BK. No. 02-30522-B-11 ADV. PRO. No. 09-02085-B
MEMORANDUM AND ORDER RE: MOTION TO WITHDRAW REFERENCE
Plaintiffs Kathleen Lagorio Janssen, Chris Lagorio, and Joseph Dondero brought this action seeking a permanent injunction and order prohibiting defendants David A. Hirsch and Donald F. Hirsch from further litigating their pending state court suit against plaintiffs as precluded by the bankruptcy court's previous orders in Chapter 11 proceedings that were dismissed in January 2006. Defendants filed counterclaims against plaintiffs alleging breach of fiduciary duty, conspiracy to commit breach of fiduciary duty and breach of contract, intentional infliction of emotional distress, breach of California Corporations Code § 309, and breach of 18 U.S.C. § 154. Defendants now move to withdraw the reference of this adversarial action to bankruptcy court and transfer the matter to this court pursuant to 28 U.S.C. §§ 157(d)-(e).
I. Factual and Procedural Background
This dispute originates from protracted litigation over the corporate control of Creekside Vineyards, Inc. ("Creekside Inc."), a closely held corporation, and Creekside Vineyards, LP ("Creekside LP"), a related partnership. Defendants David A. Hirsch and Donald F. Hirsch own fifty shares of Creekside Inc. stock each, giving them one-third control of Creekside Inc. (Defs.' Req. Judicial Notice Ex. E.)*fn1 Plaintiffs Kathleen Lagorio Janssen ("Janssen") and Chris Lagorio ("Lagorio") together are also one-third owners of Creekside Inc., while the remaining shares were issued to Patrick N. McCarthy ("McCarthy"). (Id.) On August 18, 2001, at a shareholder meeting to elect directors and officers for Creekside Inc., Janssen asserted that McCarthy was in default on a promissory note to the corporation and was therefore not entitled to vote his stock. (Id. Ex. B. ¶¶ 3-5.) Janssen then voted the McCarthy stock to elect plaintiffs as Directors of the Corporation and Janssen as President, with defendants dissenting. (Id. Ex. E.) Defendants and McCarthy each filed lawsuits in state court in San Joaquin County seeking to determine the validity of the election of the Creekside Inc. Board. (See Id. Ex. C.)
On September 20, 2002, the same day as the state court indicated that it would likely grant defendants' request for an order directing that a special shareholder meeting to elect a new Board be held where McCarthy was eligible to vote his stock, plaintiffs filed for protection on behalf of Creekside Inc. and Creekside LP under Chapter 11 of the Bankruptcy Code in federal bankruptcy court. (Id. Ex. E.) Defendants moved to dismiss the Chapter 11 proceedings for bad faith and lack of jurisdiction, but their motion was denied. (Pls.' Req. Judicial Notice Ex. A.)*fn2 Defendants objected to the subject matter jurisdiction of the court and the illegitimacy of plaintiffs' bankruptcy petition because of their disputed election as Directors several times throughout the Chapter 11 proceeding. (Id.) Defendants additionally objected to motions authorizing the sale of the remaining assets of Creekside Inc. and Creekside LP and to authorize a compromise made with Creekside's landlord on the grounds that the bankruptcy petitions were unauthorized. (Id.) These objections were overruled. (Id.)
On June 17, 2005, while the Chapter 11 cases were still pending, defendants filed an action against plaintiffs in state court in San Joaquin County, alleging breach of fiduciary duty, conspiracy to commit breach of fiduciary duty and breach of contract, intentional infliction of emotional distress, breach of California Corporations Code § 309, and breach of 18 U.S.C. § 154. (Id.) On January 24, 2006 the bankruptcy court dismissed the Chapter 11 cases of both Creekside entities. (Id.) The court issued an order which stated that "[d]ismissal shall not affect the validity or enforcability of the following orders: (A) Order Approving Compromise of Controversy Related to Assumption of Real Property Leases (Dkt. No. 262); (B) Order Approving Debtors' Joint Verified Motion to Assume Non-Residential Property Leases and Approving Assignment of Same." (Id.)
On March 3, 2006, the Superior Court of San Joaquin County sustained demurrers to defendants' complaint on the ground that defendants' claims were barred by the doctrines of res judicata and collateral estoppel. (Id.) The California Third Appellate District reversed the Superior Court's decision on December 20, 2007, finding that the bankruptcy court was not a court of competent jurisdiction to make a final determination as to the legitimacy of plaintiffs' control of Creekside Inc. and Creekside LP and had not clearly "actually determined" that plaintiffs' control was legitimate. (Defs.' Req. Judicial Notice Ex. E 15.)
As the state litigation continued, plaintiffs requested that the bankruptcy court reopen bankruptcy proceedings to enforce their earlier orders in accordance with the January 2006 dismissal order. On November 3, 2008, plaintiffs' obtained an order from the bankruptcy court to reopen bankruptcy proceedings. (Defs.' Mem. Supp. Mot. Withdraw Reference 5:20-28.) Plaintiffs filed this action on February 2, 2009, asking the bankruptcy court to enjoin the continuation of defendants' state court litigation. (Pls.' Objection Mot. Withdraw Reference 3:8-10.)
On June 22, 2009, in response to the action, defendants filed an Answer and Counterclaims alleging the same claims as the lawsuit in San Joaquin County Superior Court. (Pls.' Req. Judicial Notice Ex. A.) Defendants demanded a jury trial on the counterclaims, and refused to consent to a jury trial in bankruptcy court. (Id.) The parties agreed to resolve the dispute by cross-motions for summary judgment based on the Amended Joint Final Agreed Statement of Facts. (Id.) Defendants filed this Motion to Withdraw along with their cross-motion for summary judgment on August 17, 2009.
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.
This language "contains two distinct provisions: the first sentence [for cause shown] allows permissive withdrawal, while the second sentence [United States laws affecting interstate commerce] requires mandatory withdrawal in certain situations." In re Coe-Truman Technologies, Inc., 214 B.R. 183, 185 (N.D. Ill. 1997). "The burden of demonstrating both mandatory and discretionary withdrawal is on the movant." In re U.S. Airways Group, Inc., 296 B.R. 673, 667 (E.D. Va. 2003).
Pursuant to 28 U.S.C. § 157(e), "[i]f 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." Defendants filed counterclaims against plaintiffs and filed a timely demand for a jury trial. Defendants refused to consent to a jury trial before a bankruptcy court, and therefore contend that the court must immediately ...