RE: MOTION FOR WITHDRAWAL OF MEMORANDUM AND ORDER AND RELATED COUNTERCLAIMS AND CROSS-CLAIMS.
Plaintiff Travelers Casualty and Surety Company of America ("Travelers") filed a Complaint in the Chapter 11 bankruptcy proceeding of Dunmore Homes, Inc. ("Dunmore New York"), against defendants Dunmore New York, Sidney B. Dunmore ("Mr. Dunmore"), Dunmore Homes Inc. ("Dunmore California"), and Comerica Bank ("Comerica"), alleging that Travelers has a senior security interest in a $12.8 million tax refund owed to Mr. Dunmore. Comerica now moves to withdraw the reference of this adversarial action from the bankruptcy court and transfer the matter to this court pursuant to 28 U.S.C. § 157(d) and Federal Rule of Bankruptcy Procedure 5011(a).
I. Factual and Procedural Background
Mr. Dunmore was the owner and president of Dunmore California, a homebuilding company based in Roseville, California. (Comerica's Mot. Withdraw Ref. Ex. 1 ("Compl.") ¶¶ 3, 14.)*fn1 He filed an individual tax return with the Internal Revenue Service for the year 2007 and expected a tax refund in the amount of $12.8 million ("Tax Refund"). (Id. ¶ 10.) Mr. Dunmore then granted Dunmore California a security interest in the Tax Refund, which was subsequently transferred to Dunmore New York upon Dunmore New York's acquisition of all of Dunmore California's assets and liabilities. (See id. ¶¶ 32-57.) Dunmore New York later filed a voluntary petition under Chapter 11 of the Bankruptcy Code on November 8, 2007, in the U.S. Bankruptcy Court for the Southern District of New York. (Id. ¶ 5.) That case was then transferred to the U.S. Bankruptcy Court for the Eastern District of California on January 14, 2008. (Id.)*fn2
On January 16, 2009, Travelers filed a Complaint in Dunmore New York's Chapter 11 proceeding. (Id. at 1) Travelers alleges that it had provided surety bonds to Dunmore California and that, in return, Mr. Dunmore and Dunmore California granted Travelers a security interest in the Tax Refund. (Id. ¶¶ 14-31.) Although Travelers alleges that the transfer of Dunmore California's security interest to Dunmore New York was a fraudulent conveyance, it does not seek to avoid the transfer; rather, Travelers contends that its security interest in the Tax Refund is senior to any interest held by any other party. (See id. ¶¶ 32-66.) Travelers' Complaint also acknowledges that Comerica had previously issued a loan to Dunmore California that was guaranteed by Mr. Dunmore. (Id. ¶ 4.) Comerica obtained a writ of attachment in a California state court proceeding that directed the attachment of "any and all interests of Sidney B. Dunmore to a federal tax refund for tax year 2007" in the amount of $6.6 million. (Id.)
In response to Travelers' Complaint, Comerica filed counterclaims against Travelers and cross-claims against all other defendants on February 19, 2009. (Comerica's Mot. Withdraw Ref. Ex. 3.) Specifically, Comerica alleges a claim for "avoidance of fraudulent transfer and satisfaction of claim" pursuant to California Civil Code section 3439, as well as a claim for "declaratory relief or a determination of the validity, priority, or extent of interests in property" pursuant to Federal Rule of Bankruptcy Procedure 7001, against Mr. Dunmore, Dunmore New York, Dunmore California, and Travelers. (Id. Ex. 3 at 12-14.) Comerica now moves to withdraw the reference of the adversarial action from the bankruptcy court and transfer the matter to this court pursuant to 28 U.S.C. § 157(d) and Federal Rule of Bankruptcy Procedure 5011(a).
Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 in response to the Supreme Court case Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which held that the Bankruptcy Reform Act of 1978 "impermissibly shifted essential attributes of judicial power from the Article III district court to its non-Article III adjunct, the bankruptcy court." Sec. Farms v. Int'l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997). Under the 1984 law, district courts now have original jurisdiction over all cases arising under title 11 of the Bankruptcy Code, but may "'refer' bankruptcy cases to the bankruptcy judges for the district automatically. This authority [is] tempered, however, with a provision that the reference may or shall be withdrawn in certain situations." In re Casimiro, No. 07-1218, 2008 WL 4482851, at *1 (E.D. Cal. Sept. 29, 2008) (Ishii, J.) (quoting In re Vicars Ins. Agency, Inc., 96 F.3d 949, 951 (7th Cir. 1996)). Pursuant to 28 U.S.C. § 157(d), [t]he 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.
Here, Comerica makes two arguments for the withdrawal of the reference of this adversarial action. First, citing the Supreme Court case Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), Comerica contends that withdrawal is required because it has a Seventh Amendment right to a jury for its fraudulent transfer claim and does not consent to a jury trial in the bankruptcy court. (Comerica's Mot. Withdraw 7-8); see 28 U.S.C. § 157(e) ("If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial . . . with the express consent of all the parties."). Second, Comerica argues that even if withdrawal is not required, the court should exercise its discretion to withdraw the reference "for cause shown." (Comerica's Mot. Withdraw at 9-12 (quoting 28 U.S.C. § 157(d)).)
Granfinanciera involved a debtor's action under 11 U.S.C. § 548 to recover certain "fraudulent transfers" made to two creditors. 492 U.S. at 36. Although the creditors requested a jury trial, the bankruptcy court denied the request and held a bench trial, resulting in a judgment for the debtor. Id. at 37. After both the district court and the Eleventh Circuit affirmed the decision, the Supreme Court granted certiorari to address the "sole issue" of whether the Seventh Amendment conferred on the creditors "a right to a jury trial in the face of Congress' decision to allow a non-Article III tribunal to adjudicate the claims against them." Id. at 37, 50. The Court ultimately concluded that "the Seventh Amendment entitle[d] [the creditors] to the jury trial they requested," although the Court also expressly declined to decide "which court must preside over the jury trial to which [the creditors were] entitled." Id. at 65 n.19.
Citing Langenkamp v. Culp, 498 U.S. 42 (1990) (per curiam), several parties to this action assert that Comerica has waived any Seventh Amendment right to a jury trial by filing a proof of claim against the debtor in the bankruptcy proceeding. (See, e.g., Slezinger Prelim. Opp'n 3-5; Aceituno Opp'n 7-9.) In Langenkamp, a Chapter 11 trustee initiated adversarial proceedings against several creditors to recover alleged avoidable preference payments. 498 U.S. at 43. Some of these creditors had filed proofs of claim against the debtor, while other creditors had not. Id. The bankruptcy court conducted a bench trial for all of the creditors and found for the trustee, but the Tenth Circuit reversed the judgment, holding that all of the creditors were entitled to a jury trial. Id. at 43-44. After granting certiorari, the Supreme Court held that only the creditors which had not filed proofs of claim against the debtor had a right to a jury trial. Id. at 44-45. The Court explained,
[B]y filing a claim against a bankruptcy estate the creditor triggers the process of "allowance and disallowance of claims," thereby subjecting himself to the bankruptcy court's equitable power. If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance process which is ...