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In re John Davis Trucking Co., Inc.

United States District Court, D. Nevada

July 12, 2017

IN RE JOHN DAVIS TRUCKING COMPANY, INC., Debtor.
v.
SUSAN DAVIS et al., Defendants. STEPHEN R. HARRIS, Plaintiff,

          ORDER

          ROBERT C. JONES United States District Judge.

         This is an adversary proceeding, (see Adv. No. 16-ap-05033-BTB), arising out of Plaintiffs Chapter 11 bankruptcy case, (see In re John Davis Trucking Company, Inc., No. 14-bk-51643-BTB). Defendants Susan Davis, Hanica Insurance Agency, Inc., and Transwestem General Agency, Inc. (hereinafter collectively "Defendants") have asked the Court to withdraw the reference of the adversary proceeding. (Mot. Withdraw Reference, ECF No. 2.) For the reasons given herein, the Court denies the motion.

         I. LEGAL STANDARDS

         The Supreme Court long ago ruled that a judge not afforded the protections of life tenure and irreducible salary given to judges under Article HI of the Constitution, such as a bankruptcy judge, cannot enter final judgments on matters traditionally decided by Article III judges. See Dunmore v. United States, 358 F.3d 1107, 1114 (9th Cir. 2004) (citing N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982)). Congress amended the Bankruptcy Code to conform to this ruling, distinguishing "core" bankruptcy proceedings from "non-core" proceedings. Id. Congress has enumerated what it considers to be core proceedings, see id. (citing 11 U.S.C. § 157(b)(2)), but it has not enumerated non-core proceedings, see Id. Rather, non-core proceedings are broadly defined as those that "do not depend on the Bankruptcy Code for their existence and ... could proceed in another court." Id. (citing Sec. Farms v. Int'l Bhd. of Teamsters, 124F.3d999, 1008 (9th Cir. 1997)).

         Accordingly, a bankruptcy court may hear and finally determine bankruptcy cases under Title 11, as well as any proceeding arising under Title 11 or arising in a case under Title 11. See 11 U.S.C. § 157(b)(1). A bankruptcy court may also hear a non-core proceeding; however, it may not make a final determination. Rather, the court must submit proposed findings of fact and conclusions of law to the district court for de novo review. 11 U.S.C. § 157(c)(1). The Ninth Circuit has adopted the Fifth Circuit's reasoning in distinguishing between three types of proceedings: (1) those "arising under" Title 11; (2) those "arising in" a case under Title 11; and (3) those "related to" a case under Title 11, which are the three categories of cases over which district courts have subject matter jurisdiction pursuant to 28 U.S.C. § 1334(b):

28 U.S.C. § 157(b) defines core proceedings as ones "arising under title 11, or arising in a case under title 11, " and gives a nonexhaustive list of types of core proceedings. "Arising under" and "arising in" are terms of art. They are two of the three categories of cases over which district courts have jurisdiction under 28 U.S.C. § 1334(b). The third category includes cases "related to" a case under title 11. As the Fifth Circuit has explained,
Congress used the phrase "arising under title 11" to describe those proceedings that involve a cause of action created or determined by a statutory provision of title 11. . . . . . The meaning of "arising in" proceedings is less clear, but seems to be a reference to those "administrative" matters that arise only in bankruptcy cases. In other words, "arising in" proceedings are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy.
The court concluded: "If the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy it is not a core proceeding; it may be related to the bankruptcy because of its potential effect, but... it is an 'otherwise related' or non-core proceeding."

In re Eastport Assocs., 935 F.2d 1071, 1076-77 (9th Cir. 1991) (citations omitted) (quoting In re Wood, 825 F.2d 90, 96-97 (5th Cir. 1987) (footnotes omitted)).

         Upon motion or sua sponte a district court may withdraw, in whole or in part, any case or proceeding under Section 157. 11 U.S.C. § 157(d). A district court must upon timely motion withdraw a proceeding if it 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 ." Id. The party moving for withdrawal has the burden of persuasion. See In re First Alliance Mortg. Co., 282 B.R. 894, 902 (CD. Cal. 2001).

         Although a bankruptcy court may not finally determine non-Title 11 issues, the presence of such an issue alone does not mandate withdrawal of the reference. In re Vicars Ins. Agency, 96 F.3d 949, 953 (7th Cir. 1996). Rather, withdrawal is mandatory only "in cases requiring material consideration of non-bankruptcy federal law." Sec. Farms, 124 F.3d at 1008. Put differently, "mandatory withdrawal is required only when those issues require the interpretation, as opposed to mere application, of the non-title 11 statute, or when the court must undertake analysis of significant open and unresolved issues regarding the non-title 11 law." Id. at 954. Permissive withdrawal is allowed, however, "for cause shown, " 11 U.S.C. § 157(d), which a district court determines by considering "the efficient use of judicial resources (which is enhanced when non-core issues predominate), delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Sec. Farms, 124 F.3d at 1008.

         II. DISCUSSION

         Withdrawal is mandatory if the issues in the adversary proceeding require material consideration of non-bankruptcy federal law. The claims in the present Adversary Complaint (professional negligence/malpractice, negligent performance of an undertaking, and breach of fiduciary duty) require only the interpretation of state law. Therefore, withdrawal is not mandatory. The Court may withdraw the reference, however, "for cause shown, " after considering the factors of efficiency (which is enhanced when non-core issues predominate), delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors.

         In their motion, Defendants make multiple arguments for the Court's discretionary withdrawal of this adversary case. Primarily, Defendants assert that the bankruptcy court's lack of authority to make final determinations may lead to the inefficiency of duplicative proceedings in the district court. Of course, this is true. The Adversary Complaint consists entirely of non-core, "related to" claims over which the district court has jurisdiction under 28 U.S.C. § 1334(b) and which the bankruptcy court cannot finally determine because they are not created or determined by Title 11 and are not administrative bankruptcy matters. See In re Eastport Assocs., 935 F.2d at 1076-77. If withdrawal of the reference is denied, the Court may be required to consider all dispositive motions anew, after the Bankruptcy Court has already held any related proceedings, because the Bankruptcy Court does not have the constitutional authority to finally rule on any of the claims. See Stern v. Marshall,131 S.Ct. 2594, 2608-20 (2011). The first and second factors (judicial efficiency, and delay and cost to the parties) therefore weigh in favor of withdrawal. The third factor ...


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