Opinion
PAUL LAURIN, STACY FOSTER, BARNES & THORNBURG LLP, Los Angeles, California, Attorneys for Plaintiff ONE LONGHORN LAND I, L.P.
NOTICE OF MOTION AND MOTION TO WITHDRAW REFERENCE OF ADVERSARY PROCEEDING FROM BANKRUPTCY COURT UNDER 28 U.S.C. SECTION 157(d), FRBP 5011, AND LOCAL BANKRUPTCY RULE 5011-1; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF;
MAUREEN A. TIGHE, District Judge.
MOVANT ONE LONGHORN LAND I, L.P.'S MOTION TO WITHDRAW REFERENCE OF ADVERSARY PROCEEDING FROM BANKRUPTCY COURT UNDER 28 U.S.C. SECTION 157(d), FRBP 5011, AND LOCAL BANKRUPTCY RULE 5011-1; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF:
TO ALL PARTIES AND THEIR COUNSEL OF RECORD: PLEASE TAKE NOTICE that defendant One Longhorn Land I, L.P., as a creditor of Debtor Brian Presley, will and hereby does move for entry of an order withdrawing the reference to the United States Bankruptcy Court for the Central District of California of the adversary proceeding styled Brian D. Presley v. One Longhorn Land I, L.P., Adv. Proc. No. 1:15-ap-01016.
Withdrawal by this Court of the reference of this action to the bankruptcy court is mandatory under 28 U.S.C. § 157(d) because resolution of the proceeding will require substantial and material consideration of federal laws other than title 11 of the United States Code (the "Bankruptcy Code" ). In the alternative, cause is shown for permissive withdrawal of the reference under section 157(d). The grounds for the motion are set forth in the following memorandum of points and authorities, and are supported by the Declaration of Paul Laurin dated March 2, 2015.
TABLE OF CONTENTS I. PRELIMINARY STATEMENT 1 II. PROCEDURAL STATUS 2 III. THIS MOTION IS TIMELY 2 IV. APPLICABLE LEGAL STANDARD 2 V. PLAINTIFF'S COMPLAINTS REQUIRE "SUBSTANTIAL AND MATERIAL" CONSIDERATION OF SECURITIES LAWS 3 VI. ALTERNATIVELY THE COURT SHOULD WITHDRAW THE REFERENCE OF THE ADVERSARY PROCEEDING "FOR CAUSE SHOWN" 5 A. Withdrawal Promotes Judicial Economy 6 B. Withdrawal is Expeditious and Advances the Bankruptcy Process of Determining Dischargeability of Debts 7 C. Jury Rights are Implicated 8 VII. CONCLUSION 9
TABLE OF AUTHORITIES FEDERAL CASES Addison v. U.S. Department of Education (In re Addison), 240 B.R. 47 (C.D. Cal. 1999) 10, 11 Granfinanciera, S.A. v. Nordberg, 495 U.S. 33 (1989) 2, 13 In re Baldwin-United Corp., 57 B.R. 751 (S.D. Ohio 1985) 2, 7 In re Castlerock Properties, 781 F.2d 159 (9th Cir. 1986) 10 In re Cinematronics, Inc., 916 F.2d 1444 (9th Cir. 1990) 3, 13 In re Healthcentral.com, 504 F.3d 775 (9th Cir. 2007) 3, 14 In re Jafari, 401 B.R. 494 (Bankr. D.Colo. 2009) 9 In re James, 2012 WL 4849618 (Bankr. D. Colo. 2012) 9 In re Molina, Number CV 10-0575 SBA, 2010 WL 3516107 (N.D. Cal. Sept. 8, 2010) 9 In re National Consumer Mortg., LLC, Number 09-792, 2009 U.S. Dist. LEXIS 92064 (C.D. Cal. Sept. 14, 2009) 3 In re National Consumer Mortg., LLC, No. 09-792, 2009 U.S. Dist. LEXIS 92064 (C.D. Cal. Sept. 14, 2009) 14 Langenkamp v. Culp, 498 U.S. 42 (1990) 2, 13 Orion Pictures Corp. v. Showtime Networks, 4 F.3d 1095 (2d Cir. 1993) 10 Sec. Farms. v. International Brotherhood Of Teamsters, Chauffeurs, Warehouseman & Helpers, 124 F.3d 999 (9th Cir. 1997) passim Sec. Investor Prot. Corp. v. Bernard L. Madoff Investment Sec. LLC, 454 B.R. 307 (S.D.N.Y. 2011) 9 Stern v. Marshall, 131 S.Ct. 2594 (2011) 12
Vacation Village, Inc. v. Clark County, Nev, 497 F.3d 902 (9th Cir. 2007) 12 DOCKETED CASES Brian D. Presley v. One Longhorn Land I, L.P., Adv. Proc. No. 1:15-ap-01016 1 In re National Consumer Mortg., LLC, No. 8:09-01053 10 FEDERAL STATUTES 11 U.S.C. § 523(a) 7, 9 11 U.S.C. § 529(a) 6 28 U.S.C. § 157(b)(2) 11 28 U.S.C. § 157(c)(1) 10 28 U.S.C. § 157(d) passim FRBP 50111 LBR 5011-11 STATE STATUTES California Corporations Code § 25504 8 California Corporations Code § 25504.1 8 TREATISES AND LAW REVIEWS Securities Exchange Act 1934 - Rule 10b-5 4, 8 The Texas Securities 33.A - Act 09-01-2011 8, 9
MEMORANDUM OF POINTS AND AUTHORITIES
I. PRELIMINARY STATEMENT
One Longhorn Land I, L.P. ("Longhorn") is a Texas limited partnership which holds Federal and State securities law claims and state common law fraud claims against Brian Presley, an individual debtor in chapter 7 bankruptcy pending in this district. Longhorn has filed its claims as part of its adversary to deny the bankruptcy discharge to Brian Presley under 11 U.S.C. Section 529(a). Although such a determination has been identified by Congress as a "core" matter arising under the Bankruptcy Code, the liquidation of the underlying claims directly implicate non-bankruptcy federal laws including the Securities and Exchange Act of 1934 as well as non-bankruptcy state laws including California Corporations Code Sections 25504 and 25504.1 and Section 33.A of The Texas Securities Act 09-01-2011.
Assuming that it would be proper for the Bankruptcy Court to make non-bankruptcy claims liquidation adjudications, such an approach would not be efficient since Longhorn will, by the time of the hearing on this motion, have filed a related action in the District Court against non-debtor joint tortfeasors, including Brian Presley's father, a control person over the fraud entities, Anthony Stacy and Paul Ross, former representatives of an Arizona registered investment advisor, to adjudicate the same federal and state securities claims and common law claims for which Longhorn will seek liquidation and adjudication of non-dischargeabilty under Bankruptcy law. The Bankruptcy Court has no subject matter jurisdiction over such third party claims between non-debtor parties on non-bankruptcy matters with no impact on the bankruptcy estate. As a consequence, the most efficient and logical court to render full, complete and non-duplicative relief is a district court. Upon withdrawal of the reference, Plaintiff anticipates making an appropriate procedural motion to consolidate and coordinate the related matters.
II. PROCEDURAL STATUS
On June 18, 2014, Defendant filed a voluntary petition for relief under the provisions of chapter 7 of the United States Bankruptcy Code in Central District of California Bankruptcy Court. Defendant is a 50% interest owner and managing member of Freedom Films, LLC ("Freedom Films") a Delaware limited liability company. Freedom Films is a debtor in possession in a related pending chapter 11 bankruptcy case in the Bankruptcy Court. Pursuant to court order granting Longhorn an extension of the deadline to file a complaint objecting to the nondischargeability of debt against Defendant in the chapter 7 bankruptcy, Longhorn filed an adversary complaint against Defendant on February 23, 2015 in the Central District Bankruptcy Court (Case No. 1:15-ap-01016). The adversary complaint alleges violations of the Securities and Exchange Act of 1934, California and Texas securities law, and common law fraud, which establish grounds for non-dischargeability under 11 U.S.C. § 523(a).
III. THIS MOTION IS TIMELY
"A motion to withdraw [the reference] is timely if it was made as promptly as possible in light of the developments in the bankruptcy proceeding.'" Sec. Farms. v. Int'l Bhd. Of Teamsters, Chauffeurs, Warehouseman & Helpers, 124 F.3d 999, 1007 n.3 (9th Cir. 1997) (quoting In re Baldwin-United Corp., 57 B.R. 751, 754 (S.D. Ohio 1985)). Here, Plaintiff Longhorn filed this motion within a week of filing its adversary complaint while it awaited a response from counsel for Defendant to a proposal to stipulate to withdrawal of the reference. As such, there have been no substantive actions in adversary proceeding to date. Thus, parties will not be prejudiced as a result of withdrawal of the reference.
IV. APPLICABLE LEGAL STANDARD
Withdrawal of the reference of matters pending before the Bankruptcy Court is governed by Rule 5011 of the Federal Rules of Bankruptcy Procedure and 28 U.S.C. § 157(d) which provides that:
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) (emphasis added). This provision provides for withdrawal of the reference of any referred matter on both mandatory and permissive grounds. The District Court may withdraw the reference "for cause shown." Alternatively, if resolution of the matter requires "substantial and material" consideration of certain non-bankruptcy law, the reference must be withdrawn.
In this matter, both forms of withdrawal are applicable. Resolution of the adversary proceeding will require substantial and material considerations of non-bankruptcy state and federal laws, including the Securities and Exchange Act of 1934 and applicable state securities and common law tort claims that should be resolved in a district court. Alternatively, permissive withdrawal is warranted because the adversary complaint raises "non-core" issues that are more properly resolved by an Article III district court judge rather than an Article I bankruptcy judge. Additionally, withdrawal of the reference will best promote judicial economy and expedite the bankruptcy process.
V. PLAINTIFF'S COMPLAINTS REQUIRE "SUBSTANTIAL AND MATERIAL" CONSIDERATION OF SECURITIES LAWS
Withdrawal of the reference under 28 U.S.C. § 157(d) is mandatory if resolution of the issues requires "substantial and material consideration of non-bankruptcy federal law." In re Molina, No. CV 10-0575 SBA, 2010 WL 3516107, at *3 (N.D. Cal. Sept. 8, 2010) (quoting Sec. Farms., 124 F.3d at 1008). This case is premised on the interpretation of state and federal securities laws, which is the type of substantive and material non-bankruptcy law that satisfies the mandatory withdrawal portion of 28 U.S.C. § 157(d). See, e.g., Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 307 (S.D.N.Y. 2011).
In this case, the debt owed by Defendant to Plaintiff arises from Defendant's transactions induced by means of false pretenses, false representations and actual fraud. Defendant violated non-bankruptcy Federal securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934) including the Securities and Exchange Act of 1934 as well as state securities laws and is alleged to have committed common law fraud.
In In re Jafari creditors brought an adversary proceeding and moved for summary judgment, claiming debts arising from debtor's securities fraud were not dischargeable under § 523(a)(19). In re Jafari, 401 B.R. 494, 499-500 (Bankr. D.Colo. 2009). The court held that the plain language of Section 523(a)(19) requires that a determination of securities fraud liability be made by a non-bankruptcy court prior to a determination of nondischargeability. Id. Similarly, the bankruptcy court in In re James agreed with the reasoning in In re Jafari and held that a non-bankruptcy court must first determine liability for securities fraud before determining dischargeability under 11 U.S.C. § 523(a)(19). In re James, 2012 WL 4849618 at *4 (Bankr. D. Colo. 2012). Under these circumstances, section 157(d) mandates withdrawal of the reference for adjudication before an Article III court as a matter of law because resolution of the issues in the adversary proceeding requires substantial and material consideration of the federal and state securities laws which does not involve application of the Bankruptcy Code.
VI. ALTERNATIVELY THE COURT SHOULD WITHDRAW THE REFERENCE OF THE ADVERSARY PROCEEDING "FOR CAUSE SHOWN"
Alternatively, permissive withdrawal is warranted because the adversary complaint raises numerous "non-core" issues that are more properly resolved by an Article III district judge in federal district court than by an Article I bankruptcy judge. The determination to order "permissive" withdrawal of the reference under 28 U.S.C. § 157(d) is subject to the Court's discretion. See Addison v. U.S. Dep't of Educ. ( In re Addison ) 240 B.R. 47, 49 (C.D. Cal. 1999).
Although "cause" for permissive withdrawal of the reference under Section 157(d) is not defined in the statute, courts have held that the district courts should consider several factors including whether the claims involved are "core" or "non-core, " the most efficient use of judicial resources, expediting the bankruptcy process, uniformity of bankruptcy administration, preventing forum shopping, and other related factors, including reducing confusion and a request for a jury trial. See Sec. Farms 124 F.3d at 1008 (citing Orion Pictures Corp. v. Showtime Networks 4 F.3d 1095, 1101 (2d Cir. 1993)).
Bankruptcy courts are not permitted to enter final judgment on "non-core" proceedings within the meaning of Section 157(d). Any findings entered by the bankruptcy court in "non-core" proceedings are subject to de novo review by the district court. See 28 U.S.C. § 157(c)(1). Consequently, as an initial step in the permissive withdrawal analysis courts generally evaluate whether the matter at issue is a "core" or "non-core" proceeding. See In re Nat'l Consumer Mortg., LLC, No. 8:09-01053 TA, 2009 WL 2985243, at *2 (C.D. Cal. Sept. 14, 2009). As the Ninth Circuit has explained, "[a]ctions that do not depend on bankruptcy laws for their existence and that could proceed in another court are considered non-core.'" Sec. Farms, 124 F.3d at 1008 (citing In re Castlerock Props., 781 F.2d 159, 162 (9th Cir. 1986)); see 28 U.S.C. § 157(b)(2) (listing matters that are considered "core" proceedings).
The crux of Plaintiff's complaint involves state and federal securities claims and common law fraud which are "non-core" as they are not dependent on bankruptcy law. Moreover, the Ninth Circuit has held that "withdrawing the reference typically enhances efficiency where non-core issues predominate." Sec. Farms, 124 F.3d at 1009. Since non-core securities and common law fraud issues predominate here, immediate withdrawal constitutes the most efficient use of judicial resources.
A. Withdrawal Promotes Judicial Economy
Permissive withdrawal of "non-core" proceedings eliminates unnecessary costs because the alternative is for such matters to proceed in the bankruptcy court subject to de novo review by the district court. Sec. Farms, 124 F.3d at 1009. Further, this is not a case where the bankruptcy court has particular familiarity with the relevant issues and facts. There have been no substantive proceedings in this action as the adversary complaint has been filed within a week of this motion. Because the bankruptcy court lacks constitutional authority to decide the securities claims, "unnecessary costs could be avoided by a single proceeding in the district court." Sec. Farms, 124 F.3d at 1008. California district courts have determined that withdrawing reference from the bankruptcy court as soon as possible constitutes the most efficient use of judicial resources.
In In re Addison, the defendant in a non-core adversary proceeding moved to withdraw reference from the bankruptcy court and the motion was granted because "the interest of judicial economy dictates that [the] Court should exercise permissive withdrawal and adjudicate this matter now, rather than awaiting the determination of the bankruptcy court." In re Addison 240 B.R. 47, 50. (CD. Cal. 1999). Here, withdrawal of the reference immediately will similarly conserve judicial resources. A district court must eventually withdraw the reference to preserve plaintiff's right to a jury trial and review the Bankruptcy Court's findings of fact and conclusions of law as to plaintiff's non-core claims de novo. Withdrawing the reference now will avoid unnecessary duplication of effort between a district court and the Bankruptcy Court and a potential waste of each court's resources.
B. Withdrawal is Expeditious and Advances the Bankruptcy Process of Determining Dischargeability of Debts
28 U.S.C. § 157(d) provides that the district court has the power to "withdraw, in whole or part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." See Vacation Village, Inc. v. Clark County, Nev, 497 F.3d 902 (9th Cir. 2007) (district court judge's decision to withdraw reference sua sponte sustained; even though judge had served as bankruptcy judge in the removed proceedings, judge was acting in the interest of efficient use of judicial resources and saving costs). In Stern v. Marshall , the Supreme Court held that a bankruptcy court lacked constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim. Stern v. Marshall, 131 S.Ct. 2594 (2011). Since Stern was decided, issues have been raised in nondischargeability actions concerning whether bankruptcy courts have authority to issue final judgments, even with consent, on these "core" matters. Given the Stern ruling, the inefficiency of multiple fact-finding proceedings, the reference should be withdrawn before any further proceedings are conducted.
As discussed above, a district court is the proper court to adjudicate the securities claims. By withdrawing the reference immediately, a district court can adjudicate the claims together with other similar claims against third parties not subject to bankruptcy court jurisdiction and hold a jury trial to fully and finally adjudicate these claims which are the necessary predicate to deciding nondischargeability. Judicial economy is therefore best promoted by withdrawing the reference and allowing a district court to determine dischargeability of the subject claims in the adversary proceeding pending in the Bankruptcy Court.
C. Jury Rights are Implicated
The complaint in the Adversary Proceeding requests money damages for violations of the Securities Exchange Act of 1934, violation of Rule 10b-5 and Section 12(a)(2) of the Securities Act of 1933 as well as State securities violations and common law fraud. Plaintiff clearly has a right to trial by jury trial of the predicate securities and common law fraud claims underlying the request for the determination of non-dischargeability in the Adversary Proceeding. The Seventh Amendment provides in pertinent part:
In suits at common law, where the value of the controversy shall exceed twenty dollars, the right of trial by jury shall be preserved...
The Supreme Court has consistently interpreted the phrase, "suits at common law' to refer to suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized, and equitable remedies were administered.'" Granfinanciera, S.A. v. Nordberg, 495 U.S. 33, 41 (1989), citations omitted. Longhorn, having demanded trial by jury in its adversary complaint, is entitled to trial by jury on the issues of liability and damages on all claims pertaining to securities violations and fraud. Langenkamp v. Culp, 498 U.S. 42 (1990), rehearing denied, 498 U.S. 1043 (1991). Accordingly, efficiency will be maximized if the reference is withdrawn and a district court adjudicates the entire case because doing so will avoid duplicative proceedings and the costs and delay that necessarily arise when litigating a matter in two different forums, including the related matters against non-debtor third parties. See, e.g., In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 1990) ("where a jury trial is required and the parties refuse to consent to bankruptcy court jurisdiction, withdrawal of the case to the district court is appropriate").
While the Ninth Circuit's decision in In re Healthcentral.com held that the "the bankruptcy court may retain jurisdiction over the action for pre-trial matters." In re Healthcentral.com, 504 F.3d 775, 787 (9th Cir. 2007) (emphasis added), courts have decided to withdraw reference from a bankruptcy court immediately rather than allow the bankruptcy court to preside over all pre-trial matters. In re Nat'l Consumer Mortg., LLC, No. 09-792, 2009 U.S. Dist. LEXIS 92064 (C.D. Cal. Sept. 14, 2009). In this case, the adversary complaint has been filed within a week of this Motion to Withdraw Reference. Thus, the Bankruptcy Court is no more familiar with the underlying claims than any district court. Because Longhorn does not consent to a jury trial before the bankruptcy court, and for the reasons stated above, the reference of the adversary proceeding should be withdrawn.
VII. CONCLUSION
For the foregoing reasons, One Longhorn Land I, L.P. respectfully requests that the reference be withdrawn with respect to the adversary proceeding filed against Defendant Brian Presley.
DECLARATION OF PAUL LAURIN IN SUPPORT OF MOTION TO WITHDRAW REFERENCE OF ADVERSARY PROCEEDING FROM BANKRUPTCY COURT UNDER 28 U.S.C. SECTION 157(d), FRBP 5011, AND LOCAL BANKRUPTCY RULE 5011-1
I, Paul Laurin, do hereby declare as follows:
1. I am an attorney duly admitted to practice law before all courts of the State of California and the United States District Court, Central District. I am a partner with the law firm of Barnes & Thornburg LLP, counsel of record for One Longhorn Land I, L.P. ("Longhorn"). I have personal knowledge of the facts set forth below, and if called and sworn as a witness, I could and would testify competently thereto.
2. On June 18, 2014, Defendant Brian Presley filed a voluntary petition for relief under the provisions of chapter 7 of the United States Bankruptcy Code in Central District of California Bankruptcy Court (Case No. 1:14-bk-13029-MT).
3. On October 24, 2014, the deadline for Longhorn to file a nondischargeability complaint was extended to February 23, 2015.
4. On February 23, 2015, Longhorn filed an adversary complaint against Defendant Brian Presley objecting to the non-dischargeability of debt (Adv. No. 1:15-ap-01016) (the "Complaint"). A true and correct copy of the Complaint is attached hereto as "Exhibit 1."
5. Longhorn's Complaint involves violations of Federal securities laws and State securities laws.
6. Although no counsel for Brian Presley has appeared in the adversary proceeding, we made an effort to comply with the spirit of Local Rule 7-3 to meet and confer. On February 21, 2015, I sent an email correspondence to Gary Wallace, chapter 7 bankruptcy counsel for Brian Presley, informing him that Longhorn intended to file this Motion to withdraw reference and inviting him to meet and confer regarding a stipulation to withdraw reference.
7. On February 24, 2014, Mr. Wallace sent me an email correspondence informing me that he is authorized to accept service of process for Brian Presley in the adversary proceeding.
8. At the time of filing this Motion to Withdraw Reference, defendant Brian Presley has not responded to the adversary complaint. The summons and complaint have been served by mail on Mr. Wallace.
9. On February 24, 2015, Mr. Wallace requested a draft of the Motion to Withdraw to consider a stipulation to withdraw reference from the Bankruptcy Court.
10. On February 25, 2015, Stacy Foster, an associate at my law firm, sent Mr. Wallace a draft Motion and requested a response by the end of the day on February 26, 2015. We informed Mr. Wallace that we felt the need to move promptly to withdraw the reference in light of applicable law governing withdrawal of the bankruptcy reference. As of the time of this Motion, Mr. Wallace has not responded to that correspondence.
I hereby declare under penalty of perjury under the laws of the United States of America that the foregoing is true and correct to the best of my knowledge, information, and belief.
EXHIBIT "1"