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Tavenner v. Chesapeake Construction Group, LLC

United States District Court, E.D. Virginia, Richmond Division

March 27, 2018




         This matter comes before the Court on the Motion to Withdraw the Reference filed by Defendants Chesapeake Construction Group, LLC, David Oelrich, Lawrence Oelrich, a/k/a Larry Oelrich, and Matt Oelrich (collectively, "Defendants"). (ECF No. 1.) Defendants move to withdraw the four-count adversary complaint initiated by Trustee Lynn Tavenner (the "Trustee") in the underlying bankruptcy action. Trustee opposes the withdrawal. The Court exercises jurisdiction pursuant to 28 U.S.C. § 157(d).[1]

         The 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 to Withdraw the Reference and remand this matter to the Bankruptcy Court.

         I. Factual and Procedural Background [2]

         On March 24, 2014, five individuals instituted an involuntary bankruptcy petition against James Ashby Moncure (the "Debtor") under Chapter 7 of the Bankruptcy Code.[3] The United States Bankruptcy Court for the Eastern District of Virginia (the "Bankruptcy Court") thereafter appointed the Trustee. On March 25, 2016, the Trustee initiated an adversary action against Defendants by filing a Complaint in the Bankruptcy Court (the "Trustee Complaint"). The Trustee Complaint asserted four causes of action: (1) "Turnover and Accounting"; (2) "Preferential Transfers"; (3) "Fraudulent Transfers"; and, (4) "Fraudulent Transfer." (Trustee Compl. ¶¶ 27-54.) The Trustee alleged that the Debtor had made nine transfers to Defendants within the two years before the petition was filed, in the total amount of $433, 000, at a time when the Debtor's liabilities were greater than his assets, and that the bankruptcy estate was therefore entitled to recover that money.

         The Trustee asserted the following claims:

Count One: Turnover and Accounting (the "Turnover Claim")[4] - All of the Transfers constitute property of the bankruptcy estate.
Count Two: Preferential Transfers (the "Preference Claim") - Certain transfers were made within 90 days prior to the bankruptcy petition, for the benefit of the Defendants, while the Debtor was insolvent, and when the Defendants were creditors of the Debtor.
Count Three: Fraudulent Transfers (the "548(a)(1)(A) Fraudulent Transfer Claim") - The Debtor made certain transfers within the two years prior to the bankruptcy petition with the actual intent to hinder, delay, and defraud some of his debtors.
Count Four: Fraudulent Transfer (the "548(a)(1)(B) Fraudulent Transfer Claim")[5] - The Debtor made certain transfers within the two years prior to the bankruptcy petition, at a time when he was insolvent, for less than a reasonably equivalent value in exchange, and intending to incur debts beyond his ability to pay.

         The Trustee averred that she could void or recover the transferred amounts pursuant to 11 U.S.C. § 548(a)(1)(A) and (B), [6] § 547(b), [7] and recover the money for the bankruptcy estate pursuant to 11 U.S.C. §§550[8] and 551.[9]

         Defendants moved to dismiss the Trustee Complaint (the "First Motion to Dismiss"), and on March 15, 2017, the Bankruptcy Court held a hearing on the First Motion to Dismiss. During the hearing, the Bankruptcy Court announced its intent to grant the Motion to Dismiss in part, deny it in part, and grant the Trustee leave to amend. The parties also discussed discovery, pretrial procedures, and trial dates. On March 24, 2017, the Bankruptcy Court entered an Order granting in part and denying in part the First Motion to Dismiss, and granting the Trustee leave to amend. The Bankruptcy Court ordered the Trustee to file an Amended Complaint within fourteen days and ordered Defendants to file a responsive pleading within ten days after that.

         Two days earlier, on March 22, 2017, the Bankruptcy Court entered a Pretrial Order governing discovery, dispositive motions, and pretrial filings. The Pretrial Order also ordered:

Any party not consenting to the entry of a final order by the Bankruptcy Judge shall file a Motion to Withdraw the Reference or for other appropriate relief within 30 days of the entry of this Scheduling Order, and shall promptly set the matter for hearing. The failure to comply with the terms of this paragraph shall be deemed to constitute consent to the entry of final orders by the Bankruptcy Judge.

(Pretrial O.¶ 13.)

         The Trustee filed an Amended Complaint on April 7, 2017 (the "Trustee Amended Complaint"), and Defendants thereafter filed a Partial Motion to Dismiss (the "Second Motion to Dismiss"). The Trustee opposed the Second Motion to Dismiss, and Defendants replied. Defendants never set the Second Motion to Dismiss for a hearing. On May 24, 2017, the Trustee filed a Motion to Deny Jury Demand, moving the Bankruptcy Court to deny Defendants' demand for a jury trial. Defendants opposed, and the Court held a hearing on June 7, 2017. At the June 7, 2017 hearing, the Bankruptcy Court denied the Second Motion to Dismiss and granted the Motion to Deny Jury Demand. On June 16, 2017, the Bankruptcy Court entered an Order denying the Second Motion to Dismiss and granting the Motion to Deny Jury Demand (the "June 16, 2017 Order").

         In the June 16, 2017 Order, the Bankruptcy Court "adopted and incorporated" the Proposed Findings of Fact and Conclusions of Law (the "Findings of Fact") filed by the Trustee on June 16, 2017. (June 16, 2017 O. 1.) The Findings of Fact state that Defendants

did not timely move to withdraw the reference, nor did [they] seek other appropriate relief. [They] set nothing down for hearing after entry of the Pre-Trial Order. [They] took no affirmative action as is required by the Court's Pre-Trial Order. Thus, [they have] consented to the entry of final orders by [the Bankruptcy] Court. [They have] consented to [the Bankruptcy] Court hearing all matters.

(Findings of Fact 9 (emphasis added).)

         On June 12, 2017, Defendants filed the Motion to Withdraw.

         II. Analysis

         A. Jurisdiction of the Bankruptcy Courts

         Pursuant 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), [10] 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).

         In general, bankruptcy courts oversee the matters before them in two different ways. Under 28 U.S.C. § 157(b), "[b]ankruptcy judges may 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(b)(1) (emphasis added). Thus, in bankruptcy cases and in so-called "core proceedings, " bankruptcy courts have jurisdiction to both hear and determine the case. See id. Under 28 U.S.C. § 157(c) when a proceeding before the bankruptcy court is "non-core, " but "otherwise related to a case under title 11, " a bankruptcy court has the authority to hear but not determine the proceeding. In those cases, the bankruptcy court must "submit proposed findings of fact and conclusions of law to the district court, " which considers the bankruptcy court's recommendations, and enters the final orders and judgments.[11] 28 U.S.C. § 157(c)(1).

         Given the jurisdictional limitation on bankruptcy courts, the determination of whether a matter is "core" or "non-core" becomes important. Section 157(b)(2)[12] sets forth a list of so- called "statutory core proceedings." This non-exhaustive list provides guidance about whether a proceeding is core, but is not dispositive. Ultimately, in order to deem a proceeding "core" or "non-core, " a "[c]ourt [should] identify the nature of the cause of action itself, and whether the action invokes a right under title 11 or that arose in a case under title 11." Chesapeake Trust v. Chesapeake Bay Enters., Inc., No. 3:13cv344, 2014 WL 202028, at *3 (E.D. Va. Jan. 17, 2014) (citing Corliss Moore & Assoc., LLC v. Credit Control Servs., Inc., 497 B.R. 219, 224 (E.D. Va.2013)).

         A proceeding "arising in" a case under title 11 "is a proceeding that, even if not specifically provided for in the Bankruptcy Code, can take place only in the context of a case under title 11, " including "various matters affecting administration of a bankruptcy estate." In re Gladstone, 513 B.R. 149, 153 (Bankr. S.D. Fl. 2014). In making the core or non-core determination, the Court evaluates whether the claim seeks relief that would "require[] the Court to recognize whether something is or is not property of a debtor to be administered as part of the estate." Id. If the relief sought in the claim requires that the Court make such a determination, "the matter 'arises in' a title 11 case and 'arises under' title 11 within the meaning of 28 U.S.C. § 1334(b)." Id. In sum, "[t]he Court looks beyond the label applied to the claim to [the claim's] substance" to determine whether a claim is core or non-core. Id. Thus, a proceeding could be designated "core" under § 157(b), but, because of the nature of the cause of action, not constitute a "core proceeding." Proceedings of this nature have been referred to as "constitutionally non-core proceedings."

         However, even the presence of non-core claims in an adversary proceeding does not mean "that the bankruptcy court immediately loses jurisdiction of the entire matter or that the district court cannot delegate to the bankruptcy court the responsibility for supervising discovery, [and] conducting pre-trial conferences." In re Stansbury Poplar Place, Inc., 13 F.3d 122, 128 (4th Cir. 1993). They may instead fall into the category of claims that a bankruptcy court could hear but not determine. And, of course, if all parties consent to the bankruptcy court's jurisdiction, bankruptcy courts may hear all matters and enter final judgment in even non-core claims. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, 135 S.Ct. 1932, 1942 (2015) ("[L]itigants may validly consent to adjudication by bankruptcy courts.").

         B. Withdrawal of the Reference

         As to all bankruptcy proceedings, whether core or non-core, the district court retains the power to "withdraw... any proceeding referred" to the bankruptcy court, and decide the matter itself. 28 U.S.C. § 157(d). Bankruptcy 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. § 157(d).[13] 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 ...

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