Harker v. Webb

DONALD F. HARKER, III, Plaintiff, v. ERIC WEBB, Defendant.

DONALD F. HARKER, III, Plaintiff, v. CHRISTOPHER F. CUMMINGS, Defendant.

Nos. 3:21-cv-22, 3:21-cv-23

United States District Court, S.D. Ohio, Western Division, Dayton

September 9, 2021

ORDER

Hon Michael J. Newman United States District Judge

ORDER: (1) DENYING WITHOUT PREJUDICE DEFENDANTS' MOTIONS TO WITHDRAW THE REFERENCE TO THE BANKRUPTCY COURT AND (2) INSTRUCTING THE BANKRUPTCY COURT TO CONDUCT ALL REMAINING PRETRIAL MATTERS

This case is before the Court on Defendants Eric Webb's and Christopher F. Cummings's motions to withdraw the reference of the preferential transfer, 28 U.S.C. § 157 and fraudulent conveyance, 28 U.S.C. § 158, claims filed against them from the U.S. Bankruptcy Court for the Southern District of Ohio. Harker v. Webb (“Webb”), No. 3:21-cv-22, Doc. No. 2; Harker v. Cummings (“Cummings”), No. 3:21-cv-23, Doc. No 2. The motions were fully briefed before the Bankruptcy Court and are now ripe for review.

Defendants' (particularly Webb's) case strikes at the heart of the constitutional limits that Article III of the U.S. Constitution places on Congress's power to delegate administration of the bankruptcy laws to the bankruptcy courts. See U.S. Const. art. III, § 1, cl. 1 (“The judicial power of the United States, shall be vested in one supreme court, and in such inferior courts as the Congress may from time to time ordain and establish”). In Stern v. Marshall, the Supreme Court held that a bankruptcy court unconstitutionally exercised the “judicial power of the United States” by entering final judgment on a counterclaim arising under state law. 564 U.S. 462, 487 (2011). But, since Stern, the Supreme Court has clarified that a bankruptcy proceeding need not immediately be transported to the district court the moment uncertainty arises over whether a bankruptcy court can finally adjudicate certain claims. See Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 38 (2014).

In this case, there remains significant pretrial work outstanding that no party questions the Bankruptcy Court is constitutionally permitted to oversee. 28 U.S.C. § 157. The Court does not doubt the claims in this case present legitimate constitutional questions, but it equally finds no reason why those concerns cannot be addressed in the ordinary course. 28 U.S.C. § 157(c)(1). Consequently, Defendants' motions to withdraw are premature, and these cases will be returned to the Bankruptcy Court.

I.

Debtor GYPC, Inc. filed a voluntary petition for Chapter 11 bankruptcy on March 30, 2017. Webb, Doc. No. 3 at PageID 20. The matter was converted to a Chapter 7 case on August 16, 2017. Id. Debtor's bankruptcy counsel filed, and the Bankruptcy Court granted, an application to retain Special Counsel. Id.

The Special Counsel filed adversary proceedings for preferential transfer and fraudulent conveyance against Webb and Cummings. Webb, Doc. No. 2 at PageID 9. Webb and Cummings are Debtor's only two shareholders. Webb, Doc. No. 3 at PageID 20. In short, the Special Counsel alleges Webb and Cummings used their insider status to transfer corporate funds to themselves within the one-year look back period. Harker v. Cummings, 3:19-ap-3046, Doc. No. 53; Harker v. Webb, 3:19-ap-3047, Doc. No. 54. The Special Counsel petitioned the Bankruptcy Court to avoid the transfers and order Webb and Cummings to repay the funds to the estate. Id.^[1] Both adversary proceedings arise out of the same set of operative facts, and the only procedural difference is that Cummings filed a proof of claim with the Bankruptcy Court, while Webb has not. Webb, Doc. No. 2 at PageID 9; Cummings, Doc. No. 2 at PageID 9.^[2]

Both Defendants moved to dismiss the Trustee's claims. Id. But the Bankruptcy Court denied their motions and granted the Trustee leave to file an amended complaint. Id. Defendants renewed their motions to dismiss, and this time the Bankruptcy Court granted and denied in part their motions. Id. Both Defendants answered and asserted their right to a jury trial. Id. They now request this Court to withdraw their adversary proceedings from the Bankruptcy Court. Webb, Doc. No. 2; Cummings, Doc. No. 2.

II.

Bankruptcy jurisdiction only exists by congressional grant of subject-matter jurisdiction. See 28 U.S.C. §§ 1334(a), (b), and (e). Jurisdiction over bankruptcy cases under Title 11 of the Bankruptcy Code is vested exclusively in the district courts. 28 U.S.C. § 1334(a). But, through the Bankruptcy Amendments and Federal Judgeship Act of 1984 (“1984 Act”), Congress established a division of labor between the district courts and the bankruptcy courts. See Exec. Benefits, 573 U.S. at 33 (“The 1984 Act largely restored the bifurcated jurisdictional scheme that existed prior to the [Bankruptcy Act of 1978]. The 1984 Act implements that bifurcated scheme by dividing all matters that may be referred to the bankruptcy court into two categories: ‘core' and ‘non-core' proceedings”).

To that end, Congress created 28 U.S.C. § 157. Section 157 is not a jurisdictional provision; rather, it defines what are and are not core claims. See In re Leslie Fay Cos., Inc., 212 B.R. 747, 773 (Bankr. S.D.N.Y. 1997) (citation omitted) (“The classification of a proceeding as core or non-core does not determine the jurisdiction of a bankruptcy court, but instead relates to a determination of whether the court may enter a final order or judgment or whether it may only issue findings of fact and conclusions of law upon which the district court enters a final order upon de novo review”). Bankruptcy courts are entrusted with answering the core, non-core question in the first instance. 28 U.S.C. § 157(b)(3) (“The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11”). If the claim is core, the bankruptcy court is empowered to adjudicate and enter final judgment on the claims. 28 U.S.C. § 157(b)(1); see Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 670 (2015). If a claim is non-core but “otherwise related to a case under title 11, ” the bankruptcy court may still preside over the claim and do everything but enter final judgment and conduct a jury trial absent the parties' consent. 28 U.S.C. § 157(c)(1), (e); see Stern, 564 U.S. at 475 (explaining the divergent procedural path following the bankruptcy court's core, non-core analysis). Bankruptcy courts that handle non-core claims -- like a United States Magistrate Judge -- “shall submit proposed findings of fact and conclusions of law to the district court” for the district court to review de novo. 28 U.S.C. § 157(c)(1).

District courts retain discretion to “withdraw, in whole or in part, any case or proceeding referred” to bankruptcy courts “for cause shown.” 28 U.S.C. § 157(d). The Bankruptcy Code does not define “cause, ” so courts evaluate the following factors to determine whether withdrawal is appropriate: “(1) whether the right to a jury trial exists; (2) whether the matter is core or non-core; (3) promoting judicial economy; (4) promoting uniformity in bankruptcy administration; (5) reducing forum shopping and confusion; (6) conserving the creditor's and debtor's resources; and (7) expediting the bankruptcy process.” Sergent v. McKinstry, 472 B.R. 387, 404 (E.D. Ky. 2012); see also In re Oasis Corp., No. 2:08-cv-288, 2008 WL 2473496, at *1 (S.D. Ohio June 18, 2008). “Permissive withdrawal of reference ‘is not intended to be an “escape hatch” from bankruptcy court into district court,' therefore, ‘courts prefer to grant such relief only in a limited class of proceedings.'” In re Rivas, No. 1:09-cv-176, 2009 WL 2929424, at *1 (E.D. Tenn. Sept. 8, 2009) (quoting Holland v. LTV Steel Co., Inc., 288 B.R. 770, 772-73 (N.D. Ohio 2002)).

III.

Webb argues that withdrawal of the adversary proceedings is not only appropriate but necessary because the Trustee presents so-called Stern claims, on which the Bankruptcy Court is constitutionally prohibited from entering final judgment. Webb, Doc. No. 2 at PageID 11.^[3] Webb also seeks a jury trial on these claims. Id. at PageID 10. He asserts that without his consent --which he does not intend to give -- the Seventh Amendment to the U.S. Constitution prohibits the Bankruptcy Court from presiding over a jury trial. Id.

The Trustee contends that withdrawal -- even if warranted -- is premature. Webb, Doc. No. 3 at PageID 26. Bankruptcy courts, in the Trustee's view, are better equipped with specialized knowledge to handle matters just like this, and it would be inefficient to have a second judge get up to speed on the case when the matter has been handled ably by a bankruptcy judge for years. Id. Plus, the Trustee points out, even if the Bankruptcy Court was constitutionally barred from entering final judgment or conducting a jury trial on the adversary claims, § 157(c)(1) permits bankruptcy judges to preside over all pretrial matters. Id. at PageID 25-27. The Trustee sees no issue with the Bankruptcy Court either making a report and recommendation on summary judgment or preparing the claims for trial before handing the case off to the district court. Id.

The Court agrees with the Trustee that withdrawal is untimely. Webb is right as a doctrinal matter that the district court must enter final judgment or hold a jury trial on the adversary proceedings lodged against him. See Waldman v Stone, 698 F.3d 910, 919 (6th Cir. 2012). But Webb presents no persuasive reason why the Bankruptcy Court cannot handle all pretrial matters in these cases up and until the point of issuing proposed findings of fact and conclusions or law or certifying that they are...