantial and material consideration." In re U.S. Airways Group, Inc., 296 B.R. 673, 678 (E.D.Va. 2003).

Ambiguity notwithstanding, "[o]verwhelmingly courts and commentators agree that the mandatory withdrawal provision cannot be given its broadest literal reading, for sending every proceeding that required passing 'consideration' of non-bankruptcy law back to the district court would 'eviscerate much of the work of the bankruptcy courts,' From a litigant's perspective, such a reading would also create an 'escape hatch' by which bankruptcy matters could easily be removed to the district court." In re Vicars Ins. Agency, Inc., 96 F.3d 949, 952 (7^th Cir. 1996) (internal citation omitted).

With regard to permissive withdrawal, "[t]here is no statutory definition of what constitutes 'cause shown' under 28 U.S.C. § 157(d)." In re Lars, Inc., 290 B.R. 467, 469 (D.P.R. 2003). Typically, courts will first consider whether the proceeding is core or non-core. Further, the Ninth Circuit counsels that "a district court should consider the efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Security Farms, 124 F.3d at 1008 (internal citation omitted).

DISCUSSION

I. TIMELINESS OF DEFENDANTS' MOTION TO WITHDRAW THE REFERENCE

Plaintiff asserts that Defendants' Motion to Withdraw the Reference should be denied as untimely.

Section 157(d) of Title 28 states as follows:

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 [emphasis added].

A motion to withdraw is timely "if it was made as promptly as possible in light of the developments in the bankruptcy proceedings." Security Farms, 124 F.3d at 1007 n. 3 (quoting In re Baldwin-United Corp., 57 B.R. 751, 754 (S.D.Ohio 1985)).

Defendants contend that Security Farms, 124 F.3d at 1007, n. 3, further states that section 157 is designed not to be a bright line rule but, rather, to be flexible in the context of the totality of the facts, circumstances, and developments of the each case. Therefore, Defendants assert that their Motion to Withdraw the Reference is timely because Plaintiff was on notice as Defendants included a jury demand in their Answer. Moreover, Defendants' assert that the Motion to Remand is timely because Plaintiff does not assert that Defendants' Motion causes him any prejudiced. See In re TPI Intern. Airways, 222 B.R. 663, 667 (S.D.Ga. 1998) ("Defendants do not argue that this motion has caused them any prejudice, so the Court concludes that Catchpole's motion is timely.").

A district court may withdraw the reference at any time. In re Hall, Bayoutree Associates, Ltd., 939 F.2d 802 (9^th Cir. 1991).See also In re H W Motor Express Co., 343 B.R. 208 (N.D.Iowa 2006) ("The court holds that the test for timeliness is ultimately one of reasonableness under the circumstances."); In re Kaplan, 146 B.R. 500, 503 (D.Mass. 1992) (finding that timeliness is determined based on a review of the facts of the specific situation). In light of the circumstances involved in this case, including Defendants' demand for a jury trial, Defendants' Motion to Withdraw the Reference is timely.

II. MANDATORY WITHDRAWAL

Defendants assert that withdrawal of the reference is mandatory because Plaintiff's claims are non-core state law claims and because Defendants have demanded a jury trial in this Court. The mandatory withdrawal provision only deals with "consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." 28 U.S.C. § 157(d). Consideration of state laws does not give rise to mandatory withdrawal. See e.g., In re Com 21, 2005 WL 1606357, *11 (N.D.Cal. 2005); Diagnostic In'l, Inc. v. Aerobic Life Prods. Co., 257 B.R. 511, 513 (Bankr.D.Ariz. 2000). Here, Plaintiff alleges state law claims. None of Plaintiff's claims deal with "title 11 or other laws of the United States regulating organizations or activities affecting interstate commerce." Thus, the nature of Plaintiff's claims does not warrant a finding that withdrawal is mandatory.

Regarding mandatory withdrawal due to the preserved right to a jury trial, Defendants cite Larry's Apartment L.L.C. v. Galam, 210 B.R. 469, 472 (D.Ariz. 1997), to aver that "because bankruptcy courts cannot conduct jury trials on noncore matters, withdrawal is mandated if the litigant is entitled to a jury trial on such matters." However, the district court case ofLarry's Apartment, in turn, cites the precedential Ninth Circuit case of In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9^th Cir. 1990), which states that "where a jury trial is required and the parties refuse to consent to bankruptcy jurisdiction, withdrawal of the case to the district court is appropriate. " (emphasis added.) The Court finds that withdrawal of the reference may be appropriate, however, the Court is not convinced that withdrawal is mandatory.

III. VOLUNTARY WITHDRAWAL

A. CORE VERSUS NON-CORE CLAIMS

1. THIS COURT'S AUTHORITY TO MAKE A CORE/NON-CORE DETERMINATION

Plaintiff relies on 28 U.S.C. § 157(b)(3) to argue that a determination as to whether a claim is core or non-core shall be made by the bankruptcy court before the district court may withdraw the reference. However, Congress has vested jurisdiction of bankruptcy matters in the district courts. 28 U.S.C. § 1334.

While section 157(b)(3) provides that a bankruptcy judge shall determine whether a claim is a core or a non-core claim, that provision relates to the scope of authority for bankruptcy courts under section 157 once federal jurisdiction is found to exist under section 1334. See In re Gruntz, 202 F3d 1074, 1080 (9^th Cir. 2000). However, it does not prohibit the district court from determining whether a proceeding is core or non-core where, as here, there has been no prior determination.Id. Indeed, district courts routinely engage in such analysis.See, e.g., Williams v. Shell Oil Co., 169 BR 684, 692 (S.D.Cal. 1994); In re Kold Kist Brands, Inc, 158 BR 175, 178 (C.D.Cal. 1993). Thus, this Court does have authority to determine, if necessary, whether the claims are core or non-core.

2. DISCUSSION OF CORE VERSUS NON-CORE CLAIMS

Title 28 U.S.C. § 157(b)(2) provides a non-exhaustive list of core proceedings. The claims Plaintiff has alleged in this lawsuit are not among the itemized claims in 157(b)(2). "Courts attempting to analyze the status of a particular claim that is not listed in section 157(b)(2) have considered factors such as whether the rights involved exist independent of title 11, depend on state law for their resolution, existed prior to the filing of a bankruptcy petition, or were significantly affected by the filing of the bankruptcy case." In re Cinematronics, Inc., 916 F.2d at 1450 n. 6.

"In noncore matters, the bankruptcy court acts as an adjunct to the district court, in a fashion similar to that of a magistrate or special master. In noncore matters, the bankruptcy court may not enter final judgments without the consent of the parties, and its findings of fact and conclusions of law in noncore matters are subject to de novo review by the district court. . . . In contrast to the bankruptcy court's authority in noncore cases, the bankruptcy court may enter final judgments in so-called core cases, which are appealable to the district court." Piombo Corp. v. Castlerock Properties (In re Castlerock Properties), 781 F.2d 159, 161 (9^th Cir. 1986), (internal citation omitted).

The distinction between core and non-core claims is important because it determines how the claims must be treated.

In non-core matters, the bankruptcy court acts as an adjunct to the district court, in a fashion similar to that of a magistrate or special master. In noncore matters, the bankruptcy court may not enter final judgments without the consent of the parties, and its findings of fact and conclusions of law in noncore matters are subject to de novo review by the district court. . . . In contrast to the bankruptcy court's authority in noncore cases, the bankruptcy court may enter final judgments in so-called core cases, which are appealable to the district court.

Piombo Corp., 781 F.2d at 161 (internal citation omitted).

"Despite the importance of the core designation to bankruptcy adjudication, no exact definition of the term exists in the bankruptcy code. Rather, as stated above, section 157(b)(2) contains a laundry list of core proceedings along with the admonition that core proceedings include, but are not limited to, the items listed." In re Cinematronics, Inc., 916 F.2d at 1449-50. This definitional shortcoming notwithstanding, courts are not without guidance in this area.

"Courts attempting to analyze the status of a particular claim that is not listed in section 157(b)(2) have considered factors such as whether the rights involved exist independent of title 11, depend on state law for their resolution, existed prior to the filing of a bankruptcy petition, or were significantly affected by the filing of the bankruptcy case." Id. at 1450 n. 6 (9^th Cir. 1990). Claims that arise under or in Title 11 are deemed to be "core" proceedings, while claims that are related to Title 11 are "non-core" proceedings. See e.g. Robertson v. Isomedix, Inc. (In re Int'l Nutronics), 28 F.3d 965, 969 (9^th Cir. 1994) ("[c]ore proceedings are matters concerning the administration of the estate and rights created by title 11.") (internal quotation omitted). "Actions that do not depend on bankruptcy laws for their existence and that could proceed in another court are considered non-core." Security Farms, 124 F.3d at 1008.

Plaintiff has asserted seven causes of action in his Complaint. The causes of action are as follows: alter ego/piercing the corporate veil (Count I); fraudulent transfer (Count II); common law fraud (Count III); negligent misrepresentation (Count IV); Arizona RICO claim pursuant to A.R.S. § 13-2414.04 (Count V); violation of corporate trust fund doctrine (Count VI); and unjust enrichment (Count VII).

Defendants assert that because all counts in Plaintiff's Complaint are based on State law, none of Plaintiff's claims are core claims. In their Reply, Defendants cite In re Chemetco, Inc. 308 B.R. 339 (Bkrtcy. S.D.Ill. 2004) to contend that Plaintiff is silent as to Defendants' assertion that all counts are noncore. Defendants further contend that Plaintiff's silence denotes concession that all claims are noncore.

Contrary to Defendants' contentions, Plaintiff's Response is not silent regarding whether the counts in the Complaint are core or noncore. In fact, Plaintiff cites In re Mankin, 823 F.2d 1296 (9^th Cir. 1987) and In re Building by Jamie, Inc., 230 B.R. 36, 44-45 (D.N.J. 1998) to assert that at least his alter ego/piercing the corporate veil and fraudulent transfer claims are core claims. See In re Mankin, 823 F.2d 1296 (fraudulent conveyance claim based upon state law was core claim); In re Building by Jamie, 230 B.R. at 44-45 (Chapter 7 trustee's alter ego claim, seeking to pierce the corporate veil of corporate debtor, was a core proceeding).

It is true that Plaintiff has not alleged causes of action that are created or determined by a statutory provision of the bankruptcy laws. In fact, each of Plaintiff's claims is based on state law. However, Plaintiff has submitted evidence to show that at least one count is a core claim, with a strong assertion that other claims may be as well. In fact, here, as in In re Mankin, the fraudulent transfer claim "directly relates to the restructuring of debtor-creditor relations and is not merely an action to bring property into the estate." In re Mankin, 823 F.2d at 1307. Furthermore, it is possible that Plaintiff's alter ego/piercing the corporate veil claim is a core claim as well. For these reasons, the Court is not willing to find that Plaintiff's Complaint contains only noncore claims as Defendants assert.

Moreover, "[a] matter is related to the bankruptcy when the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5^th Cir. 1987) (internal citation omitted). "An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate." Walker v. Cadle Co. (In re Walker), 51 F3d 562, 569 (5^th Cir. 1995) (internal citation omitted).

The essence of this adversary proceeding is Plaintiff's attempt to collect a judgment of $2,320,000 plus interest from the bankruptcy estate, arising out of a sale that was approved by the Bankruptcy Court. Plaintiff also has asserted claims that the bankruptcy estate has not been handled appropriately. Therefore, regardless of whether Plaintiff's claims ultimately are determined to be core or noncore, at the very least, Plaintiff's claims are related to the Don's Making Money bankruptcy proceeding.

B. IMMEDIATE WITHDRAWAL OF REFERENCE BASED ON A SEVENTH AMENDMENT RIGHT TO A JURY TRIAL IN THIS COURT

Defendants assert that withdrawal of the reference is appropriate because Defendants have asserted and have retained the right to a jury trial in an Article III court. The Court will consider whether such a right warrants immediate withdrawal.

Courts uniformly acknowledge the relevance of a party's right to a jury trial in district court when deciding whether to withdraw reference to the bankruptcy court, however, a number of courts have denied a party's request for immediate withdrawal of reference where the basis of the request is a party's entitlement to a jury trial. See, e.g., Barlow Peek, Inc. v. Manke Truck Lines, Inc., 163 B.R. 177, 179 (D.Nev. 1993) ("The filing of a jury demand in a non core proceeding which is related to a bankruptcy case should not result in the District Judge on a knee jerk basis withdrawing the order of reference."); In re Apponline.Com., Inc., 303 B.R. 723, 727 (E.D.N.Y. 2004) ("A rule that would require a district court to withdraw a reference simply because a party is entitled to a jury trial, regardless of how far along toward trial a case may be, runs counter to the policy favoring judicial economy that underlies the statutory scheme.") quoting Kanai Corp v. National Union Fire Ins. Co. (In re Kenai Corp.), 136 B.R. 59, 61 (S.D.N.Y. 1992)); In re Commercial Financial Services, Inc., 239 B.R. 586, 597 (Bankr. N.D.Okla. 1999) (same); In re Hardesty, 190 B.R. 653, 656 (D.Kan. 1995) ("Even if a jury trial may constitute cause for withdrawal, the district court may decline to withdraw the reference until the case is ready for trial.").

"The Court has the option of withdrawing the entire adversary matter, or withdrawing only the trial portion, leaving the pre-trial and discovery matters to be handled by the bankruptcy judge." In re Lars, 290 B.R. at 469. The Ninth Circuit has acknowledged such procedure in dicta: "[T]he Fourth Circuit has concluded that a bankruptcy court may postpone withdrawal of the reference where a party asserts a right to a jury trial in the district court. In such an instance, a bankruptcy court may perform pretrial functions short of jury selection and trial, and presumably could dismiss a party's action for failure to comply with any pretrial order. Here, however, the Northern District of California's local bankruptcy rules dictate that the withdrawal of the reference is 'automatic' . . ." Dunmore v. United States, 258 F.3d 1107, 1117 (9^th Cir. 2004), citing Official Committee of Unsecured Creditors v. Schwartzman, 13 F.3d 122, 128 (4^th Cir. 1993). The District of Arizona, unlike the Northern District of California, does not have a local rule barring the procedure outlined by the circuit courts.

Even where the presence of non-core claims and a jury demand dictate that the reference to the bankruptcy court ultimately may have to be withdrawn, a district court may exercise its discretion not to withdraw the reference immediately where, for example, the bankruptcy court already is familiar with the relevant facts and issues, and the issues triable by a jury are not yet ripe for trial. See, e.g., Barlow Peek, 163 B.R. at 179; In re Orion Pictures Corp., 4 F.3d 1095, 1101-1102 (2^nd Cir. 1993). Courts should strictly construe the section 157(d) factors "so that it does not provide an 'escape hatch' out of bankruptcy court." CIS Corp. v. Citicorp North America, Inc. (In re CIS Corp.), 188 B.R. 873 (S.D.N.Y. 1995) (quoting In re White Motor Corp., 42 B.R. 693, 704 (N.D.Ohio 1984).

"Courts have also recognized that it serves the interests of judicial economy and efficiency to keep an action in Bankruptcy Court for the resolution of pre-trial, managerial matters, even if the action will ultimately be transferred to a district court for trial." In re Enron Corp., 295 B.R. 21, 28 (S.D.N.Y. 2003). "The decision whether or not to withdraw the referral immediately is frequently more a pragmatic question of efficient case administration than a strictly legal decision. While the bankruptcy court may be uniquely qualified to conduct pre-trial matters in some core proceedings, in other cases such a referral would be a futile detour, requiring substantial duplication of judicial effort."Schwartzman, 13 F.3d at 128 (internal citation omitted).

Defendants argue that reference to bankruptcy court ultimately will be withdrawn because Defendants have preserved their right to a jury trial in this Court. Defendants contend that now is a good time to withdraw the reference because the parties are at the initial stages of discovery, having just begun written discovery requests.

Plaintiff claims that discovery in this case has been ongoing since before the case was filed in November 2005 and has continued ever since. Plaintiff asserts that the Bankruptcy Court is thoroughly familiar with this case, the parties, and the discovery performed to date. In fact, Plaintiff states that the Bankruptcy Court was the court that approved the sale and purchase in question.

As determined above, regardless of whether Plaintiff's claims are core or non-core, clearly the claims are at the very least "related to" the bankruptcy proceedings. Discovery officially has been ongoing for at least a year. In fact, Plaintiff filed his first motion to compel discovery on May 11, 2006.¹ Since that time, the Bankruptcy Court has granted two motions to compel and two motions for sanctions in Plaintiff's favor. Thus, it is clear that the Bankruptcy Court is familiar with the facts of this case. Therefore, without making a determination as to whether Defendants have, in fact, preserved their right to a jury trial, an issue Plaintiff does not seem to contend, the Court finds that it is more judicially efficient for the bankruptcy court to continue to oversee this case through the discovery process.

1 Plaintiff recently filed his Third Motion to Compel, which he filed with this Court on February 20, 2007.

CONCLUSION

In the interest of judicial economy, minimizing delay and costs to the parties, uniformity of bankruptcy administration, and reasonableness under the circumstances, the Court finds it more appropriate to deny without prejudice Defendants' Motion to Withdraw the Reference. The Bankruptcy Court shall continue oversight of this case. Defendants may reassert their Motion at the appropriate time before trial.

Accordingly,

IT IS ORDERED that Plaintiff's Motion to Accelerate Ruling on Defendants' Motion to Withdraw the Reference (Doc. 9) is granted.

IT IS FURTHER ORDERED that Defendants' Motion to Withdraw the Reference (Doc. 2) is denied without prejudice to be reasserted at the appropriate time before trial.

IT IS FURTHER ORDERED that Plaintiff's Third Motion to Compel Disclosure (Doc. 4) is denied as moot.

IT IS FURTHER ORDERED that Defendants' Motion for Judgment on the Pleadings (Doc. 10) is denied as moot.