Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_05-cv-01153/USCOURTS-caed-1_05-cv-01153-1/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 11:101 Bankruptcy

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

In Re: )

 )

CENTRAL VALLEY PROCESSING, INC,)

 )

 )

Debtor. )

______________________________________)

 ) 

MICHAEL D. McGRANAHAN, )

CHAPTER 7 TRUSTEE )

 )

Plaintiff, )

 )

v. )

 ) 

ROBERT CHRISTIAN, et al., )

 )

Defendants )

______________________________________)

CV F 05-1153 AWI LJO

ORDER DENYING MOTION

TO WITHDRAW REFERENCE

FROM BANKRUPTCY COURT

This is an adversary proceeding for damages, declaratory relief, avoidance and recovery

of fraudulent transfers, and avoidance and recovery of preference payments that arises from the

bankruptcy case of Central Valley Processing, Inc. (“CVP”) by Michael D. McGranahan,

Chapter 7 Trustee (“Plaintiff”). Defendants in this action are five named individuals who, at

times relevant to this action, were shareholders and officers or members of the board of

directors of CVP, and two California general partnerships (collectively, “Defendants”). In the

instant motion, Defendants seek to withdraw the reference to the bankruptcy court for purposes

of jury trial on the issues presented in the adversary proceeding. The complaint, which alleges

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a total of sixteen claims for relief, alleges claims that are both core bankruptcy proceedings

within the meaning of 28 U.S.C., section 157(b), as well as non-core state law claims. Federal

subject matter jurisdiction over the core claims exists pursuant to 28 U.S.C., section 1334.

Supplemental jurisdiction exists over the state law claims pursuant to 28 U.S.C., section 1367. 

Venue is proper in this court.

FACTUAL AND PROCEDURAL BACKGROUND

CVP is a California corporation located in Merced County whose primary business is

the processing and selling of almonds. On February 21, 2003, CVP filed a voluntary petition

for bankruptcy under Chapter 11. Plaintiff was appointed Chapter 11 trustee on or about

August 12, 2003. On or about November 20, 2004, CVP’s case was converted to a bankruptcy

proceeding under Chapter 7. Plaintiff remains the Chapter 7 bankruptcy trustee. 

The complaint in the adversary action that is the subject of the motion for withdrawal of

the reference was filed in bankruptcy court on February 17, 2005. The complaint names as

defendants individuals Robert W. Christian, Arla Dill, Karen E. Torrano, George Crafton, and

Andrew Pursley, and partnerships Merced Almond Venture (“MAV”) and Dairyland Haulers. 

The complaint alleges a total of sixteen claims for relief. The first and second claims for relief

allege breaches of fiduciary duty and misconduct against the individual defendants. The first

claim is alleged against Christian alone, and the second claim is alleged against Dill, Torrano,

Crafton and Pursley. Claim three request declaratory relief to determine indebtedness of MAV

to CVP and claim four requests judgment on the debt. Claims five and six are also against

MAV to avoid and recover fraudulent transfer, and preferential transfer, respectively. Claim

seven is against Dill for judgment on open book account. Claims eight through fourteen are to

avoid and recover either preference or fraudulent transfers to both partnerships and all the

individual defendants except Christian. Claim fifteen is against all Defendants for recovery of

property of the bankruptcy estate and the sixteenth claim is against all defendants for

disallowance of claims of all Defendants against the bankruptcy estate. 

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Pertinent to the motion to withdraw the reference, the sixteenth claim for relief alleges

that each of the individual and partnership Defendants has filed at least one claim against the

bankruptcy estate. Specifically, the sixteenth claim asks the court to disallow claims against

the bankruptcy estate by Christian (claim 62), by Crafton (claim 58), by Torrano for Crafton

(claim 65), by Torrano for Torrano Farms (claim 25), by Torrano for Torrano (claim 64), for

Dill with no amount (claim 57), for Norman and Arla Dill (claim 63), by Dill for Dill Ranch

(claim 92) by Pursley for Pursley (claim 66), and by Pursley for Pursley Trucking (claim 78). 

The court also notes the sixteenth claim also requests disallowance of claims by Merced

Almond Venture and Dairyland Haulers. Because the briefings on the motion to withdraw the

reference do not address the status of these claims, the court must infer the claims against the

bankruptcy estate remain part of the bankruptcy proceeding.

The motion to withdraw the reference to the bankruptcy court was filed on September

9, 2005, by individual defendant Christian. The remaining individual defendants have

endorsed or not opposed the motion. On February 10, 2006, Plaintiff filed a “Limited

Opposition to Motion to Withdraw Reference to the Bankruptcy Court.” In the limited

opposition, Plaintiff states jury trial is desirable but that discovery should continue to be

overseen by the bankruptcy court. On February 21, 2006, Christian filed a reply in which he

opposed that portion of Plaintiff’s limited opposition. Christian’s reply contends the

bankruptcy court should not conduct discovery for purposes of the adversary proceeding.

LEGAL STANDARD

Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 in

response to the Supreme Court Case, Northern Pipeline Construction Co. V. Marathon Pipe

Line Co., 458 U.S. 50 (1982), which held the Bankruptcy Act of 1978 had “impermissibly

shifted essential attributes of judicial power from the Article III district court to its non-Article

III adjunct, the Bankruptcy court.” Security Farms v. International Brotherhood of Teamsters,

Chauffeurs, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1997). Under the 1984

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act, district courts were given original jurisdiction over all cases arising under title 11 of the

Bankruptcy Code, but “allowed federal courts to ‘refer’ bankruptcy cases to the bankruptcy

judges for the district automatically. [Citation.] This authority was tempered, however, with a

provision that the reference may or shall be withdrawn in certain situations:

‘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. 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.’”

In re Vicars Ins. Agency, Inc. 96 F.3d 949, 951-952 (7th Cir. 1996) (quoting 28 U.S.C. §

157(d)). The above-quoted statute contains two distinct provisions: the first sentence allows

permissive withdrawal, while the second sentence requires mandatory withdrawal in certain

situations. [Citation.]” In re Coe-Truman Technologies, Inc., 214 B.R. 183, 185 (N.D. Ill.

1997). “The burden of demonstrating both mandatory and discretionary withdrawal is on the

movant.” In re U.S. Airways Group, Inc., 296 B.R. 673, 667 (E.D. Virginia 2003).

DISCUSSION

Defendants correctly contend the Ninth Circuit applies four non-exclusive factors to

determine whether cause exists under 28 U.S.C. 157(d) to permissively withdraw the reference

to the bankruptcy court. The four non-exclusive factors are efficient use of judicial resources,

delay and costs to the parties, uniformity of bankruptcy administration, and prevention of

forum shopping as well as related factors that may bear on the decision. In re Canter, 299 F.3d

1150, 1154 (9th Cir. 2002). The court takes judicial notice of the fact that under local practice,

bankruptcy courts of this district do not provide jury trials. Both Defendants and Plaintiff

contend jury trial is necessary in this case and reason that considerations of both judicial

economy and effective administration of law militate strongly in favor of withdrawal of the

reference for the purpose of trying the claims set forth in the complaint to a jury.

Whether withdrawal of the reference serves the interests of any of the factors mentioned

above depends on whether the parties are entitled to a jury trial on the claims set forth in the

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complaint and, if so, on which specific claims. Certainly, withdrawal of the reference to

provide a jury trial would be extraordinarily wasteful where the right to jury trial does not exist,

regardless of how favorably the parties may look on a jury trial to settle their claims. 

To the extent the parties have briefed the issue of entitlement to a jury trial, their

arguments have focused on the fact the complaint sets forth non-core, as well as core

bankruptcy issues. The parties seem to infer that where an adversary action within a

bankruptcy case involves the settling of claims that involve non-core issues, jury trial is

authorized. This significantly misstates the significance of the core, non-core distinction.

The 1984 amendments to the Bankruptcy Code provided the bankruptcy court “with

two tiers of judicial authority, depending upon whether the proceeding before it was ‘core or

‘non-core.’” Dunmore v. United States, 358 F.3d 1107, 1114 (9th Cir. 2004). The Dunmore

court went on to explain:

This distinction forms the linchpin for bankruptcy court adjudication under the

amended Act. In “core” proceedings, the bankruptcy court may hear, determine,

and enter final orders and judgments. 28 U.S.C. § 157(b)(1). Acting as

appellate courts, the district courts and the courts of appeal review the

bankruptcy court’s decisions in core matters. 28 U.S.C. § 158. In contrast, in

“non-core” proceedings, the bankruptcy is limited to hearing the matter and

submitting proposed findings of fact and conclusions of law to the district court. 

The district court reviews de novo any findings or conclusions objected to and

enters a final order and judgment. [. . . .] The core/non-core distinction

segregates those proceedings that an Article I legislative court may hear and

decide by a final order from those that an Article III court must subject to nondeferential review as non-final orders.

Id. In short, the core/non-core distinction goes to the extent of the bankruptcy court’s

jurisdiction, not the rights of parties to jury trials on particular contested issues. 

The right to jury trial in civil cases is determined by the Seventh Amendment. In

Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), the Supreme Court examined the extent

of the Seventh Amendment right to jury trial in a civil case in the context of bankruptcy

proceedings. The Seventh Amendment grants the right of jury trial only to “suits at common

law,” which the Granfinanciera court interpreted as meaning cases involving legal rights. “No

jury right attaches to equitable claims.” Billing v. Ravin, Greenberg & Zackin, 22 F.3d 1242,

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1245 (3rd Cir. 1994) (citing Granfinanciera 492 U.S. at 41). The Granfinanciera court set forth

a three-part test to determine whether a Seventh Amendment trial right exists in a particular

action:

First, we compare the statutory action to 18th - century actions brought in the

courts of England prior to the merger of the courts of law and equity. Second,

we examine the remedy sought and determine whether it is legal or equitable in

nature. The second stage of this analysis is more important than the first. If, on

the balance, these two factors indicate that a party is entitled to a jury trial under

the Seventh Amendment, we must decide whether Congress may assign and has

assigned resolution of the relevant claim to a non-Article III adjudicative body

that does not use a jury as factfinder. 

Id. at 42. 

Actions sounding in tort or actions seeking money damages for a breach of contract are

generally considered actions at law. Billing, 22 F.3d at 1245. On the other hand, “actions to

determine the non-dischargeability of debts fail the second prong of [the Granfinanciera] test

because such proceedings are equitable in nature. [Citation.] Bankruptcy litigants therefore

have no Seventh Amendment right to a jury trial in dischargeability proceedings.” American

Express Travel Related Serv. Co., Inc. V. Hashemi, 104 f.3d 1122, 1124 (9 Cir. 1997)

(“Hashemi”). 

The issue that the Granfinanciera court directly addressed, and that arises in the

complaint in this case, is whether the defendant in an action by a bankruptcy trustee to avoid

and/or recover a fraudulent transfer is entitled to a jury trial under the Seventh Amendment. 

See Granfinanciera, 492 U.S. at 36. Significantly, in Granfinanciera, the defendant in the

action to avoid the fraudulent transfer had not filed a claim against the bankruptcy estate. Id.

The Court held that an action to avoid fraudulent transfer was legal in nature, id. at 47-48, and

that a defendant in such an action is entitled to jury trial under the Seventh Amendment

“notwithstanding Congress’ designation of fraudulent conveyance actions as ‘core proceedings’

in 28 U.S.C. § 157(b)(2)(H).” Id. at 36.

In Langenkamp v. Culp, 498 U.S. 42 (1990), the Supreme Court clarified its holding in

Granfinanciera by addressing directly the issue of whether the Seventh Amendment right to

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jury trial applies where creditors who submit a claim against a bankruptcy estate and who are

then “sued by the trustee in bankruptcy to recover allegedly preferential monetary transfers are

entitled to jury trial under the Seventh Amendment.” Id. at 42-43. The Langenkamp Court

reasoned its holding as follows:

In Granfinanciera we recognized that by filing a claim against a bankruptcy

estate the creditor triggers the process of “allowance and disallowance of

claims,” thereby subjecting himself to the bankruptcy court’s equitable power.

[Citations.] If the creditor is met, in turn, with a preference action from the

trustee, that action becomes part of the claims-allowance process which is

triable only in equity. [Citation.] In other words, the creditor’s claim and the

ensuing preference action by the trustee become integral to the restructuring of

the debtor-creditor relationship through the bankruptcy court’s equity

jurisdiction. [Citation.] As such, there is no Seventh Amendment right to a jury

trial. If a party does not submit a claim against the bankruptcy estate, however,

the trustee can recover allegedly preferential transfers only by filing what

amounts to a legal action to recover a monetary transfer. In those circumstances

the preference defendant is entitled to a jury trial. [Citation.]. ¶ Accordingly, “a

creditor’s right to a jury trial on a bankruptcy preference claim depends upon

whether the creditor has submitted a claim against the estate.” [Citation.]

Langenkamp, 498 U.S. at 44-45 (citations omitted, emphasis in original).

The Ninth Circuit has held that “a bankruptcy litigant waives his right to a jury trial in

proceedings ‘vital to the bankruptcy process of allowance and disallowance of . . . claims.’

[Citation.]” Hashemi, 104 F.3d at 1125 (quoting Benedor Corp. v. Conejo Enterprises, Inc., 96

F.3d 346, 354 n.6 (9th Cir. 1996)). 

Reviewing the complaint, it is plain that claims numbered 5, 6, and 8 through 14 are all

claims to avoid and recover preference payments or to avoid and recover fraudulent transfers. 

As such, they are claims identical to those considered in Granfinanciera and Langenkamp. 

Under those cases, the right to a jury trial depends on whether the defendants in the contested

action to avoid and recover fraudulent transfers or preference payments have submitted

themselves to the equitable powers of the bankruptcy court by filing claims against the

bankruptcy estate. Since the court has found it must infer from the complaint that each of the

defendants has filed at least one claim against the bankruptcy estate, claims 5, 6, and 8 through

14 are claims to which Defendants have waived their Seventh Amendment trial rights by filing

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claims against the bankruptcy estate. 

In addition, the court concludes, after examining the third and fourth claims for relief

(open book account against MAV), the seventh claim (open book account against Dill), the

fifteenth claim (recovery of estate property), and the sixteenth claim (disallowance of the

claims of the individual defendants), that these are all claims falling within the broader

category of claims that are integral to the restructuring of the debtor-creditor relationship. As

such, they are subject to the bankruptcy court’s equity jurisdiction. Langenkamp, 498 U.S. at

44-45. Following Langenkamp, the court must conclude Defendants have no right to jury trial

on these claims as well. 

The first and second claims for relief are the only remaining claims for which

Defendants may have a Seventh Amendment right to jury trial. Both claims are essentially for

breaches of fiduciary duty; against Christian in the first claim, and against the other individual

defendants in the second claim. For the reasons discussed below, there is no Seventh

Amendment right to jury trial on either of these claims.

Analyzing the right to jury trial with regard to the first and second claims for relief, the

court, following Granfinanciera, compares the statutory action to 18th - century actions brought

in the courts of England prior to the merger of the courts of law and equity, and then examines

the remedy sought to determine whether it is legal or equitable in nature. Granfinanciera, 492

U.S. at 42. Whether a particular claim is to be accorded the right to jury trial under the Seventh

Amendment “depends on the nature of the issue to be tried rather than the character of the

overall action.” Chauffeurs, Teamsters and Helpers, Local No. 391 v. Terry, 494 U.S. 558, 569

(1990) (“Terry”). 

Here, as previously discussed, the issue is whether the individual defendants breached

their fiduciary duties to the bankruptcy estate. “Actions for breach of fiduciary duty,

historically speaking, are almost uniformly actions in equity – carrying with them no right to

trial by jury.” In re Evangelist, 760 F.2d 27, 29 (1st Cir. 1985). The characterization of actions

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for breach of fiduciary duties as primarily equitable has been upheld in a number of contexts,

including the bankruptcy context. See e.g. id. at 30-31 (equitable claim in context of breach by

manager of investment fund); Terry 494 U.S. at 569 (labor union’s duty to members); Dunoco

Corp. v. Dunoco Dev. Corp., 56 B.R. 137, 140 (C.D. Cal. 1985) (bankruptcy trustee’s action

for breach of fiduciary duty).

As to the nature of the remedy requested, the court finds the remedy is primarily

restitutional. That is, Plaintiff seeks to recover monies lost through alleged transfers for

insufficient consideration, self dealing, and losses resulting from bad business practices. In

DePinto v. Provident Sec. Life Ins. Co.,323 F.2d 826 (9th Cir. 1963), the court held “that where

a claim of breach of fiduciary duty is predicated upon underlying conduct, such as negligence,

which is actionable in a direct suit at common law, the issue of whether there has been such a

breach is, subject to appropriate instructions, a jury question.” Id. at 837. Here, the underlying

conduct is not of a nature that it would be actionable in a direct suit at common law. That is,

there is no allegation of negligence or contractual breach or any other conduct that would

normally be actionable at common law. 

The essence of Plaintiff’s claims against the individual defendants is that they engaged

in self-dealing, poor business management practices, transfers of property in violation of

bankruptcy code, and failure to adequately supervise. None of these constitute claims that are

traditionally actionable at common law. Further, the fact that the relief requested is monetary

does is not determinative of the nature of the remedy requested. “Monetary damages are

equitable where they are restitutionary in nature. E Z Feed Cube Co., Ltd. (Grassmueck v.

Foster), 115 B.R. 684, 689 (D. Ore. 1990), 

In E Z Feed Cube Co., the court noted that there has developed a limited exception to

the general doctrine that actions for breach of fiduciary duty are equitable where “‘the liability

of the trustee is definite and clear and no accounting is necessary to establish [the claim].” Id.

at 687-688 (quoting III Scott, The Law of Trusts, § 198 at 1631). An examination of the first

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claim for relief indicates the exception does not apply. Again, the claims here are essentially

restitutional, reflecting transfer of assets to other entities in which Christian had an interest

without adequate compensation to CVP, and other alleged acts of gross mismanagement. 

Obviously, the amount of claims are not clear and something in the nature of an accounting

will be required to establish the amount of the claim. The same is true of the second claim for

relief where the individual defendants are alleged to have engage in self-dealing, and failed to

exercise sufficient control over Christian.

The court finds the first and second claims for relief fail the first two prongs of the test

in Granfinanciera, and as a consequence the Seventh Amendment right to jury trial does not

apply. In sum, the court concludes there is no right to jury trial on any of the claims alleged in

the complaint. Consequently, the motion to withdraw the reference from the bankruptcy court

will be denied. The court recognizes the parties have not briefed the issue of Seventh

Amendment right to jury trial in this case. It is, however, the court’s opinion both the law and

the facts of this case are clear that there is no right to jury trial. Should any party disagree with

the court’s conclusion, they may file a request for reconsideration of the court’s decision

pursuant to Local Rule 78-230.

THEREFORE, in consideration of the foregoing discussion, it is hereby ORDERED

that Defendants motion to withdraw the reference to the bankruptcy court is DENIED. The

Clerk of the Court shall CLOSE the case.

IT IS SO ORDERED.

Dated: March 24, 2006 /s/ Anthony W. Ishii 

h2ehf UNITED STATES DISTRICT JUDGE

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