Bankruptcy Case No. 07 06614 LA7 Adversary Action No. 08-90516-LA
The opinion of the court was delivered by: M. James Lorenz United States District Court Judge
ORDER DENYING MOTION TO WITHDRAW THE REFERENCE
Defendants Thomas P. Richtarich and Mirang Wonne Choe, successor to defendant WonGil Choe, move to withdraw the reference of the Adversary Action filed by the Trustee in the Chapter 7 Bankruptcy proceeding of Professional Satellite and Communication, LLC ("ProSat").
ProSat filed its Chapter 7 bankruptcy action on November 19, 2007. The bankruptcy Trustee filed an adversary complaint against defendants Nayna Networks, Richtarich and Choe. After defendants' motion to dismiss was granted with leave to amend, the Trustee filed a first amended complaint ("FAC").*fn1 Defendants again moved to dismiss the action but the motion was denied and each defendant answered separately on September 30, 2010. After filing its answer to the FAC, counsel for defendant Nayna moved to withdraw. The Bankruptcy Court granted that motion on July 29, 2011. On the record presented, Nayna has not obtained counsel and has not joined in the motion for withdrawal of the reference The individual defendants now move to withdraw the reference from the Bankruptcy Court to the District Court. The motion has been fully briefed.*fn2
In January 2007, Nayna agreed to purchase all outstanding membership interests in ProSat from ProSat's former members. (FAC ¶¶ 12-14.) With the Purchase Agreement, Nayna took full possession of ProSat in March 2007. (FAC ¶¶ 12, 14.)
In 2004, DIRECTV and ProSat entered into a written Customer Referral Agreement ("CRA Contract") which provided ProSat would sell DIRECTV products on an exclusive basis in return for sales commissions and residuals. (FAC ¶ 10.) Shortly after Nayna acquired ProSat in 2007, DIRECTV terminated the CRA Contract early allegedly causing ProSat's loss of commissions of approximately $600,000. (FAC ¶ 15.)
In August 2007, DIRECTV offered to purchase from ProSat toll free numbers, its website, and related advertizing for two million dollars. (FAC ¶ 17.) ProSat's failure to pay its creditors while the transaction with DIRECTV was pending jeopardized the deal according to the Trustee. (FAC ¶ 17.) On August 6, 2007, ProSat informed Nayna that approximately $100,000 was due to a creditor, Imagitas. (FAC ¶ 18.) Instead of paying its creditors, ProSat sent $228,185 to Nayna on August 7, 2007. (FAC ¶ 24.) Because of ProSat's default on its $100,000 payment to Imagita, the agreement with DIRECTV did not occur and ProSat lost approximately two million dollars. (FAC § 26.)
In her Adversary Action, the Trustee brought two fraudulent transfer claims seeking avoidance and recovery of fraudulent transfers against Nayna only for transferring $228,185 of ProSat's funds to itself (FAC ¶¶ 18-24, 28-31.) In addition, the Trustee brought causes of action against the moving defendants, two of Nayna's directors, for breach of fiduciary duty, fraud and negligence. (FAC ¶¶ 28-47.)
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). When a case or proceeding is referred to the bankruptcy judges, the district court may withdraw the reference "on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d). The party seeking withdrawal of the reference bears the burden of showing that the reference should be withdrawn. Carmel v. Galam (In re Larry's Apartment, LLC), 210 B.R. 469, 472 (Bankr. D. Ariz. 1997). "In determining whether cause exists, a district court should 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 Brotherhood of Teamsters, 124 F.3d 999, 1008 (9th Cir. 1997). "[B]ankruptcy courts may hear and enter final judgments in 'core proceedings' in a bankruptcy case." Stern v. Marshall, 131 S. Ct. 2594, 2601--02 (2011). In "non-core proceedings, 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." Id.
"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).
Here, defendants Richtarich and Choe argue that the Trustee's claims against them are strictly state law causes of action that do not draw from, arise under, or rely on bankruptcy law and therefore, are non-core proceedings which must be heard in this Court. In other words, like Stern case, the state law claims at issue in the present action are "in no way derived from or dependent upon bankruptcy law." 131 S. Ct. at 2618.
The Trustee opposed withdrawal of the reference by first contending defendants have consented to the bankruptcy court entering final orders or a judgment on all claims against them because they participated in ProSat's Chapter 7 proceedings. This argument is without merit. Merely participating in meetings of creditors, the filing of objection concerning approval to sell assets, or moving for a protective order ...