Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-02562/USCOURTS-azd-2_05-cv-02562-0/pdf.json

Nature of Suit Code: 423
Nature of Suit: Bankruptcy Withdrawal 28 USC 157
Cause of Action: 28:0157 Motion for Withdrawal of Reference

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

MCA Financial Group, LTD, as Trustee

for the Fourthstage Technologies, Inc.

Liquidating Trust, 

Plaintiff, 

vs.

Gardere Wynne Sewell, L.L.P.; Indrajit

Bobby Majumder and Jane Doe

Majumder, 

Defendants. 

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No. CV 05-2562-PHX-MHM

ORDER

Currently, before the Court is Defendants' Motion to withdraw the reference pursuant to

U.S.C. § 157(d) and Fed. R. Bankr. 5011. (Dkt.#1). After the reviewing the pleadings, the

Court issues the following order. 

I. Background

MCA Financial Group, LTD ("Trustee") is the bankruptcy trustee of the bankruptcy

estate of Fourthstage Technologies, Inc. ("debtor"), in Case No.01-17604, which is currently

pending in the United States Bankruptcy Court for the District of Arizona. On November

19, 2004 the Trustee asserted an adversary action in that case, Adv. No. 03-1127, against

Defendant Gardere Wynne Sewell LLP ("Gardere") and Defendant Indrajit Bobby Majumder

("Mr. Majumder") (collectively "Defendants") asserting common law tort claims arising out

of the representation Defendants provided to the debtor Fourthstage Technologies, Inc.

Case 2:05-cv-02562-MHM Document 7 Filed 03/31/06 Page 1 of 5
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The significance of core versus non-core claims relates to the weight given to the

bankruptcy courts in resolving such claims. Specifically, if the claim is a core claim the

bankruptcy court may resolve the claim on the merits and it will be deemed to be judgment.

Conversely, absent the consent of the parties, the bankruptcy court may hear non-core claims

and are required to submit proposed findings of fact and conclusions of law to the district

court for de novo review on timely objection. See 28 U.S.C. § 157(b)(1) and § 157(c)(1), (e).

2

These provisions are referred to as the catch-all provisions. See In re Castlerock

Properties, 781 F.2d 159 (9th Cir. 1986). 

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Defendants have now moved to withdraw the reference of Adv. No. 03-1127 to this Court.

The Trustee objects to this request.

II. Standard

28 U.S.C. § 157(a) provides that "[e]ach district court may provide that any or all

cases arising under Title 11 and any or all proceedings arising under Title 11 or arising in or

related to a case under Title 11 shall be referred to the bankruptcy judges for the district."

Additionally, § 157(d) provides: "[t]he 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...." § 157(b)(1) provides that "Bankruptcy 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..."1

 § 157 does not define "core" proceedings but provides an

unexclusive list. For instance, § 157(b)(2)(A) provides "[c]ore proceedings include, but are

not limited to matters concerning the administration of the estate." Moreover, § 157(b)(2)(O)

relates that core matters are "other proceedings affecting the liquidation of the assets of the

estate or the adjustment of the debtor-creditor ... relationship..."2

 The movant bears the

burden of proof on a motion to withdraw the reference. In re Larry's Apartment, LLC, 210

B.R. 469, 472-73 (D. Ariz. 1997). 

III. Discussion

In the present case, Defendants move to withdraw the reference on the grounds that

they are entitled to a jury trial on the Trustee's state law tort claims of professional

negligence, breach of fiduciary duty, and aiding and abetting tortious conduct asserted in the

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In the pleadings provided to the Court there appears to be a pending motion to

dismiss as well as motion compelling arbitration. This Court will not reach those motions

in this ruling as the threshold that must first be resolved is whether withdrawal of the

adversary proceeding to this Court is proper. 

4

 In re Cinematronics, 916 F.2d at 1451 (stating that bankruptcy courts cannot conduct

jury trials on noncore matters where the parties have not consented). Here, Defendants do

not provide any such consent. 

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Adversary Action (Am. Compl. ¶'s 59-74) and will not consent to a jury trial in the

Bankruptcy Court, thus making withdrawal of the adversary proceeding to this Court

mandatory.3

 

A. Jury Trial On Non-Core Claims

Because bankruptcy courts cannot conduct jury trials on non-core matters, withdrawal

of the reference from bankruptcy court is mandatory if a litigant is entitled to a jury trial on

such matters. In re Larry's Apartment, 210 B.R. at 472 (citing In re Cinematronics, Inc., 916

F.2d 1444, 1451 (9th Cir. 1990). This is the basis for Defendants' motion before the Court.

Specifically, Defendants contend that because the state law claims asserted in the Trustee's

amended complaint are non-core claims and Defendants do not consent to a jury trial before

the bankruptcy court that withdrawal is mandatory.4

Therefore, the crucial issue to resolve is whether the state tort claims at issue asserted

by the Trustee constitute non-core claims requiring withdrawal or core claims that permit the

bankruptcy court to resolve on the merits. In determining whether a claim is a core or noncore claim courts typically look to four main factors. Specifically, (1) whether the rights

involved exist independent of Title 11, (2) depend on state law for resolution, (3) existed

prior to the filing of the bankruptcy petition and (4) were significantly affected by the filing

of the bankruptcy case. In re Cinematronics. at 1450 n. 5 (citing In re World Solar Corp, 81

B.R. 603 (Bankr. S.C. Cal. 1988); In re Commercial Heat Treating, Inc., 80 B.R.. 880, 888

(Bankr. S.D. Ohio 1987). 

First, the rights involved in the state law tort claims asserted by the Trustee clearly

exist independent of Title 11. The Trustee's tort claims against the Defendants relate to

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conduct that occurred pre-bankruptcy filing on December 31, 2001. (Am. Compl. ¶'21-44).

Such claims could have been advanced regardless of the ultimate Chapter 11 filing. See In

re World Solar Corp., 81 B.R. 603, 608 (Bankr. S.D. Cal. 1988) (stating that when issues

"depend on state law for their resolution and are matters which, but for the intervention of

bankruptcy, could have been brought in state court, they are not core proceedings") (citing

In re Bokum Resources Corp., 49 B.R. 854 (Bankr.D.N.M. 1985). Second, such claims

clearly depend on state law for resolution as they are state law tort claims against the

Defendants relating to the representation provided to Fourthstage Technologies, Inc., leading

up to its bankruptcy. (Am Compl.¶'s21-44). Third, as noted above, the conduct at issue

relates to conduct occurring prior to the chapter 11 filing by Fourthstage. Lastly, the rights

asserted do not appear to be substantially altered by the filing of the bankruptcy. In other

words, these claims still retain their state law character and will be resolved based solely

upon state tort law, not the outcome of the pending Chapter 11 proceeding. Thus, in

reviewing these factors they demonstrate that the state law claims currently before the

bankruptcy court are non-core claims. 

In making this determination, the Court is conscience of the Trustee's reliance on the

holding set forth in In re S.P.I. Communications & Marketing, Inc., 112 B.R. 507 (N.D.N.Y.

1990) where the New York district court held that the trustee's complaints against the debtor's

counsel for legal malpractice directly concerning the bankruptcy case which arose postpetition fall within the scope of the federal bankruptcy power as a core proceeding. Id. at

510. Specifically, the debtor counsel's actions involved providing consent on the debtors

behalf to conversion of the debtors' chapter 11 case to a chapter 7 case contrary to the

debtors' wishes. Id. Moreover, the court noted that the "[t]he adjudication by the bankruptcy

court of claims arising from post-petition contracts with the debtor are "an essential part of

administering the estate" and, therefore, are core matters pursuant to 28 U.S.C. §

157(b)(2)(A)." Id. 

Here, as discussed above, the conduct at issue does not relate to the post-petition

conduct of Defendants but rather to pre-petition conduct that is alleged to have contributed

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to the debtor's financial demise. (Am.Compl. ¶'s 21-44). The timing is significant as the prepetition contract between Defendants and Fourthstage Technologies, Inc., and alleged

conduct of Defendants arises prior to the bankruptcy and thus have independent basis.

Further, even though the Trustee alleges that such claims contributed to the financial demise,

such allegations do not push the claims into the classification of core claims. See In re RDM

Sports Group, Inc., 260 B.R. 915, 918 (N.D. Ga. 2001) (acknowledging that claims of prepetition claims by trustee against law firm for breach of fiduciary duty, legal malpractice and

negligence, and other state law claims arising out of conduct that allegedly contributed to

debtor's financial demise were non-core claims in nature as they did not invoke substantive

rights under the Bankruptcy Code and they existed independent of bankruptcy). Thus, here

in reviewing the factors distinguishing core and non-core claims, this Court finds that the

state law torts claims asserted by the Trustee are non-core claims in nature. 

Moreover, it is important to note that Plaintiffs' claims seek monetary damages

(Am.Compl ¶'s 64,69,&74) arising out of Defendants' alleged tortious conduct, thus invoking

the Seventh Amendment's right to a jury trial. See United States v. Fotopulos, 180 F.2d 631,

634 (9th Cir. 1950) (stating that in ordinary tort actions in federal court, right of trial by jury

is guaranteed by constitution.). The relevance of this right to jury trial is that because

Defendants possess this right and refuse to consent to any such jury trial of these non-core

claims in the bankruptcy court, withdrawal to the present Court is mandatory. See In re

Larry's Apartment, 210 B.R. at 472; see also 28 U.S.C. § 157(d).

Accordingly, 

IT IS HEREBY ORDERED granting Defendants' Motion to withdraw the reference

of the adversary proceeding, Adv.No. 03-1127 to this Court. (Dkt. #1). An order from the

Court setting this matter for a status conference will follow.

DATED this 25th day of March, 2006.

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