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In Re: Imperial Capital Bancorp

December 29, 2011

IN RE: IMPERIAL CAPITAL BANCORP, INC., A DELAWARE CORPORATION, DEBTOR.


The opinion of the court was delivered by: Honorablelarryalanburns United States District Judge

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO WITHDRAW THE REFERENCE

Now pending before the Court is the FDIC's motion to withdraw the reference to the bankruptcy court of two matters: (1) Imperial Capital Bancorp's objection to a proof of claim filed by the FDIC, as receiver for Imperial Capital Bank, in ICB's bankruptcy; and (2) the Committee of Unsecured Creditors' motion for permission to investigate and bring claims against ICB's former officers and directors on behalf of the bankruptcy estate.

The bankruptcy court has already ruled on ICB's objection, which it granted and denied in part, and the CUC's motion, which it granted. (See Dkt. No. 7-2, Exs. D, E, and F.) It also denied the FDIC's request to stay those rulings pending the Court's resolution of the motion to withdraw their reference. (Dkt. No. 7-2, Ex. C.) Subsequently, the Court denied that same stay request, finding that the FDIC "has not shown it is likely to prevail on the merits of the withdrawal motion." (Dkt. No. 14.)

I. Legal Standard

This is not the first time the FDIC has sought to withdraw matters from the bankruptcy court. Previously, in a related matter, the Court granted the FDIC's motion to withdraw a "Tax Refund Proceeding" and related "Stay Violation Action," and it denied a motion to withdraw a "Capital Maintenance Claim." (See Case No. 10-CV-1991, Dkt. No. 22.) The Court will follow the same legal standard now that it followed then:

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 But cases arising under title 11 - or matters within those cases - may also be withdrawn from bankruptcy courts and heard by district courts: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 Un it e d S ta tes r eg ula ti ng 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 will, too. See, e.g., Hawaiian Airlines, Inc. v. Mesa Air Group, Inc., 355 B.R. 214, 222 (D. Hawaii 2006).

II. Proof of Claim Objection

ICB filed for bankruptcy on December 18, 2009, the same day that the California Department of Financial Institutions closed Imperial Capital Bank and appointed the FDIC as receiver. On June 15, 2010, the FDIC filed a proof of claim in ICB's bankruptcy for the aggregate sum of $88,900,000. Over a year later, on June 16, 2011, ICB filed an objection to the proof of claim. According to ICB, it objected specifically to:

(I) intercompany claims by the Bank against the Debtor, (ii) claims to certain insurance proceeds and premium refund claims, (iii) claims against the Debtor under the "Imperial Capital Bancorp Rabbi Trust Agreement Amended and Restated Effective January 1, 2005", (iv) claims for deposit funds in one of the Debtor's accounts at CNB, (v) fraudulent conveyance claims, (vi) claims based on the purchase and assumption agreement the FDIC-R and CNB, (vii) other unsecured claims, and (viii) unsecured ...


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