Summary
declining to withdraw the reference because the Bankruptcy Court has "special expertise and experience" and "the consideration of the best use of judicial resources counsels strongly in favor" of denying the motion to withdraw the reference.
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03 Civ. 2992 (HB), case no. 02-37706 (CGM).
June 30, 2003.
OPINION ORDER
Sho-Me Power Electric Cooperative ("Sho-Me") moved by order to show cause pursuant to 28 U.S.C. § 157(d) to withdraw the reference for Remee's bankruptcy proceeding and to dismiss the proceeding. For the reasons below, Sho-Me's motion is denied.
I. BACKGROUND
In a trial before a jury over which I presided from October 28, 2002 to November 1, 2002, Sho-Me obtained a judgment against Remee Products Corp. ("Remee") for $5,176,569. See Remee Prods. Corp. v. Sho-Me Power Elec. Coop., 2003 U.S.Dist. LEXIS 494, at *2-*3 (S.D.N.Y. Jan. 17, 2003). The jury found that Remee, a manufacturer of fiber optic cable, breached its implied warranties of merchantability and fitness for intended use by shipping defective cable, and awarded Sho-Me damages totaling $3,443,627, and further found that Remee made intentional misrepresentations and omissions with respect to its defective fiber optic cable and awarded Sho-Me $1,732,942 for this intentional misrepresentation. Two weeks after this verdict, Remee filed a motion for judgment as a matter of law or for a new trial. That same day, Remee also filed a voluntary petition for bankruptcy.
The jury also awarded Remee $399,539 for Sho-Me's failure to pay for a final shipment of fiber optic cable.
As the largest (by far) of Remee's 238 unsecured creditors, Sho-Me has participated actively in the bankruptcy proceeding, including serving as chair of the Committee of Unsecured Creditors and has sought document production and depositions. On April 16, 2003, the Office of the United States Trustee filed a motion to dismiss or convert. On June 2, 2003, an Asset Purchase Agreement was reached between Remee and Remee Acquisition, Inc., and on June 3, the Bankruptcy Court held a hearing at which it approved the bid procedures to sell Remee's assets. A hearing in the Bankruptcy Court on the motion to approve the proposed sale is scheduled for July 1, 2003.
II. DISCUSSION
Sho-Me contends that Remee's bankruptcy proceeding is a sham and that it is a bad-faith tactic solely designed to avoid Sho-Me's judgment. Sho-Me claims that during settlement negotiations prior to trial, Remee's counsel stated that Remee would file for bankruptcy and its president Elias Muhlrad would repurchase the assets at the bankruptcy sale if the jury awarded a verdict against it. Sho-Me contends that subsequent events reflect that Remee filed for bankruptcy with no intent of reorganizing but is carrying out what it stated it would do to avoid Sho-Me's judgment. As further evidence of this alleged bad faith, Sho-Me claims inter alia 1) that Remee operated at a profit both before and after the bankruptcy petition, and 2) that Remee's bankruptcy petition and its financial statements are incomplete and inaccurate and that Remee has failed to comply with the Bankruptcy Court's discovery order and obtain bona fide bidders for its assets. Remee also points to the timing of the bankruptcy petition and to Remee's conduct during the pre-petition litigation, such as that Remee actively concealed the existence of a similar case pending in another court in this district for which Remee had produced documents that were also relevant to Sho-Me's claim but which Remee had failed to turn over. Remee contends that the terms of the Asset Purchase Agreement bear out that it is designed to permit Muhlrad to buy back Remee's assets on favorable terms and effectively extinguish Sho-Me's judgment.
The parties have submitted conflicting affidavits about whether such a conversation took place.
Sho-Me also contends that several of Remee's creditors are actually companies owned by Muhlrad and his family members that are centrally managed so that assets are transferred among the companies.
According to Sho-Me, these procedures contain inadequate notice and are "rigged" to allow Muhlrad to purchase Remee's assets with little or no contest.
Section 157(d) of Title 28 provides that a "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." In a recent decision, I reviewed the seven factors that the Second Circuit has identified for courts to consider in deciding whether to withdraw a reference to the bankruptcy court "for cause shown:" "(1) whether the claim is core or non-core; (2) whether the claim is legal or equitable; (3) whether the claim is triable by a jury; (4) the most efficient use of judicial resources; (5) reduction of forum shopping; (6) conservation of estate and non-debtor resources; and (7) uniformity of bankruptcy administration." See In reEnron Power Marketing, Inc. No. 01 Civ.7964, 2003 WL 68036, at *6 (S.D.N.Y. Jan. 8, 2003) (citing Orion Pictures Corp. v. Showtime Networks 4 F.3d 1095, 1101 (2d Cir. 1993). Several other propositions of law from that decision bear repeating here: First, "[t]he party seeking to withdraw reference must demonstrate that withdrawal is in the interests of judicial economy and that it will be prejudiced by having the bankruptcy court oversee pretrial matters." See In re Enron Power Marketing. 2003 WL 68036, at *7. Second, "the court should consider whether a claim is core or non-core, `since it is upon this issue that questions of efficiency and uniformity will turn.' Once a court has made a core/non-core determination, it must then proceed to "weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Id. at *6 (quoting Orion Pictures).
Section 157(d) also provides mandatory withdrawal: "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." See In re Enron Power Marketing, 2003 WL 68036, at *4. However, Sho-Me invokes only the district court's discretionary authority to withdraw the reference.
Remee contends that these seven factors weigh in favor of denying the motion to withdraw the reference, and Sho-Me implicitly concedes as much since it fails to explain how and why withdrawal is appropriate when measured against these factors. For example, the matter before the Bankruptcy Court is a quintessential "core" proceeding. Remee also contends that as a pre-petition judgment creditor Sho-Me has no right to a jury trial in the Bankruptcy Court, that the Bankruptcy Court has the greater familiarity with the issues presented, that Sho-Me's motion will fragment the administration of the bankruptcy estate, and that Sho-Me's motion is blatant forum-shopping. Instead, Sho-Me relies on two cases where the court withdrawn a bankruptcy reference where it appeared that the bankruptcy petition was filed to defraud judgment creditors. See Duttle v. Bandler Kass 147 F.R.D. 69, 70 (S.D.N.Y. 1993); In re Housecraft Indus. USA, Inc., 310 F.3d 64, 67 n. 2 (2d Cir. 2002). In addition, Sho-Me relies on 11 U.S.C. § 1112(b) which provides:
The Official Committee of Unsecured Creditors appeared to contest this motion on the basis that dismissal of the bankruptcy petition would place Sho-Me in a more advantageous position than the other unsecured creditors. General Electric Capital Corp., the only secured creditor, also appeared to oppose Sho-Me's motion for substantially the same reasons as Remee advances.
Remee states that Sho-Me's motion will not only fragment the bankruptcy process, it will "subvert it and derail it." However, if Sho-Me is correct that Remee's bankruptcy petition is a bad-faith subterfuge, the fact that the motion will derail the proceeding would seem a benefit rather than minus. With respect to Remee's claim that Sho-Me is forum-shopping, it is not clear that Sho-Me did anything other than what it was required to do by the Local Rules for the Division of Business Among District Judges, even if Sho-Me was very keen to bring this motion before me. Rule 21 of the Local Rules for the Division of Business Among District Judges provides that a civil matter shall be designated for assignment to White Plains if the claim arose in whole or in major part in the Northern Counties and at least one of the parties resides in the Northern Counties. Although the Remee bankruptcy is proceeding in Poughkeepsie, Sho-Me filed this as a related case to Remee v. Sho-Me, 01 Civ. 5554, as required by Rule 4 of the division-of-business rules. According to Rule 27, "[r]elated cases are heard at the place of holding court where the earliest case was filed." See L.B. v. Town of Chester, 232 F. Supp.2d 227, 232-33 (S.D.N.Y. 2002) (denying transfer to White Plains of a case that was filed as a related case in Foley Square even though under Rule 21 White Plains would have been appropriate); see also Rodriguez v. County of Orange, 1993 WL 427426 (S.D.N.Y. Oct. 18, 1993) (same).
[T]he court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including —
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is prejudicial to creditors;
(4) failure to propose a plan under section 1121 of this title within any time fixed by the court;
(5) denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) revocation of an order of confirmation under section 1144 of this title, and denial of confirmation of another plan or a modified plan under section 1129 of this title;
(7) inability to effectuate substantial consummation of a confirmed plan;
(8) material default by the debtor with respect to a confirmed plan;
(9) termination of a plan by reason of the occurrence of a condition specified in the plan; or
(10) nonpayment of any fees or charges required under chapter 123 of title 28.
Remee contends that cases decided under § 1112(b) impose a requirement that the bankruptcy petition be filed in good-faith and that absence of good faith is a grounds for dismissal. See In re HBA East Inc., 87 B.R. 248, 258 (Bankr. E.D.N.Y. 1998) ("This implicit good faith Chapter 11 prerequisite has been consistently upheld by the courts."). While I do not doubt that a bankruptcy petition that is filed in bad faith solely to avoid a judgment is grounds for a bankruptcy court to dismiss "for cause" under § 112(b) and is within this court's discretion to withdraw the reference for "cause shown" under § 547(d), that in my opinion only begs the question of which court is the appropriate one to make that determination — a question that the Circuit's seven-factor test is designed to help answer. As noted above, Sho-Me's silence with respect to those factors is telling.
At oral arguments, Sho-Me urged this court rather than the Bankruptcy Court to dismiss Remee's petition because "the bankruptcy court will hear our application in a vacuum." (Tr. at 15) Sho-Me argued further:
Your Honor has dealt with Remee's bad faith. Your Honor has seen Remee's witnesses. Your Honor has read Remee's affidavits. Your Honor has decided that Remee has undertaken sanctionable conduct. Your Honor has an understanding that this could be part of a strategy that Remee sought to employ even before the trial began. (Tr. at 15-16)
While I agree that my role in the prior litigation affords me some perspective on Remee and, as I indicated at the hearing, makes me very skeptical about Remee's and Muhlrad's motives, I disagree with the view that I am "uniquely qualified" to determine the legitimacy and the future course of Remee's bankruptcy. To the contrary, I think that the Bankruptcy Court is better positioned to make this determination, for several reasons. First, the Bankruptcy Court is no less able than I to take into consideration those aspects of Remee's allegedly bad-faith conduct that occurred in the pre-petition litigation before me; this is so because Remee's deviousness is well documented — in the jury's findings about intentional misrepresentation, in my decision sanctioning Remee for discovery violations, see Remee Prods. Corp. v. Sho-Me Power Elec. Coop., 2002 U.S.Dist. LEXIS 19700 at *43-*44 (S.D.N.Y. Oct. 15, 2002), and in my remarks at the hearing on Sho-Me's motion. Second, a considerable portion of the facts supporting Sho-Me's allegation that Remee's bankruptcy petition is in bad faith relate to or occurred in the proceedings in the Bankruptcy Court. Accordingly, I have no greater insight into the veracity of these accusations than the Bankruptcy Court. Third, and perhaps most significant, several facts which Sho-Me contends show bad faith involve issues that are within the Bankruptcy Court's special expertise. For example, the Bankruptcy Court rather than this court is better positioned to evaluate the merits and significance of Sho-Me's contentions that Remee operated at a profit both before and after the bankruptcy petition, that Remee's bankruptcy petition and its financial statements are incomplete and inaccurate, that Remee has failed to comply with the Bankruptcy Court's discovery order and obtain bona fide bidders for its assets. Moreover, the Bankruptcy Court is better able to evaluate the proposed sale agreement, in light of all that has gone on before, and determine whether or not Remee's conduct and intentions warrants dismissal of its petition. These are all matters within the Bankruptcy Court's bailiwick, and thus it is a much more efficient use of judicial resources to permit the Bankruptcy Court to determine whether Remee's bankruptcy petition should be dismissed.
For example, in response to Remee's contention about "misstatements, half-statements, and distortions," contained in the affidavits submitted along with Sho-Me's motion, I responded: "[T]he discussions that you raise about distortions of fact really sit poorly . . . since my experience at trial was that starting from the Starlight episode and moving right into this courtroom, there was nothing but bad faith evidenced, as the jury found, by [Remee]." (Tr. 25).
In sum, applying the factors enumerated in Enron Power Marketing, I decline to withdraw Remee's reference to Bankruptcy Court and to dismiss the petition. On this matter, the Bankruptcy Court is much better positioned to evaluate Sho-Me's allegations and to determine what action, if any, is appropriate in these circumstances for all parties concerned. Given the Bankruptcy Court's special expertise and experience in this area, the consideration of the best use of judicial resources counsels strongly in favor of this Court denying Sho-Me's motion to withdraw the reference and to dismiss Remee's petition and there are no compelling countervailing factors.
III. CONCLUSION
For the foregoing reasons, Sho-Me's motion is denied. The clerk of the court is instructed to close this and any other open motions in this matter.