Mason v.

498 B.R. 540

Joseph E. MASON, Defendant–Appellant,

v.Charles M. IVEY, III, Chapter 7 Trustee for the Estate of James Edwards Whitley, Plaintiff–Appellee.

Faye Swofford, Defendant–Appellant,

v.Charles M. Ivey, III, Chapter 7 Trustee for the Estate of James Edwards Whitley, Plaintiff–Appellee.

Robert P. Swofford, Defendant–Appellant,

v.Charles M. Ivey, III, Chapter 7 Trustee for the Estate of James Edwards Whitley, Plaintiff–Appellee.

Lucian Vick, Defendant–Appellant,

v.Charles M. Ivey, III, Chapter 7 Trustee for the Estate of James Edwards Whitley, Plaintiff–Appellee.

Nos. 1:12–cv–00525, 1:12–cv–00528, 1:12–cv–00529, 1:12–cv–00531.

United States District Court, M.D. North Carolina.

Aug. 23, 2013.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Jeffrey S. Southerland, Sarah Flintom Sparrow, Tuggle Duggins & Meschan, P.A., Greensboro, NC, Angus Scott McKellar, Battle Winslow Scott & Wiley, P.A., Rocky Mount, NC, for Defendant–Appellant.

James Edwards Whitley, Greensboro, NC, pro se.

Charles Marshall Ivey, IV, Edwin R. Gatton, Ivey McClellan Gatton & Talcott, L.L.P., Greensboro, NC, for Plaintiff–Appellee.

MEMORANDUM OPINION AND ORDER

THOMAS D. SCHROEDER, District Judge.

This matter arises from adversary proceedings brought by Chapter 7 Trustee Charles M. Ivey, III (“Trustee”) in the involuntary bankruptcy case of Debtor James Edwards Whitley (“Whitley” or “Debtor”). Before the court is the Joint Motion to Withdraw Reference to the United States Bankruptcy Court filed by Defendants Joseph E. Mason, Faye Swofford, Robert P. Swofford, and Lucian Vick (“Defendants”). (Doc. 10 (12–cv–00525, 12–cv–00528, 12–cv–00529); Doc. 7 (12–cv–00531).) The Trustee has responded (Doc. 14 (12–cv–00525, 12–cv–00528, 12–cv–00529); Doc. 12 (12–cv–00531)) and Defendants have replied (Doc. 15 (12–cv–00525, 12–cv–00528, 12–cv–00529); Doc. 13 (12–cv00531)). The matter is ready for decision. For the reasons set forth below, the motion will be denied.

I. BACKGROUND

On March 8, 2010, a group of unsecured creditors, which did not include Defendants, filed an involuntary petition for relief under Chapter 7 of the United States Bankruptcy Code against Whitley. As observed by the Bankruptcy Court, “James Edward[s] Whitley (the ‘Debtor’) was the sole shareholder and principal officer of South Wynd Financial, Inc., a corporation purportedly in the business of invoice funding and receivables financing (‘factoring’). In reality, the Debtor's factoring business was non-existent, fictitious, and amounted to a Ponzi scheme.” In re Whitley, Bankr.No. 10–10426C–7G, 2012 WL 1268670, at *1 (Bankr.M.D.N.C. Apr. 13, 2012). Pursuant to 28 U.S.C. § 157 and the order of reference, the bankruptcy case was referred from this court to the Bankruptcy Court, where it proceeds under Chapter 7.

Defendants were investors in Whitley's scheme, and they timely filed proofs of claim in the Bankruptcy Court: (1) Defendant Mason, a claim for $1,330,000; (2) Defendant Faye Swofford, a claim for $528,538.00; Defendant Robert Swofford, a claim for $865,000.00; and Defendant Vick, a claim for $658,700.00.

In July 2011, the Trustee objected to the proofs of claim and brought adversary proceedings against each Defendant, asserting fraudulent transfer claims based on transfers to Defendants pursuant to the alleged Ponzi scheme. In addition to claims for constructive fraud, the Trustee's complaint alleged causes of action for (1) actual fraud pursuant to Bankruptcy Code § 548(a)(1)(A)¹ (Count I) and (2) actual fraud under state law, N.C. Gen.Stat. § 39–23.1 et seq., pursuant to Bankruptcy Code § 544(b)(1)² (Count II). Each Defendant filed an answer, raised various defenses, ³ and demanded a jury trial. Important here, Defendants also challenged the Bankruptcy Court's jurisdiction over the adversary proceedings, specifically the right to enter a final judgment on the fraudulent transfer claims in Counts I and II of the complaints, in light of the Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).⁴

The Bankruptcy Court invited the parties to either consent to its jurisdiction to enter a final judgment in the adversary proceedings or brief why it lacked jurisdiction under Stern; Defendants chose the latter. On April 13, 2012, the Bankruptcy Court issued a memorandum opinion in which it concluded that the fraudulent transfer claims were core proceedings and that each Defendant filed a proof of claim for monies loaned. The court concluded that, in light of the filed proofs of claim, it could “enter final judgment on the Plaintiff's claims because it is necessary to decide the fraudulent transfer claims in order to allow or disallow the Defendants' proofs of claim.” In re Whitley, 2012 WL 1268670, at *2.

Defendants filed for leave to appeal to this court. This court questioned whether a motion to withdraw the reference, as opposed to an interlocutory appeal, was the appropriate vehicle to present the issue to this court. After a hearing, the court denied without prejudice appellants' joint motion for leave to appeal, and the matter has proceeded on the instant motions to withdraw the reference. (Docs. 12 at 4 (12–cv–00525, 12–cv–00528, 12–cv–00529), 9 (12–cv–00531).) The court directed the parties to address whether withdrawal of the reference was either required or advisable, including the impact, if any, of the Supreme Court's decision in Stern on the Bankruptcy Court's authority to enter final judgments in the adversary proceedings.

Defendants now argue that the adversary proceedings must or, alternatively, should be withdrawn because under Stern the Bankruptcy Court lacks constitutional authority to enter final judgment on the Trustee's fraudulent transfer claims, which are state law claims between private parties. The Trustee contends that the impactof Stern is narrow and that Defendants have submitted themselves to entry of a final judgment by filing proofs of claim. The Trustee further argues that his power to recover fraudulent transfers “unquestionably invokes the Bankruptcy Code and, unlike the common law state claim at issue in Stern, cannot be resolved outside the claims resolution process.”

II. ANALYSIS

A motion for withdrawal of the reference is governed by 28 U.S.C. § 157(d), which provides:

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). The first sentence of section 157(d) provides for permissive withdrawal, while the second sentence addresses mandatory withdrawal.

Defendants urge mandatory withdrawal on the grounds that although the fraudulent transfer claims are core proceedings, the Bankruptcy Court lacks constitutional authority to enter a final judgment under Stern and the Bankruptcy Court therefore lacks the statutory authority to enter proposed findings of fact and conclusions of law under § 157(c)(1).⁵ The Trustee contends that Stern does not apply here, but if it does, the court should rely on those cases that have held that the Bankruptcy Court retains authority to issue proposed findings of fact and conclusions of law. See, e.g., Dang v. Bank of Am.,N.A., No. RDB–12–3343, 2013 WL 1683820, at *12 (D.Md. Apr. 17, 2013) (“A majority of courts considering this issue in Stern's wake have concluded that a bankruptcy court has the power to submit proposed findings of fact and conclusions of law on claims for which they cannot issue final judgments.”); ACC Retail Prop. Dev. & Acquisition Fund, LLC, No. 5:12–CV–361–BO, 2012 WL 8667572, at *3 (E.D.N.C. Sept. 28, 2012) (“[A] majority of courts have found that Stern did not disturb the power of the bankruptcy court to issue proposed findings of fact and conclusions of law as to those claims over which it does not have the power to enter final judgment.”); Joe Gibson's Auto World, Inc. v. Zurich Am. Ins. Co. (In re Joe Gibson's Auto World, Inc.), C/A No. 7:11–2482–TMC, 2012 WL 1107763, at *2 (D.S.C. Apr. 2, 2012) (citing cases); see also Schafer v. Nextiraone Fed., LLC, No. 1:12cv289, 2012 WL 2281828, at *4 (M.D.N.C. June 18, 2012) (reviewing cases); Heller Ehrman LLP v. Arnold & Porter LLP (In re Heller Ehrman LLP), 464 B.R. 348, 355–56 (N.D.Cal.2011) (considering mandatory withdrawal but concluding it did not apply because bankruptcy court could enter proposed findings of fact and conclusions of law).

The starting point for Defendants' arguments is the jurisdiction of the Bankruptcy Court. A bankruptcy court derives its jurisdiction from the district court, which has, with exceptions not relevant here, “original and exclusive jurisdiction of all cases under title 11,” and “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(a), (b); id. § 157(a). The manner in which a bankruptcy judge may act on a referred matter depends on the type of proceeding involved. “Bankruptcy judges may hear and determine ... all core proceedings arising under title 11, or arising in a case under title 11....” 28 U.S.C. § 157(b)(2) (emphasis added). The parties agree that the Trustee's fraudulent transfer claims are defined by statute as “core” proceedings. See28 U.S.C. § 157(b)(2)(H) ( “[P]roceedings to determine, avoid, or recover fraudulent conveyances” are listed as “core” proceedings.). Thus, while the parties agree that the Bankruptcy Court has been granted statutory authority to determine the Trustee's fraudulent conveyance claims, Defendants argue that Stern determined that Congress' grant was unconstitutional.

In Stern, the Supreme Court held...