In re Estate Financial, Inc.

In Re Estate Financial, Inc.

Bankruptcy Court case number: 9:08-11457-RR

Adversary number: 9:11-ap-11467 RR

CASE NO.: CV 11-04213 SJO

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

DATE: September 9, 2011

CIVIL MINUTES - GENERAL

PRESENT: THE HONORABLE S. JAMES OTERO, UNITED STATES DISTRICT JUDGE

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¦Victor Paul Cruz                ¦Not Present                      ¦
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¦COUNSEL PRESENT FOR PLAINTIFF:  ¦COUNSEL PRESENT FOR DEFENDANTS:  ¦
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PROCEEDINGS (in chambers): ORDER DENYING DEFENDANTS' MOTION TO WITHDRAW THE REFERENCE TO THE BANKRUPTCY COURT AS TO ADVERSARY PROCEEDING [Docket No. 6]

This matter is before the Court on Defendants Bryan Cave, LLP and Katherine M. Windler's (collectively, "Defendants") Motion to Withdraw the Reference to the Bankruptcy Court as to Adversary Proceedings ("Motion"), filed on May 20, 2011.¹ Plaintiff Thomas P. Jeremiassen, Chapter 11 Trustee to Debtor Estate Financial Inc. ("EFI") ("Plaintiff"), filed an Opposition to the Motion on May 27, 2011, to which Defendant replied. The Court found this matter suitable for disposition without oral argument and vacated the hearing set for June 20, 2011. See Fed. R. Civ. P. 78(b). For the following reasons, Defendants' Motion is DENIED.

I. BACKGROUND

EFI was a mortgage brokerage company engaged in the business of funding, servicing and managing commercial and construction loans secured by real estate located in California. (Opp'n 3:22-24.) EFI funded its loans with money obtained from individual investors or from Estate Financial Mortgage Fund, LLC, a funding company that EFI formed in 2002 for the purpose of investing in EFI-brokered loans. (Id. at 3:24-26.) In November, 2006, EFI retained Defendants to conduct a compliance review and audit of EFI's business practices. (Id. at 5:4-6.)

On June 25, 2008, EFI's creditors filed an involuntary bankruptcy petition against it. (EFI Req. for Judicial Notice ("EFI RJN") Ex. 2 at 9.) EFI consented to the entry of an order for relief under Chapter 11 on July 11, 2008, and on July 16, 2008, the order was entered. (Id. at 10.) In response to the order for relief, the Court appointed Plaintiff to EFI's estate on July 25, 2008. (EFIRJN Ex. 3 at 20.) On March 31, 2010, Defendants filed proofs of claim ("Proof of Claim") totaling $281,684.25 in EFI's bankruptcy for unpaid fees. (EFI RJN Ex. 6 at 338.) Subsequently, Plaintiff notified Defendants on June 11, 2010, that Plaintiff intended to commence litigation against them with causes of action stemming from Defendants' legal representation of EFI. (EFI RJN Ex. 11 at 363.) Shortly thereafter, Plaintiff and Defendants entered into a tolling agreement to allow more time to explore alternatives to litigation. (Id.) In a final effort to avoid litigation, Defendants and Plaintiff held a settlement conference on April 28, 2011. No progress was made at the conference, and Plaintiff immediately filed his complaint against Defendants. (Id.)

Following notice of the commenced action, Defendants filed a Notice of Withdrawal and Withdrawal of Claim Pursuant to Rule 3007 of the Federal Rules of Bankruptcy Procedure ("Withdrawal of Claim") on May 2, 2011. (EFI RJN Ex. 3 at 210.) In response, Plaintiff filed objections to Bryan Cave's Withdrawal of Claim on May 5, 2011. (Id.) Defendants filed the instant Motion with the Court on May 17, 2011. Defendants assert that the bulk of Plaintiff's claims are non-core to the bankruptcy proceedings because the claims are common-law causes of action arising out of Defendants' pre-petition representation of EFI. (See generally Mot.) Defendants also assert that Plaintiff seeks a jury trial, and Defendants have not consented to a jury trial before the bankruptcy court. (See generally Mot.)

II. LEGAL STANDARD

Pursuant to 28 U.S.C. § 157 ("section 157"), a district court has authority to withdraw reference to the bankruptcy court. See 28 U.S.C. § 157(d). Section 157(d) provides for both permissive and mandatory withdrawal, depending on the circumstances of the action. Id. For permissive withdrawal, section 157(d) authorizes "[t]he district court [to] withdraw, in whole or in part, any case or proceeding referred . . . on its own motion or on timely motion of any party, for cause shown." Id. When a party timely moves to withdraw proceedings that requires "consideration of both [T]itle 11 [of the Bankruptcy Code] and other laws of the United States regulating organizations or activities affecting interstate commerce," the court is mandated to withdraw the reference. Id. The party seeking withdrawal carries the "burden of persuasion." FTC v. First Alliance Mortg. Co., 282 B.R. 894, 902 (C.D. Cal. 2001) (citation omitted). It is within a district court's discretion to grant or deny a motion for permissive withdrawal of reference; that decision will not be disturbed unless the court abuses its discretion. See In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 1990).

III. DISCUSSION

Defendants fail to show cause for permissive withdrawal of the reference from bankruptcy court. "Permissive withdrawal is permitted only in a limited number of circumstances." Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 223 (D. Haw. July 31, 2006) (citations omitted). The Ninth Circuit has held that "[i]n determining whether cause exists, a district court should consider 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." Sec. Farms v. Int'l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997).

A. Core Matters

Bankruptcy judges have jurisdiction to hear and determine all cases brought under Title 11 of the Bankruptcy Code and "all core proceedings" arising under Title 11, or arising in a case brought under Title 11. See 28 U.S.C. § 157(b)(1). Section 157(b)(1) authorizes bankruptcy judges to enter appropriate orders and judgments with respect to Title 11 cases and core proceedings, subject to review by the district court. Id. Although "core proceedings" is undefined, section 157(b)(2) sets forth a "non-exhaustive list" of core proceedings. See In re Yochum, 89 F.3d 661, 669 (9th Cir. 1996) (citation omitted).

Adjudication of "counterclaims by the estate against persons filing claims against the estate" is characterized as a core proceeding. 28 U.S.C. § 157(b)(2)(D). A counterclaim, "even one based entirely on state law, can be a core proceeding . . . ." In re Marshall, 600 F.3d 1037, 1058 (9th Cir. 2010) (quotes omitted). The Ninth Circuit, however, recently clarified in In re Marshall that simply because a counterclaim "falls within the plain language definition of a core proceeding" of Section 157(b)(2) does not automatically make it a core proceeding. See id. at 1056-57 (quotes omitted); but cf. Perrin v. United States, 444 U.S. 37, 42 (1979) ("A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.") (citation omitted). Rather, "[a] counterclaim to a proof of claim can be adjudicated as a core proceeding . . . if it is a 'necessary precursor to the resolution of [a proof of claim] against the bankruptcy estate.'" In re Gorilla Co. (Gorilla II), No. 10-1029, 2010 WL 4038842, at *2 (D. Ariz. Oct. 14, 2010) (quoting Marshall, 600 F.3d at 1040). In other words, the counterclaim must be "so closely related to the proof of claim that the resolution of the counterclaim is necessary to resolve the allowance or disallowance of the claim itself." Marshall, 600 F.3d at 1058 (citation omitted).

"The existence of core matters weighs in favor of resolution of the adversary proceeding by the bankruptcy court." Hawaiian Airlines, 355 B.R. at 223. This is because "hearing core matters in a district court could be an inefficient allocation of judicial resources given that the bankruptcy court generally will be more familiar with the facts and issues." In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993); accord Molina, 2010 WL 3516107, at *2; In re Woldrich, No. 10-1245, 2010 WL 3087487, at *1 (D. Ariz. Aug. 6, 2010).

B. Plaintiff's Counterclaims

Defendants assert that Plaintiff's claims for professional negligence, negligence, aiding and abetting breach of fiduciary duty, breach of contract, and fraud are non-core because the claims are common-law causes of action arising out of Defendants' pre-petition representation of EFI. (Mot. 1:6-8.) However, Plaintiff argues that these counterclaims are related to the bankruptcyclaims because Defendants were hired to conduct a "compliance review and audit" regarding EFI's business practices, had knowledge of EFI's non-complaint business activities, failed to properly advise its client, and counseled EFI to continue their current business practices. (Opp'n 5:1-4; 5:26-28.)

Firstly, Plaintiff's claims are actually "counterclaims" because they are "counterclaims asserted by a debtor against [] persons filing claims in [a] bankruptcy case . . . ." See In re Gorilla Co. (Gorilla I), 429 B.R. 308, 312 (D. Ariz. 2010); see also Marshall, 600 F.3d at 1040 (where debtor "made a counterclaim" against a person who "filed a proof of claim"). Secondly, the Ninth Circuit has made abundantly clear that a counterclaim, "even one based entirely on state law, can be a core proceeding . . . ." Marshall, 600 F.3d at 1058 (citing In re Harris, 590 F.3d 730, 738-41 (9th Cir. 2009) (holding that a state...