Bankruptcy Case No. 09-12738-LA-11 Adversary Action No. 10-90527-LA
The opinion of the court was delivered by: M. James Lorenz United States District Court Judge
ORDER GRANTING MOTION TO WITHDRAW THE REFERENCE
Plaintiff Midway Venture, LLC. moves to withdraw the reference of the adversary action that it commenced in the bankruptcy court. Plaintiff asserts two causes of action in the operative second amended complaint ("SAC") in the adversary proceeding for (1) misrepresentation, and (2) implied equitable indemnity. Defendant Leslie T. Gladstone, Chapter 11 Trustee, opposes. The Court found this motion suitable for determination on the papers submitted and without oral argument. See Civ. L.R. 7.1(d.1). (Doc. 13.) For the following reasons, the Court GRANTS Plaintiff's motion to withdraw the reference.
On August 27, 2009, Pacers, Inc. filed its Chapter 11 bankruptcy petition. On March 19, 2010, the bankruptcy court appointed Defendant as the Chapter 11 Trustee. At the time of Defendant's appointment, the bankruptcy estate's assets included the transferable assets of an adult entertainment business then doing business as "Larry Flynt's Hustler Club." On April 29, 2010, Defendant moved to sell the assets of debtor's estate to Peter Z. Balov, Steven R. Bitter, and Plaintiff. On June 8, 2010, the bankruptcy court entered an order granting Defendant's motion.
On November 1, 2010, Plaintiff commenced an adversary proceeding in the bankruptcy court against defendants LFP IP, LLC, LFP Publishing Group, LLC, Larry C. Flynt, Keith Campbell, and Defendant Leslie T. Gladstone. In that complaint, Plaintiff asserted causes of action for (1) declaratory relief, (2) misrepresentation, (3) breach of implied covenant of good faith and fair dealing, and (4) implied equitable indemnity. All the defendants have since been dismissed except for Gladstone. On March 8, 2011, Plaintiff filed a first amended complaint ("FAC") against the Defendant asserting causes of action for misrepresentation and implied equitable indemnity. On March 16, 2011, Plaintiff filed a SAC-which is the subject of this motion-alleging the same causes of action.
On April 18, 2011, Plaintiff filed a motion in the bankruptcy court to withdraw the reference of the adversary action and to remove the action to the district court. Plaintiff contends that the Bankruptcy Court Clerk failed to forward the motion to the district court. (Pl.'s Mot. 11:26--28.) The bankruptcy court subsequently denied Plaintiff's motion.
On August 11, 2011, Plaintiff filed this motion in this Court to withdraw the reference. The parties have fully briefed the motion.
A. The Adversary Action Is a Non-Core Proceeding.
District courts have discretion to refer "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" to the bankruptcy judges for that district. 28 U.S.C. § 157(a). "[B]ankruptcy courts may hear and enter final judgments in 'core proceedings' in a bankruptcy case." Stern v. Marshall, - U.S. -, 131 S. Ct. 2594, 2601--02 (2011). In non-core proceedings-proceedings that are not core but are "otherwise related to a case under title 11," 28 U.S.C. § 157(c)(1)-"the bankruptcy courts instead submit proposed findings of fact and conclusions of law to the district court, for that court's review and issuance of final judgment." Stern, 131 S. Ct. at 2601--02.
The District Court "may withdraw in whole or in part, any case proceeding referred, on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d). "Core proceedings are actions by or against the debtor that arise under the Bankruptcy Code in the strong sense that the Code itself is the source of the claimant's right or remedy, rather than just the procedural vehicle for the assertion of a right covered by some other body of law, normally state law." Matter of U.S. Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997). The party seeking withdrawal of the reference bears the burden of showing that the reference should be withdrawn. In re Larry's Apartment, LLC, 210 B.R. 469, 472 (Bankr. D. Ariz. 1997).
In this case, Plaintiff moves to withdraw the reference of the adversary complaint based on the contention that the claims that it asserts are not core bankruptcy matters, but instead are based on alleged violations of state law. Plaintiff argues that its causes of action for misrepresentation and implied equitable indemnity do not invoke a substantive right created by federal bankruptcy law and therefore, are non-core proceedings that should be heard in this Court. (Pl.'s Mot. 4:4--6.) In other words, like the Stern case, the state law claims at issue in this action are "in no way derived from or dependent upon bankruptcy law." See Stern, 131 S. Ct. at 2618. In response, Defendant contends that Plaintiff's adversary action is a core proceeding because Plaintiff conceded that it was a core proceeding in its initial complaint for damages and again in its FAC. (Def.'s Opp'n 2:6--7.) The Court disagrees with Defendant.
Plaintiff's prior concessions have no bearing on this Court's determination. Plaintiff's causes of action relate to a sales transaction that merely involved bankruptcy proceedings, and thus "is not a core proceeding but . . . is otherwise related to a case under title 11." See 28 U.S.C. § 157(c)(1). In addition, Plaintiff's alleged misrepresentation is an action at "common law[,] . . . the very type of claim that . . . must be decided by an Article III court." ...