Opinion
CASE NO. 01-49589-DML-11
October 3, 2003
REPORT AND RECOMMENDATION REGARDING MOTION TO WITHDRAW REFERENCE AND MOTION FOR VOLUNTARY ABSTENTION
TO THE HONORABLE TERRY R. MEANS, UNITED STATES DISTRICT JUDGE:
Before the court is Cottrell, Inc.'s ("Defendant") Motion to Withdraw Reference filed August 1, 2003. The Response of Nu Van Technology, Inc. ("Plaintiff") to the Motion to Withdraw Reference of Defendant was filed August 29, 2003. Also before the court is Defendant's Motion for Voluntary Abstention filed August 1, 2003. Plaintiff's Response to the Motion for Voluntary Abstention was filed August 28, 2003. The Creditors' Committee's Joinder in Debtor's Response to Defendant's Motion for Voluntary Abstention and Response to Defendant's Motion to Withdraw Reference was filed September 14, 2003.
On September 2, 2003, a hearing and status conference was held by this court regarding Defendant's alternative motions for relief. After considering the record before the court and the arguments of the parties at the hearing, this court respectfully recommends that Defendant's Motion to Withdraw Reference be granted and the reference be withdrawn. Additionally, if the District Court grants Defendant's Motion to Withdraw and Defendant nevertheless wishes to continue pursuit of its Motion for Voluntary Abstention, this court respectfully recommends that Defendant's Motion for Voluntary Abstention be returned to this court for consideration prior to disposition by the District Court.
BACKGROUND
On December 28, 2001, Plaintiff filed a voluntary petition for relief under chapter 11 of the bankruptcy code. 11 U.S.C. § 101, et seq.("Code"). Plaintiff's First Amended Plan of Reorganization ("Plan") was confirmed by this court on June 5, 2003.
As part of Plaintiff's reorganization efforts, Plaintiff considered various opportunities, including the addition of investment partners and/or the sale of some or all of Plaintiff's assets. With this court's approval, Plaintiff's business analyst and marketing agent, Equity Partners, Inc., required all potential investors/purchasers to execute a Confidentiality Agreement in connection with Plaintiff's confidential financial, production, and customer-based information.
After Defendant expressed an interest in Plaintiff's business, Defendant executed a Confidentiality Agreement. Defendant was then provided with access to, inter alia, Plaintiff's confidential records regarding Plaintiff's financials, customer lists, pricing, manufacturing, and distribution. Defendant did not invest in or purchase any assets of Plaintiff. Thereafter, however, Plaintiff learned that Defendant had begun to manufacture and market to Plaintiff's customers products virtually identical to Plaintiff's products.
Plaintiff's Original Complaint, filed with this court on March 20, 2003, claims that Defendant (1) breached its contractual Confidentiality Agreement with Plaintiff; (2) committed common law fraud; (3) engaged in tortious interference with Plaintiff's business relationships; and (4) breached its duty of good faith, fair dealing, and fiduciary duty. Plaintiff seeks compensatory damages, punitive damages, prejudgment interest, postjudgment interest, attorneys' fees, and costs of court. Defendant's Original Answer and jury demand was timely filed June 18, 2003.
DISCUSSION
Motion to Withdraw Reference
Defendant argues that Plaintiff's causes of action for breach of contract, fraud, tortious interference, and breach of good faith, fair dealing, and fiduciary duty are based on state common law, not federal law, and are not, by nature, matters which arise in the context of bankruptcy law. Defendant also argues that Defendant has not filed a proof of claim against the bankruptcy estate, has timely and properly demanded a jury trial, and has not given express consent for this court to conduct the jury trial. Thus, Defendant argues that withdrawal of the reference is appropriate.
Plaintiff argues, however, that Plaintiff's adversary proceeding is a core proceeding pursuant to §§ 549 and 550 of the Code and is subject to this court's retained jurisdiction under Article X of the Plan. Plaintiff also contends that the outcome of the adversary proceeding could adversely affect the value of the assets of the estate, Plaintiff's ability to perform under the Plan, and the amount of future distributions to other creditors. Moreover, Plaintiff argues that Defendant consented to the jurisdiction of this court when Defendant, as a prerequisite to inspection of Plaintiff's confidential information, entered into the Confidentiality Agreement post-petition. Finally, Plaintiff argues that denial of the withdrawal of reference would ensure judicial economy and the efficient administration of the bankruptcy estate in this court.
Defendant seeks permissive withdrawal of the reference pursuant to 28 U.S.C. § 157(d) and (e), which provide, in relevant part, as follows:
(d) The district court may withdraw, in whole or in part, any case or proceeding referred under this section . . . for cause shown. . . .
(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.
28 U.S.C. § 157(d) and (e) (2003).
Defendant, as the moving party, bears the burden of showing sufficient cause justifying discretionary withdrawal of the reference. NDEP Corp. v. Handl-It, Inc. (In re NDEP Corp.), 203 B.R. 905, 907 (D. Del. 1996). Cause may exist where the movant's right to a jury trial dictates that the reference be withdrawn. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 47-48 (1989).
A party against whom legal action has been brought to recover monetary damages and who has never filed a claim against the estate is entitled to a jury trial under the constitutional mandates of the Seventh Amendment to the United States Constitution, notwithstanding Congress' characterization of the action as a core proceeding. Id. at 36, 57-58. See also Langenkamp v. Culp, 498 U.S. 42, 45 (1990) (reaffirming that "[i]f a party does not submit a claim against the bankruptcy estate, however, the trustee can recover allegedly preferential transfers only by filing what amounts to a legal action to recover a monetary transfer, In those circumstances the preference defendant is entitled to a jury trial") (emphasis in original).
The United States Supreme Court made clear that "the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages that is at issue in this case." Granfinanciera, 492 U.S. at 57. The Court "did not intend to cast doubt on the proposition" that actions which seek solely legal relief by parties who have not entered a claim against the estate neither arise "as part of the process of allowance and disallowance of claims" nor are "integral to the restructuring of debtor-creditor relations." Id. at 58. In those instances, the Court determined that the right to a jury trial had been preserved. Id.
Although the Supreme Court acknowledged that, under certain circumstances, allowing jury trials could "impede the swift resolution of bankruptcy proceedings and increase the expense of Chapter 11 reorganizations," the Court nevertheless concluded that "these considerations are insufficient to overcome the clear command of the Seventh Amendment," particularly because "respondent's suit was commenced after the Bankruptcy Court approved the debtor's plan of reorganization." Id. at 63.
In the instant matter, this court believes that Defendant has shown cause sufficient to justify withdrawal of the reference. Plaintiff does not dispute that (1) Defendant has never filed a claim against the estate; (2) Defendant timely demanded a jury trial; or (3) Plaintiff's causes of action for breach of contract, fraud, tortious interference, and breach of good faith, fair dealing, and fiduciary duty are legal claims seeking monetary damages for which Defendant would otherwise be entitled to a jury trial absent the bankruptcy proceedings. In re Clay, 35 F.3d 190, 194 (5th Cir. 1994) (determining that traditional common-law actions be adjudicated by "the traditional common-law mode of judge and jury"). Rather, Plaintiff argues that Plaintiff's state-based claims constitute core proceedings, the outcome of which could affect the value of the assets of the estate, could impact on Plaintiff's ability to perform under the Plan, and necessarily belong in the bankruptcy court. This court disagrees.
First, although the United States Court of Appeals for the Fifth Circuit recognizes that non-Article III bankruptcy courts may hear cases involving "public rights," which are rights against the government or closely intertwined with a regulatory scheme, including bankruptcy, the Fifth Circuit also asserts that "[r]egardless of whether one characterizes a proceeding as core or noncore, a case is not a public rights case if a litigant has a Seventh Amendment right to a trial by jury." In re Clay, 35 F.3d at 194. Indeed, "where a case or controversy gives rise to a Seventh Amendment right to a jury trial, Congress may not give jurisdiction to a non-Article III court." Id. at 195. "[T]he fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution." Id. (citing INS v. Chadha, 462 U.S. 919, 944 (1983)).
Second, as in the instant matter, it is well settled that "a contract and tort action for damages, is clearly legal in nature and involves a matter of private right." NDEP Corp., 203 B.R. at 909. See also Granfinanciera, 492 U.S. at 55-56 (stating that "suits which . . . constitute no part of the proceedings in bankruptcy . . . are quintessentially suits at common law that more nearly resemble state-law contract claims . . . than they do creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res").
Because Plaintiff's state law causes of action are legal controversies that (1) do not depend on the bankruptcy laws for their existence, i.e., Plaintiff could proceed with these actions in another court even in the absence of bankruptcy; (2) do not arise as part of the process of allowance and disallowance of claims; and (3) are not integral to the restructuring of debtor-creditor relations, this court finds that Plaintiff's claims are noncore matters; and because Defendant has timely and properly demanded a jury trial and has not expressly consented to this court's conduct of the jury trial under section 157(e) supra, this court is convinced that Plaintiff's claims must be heard by an Article III court and that the reference must be withdrawn. See Wood v. Wood (In re Wood), 825 F.2d 90, 96-97 (5th Cir. 1987) (finding that actions related only peripherally to an adjudication under bankruptcy must, absent consent of the litigants, be heard by an Article III court); Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir. 1985) (enumerating factors to be considered when cause for withdrawal of reference must be determined, including, inter alia, whether a jury trial has been requested); Viburnum, Inc. v. Executive RiskIndem., Inc. ( In re Jackson BrookInst., Inc., 280 B.R. 779, 782 (D. Me. 2002) (agreeing that withdrawal is mandatory "if a litigant is entitled to a jury trial on [non-core] matters") (citations omitted); Goldstein v. K-Swiss, Inc. (In re Just for Feet, Inc., 2002 Bankr. LEXIS 330, at *5 (D. Del. Apr. 9, 2002) (agreeing that the right to a jury trial constitutes sufficient cause for withdrawal of the reference).
Plaintiff argues, however, that Defendant's post-petition execution of the Confidentiality Agreement waived Defendant's right to a jury trial. Plaintiff offers no authority, and this court finds none, which supports this proposition. While this court agrees that a party may waive its Seventh Amendment right to a jury trial by voluntarily submitting to the jurisdiction of the bankruptcy court through the filing of a petition or claim in the bankruptcy court, Billing v. Ravin, Greenberg Zacking, P.A., 22 F.3d 1242, 1250-53 (3d Cir. 1993), Defendant has filed no claims against the estate, has in no way been intertwined with any proceedings or matters previously before the bankruptcy court, and has been, and currently is, in all other respects an unrelated third party to Plaintiff's bankruptcy and reorganization. See In Re Jensen, 946 F.2d 369, 373-74 (5th Cir. 1991) (affirming the right to a jury trial on state law claims where plan had previously been confirmed, the dispute was not between creditors and the debtor over amounts to be divided, the dispute was not integral to the restructuring of debtor-creditor relations, and the suit was against a third party who was not a creditor of the estate).
It is well settled that "the right of jury trial is fundamental, and courts must indulge every reasonable presumption against waiver." Jennings v. McCormick, 154 F.3d 542, 545 (5th Cir. 1998). See also Capital Assocs. Int'l, Inc. v. Banc One Leasing Corp. (In re Capital Assocs. Int'l, Inc.), 2003 Bankr. LEXIS 931, at *6 (N.D. Tex. Aug. 6, 2003) (finding that "courts construe purported contractual jury waiver provisions strictly against waiver, and will indulge every reasonable presumption against waiver"); Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 393 (1937) (indulging every reasonable presumption against waiver "as the right of jury trial is fundamental"); Medical Air Tech. Corp. v. Marwan Inv. Inc., 303 F.3d 11, 18-19 (1st Cir. 2002) (finding a presumption against denying a jury trial based on waiver and determining that waivers must be strictly construed). Moreover, relinquishment of the right to jury trial must be knowing and voluntary based on the facts of the case. Jennings, 154 F.3d at 545.
Consistent with the above principles, this court concludes that Defendant did not waive its right to a jury trial by executing the Confidentiality Agreement. Plaintiff has offered no evidence that any language contained in the Confidentiality Agreement unquestionably demonstrates Defendant's knowing and voluntary relinquishment of Defendant's right to trial by jury. To the contrary, Defendant has specifically withheld its express consent to this court's conduct of a jury trial pursuant to section 157(e) supra. See In re Clay, 35 F.3d at 196 (finding that "[c]onsent is a key factor empowering [non-Article III judges] to conduct jury proceedings"). See also Landry v. Exxon Pipeline Co. Mendoza Marine, Inc., 260 B.R. 769, 805 n. 117, (M.D. La. 2001) (concluding that lack of consent of all parties to bankruptcy court's conduct of jury trial can be cured by withdrawal of the reference).
Because this court's obligation is to "indulge every reasonable presumption against waiver," Jennings, 154 F.3d at 545, and to not find waiver in a "doubtful situation," McAfee v. U. P. Martin, 63 F.3d 436, 437 (5th Cir. 1995), this court concludes that the facts in this case do not support a finding of Defendant's knowing and voluntary waiver of the right to trial by jury and that withdrawal of the reference is appropriate.
Motion for Voluntary Abstention
If the above Court grants Defendant's Motion to Withdraw and Defendant nevertheless wishes to continue pursuit of its Motion for Voluntary Abstention, this court respectfully recommends that Defendant's Motion for Voluntary Abstention be returned to this court for consideration prior to disposition by the District Court.
CONCLUSION
After considering the record before the court and the arguments of the parties at the hearing, this court concludes that Defendant has filed no claims against the estate, Plaintiff pursues non-core state law legal claims, Defendant timely and properly demanded a jury trial, Defendant has not waived its right to a trial by jury, and Defendant has not consented to this court's conduct of a jury trial as required by 28 U.S.C. § 157(e). Accordingly, this court respectfully recommends that Defendant's Motion to Withdraw Reference be granted and the reference be withdrawn. Additionally, if the above Court grants Defendant's Motion to Withdraw and Defendant nevertheless wishes to continue pursuit of its Motion for Voluntary Abstention, this court respectfully recommends that Defendant's Motion for Voluntary Abstention be returned to this court for consideration.