Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP)

464 B.R. 348

In re HELLER EHRMAN LLP, Liquidating Debtor.Heller Ehrman LLP, Liquidating Debtor, Plaintiff,

v.Arnold & Porter, LLP, et al., Defendants.

No. C 11–04848 CRB.

United States District Court, N.D. California.

Dec. 13, 2011.

Melissa Lor, Christopher Daniel Sullivan, Matthew Rutledge Schultz, Trepel Greenfield Sullivan & Draa LLP, San Francisco, CA, for Plaintiff.

Jonathan W. Hughes, Diana Donohoe Digennaro, Pamela Phillips, Howard Rice Nemerovsky Canady Falk, Nathaniel Peardon Garrett, Tobias Sebastian Keller, Jones Day, D. Donald Ryland, Martin Daniel White, Sheppard Mullin Richter & Hampton, James Lynn Miller, Luther Kent Orton, Snyder Miller & Orton LLP, Aaron M. Oliner, Neil William Bason, Duane Morris LLP, San Francisco, CA, Richard W. Brunette, Sheppard Mullin Richter & Hampton, Los Angeles, CA, for Defendants.

Dennis Montali, San Francisco, CA, pro se.USBC Manager–San Francisco, San Francisco, CA, pro se.

MEMORANDUM AND ORDER DENYING MOTION TO WITHDRAW THE REFERENCE

CHARLES R. BREYER, District Judge.

This case deals with the parameters of the Supreme Court's recent decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Stern v. Marshall held bankruptcy judges did not have Article III constitutional authority to enter final judgment under 28 U.S.C. § 157(b)(2)(C) on a debtor's state-law counterclaim that is not resolved in the process of ruling on the creditor's proof of claim. ––– U.S. ––––, 131 S.Ct. 2594, 2608, 180 L.Ed.2d 475.

Sixteen law firm defendants ¹ have asked this Court to withdraw from the bankruptcy judge the cases pending against them by the Plan Administrator for Heller Ehrman LLP (“Heller”). The cases stem out of Heller's dissolution, and the shareholders movement to other law firms. Heller is now suing those other law firms to recover profits from unfinished business Heller shareholders brought with them to new firms, under the theory that they were fraudulent transfers.

The law firm defendants (“Defendants”) argue the reasoning of Stern precludes bankruptcy judges from entering a final judgment on fraudulent conveyance actions brought pursuant to 28 U.S.C. § 157(b)(2)(H). Heller argues the decision is a “narrow” one, and should not be read to apply to a statutory provision not at issue in Stern. The Court concludes that while Stern prevents the bankruptcy court from entering a final judgment on the claim at issue here, it does not require that this Court withdraw the bankruptcy reference. Moreover, for the reasons stated below, Defendants have not established cause for permissive withdrawal of the reference. Accordingly, the Court DENIES the motion to withdraw, and requests the bankruptcy court to prepare proposed findings of fact and conclusions of law if necessary.

I. FACTUAL BACKGROUND

Heller's Chapter 11 Bankruptcy case commenced more than two years ago. Decl. of Jonathan Hughes in support of Arnold & Porter Mot. to Withdraw the Reference (“Hughes Decl.”) (dkt. 1) Ex. A (Chapter 11 Voluntary Petition). The bankruptcy court confirmed Heller's liquidation plan on August 16, 2010. Hughes Decl. Ex. B (Notice of Entry of Confirmation Order).

As the Reorganized Debtor, Heller is seeking to recover from the defendant law firms the value of profits received by them with respect to unfinished business that was being handled by Heller at the time of its dissolution, and then taken to defendant law firms by former Heller shareholders. As part of its dissolution process but prior to the initiation of bankruptcy proceedings, Heller agreed to waive its rights under Jewel v. Boxer, 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1984), to recover fees associated with such unfinished business that were generated by its attorneys after their departure. Heller now seeks to avoid what is generally known as the “ Jewel Waiver” as constituting actual or constructive fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550, as well as under California Civil Code §§ 3439.04, 3439.05, 3439.07 via 11 U.S.C. § 544.²

On June 23, 2011, the Supreme Court issued its opinion in Stern. Heller filed amended complaints in late June and early July, and most of the Defendants answered and made a jury demand. Discovery began in the case, and has been proceeding apace with exchanges of RFPs, RFAs, and interrogatories. Sullivan Decl. ¶ 14.

In early September, the Defendants filed motions to withdraw the reference, which the bankruptcy judge consolidated. The bankruptcy judge also filed a Recommendation pursuant to Bankruptcy Local Rule 5011–2(b), suggesting that this Court deny the motions to withdraw the reference. In re Heller Ehrman LLP, Bankr.No. 08–32514, 2011 WL 4542512 (Bankr.N.D.Cal. Sept. 28, 2011). Defendant law firms Arnold & Porter, Jones Day, Davis Wright Tremaine, Foley & Lardner LLP and Winston & Strawn LLP thereupon filed motions with this court to withdraw the reference, Heller opposed these motions, and Jones Day, and Orrick, Herrington & Sutcliffe (taking over for Arnold & Porter, which settled), filed replies joined by other Defendants. The Court held a hearing on the matter on November 18, 2011.

II. LEGAL STANDARD

The Northern District of California's Local Rules require that all cases and proceedings “related to” a bankruptcy case be referred to a bankruptcy court. B.L.R. 5011–1(a); see also 28 U.S.C. § 157(a). The court “may withdraw in whole or in part, any case proceeding referred, on its own motion or on timely motion of any party, for cause shown.” 28 U.S.C. § 157(d). Clearly, good cause for withdrawal would be the absence of jurisdiction to adjudicate the action. However, even if jurisdiction exists, a district court may withdraw the reference in its discretion. The Defendants here argue the Court must withdraw the reference because the Bankruptcy Court no longer has jurisdiction to hear the case under the statute (mandatory withdrawal), or, in the alternative, the Court should exercise its discretion to withdraw the reference (permissive withdrawal).

As to permissive withdrawal, the Ninth Circuit has held that a district court should consider several factors, including “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” in the exercise of its discretion. Sec. Farms v. Int'l. Bhd. of Teamsters (In re Security Farms), 124 F.3d 999, 1008 (9th Cir.1997). The party seeking withdrawal of the reference bears the burden of showing that the reference should be withdrawn. Carmel v. Galam (In re Larry's Apartment, LLC), 210 B.R. 469, 472 (Bankr.D.Ariz.1997).

III. DISCUSSION

In Stern, the Supreme Court held that designation of state law counterclaims as “core” in the bankruptcy statute was insufficient to find it constitutional for the bankruptcy court to render a final judgment on those counterclaims. In light of that holding, the Defendants ask this Court to find that Stern dictates that a bankruptcy judge does not have constitutional authority under Article III to enter a final judgment on the fraudulent conveyance actions at issue here. While fraudulent conveyance actions are also designated as “core” in the bankruptcy statute, they were not at issue in Stern. Thus, the question is whether the holding of Stern applies to other “core” matters in the statute. Upon examination, the Court determines the reasoning of Stern does apply to the fraudulent conveyance claims in this case, and that the bankruptcy court cannot enter a final judgment on these claims.

As a consequence of this holding, this Court must determine whether the reference should be withdrawn, either because the law compels withdrawal or, if not, withdrawal is warranted in the exercise of this court's discretion. The Defendants' argument for mandatory withdrawal is that there is no statutory authority for the bankruptcy court to retain jurisdiction of the actions for the purpose of issuing proposed findings of fact and conclusions of law. Because fraudulent conveyance actions are “core” actions under the bankruptcy statute, Defendants assert that they are not susceptible to adjudication by way of proposed findings of fact and conclusions of law.

Additionally, Defendants maintain in the alternative that under the circumstances of this case a proper exercise of discretion mandates permissive withdrawal.

The Court disagrees with both positions and finds that Stern does not require withdrawal. Moreover, neither Stern nor the law of this Circuit demonstrates that these actions would benefit from withdrawal at this time.

A. The Impact of Stern v. Marshall

Stern v. Marshall held it was unconstitutional for a bankruptcy judge to enter a final judgment on a debtor's state law counterclaim that was not resolved in the process of ruling on a creditor's proof of claim. 131 S.Ct. at 2620. Whether Stern should be read to hold that bankruptcy judges do not have constitutional authority to enter final judgments in fraudulent conveyance actions turns on whether the court applies only the strict dictate of the holding, or rather looks to the thrust of the reasoning the Court used in coming to that holding. Heller argues in favor of a narrow reading of the holding of Stern, stating by its face it does not apply to fraudulent conveyance actions.

In support of this position, Heller points to the limiting language in the Stern opinion. The decision includes several passages where the Supreme Court demonstrates its intention that the case have a narrow holding. “We do not think the removal of counterclaims such as Vickie's from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented is a ‘narrow’ one.” Stern, 131 S.Ct. at 2620. In announcing the holding, the Supreme Court stated that “Congress, in one isolated respect, exceeded [the Article III] limitation in the Bankruptcy Act of 1984.” I...