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Imperial Capital Bancorp, Inc., A Delaware Corporation v. Federal Deposit Insurance Corporation

October 14, 2011


The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge


The FDIC, as receiver for a bank previously held by chapter 11 debtor Imperial Capital Bancorp, has filed a motion to withdraw the reference of two disputes from the bankruptcy court.

The first dispute, the so-called "Tax Refund Proceeding," concerns contested claims to certain federal tax refunds paid to the bank. The FDIC and Imperial agree that this dispute should be heard in this Court. Indeed, after the FDIC filed its motion to withdraw the reference, Imperial filed a civil action in this Court seeking the recovery of the tax refunds. See Case No. 10-CV-2067. Imperial has also said it does not object to the withdrawal of the Tax Refund Proceeding. (Dkt. No. 1-7 at 1.) The FDIC's motion to withdraw the Tax Refund Proceeding from the bankruptcy court is therefore GRANTED.

Related to this first dispute is another: Imperial alleges that the FDIC violated the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a) by filing a Form 56-F with the IRS in an attempt to collect the tax refunds at issue. The FDIC does not mention the alleged automatic stay violation in its original motion, but it does ask the Court to "withdraw the reference . . . of all matters pertaining to" the Tax Refund Proceeding, and this presumably includes Imperial's charge that the FDIC violated § 362(a). This apparently caused some confusion for Imperial, which noted in its opposition to the motion to withdraw the reference that it "does not believe that the FDIC-R is requesting withdrawal of the reference with respect to the second cause of action (the "Stay Violation Action") in the Adversary Proceeding." (Dkt. No. 1-7 at 1 n.1.) The FDIC clarified in its reply brief that, in its view, "the entire Tax Refund Proceeding, including the alleged Stay Violation is subject to withdrawal." (Dkt. No. 5 at 1.) So, there is a genuine dispute between the FDIC and Imperial as to whether this Court, rather than the bankruptcy court, should hear Imperial's claim that the FDIC violated the automatic stay.

The second dispute that the FDIC seeks to withdraw from the bankruptcy court concerns a "Capital Maintenance Claim" the FDIC filed against Imperial. The claim, in essence, is that Imperial promised and failed to maintain the bank's minimal capital requirements, and it arises out of an $88.9 million Proof of Claim that the FDIC filed with the bankruptcy court. The FDIC believes this Court should adjudicate the matter; Imperial believes the bankruptcy court should.

I. Legal Standards

Bankruptcy courts have the authority to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157. But cases arising under title 11 - or matters within those cases - may also be withdrawn from bankruptcy courts and heard by district courts:

The district court may withdraw, in whole or in part, any case or proceeding . . . 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 § 157(d) has been read to provide for "permissive" withdrawal. The second sentence has been read to provide for "mandatory" withdrawal.

Permissive withdrawal, which needs to be supported only by "cause," requires a district court to 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, 124 F.3d 999, 1008 (9th Cir. 1997). If "non-core" actions predominate - actions, that is, that "do not depend on bankruptcy laws for their existence and that could proceed in another court" - permissive withdrawal may be appropriate. Id.

There are two prevailing interpretations of the mandatory withdrawal language in § 157. The first, which is a textual interpretation, supports the withdrawal of any dispute that requires the consideration of non-bankruptcy law. See, e.g., In re Addison, 240 B.R. 47, 49 (C.D. Cal. 1999) ("Mandatory withdrawal is required in those cases that call for material consideration of both title 11 and non-title 11 federal law."). The problem with this interpretation is that it "would force district courts to withdraw matters in which [Bankruptcy] Code questions overwhelmingly predominate and consideration of non-Code statutes would be de minimus." In re White Motor Corp., 42 B.R. 693, 703 (N.D. Ohio 1984).

The alternative, and more favored interpretation requires that the consideration of non-bankruptcy law be "substantial and material" before withdrawal is mandatory. See, e.g., Holmes v. Grubman, 315 F.Supp.2d 1376, 1379 (M.D. Ga. 2004). The court in Holmes reasoned that "mere application of federal law does not make withdrawal mandatory; withdrawal is only mandatory when complicated, interpretive issues are involved, especially with matters of first impression or where there is a conflict between bankruptcy and other laws." Id. (internal quotations omitted). It added, "what is necessary for a mandatory withdrawal is that the resolution of non-bankruptcy law must be essential to the dispute." Id.

The Ninth Circuit has not indicated which standard of mandatory withdrawal courts should apply, but it has approved the "substantial and material" test in dicta. See Sec. Farms, 124 F.3d at 1008 n.4 (implying that mandatory withdrawal requires "the presence of substantial and material questions of federal law"). The majority of courts have adopted a "substantial and material" standard, and this Court ...

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