IN RE: MERV PROPERTIES, LLC, Debtor.
FIFTH THIRD BANK, et al., Defendants. MERV PROPERTIES, LLC, Plaintiff, Adv. Pro. No. 13-05034
MEMORANDUM OPINION AND ORDER
DANNY C. REEVES, District Judge.
This matter is pending for consideration of Defendants Fifth Third Bank and Tim Yessin's motion to withdraw the reference to the United States Bankruptcy Court of the claims asserted against them. [Record No. 1] For the reasons set forth below, the motion will be denied.
Plaintiff MERV Properties, LLC ("Merv") was formed for the purpose of purchasing and renovating property located on Manchester Avenue in Lexington, Kentucky. [Record No. 1-1, p. 5] On October 10, 2011, Merv filed a Chapter 11 petition which initiated the main bankruptcy case in this matter. [Record No. 1, p. 2] On October 4, 2013, Merv filed the Complaint that commenced the adversary proceeding against Defendants Fifth Third, Tim Yessin, Eric Friedlander, Howard Markowitz, Mark Properties, LLC, and Forcht Bancorp, Inc. ("Forcht"). [Record No. 1-1]
Merv asserts that Fifth Third and Yessin breached their contract by permitting checks to be written from Merv's checking account without two signatures as required by the depository agreement, and by allowing two-party checks to be deposited into the checking account without the endorsements of both parties. [Record No. 1-1] Merv further alleges that Fifth Third and Yessin committed or facilitated fraud and theft by permitting Friedlander and Markowitz to write checks to themselves and to other entities connected to them from Merv's checking account, and by permitting two-party checks to be deposited into the checking account without proper endorsements. [ Id. ] Finally, Merv claims that Yessin breached his fiduciary duty.
The Complaint alleges similar claims against the other defendants. For example, against Defendants Friedlander, Mark Properties, and Markowitz, Merv asserts claims of breach of contract, fraud, and breach of fiduciary duties. [Record No. 1-1, p. 11] In addition, Merv alleges that Friendlander and Markowitz usurped an opportunity of Merv and that Friedlander made fraudulent conveyances. [ Id. ] Merv requests compensatory damages, punitive damages, attorneys' fees and costs, as well as additional remedies against Defendants Forcht, Friendlander, Markowitz, and Mark Properties. [Record No. 1-1, p. 12]
Fifth Third and Yessin argue that their status is different from that of the other defendants because they are not creditors of Merv (as is Forcht); have not filed a proof of claim in the main bankruptcy case (such as Forcht); and do not hold an ownership interest in Merv (as do Friendlander and Mark Properties). Fifth Third and Yessin argue that because the only causes of action against them - breach of contract, fraud, and breach of fiduciary duty against Yessin - are based upon state law, the reference to the bankruptcy court should be withdrawn. Further, they argue that none of these causes of action will have any bearing upon whether a proof of claim filed in the main bankruptcy case will be allowed. [Record No. 1, p. 4]
With some exceptions, district courts have "original and exclusive jurisdiction over all cases under title 11." 28 U.S.C. § 1334(a). "Congress has divided bankruptcy proceedings into three categories: those that arise under title 11; those that arise in a Title 11 case; and those that are related to a case under title 11." Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 2596 (2011) (internal quotation marks omitted). Under 28 U.S.C. § 157(b)(1), a bankruptcy judge may enter final orders and judgments in "all core proceedings arising under title 11, or arising in a case under title 11, " which have been referred to the bankruptcy court from the district court. 28 U.S.C. § 157(b)(1). Core proceeding include, but are not limited to, sixteen different types of matters, such as: (i) counterclaims by the estate against claimants against the estate; (ii) proceedings to recover preferences and fraudulent conveyances; and (iii) orders to turn over property of the estate. 28 U.S.C. § 157(b)(2)(C), (E), (F), (H).
Under § 157(c), non-core proceedings that are otherwise related to a Title 11 case may be heard by a bankruptcy judge. § 157(c)(1). In those proceedings, the bankruptcy judge submits "proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." Id.
The Local Rules for this district implement these provisions by referring to the bankruptcy court "[a]ll matters arising under - or arising on or related to cases arising under - Title 11 of the United States Code filed on or after July 10, 1984, except proceedings involving tort claims for personal injury or wrongful death." L.R. 83.12(a)(3). Regarding withdrawals from referred bankruptcy cases, the United States Code vests federal district courts with wide discretion: "The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d).
A. Jurisdiction to Enter a Final Judgment
Fifth Third and Yessin argue that recent Supreme Court and Sixth Circuit decisions stand for the proposition that "a bankruptcy court will lack jurisdiction to issue a final judgment concerning any cause of action based solely upon state law where the resolution of such cause of action is not necessary to determine whether a proof of claim filed in the main bankruptcy case is allowed or disallowed." [Record No. 5, p. 2 (citing Stern v. Marshall, 131 S.Ct. 2594 (2011); In re Global Technovations Incorporation, 694 F.3d 705 (6th Cir. 2012); and Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012)).] In Stern, the Supreme Court found, inter alia, that the bankruptcy court in that case lacked the authority under Article III to enter a final judgment on a counterclaim that was asserted in response to a defamation claim against the bankruptcy estate. Stern, 131 S.Ct. at 2611-20. The Court reached this decision even though the counterclaim was considered a core proceeding under 28 U.S.C. § 157(b). See id. It reasoned that because the counterclaim in that case arose under state common law and was between two private parties, it did not flow from the federal statutory scheme and would not necessarily be resolved by ruling on the proof of claim in the bankruptcy proceedings.
As Fifth Third and Yessin concede, Stern did not create a bright line rule regarding when a bankruptcy court may or may not enter a final judgment concerning a claim in an adversary proceeding that would otherwise appear to be a core proceeding. [Record No. 1, p. 7] Yet, it observed that when a "suit is made of the stuff of the traditional actions at common law" and "is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges and Article III courts. The Constitution assigns that job.... to the Article III Judiciary." Stern, 131 S.Ct. at 2609 (internal quotation marks omitted).
In In re Global Technovations Incorporation, 694 F.3d 705 (6th Cir. 2012), the Sixth Circuit applied Stern, noting that Stern had held that "[w]hen a claim is a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor's proof of claim in bankruptcy, the bankruptcy court cannot enter final judgment." Global Technovations, 694 F.3d at 722. And in Waldman, the Sixth Circuit extrapolated the recent Supreme Court precedent: "[W]hen a debtor pleads an action arising only under state-law, as in Northern Pipeline; or when the debtor pleads an action that would augment the bankrupt estate, but not necessarily be resolved in the claims ...