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finding that federal securities claims, RICO claims, and other state law claims were all non-core, though ultimately denying the motion to withdraw
Summary of this case from Harlow v. Wells Fargo & Co.Opinion
02 Civ. 8495 (GBD), 02-41729 (REG), (Jointly Administered)
June 3, 2003
MEMORANDUM OPINION ORDER
Plaintiff commenced the instant adversary proceeding against defendants in bankruptcy court on July 24, 2002, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the Security Exchange Act of 1934 (the "Exchange Act"), as well as pendent state law claims. Defendants now move this Court pursuant to 28 U.S.C. § 157 (d) for an order withdrawing the reference to the bankruptcy court. Plaintiff opposes defendants' motion. For the following reasons, defendants' motion is denied without prejudice to renewal.
Defendants John Rigas, members of his family, and entities they control (collectively, the "Rigas defendants") brought this motion, and defendant James R. Brown joined in that motion.
Discussion
28 U.S.C. § 157 (d) sets forth the circumstances under which a district court may withdraw the reference to bankruptcy court. That statute provides:
Plaintiff filed for Chapter 11 bankruptcy protection on June 25, 2002. Under 28 U.S.C. § 157 (a), the instant adversarial proceeding was automatically referred to the bankruptcy court as a case arising under, or related to, a case under Title 11 of the United States Code.
The district court may withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court] 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.28 U.S.C. § 157 (d). Thus, the statute provides for permissive withdraw upon motion "for cause shown," as well as mandatory withdrawal upon motion if the issues raised in the proceeding require "consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." Id.
A. Permissive Withdrawal
District courts in this circuit look to the factors outlined in In re: Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993) in determining whether cause exists to exercise discretion in withdrawing the reference to bankruptcy court. The Orion Pictures factors include: "whether the claim or proceeding is core or non-core, whether it is legal or equitable, and considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law." Orion Pictures, 4 F.3d at 1101; see also In re Iridium Operating LLC, 285 B.R. 822, 828 (S.D.N.Y. 2002). A district court must first evaluate whether a claim is core or non-core, "since it is upon this issue that questions of efficiency and uniformity will turn." Orion Pictures, 4 F.3d at 1101. While a bankruptcy court has full authority to adjudicate core proceedings under Title 11, the bankruptcy court may only make proposed findings of facts and conclusions of law subject to the district court'sde novo review in non-core proceedings. See 28 U.S.C. § 157 (c)(1);Adelphi Institute, 112 B.R. 534, 539 (S.D.N.Y. 1990). However, with respect to noncore proceedings, the bankruptcy court may still adjudicate pre-trial interlocutory matters. See In re Adelphi Institute, Inc., 112 B.R. at 539. Further, a bankruptcy court may only hold a jury trial in core proceedings, as the Seventh Amendment's Reexamination Clause prohibits the bankruptcy court from conducting a jury trial in non-core proceedings. See Orion Products, 4 F.3d at 1101.Proceedings that are core are those that are unique to or uniquely affected by the bankruptcy proceedings, or directly affect a core bankruptcy function. See In re Petrie Retail, Inc., 304 F.3d 223, 229 (2d Cir. 2002). "Core matters are ones with which the bankruptcy court has greater familiarity and expertise[.]" Chateaugay Corp. v. LTV Steel Co., Inc., 193 B.R. 669, 675 (S.D.N.Y. 1996). "A matter is a core proceeding if it invokes a substantive right provided by the Bankruptcy Code or if it could only arise in the context of a bankruptcy case." In re: Kentile Floors, Inc., 95 civ 2470, 1995 WL 479512, at *2 (S.D.N.Y. Aug. 10, 1995). "Core proceeding" has been given "a broad interpretation that is close to or congruent with constitutional limits." In re Petrie Retail, 304 F.3d at 229; Ben Cooper, 896 F.2d at 1398. Further, "bankruptcy courts are not precluded from adjudicating state-law claims when such claims are at the heart of the administration of the bankrupt estate."Ben Cooper, 896 F.2d at 1399.
Here, plaintiff's sixteen count complaint alleges violations of RICO, the Exchange Act, as well as a variety of state law claims, including but not limited to, fraudulent conveyance, constructive trust, and a demand for an accounting. The claims for fraudulent conveyance, a constructive trust, and the demand for an accounting directly impact the bankruptcy estate and are core claims. See 28 U.S.C. § 157 (b)(2)(E) and (H) ("orders to turn over property of the estate" and "proceedings to determine, avoid, or recover fraudulent conveyances" are included as part of a non-exclusive list of proceedings which Congress deems as core). Although the remaining claims in this proceeding arise from the same set of facts, they are non-core. They are not unique to a bankruptcy proceeding, they do not directly affect a core bankruptcy function, nor are they matters which the bankruptcy court would ordinarily be expected to have greater familiarity or expertise.
However, a finding that certain matters are non-core does not end the inquiry. A district court then must weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Orion Products, 4 F.3d at 1101. "[E]ven if a proceeding does not fall within the statute's definitional ambit of `core,' under § 157(c) the bankruptcy court may still exercise noncore jurisdiction during the pre-trial phase if the proceeding "is clearly a matter which is `otherwise related' to the bankruptcy proceeding." In re: Enron Power Marketing, Inc., No. 01cv7964, 2003 WL 68036, at *6 (S.D.N.Y. Jan. 8, 2003), quoting In re Keene, 182 B.R. at 384 n. 3.; see also In re: Adelphi Institute, 112 B.R. at 539.
Here, the core claims relate to whether the Rigas defendants hold property that is actually property of the bankruptcy estate. The non-core claims relate to whether the Rigas defendants obtained that property in a fraudulent maimer. The same discovery, therefore, applies to both groups of claims. The non-core and core claims are interrelated, such that dividing these claims between two different forums would not promote judicial economy, and would only lead to increased delay and costs to the parties. Further, the bankruptcy court's familiarity with this matter puts it in the best position to oversee this litigation. As noted earlier, the bankruptcy court is authorized to handle pre-trial issues with regard to the non-core matters. Pursuant to this authority, the bankruptcy court has already issued a number of pre-trial orders regarding the property. Therefore, forum shopping concerns, as well as uniform administration of the bankruptcy estate weigh in favor of keeping the entire proceeding in bankruptcy court at this time.
On September 10, 2002, the bankruptcy court, upon application by plaintiff, issued a Temporary Restraining Order ("TRO") enjoining the Rigas defendants from selling or transferring any real property without prior application to the court. Thereafter, on November 26, 2002, upon another application by plaintiff, the bankruptcy court issued a second and broader TRO freezing the Rigas defendants' assets, except those necessary to pay for operating expenses of companies of the Rigas defendants, living expenses, and legal fees. Further, on May 15, 2003, the bankruptcy court issued an order granting the Rigas defendants' motion for a stay of discovery in a related action in New York state court subject to reconsideration at a later date.
Lastly, defendants argue that they will be prejudiced because they plan on demanding a jury trial at the appropriate time, and the bankruptcy court may not conduct jury trials on noncore matters. Defendants' concern, however, is premature in light of the fact that this case is still in the pre-trial stage and extensive discover and motions practice remains. If, and when this case moves close to trial, defendants may renew their motion with respect to the non-core matters. At this time, however, cause does not exist for this Court to exercise its discretion to withdraw the reference to the bankruptcy court.
B. Mandatory Withdrawal
As noted earlier, § 157(d) provides for mandatory withdrawal where 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). Defendants argue that this action meets that criteria in that it requires consideration of Title 11 and substantial interpretation of both RICO and the Exchange Act.
"Mandatory withdrawal pursuant to the second sentence of § 157(d) is narrowly applied." In re: Keen Corp., 182 B.R. 379, 382 (S.D.N.Y. 1995). The mandatory withdrawal provision has been interpreted to apply to cases "that would otherwise require a bankruptcy court judge to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes." City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991). It has also been found appropriate where "`substantial and material' conflicts might exist between non-bankruptcy federal laws and Title II." In re: Enron Power Marketing, Inc., 01cv7964, 2003 WL 68036, at *4 (S.D.N.Y. Jan. 8, 2003);In re: Keen Corp., 182 B.R. at 382. Courts have found the mandatory withdrawal standard "more easily satisfied when complicated issues of first impression are implicated under non-bankruptcy federal laws." In re: Keen Corp., 182 B.R. at 382. Mandatory withdrawal is a fact specific inquiry, looking to the circumstances involved in each case. See id.
Here, plaintiffs complaint alleges, inter alia, violations of RICO and the Exchange Act. Defendants allege that plaintiff does not have standing to pursue the RICO claims, and that plaintiff has not satisfied the predicate acts requirement under the statute. Defendants argue that the bankruptcy court will therefore have to engage in significant interpretation of the RICO statute with regard to these issues. Defendants further allege that plaintiffs Exchange Act claim is raised in "very unusual circumstances," Rigas Defs.' Mot. at 10, and "require[s] a novel extension of existing law to be legally cognizable." Id. at 11. Defendants contend that plaintiffs complaint alleges that plaintiff was deceived by defendants' disclosures and omissions with respect to the maimer defendants financed the purchase of plaintiffs securities. Defendants further contend that plaintiff does not have standing to assert a claim under the Exchange Act.
Contrary to defendants' contentions, however, nothing about plaintiffs complaint, at this stage, requires a significant interpretation, as opposed to simple application, of the law to the facts. Standing and pleading requirements under both RICO and the Exchange Act are not complicated issues of first impression. There exists a substantial body of case law discussing RICO and the Exchange Act to guide the bankruptcy court, and therefore, the bankruptcy court, at this stage, can more than adequately handle any pre-trial issues relating to these claims.
Lastly, defendants contend that this case involves a substantial and material conflict between non-bankruptcy federal law and Title 11, in that the bankruptcy court's authority to issue a pre-judgment order freezing assets under 11 U.S.C. § 105 conflicts with the United States Supreme Court's decision in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999). This argument has no merit. Section 105 of Title 11 provides the bankruptcy courts with a broad range of equitable powers over cases within its jurisdiction. Pursuant to § 105(a), bankruptcy courts have the power to issue any order "necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105 (a). The bankruptcy court, therefore, may issue a pre-judgment order preventing a party from disposing of assets.See e.g., In re Keene Corp., 168 B.R. 285, 292 (Bankr. S.D.N.Y. 1994) ("[T]he court can enjoin activities that threaten the reorganization process or impair its jurisdiction."); In re Myerson Kuhn, 121 B.R. 145, 154 (Bankr. S.D.N.Y. 1990) ("Section 105 grants bankruptcy courts ample power to enjoin actions excepted from the automatic stay which might interfere in the rehabilitative process, whether in a liquidation or in a reorganization case.") (citations omitted).
Grupo Mexicano involved a breach of contract action for money damages where the district court granted an unsecured creditor's motion for a preliminary injunction freezing the general assets of the debtor. The U.S. Supreme Court reversed the district court's order granting the preliminary injunction, holding that "the District Court had no authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents' contract claim for money damages." Grupo Mexicano, 527 U.S. at 333 (emphasis added). Grupo Mexicano's holding specifically applied to the district courts, and therefore is inapplicable in the bankruptcy court context.
However, even if Grupo Mexicano could be applied to the bankruptcy courts, it is still distinguishable. Grupo Mexicano involved a claim for money damages, not equitable relief. The Court was careful to distinguish between general, unsecured creditors seeking money damages and those that possess or assert an equitable interest in the property. See id. at 324-26, see also Quantum Corp. Funding. Ltd. v. Assist You Home Health Care Servs. of Va., 144 F. Supp.2d 241, 249 (S.D.N.Y. 2001) ("the [Grupo Mexicano] Court made a distinction between general, unsecured creditors and those possessing a lien or equitable interest in the property at issue.") After analyzing the equity jurisdiction conveyed to the federal courts by the Judiciary Act of 1789, the U.S. Supreme Court found that a general unsecured creditor possessing neither a lien nor equitable interest in the property was not entitled to a pre-judgment restraint of a debtor's property. See id. at 318-321, see also Motorola Credit Corp. v. Uzan, 202 F. Supp.2d 239, 250 (S.D.N.Y. 2002). Since the plaintiff inGrupo Mexicano possessed neither a lien nor sought any form of equitable relief, the U.S. Supreme Court found that the district court had no authority to issue a preliminary injunction restraining the debtor's property. See Grupo Mexicano, 527 U.S. at 333.
By contrast, plaintiff here seeks not only money damages, but also equitable relief. As noted earlier, plaintiffs complaint seeks a constructive trust, and includes a demand for an accounting, both of which are equitable remedies. As plaintiff has asserted equitable relief in the complaint, Grupo Mexicano is inapplicable. See e.g., Motorola Credit, 202 F. Supp.2d at 250 (finding that Grupo Mexicano did not bar plaintiffs' request for a preliminary injunction since, in addition to asserting money damages, plaintiffs there also asserted a demand for a constructive trust, and other equitable remedies); See also CSC Holdings, Inc. v. Redisi, 309 F.3d 988, 996 (7th Cir. 2002) (upholding preliminary injunction freezing defendant's assets and finding Grupo Mexicano inapplicable on the grounds that plaintiff sought an accounting and constructive trust). Therefore, no substantial and material conflict exists between the bankruptcy court's power under 11 U.S.C. § 105 to issue a pre-judgment order freezing assets and the Supreme Court's holding in Grupo Mexicano. Nor have defendants presented a meritorious argument that a complicated issue of first impression is implicated byGrupo Mexicano in this adversarial proceeding. Consequently, mandatory withdrawal is not required here.
Conclusion
For the foregoing reasons, defendants' motion to withdraw the reference to bankruptcy court is DENIED, with leave to renew upon future appropriate developments, or should the case proceed to jury trial.
In light of today's ruling, this Court will refrain from deciding the government's Motion to Intervene and for a Limited Stay of Discovery as that motion is more properly to be decided by the bankruptcy court.