United States District Court, E.D. Virginia, Richmond Division
Hannah Lauck United States District Judge
matter comes before the Court on the Motion for Withdrawal of
the Reference filed by Debtor Russell H. Malone, III
("Malone" or "Debtor"), Malone Family
Holdings, LLC ("MFH"), 10200 W.B. Associates, LLC,
Stony Point, LLC, MH Futures, LLC, Debtor's wife, Anne
Elizabeth "Beth" Malone ("Ms. Malone"),
and Debtor's son, Russell H. Malone, IV
("Russell") (collectively, the
"Defendants"). (ECF No. 1.) Defendants seek
permissive withdrawal of the adversary proceeding initiated
when Trustee Harry Shaia, Jr., ("Trustee") filed a
two-count complaint against Defendants in the underlying
bankruptcy action. Trustee opposes the withdrawal. The Court
exercises jurisdiction pursuant to 28 U.S.C. §
parties fully briefed the matter in the Bankruptcy Court, and
the Court dispenses with oral argument because the materials
before it adequately present the facts and legal contentions,
and argument would not aid the decisional process. The matter
is ripe for disposition. For the reasons that follow, the
Court will deny the Motion for Withdrawal of the Reference
and remand the case to the Bankruptcy Court.
Factual and Procedural Background
3, 2014, Malone, faced with a sizable judgment against him,
filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code. On April 7, 2015, the case was converted to
a proceeding under Chapter 7, and the Trustee was appointed
the next day. On December 6, 2016, after conducting extensive
investigation into the estate property, the Trustee initiated
an adversary action against Defendants by filing a Complaint
in the Bankruptcy Court (the "Trustee Complaint").
The Trustee Complaint asserts two causes of action: (1)
"Alter Ego/Reverse Veil Piercing"; and, (2)
"Substantive Consolidation." (Trustee Compl. 37, 39.)
On January 5, 2017, Defendants moved to withdraw the
adversary proceeding initiated by the Trustee Complaint to
this Court. The Trustee opposed the withdrawal, and the
parties fully briefed the matter in the Bankruptcy Court.
Allegations in the Trustee Complaint
Trustee filed the Trustee Complaint against Malone, Ms.
Malone, their son, Russell, and the following five LLCs
(collectively, the "LLCs"):
1) Malone Family Holdings ("MFH"), a Virginia LLC
created in March 2011, with its principal place of business
at 10200 West Broad Street, Richmond, Virginia. At the time
MFH was created, Malone and Ms. Malone held 99.3% of the
membership interests in MFH.
2) 10200 WB Associates, LLC ("10200 WBA"), a
Virginia LLC with its principal place of business also at
10200 West Broad Street, Richmond, Virginia. Malone and Ms.
Malone held 100% of the membership interests in 10200 WBA
until they assigned all interest in 10200 WBA to MFH in March
3) Stony Point, LLC ("Stony Point"), a Virginia LLC
with its principal place of business also at 10200 West Broad
Street, Richmond, Virginia. Malone and Ms. Malone held 100%
of the membership interests in Stony Point until they
assigned all interest in Stony Point to MFH in March 2011.
4) Dickens Creek Farm, LLC ("DCF"), a Virginia LLC
organized in 1998. Malone and Ms. Malone held 100% of the
membership interests in DCF until they assigned all interest
in DCF to MFH in March 2011.
5) MH Futures, LLC ("MH Futures"), a Virginia LLC
organized in 2009. Malone and Ms. Malone held 100% of the
membership interests in MH Futures until they assigned all
interest in MH Futures to MFH in March 2011.
MFH was created in March 2011, at which time Malone and Ms.
Malone transferred their 100% ownerships in 10200 WBA, Stony
Point, DCF, and MH Futures to MFH. They then held a 99.3%
ownership interest in MFH. Malone manages each of the LLCs.
forty-page Trustee Complaint details myriad interwoven
financial transactions within and among the LLCs, Malone, Ms.
Malone, and Russell. The Trustee Complaint alleges that
through his use of various alter ego companies, the Debtor
assigned, redirected, and reallocated any property,
compensation, or gain to which he was entitled, to entities
which he controls, thereby hiding them from his creditors. In
reality, however, the Debtor retained complete dominion,
control, and full beneficial use of all this property and
proceeds for himself, Anne Elizabeth Jones Malone (his wife)
and Russell H. Malone, IV (his son).
(Trustee Compl. 1.)
Complaint, the Trustee contends that "[e]ven a cursory
examination of the financial records leads to the inevitable
conclusion that, given the rampant commingling of funds over
a period of several years, the LLCs are hopelessly
intertwined and should be consolidated into a single estate
with that of the Individual Defendants." (Id.
at 21.) The Trustee charges that Malone, Ms. Malone, and
Russell all used MFH "as if it were a personal bank
account." (Id at 34.) The Trustee Complaint
outlines the distribution of significant amounts of money to
Malone that are inconsistent with the lesser amount of income
Malone reported in the underlying bankruptcy action. In sum,
the Trustee asserts that "the Debtor, and the Debtor
alone, dominated the [LLCs] in all aspects, " meaning
that the LLCs amount to alter egos of Malone that should be
consolidated into the underlying bankruptcy action.
Trustee Complaint asserts two counts against all defendants:
Count I: "Alter Ego/Reverse Veil
Piercing" - Malone used "the corporate form of the
[LLCs] to evade [his, Ms. Malone's, and Russell's]
personal obligations, perpetrate fraud, and commit injustice
on [his, Ms. Malone's, and Russell's] creditors"
(the "Alter Ego Count"), (id. at 37-39);
Count II: "Substantive
Consolidation" - Because "there exists a
substantial identify of interests between the Debtor and the
other Defendants, " Malone's estates should be
substantively consolidated "with that of the other
Defendants" (the "Substantive Consolidation
Count"), (id. at 39).
Trustee seeks, inter alia: (1) "A declaration
that the [LLCs] are alter egos of [Malone, Ms. Malone, and
Russell, ] and liable for" Malone's debts; and, (2)
"Substantive consolidation of the estates of the Debtor
and the other Defendants." (Id. at 40.)
Legal Standard for Withdrawal of
to 28 U.S.C. § 1334, the district courts have
"original and exclusive jurisdiction of all cases"
under the Bankruptcy Code. 28 U.S.C. § 1334(a). District
courts may refer all bankruptcy matters to bankruptcy judges,
28 U.S.C. § 157(a),  as this District has done since
1984. See In the Matter of: The Administration of the
Bankruptcy Courts and Reference of Bankruptcy Cases and
Proceedings to the Bankruptcy Judges of this District
(E.D. Va. August 15, 1984) (Order). The district court
retains the power, however, to "withdraw ... any
proceeding referred" to the bankruptcy court, and decide
the matter itself. 28 U.S.C. § 157(d). A party who seeks
district court determination of a matter filed in an
underlying bankruptcy action may, as Defendants have here,
file a motion to withdraw the reference. The burden of
demonstrating the appropriateness of withdrawal-whether
mandatory or discretionary-rests with the movant. See In
re U.S. Airways Grp., Inc., 296 B.R. 673, 677 (E.D. Va.
law provides two avenues by which a district court can order
a case withdrawn from the bankruptcy court: mandatory
withdrawal or permissive withdrawal. 28 U.S.C. §
withdrawal occurs when "resolution of the proceeding
requires consideration of both title 11 and other laws of the
United States regulating organizations or activities
affecting interstate commerce." Neither party suggests
that the Motion for Withdrawal of the Reference invokes this