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Franchise Management Services, Inc. v. Righetti Law Firm

September 30, 2009

FRANCHISE MANAGEMENT SERVICES, INC., PLAINTIFF,
v.
RIGHETTI LAW FIRM, P.C. DEFENDANT.



The opinion of the court was delivered by: Honorable Barry Ted Moskowitz United States District Judge

ORDER DENYING THE MOTION TO WITHDRAW THE REFERENCE

Before the Court is Defendant Righetti Law Firm, P.C.'s Motion to Withdraw the Reference to Bankruptcy Court. For the reasons set forth below, the Court DENIES Defendant's Motion to Withdraw the Reference without prejudice.

I. BACKGROUND

On March 4, 2009, Franchise Management Services, Inc., ("Plaintiff" or "Debtor-in-Possession") filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. (Def.'s Request for Judicial Notice ("RJN"), Ex. A at 3.)

On April 8, 2009, Plaintiff filed a Complaint in bankruptcy court against Defendant the Righetti Law Firm, P.C. ("Defendant" or "Righetti"). (Def.'s RJN, Ex. A.) The Complaint arises out of alleged transfers to Defendant during the preference period in an amount not less than $501,511.75. (Def.'s RJN, Ex. A at 3.) Plaintiff brought five causes of action including claims: (1) to avoid a transfer of an interest of the debtor property under 11 U.S.C. § 547; (2) to avoid a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B); (3) to recover a post-petition transfer under 11 U.S.C. § 549; (4) to recover an avoided transfer under 11 U.S.C. § 550; and (5) to disallow all claims by Defendant under 11 U.S.C. § 502(d) and (j). (Id.)

On July 21, 2009, Defendant filed a Motion to Withdraw the Reference.

II. DISCUSSION

Defendant argues that the Court should withdraw the reference in this case because it wishes to exercise its right to a jury trial by the district court in this action. Plaintiff opposes Defendant's Motion on the grounds that Defendant waived its right to a jury trial. In the alternative, Plaintiff contends that Defendant's motion is premature.

A. Did Defendant Waive its Right to a Jury Trial?

Although district courts have original jurisdiction over cases arising under the Bankruptcy Code, 28 U.S.C. § 1334(b), they may refer these cases to the bankruptcy judges for the district pursuant to 28 U.S.C. § 157(a). District courts also have the authority to withdraw the reference to bankruptcy court. 28 U.S.C. § 157(d). Withdrawal may be mandatory if "resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organization or activities affecting interstate commerce," or permissive upon "timely motion of any party, for cause shown." Id. Defendants do not contend that withdrawal is mandatory here. Rather, Defendants argue that good cause exists to withdraw the reference.

In determining whether cause exists to withdraw the reference, district courts consider (1) the efficient use of judicial resources, (2) delay and costs to the parties, (3) uniformity of bankruptcy administration, (4) the prevention of forum shopping, and other related factors. Security Farms v. Int'l Brotherhood of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997). Courts should also determine whether "core" or "non-core" issues predominate. Withdrawing the reference typically enhances efficiency where non- core issues predominate. Id. There is no dispute that core issues predominate here. See 28 U.S.C. § 157(b)(2) (listing core proceedings). One related factor that courts must consider, however, is the parties' entitlement to a jury trial. If a party to a proceeding in bankruptcy court has the right to a jury trial, the bankruptcy court may only conduct the trial if all parties expressly consent. 28 U.S.C.§ 157(e). Without the parties' express consent, therefore, the district court must withdraw the reference in a case where a party has the right to a jury trial and the case proceeds to trial.

In an action by a bankruptcy trustee to recover allegedly preferential transfers, a defendant that has not filed a claim against the estate preserves its right to a jury trial under the Seventh Amendment to the United States Constitution. See Langenkamp v. C.A. Culp, 498 U.S. 42, 45 (1991) (per curiam); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58--59. Thus, "a creditor's right to a jury trial on a bankruptcy trustee's preference claim depends upon whether the creditor has submitted a claim against the estate." Granfinanciera, 492 U.S. at 58.

Plaintiff alleges that Defendant has filed claims against the estate, thereby waiving its right to a jury trial. Defendant contends, however, that it only filed claims by and on behalf of clients it successfully represented in a pre-petition state court class action suit against Plaintiff. Defendant argues that the Court should not construe its clients' claims for attorney's fees as its own claims against Plaintiff's bankruptcy estate. The Court agrees with Defendant.

It appears that Defendant filed claims against the estate only on behalf of its clients and acting as their attorney, to recover unpaid wages, the amount of the state court judgment in their favor, and attorney's fees, costs, and interest. (See, e.g., Pl.'s RJN, Ex. 2.) Defendant's clients' claims for attorney's fees indicate that they seek this compensation under the fee shifting provisions of the California Labor Code, ยง 1194, et seq. Section 1194 provides that "any employee receiving less than the legal minimum wage or the legal overtime compensation applicable to the employee is entitled to recover in a civil action. . . reasonable attorney's fees, and costs of suit." Id. (emphasis added). Thus, the employee, not his or her attorney, may state a claim for ...


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