Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-00781/USCOURTS-azd-2_08-cv-00781-0/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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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

In re:

Human Dynamics Corporation,

Debtor __________________________________

Reorganized Human Dynamics

Corporation, an Arizona corporation, 

Plaintiff, 

vs.

Low & Childers, PC., an Arizona

professional corporation, 

Defendant. 

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No. CV-08-0781-PHX-DGC

ORDER

 Defendant Low & Childers, PC., (“L&C”) has filed a Motion to Withdraw the

Reference of Adversary Proceeding in Whole pursuant to 11 U.S.C. § 157, Federal Rules of

Bankruptcy Procedure (“Federal Rules”) Rule 5011, and Local Rules of Bankruptcy

Procedure (“Local Rules”) Rule 5011-1. Dkt. #2 at 1. A response and reply have been filed.

Dkt. ##7, 11. For the reasons set forth below, the Court will deny the motion without

prejudice. 

I. Background.

Debtor Human Dynamic Corporation (“HDC”) is an Arizona corporation involved in

the professional employer organization industry. Dkt. #2 at 10 ¶9, 22 ¶9. In early 2002,

HDC and others brought suit in Arizona state court seeking workers’ compensation insurance

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coverage for HDC’s clients. Id. at 11 ¶11, 22 ¶11. L&C, an Arizona law firm, represented

the plaintiffs. Id. at 15 ¶¶42-43, 25 ¶42. 

HDC filed a voluntary Chapter 11 bankruptcy petition on June 6, 2005 with the

United States Bankruptcy Court for the District of Arizona. Dkt. #2 at 9 ¶1, 10 ¶7, 21 ¶1, 22

¶7. Shortly thereafter, HDC and L&C requested that the bankruptcy court appoint L&C as

special non-bankruptcy counsel in the state court litigation (see Dkt. #7 at 3; Dkt. #7-2 at 3-6,

11-15; Dkt. #11 at 9), a function that L&C performed until withdrawing as counsel on

March 16, 2007 (Dkt. #2 at 15 ¶¶42-43, 25 ¶42; see Dkt. #7-2 at 22-23). 

On July 19, 2007, HDC was reorganized as Reorganized Human Dynamics

Corporation (“RHDC”). Id. at 10 ¶7, 22 ¶7. On December 11, 2007, RHDC initiated an

adversary preceding against L&C in the bankruptcy court alleging one count of fraudulent

transfer. Dkt. #2 at 8-19. L&C subsequently filed this motion to withdraw the reference,

requesting a jury trial in this Court. Id. at 1-7.

II. Legal Standard.

The Federal Rules provide that “[a] motion for withdrawal of a case or proceeding

shall be heard by a district judge.” Fed. R. Bkrtcy. P. 5011(a). Congress has given the

district courts the authority to “provide that any or all cases 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.” 28 U.S.C. § 157(a). Consequently, the

Local Rules state that “the district court refers to the bankruptcy court for this District all

cases under Title 11 and all proceedings under Title 11 or arising in or related to a case under

Title 11.” Rule 5011-1. 

This reference is not unconditional, however, and must be withdrawn under certain

circumstances. 28 U.S.C. § 157 allows the bankruptcy court to hear jury trials only in limited

situations: 

If the right to a jury trial applies in a proceeding that may be heard under this

section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial

if specially designated to exercise such jurisdiction by the district court and

with the express consent of all the parties involved.

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Id. at §157(e). Thus, the Court must withdraw the reference if the movant can demonstrate

both a right to a jury trial and a lack of consent to a jury trial by the Bankruptcy Court or the

parties. See Dyer v. Lindblade (In re Dyer), 322 F.3d 1178, 1194 (9th Cir. 2003) (“[T]he

bankruptcy court is unable to preside over a jury trial absent explicit consent from the parties

and the district court.”).

III. Analysis.

A. Satisfaction of Section 157(e). 

The Court finds that both elements for withdrawal under section 157(e) have been

satisfied. RHDC disputes both elements in its response, but in reality its arguments only

address the issue of entitlement to a jury trial and do not touch upon consent. RHDC does

not contest that L&C’s answer to the complaint clearly states that it does not consent to a jury

trial by the Bankruptcy Court. Dkt. #2 at 29 ¶ 83. Consequently, the reference must be

withdrawn if L&C has a right to a jury trial. 

The Seventh Amendment requires a trial by jury “in suits of common law” which

encompassed all “suits in which legal rights were to be ascertained and determined in

contradistinction to those where equitable rights alone were recognized, and equitable

remedies were administered.” Granfinanciera v. Nordberg, 492 U.S. 33, 41 (1989)

(emphasis in original) (quotations and citation omitted). Suits to recover fraudulent transfers

are legal in nature and subject to the Seventh Amendment’s protection because such suits

were traditionally brought in courts of law and the relief sought is one of monetary damages.

Id. at 12, 14-15. 

 This right, however, is not absolute. A bankruptcy court has “actual or constructive

possession of the bankruptcy estate” and decides “whether to allow claims against the

estate.” Id. at 57 (quotations and citation omitted). Thus, “a creditor’s right to a jury trial on

a bankruptcy trustee’s preference claim depends upon whether the creditor has submitted a

claim against the estate,” because such a claim would constitute “part of the process of

allowance and disallowance of claims [or an] action integral to the restructuring of debtorcreditor relations,” both of which are “triable in equity.” Id. at 58.

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The parties agree that L&C has filed no claim against the estate. RHDC argues,

however, that L&C submitted itself to the equity jurisdiction of the Bankruptcy court – and

lost its right to a jury trial – by applying for and becoming special counsel for HDC. Dkt.

#7 at 8-9. RHDC argues that this action is “no different” than filing a claim against the estate

because L&C “asked for and received the opportunity to act on behalf of the debtor and

subject to Bankruptcy Court rules and procedures.” Id. at 10. RHDC cites no authority

directly supporting this assertion, but instead relies by analogy on two cases. 

RHDC’s first case, Coral Petroleum, Inc. v. Walker (In re Coral Petroleum), 249 B.R.

721 (Bankr. S.D. Tex. 2000), held that a defendant had waived his right to a jury trial through

his appointment as trustee to the estate, but this was because “trusts are special creatures over

which courts of equity had virtually exclusive jurisdiction.” Id. at 734-735. RHDC’s second

case, AVN Corporation v. Namer (In re AVN Corp.), 235 B.R. 417 (Bankr. W.D. Tenn.

1999), held that defendant had waived his Seventh Amendment rights by filing a proof of

claim, but this was because “the filing of a proof of claim triggers the process of allowance

and disallowance of claims.” Id. at 423. Because an appointment as special counsel does

not involve the special equity considerations of a trust, nor the “process of allowance and

disallowance of claims,” Granfinanciera, 492 U.S. at 58, it does not constitute a submission

to the Bankruptcy Court’s equity jurisdiction. See In re Com 21, No. C-04-03396 RMW,

2005 WL 1606357, at *10 (N.D. Cal. 2005) (Even though the Bankruptcy Court authorized

counsel’s employment and oversaw counsel’s conduct, the District Court rejected the

“sweeping conclusion that all disputes between a bankruptcy trustee and counsel are

automatically equitable claims without a right to a jury trial.”). 

L&C applied to represent HDC only in the state court litigation and filed a motion to

withdraw as council on February 23, 2007 (Dkt. #7-2 at 21-23), more than nine months

before RHDC initiated this adversary proceeding. Dkt. #7-2 at 8-19. Thus, even though

L&C was accountable to the Bankruptcy Court, that court’s oversight did not involve

allowance and disallowance of claims nor the unique exercise of equity jurisdiction. The

claim of fraudulent transfer remains one at law and L&C is entitled to a trial by jury. 

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B. Necessity of Immediate Withdrawal.

Even though the Court concludes that it must ultimately withdraw the reference of the

adversary proceeding, RHDC argues that the Court should allow the bankruptcy court to

conduct pre-trial matters. Dkt. #7 at 10-11. The Court agrees.

A right to a jury trial at the district court “does not mean the bankruptcy court must

instantly give up jurisdiction and that the case must be transferred to the district court.”

Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 504 F. 3d 775, 787 (9th

Cir. 2007). Allowing the bankruptcy court to resolve pre-trial matters “promotes judicial

economy and efficiency by making use of the bankruptcy court’s unique knowledge of Title

11 and familiarity with the actions before them,” and “only by allowing the bankruptcy court

to retain jurisdiction . . . do we ensure that our bankruptcy system is carried out.” Id. at 787-

788 (citations omitted). Because issues of fraudulent transfer are related to bankruptcy

proceedings, see 11 U.S.C. 157(b)(2)(H), and the bankruptcy court is familiar with the

background of this case, the Court concludes that the bankruptcy court should retain

jurisdiction over pretrial matters. See In re Don’s Making Money, 2007 WL 1302748 at *7

(allowing bankruptcy court to retain jurisdiction of pretrial matters because state law claims

related to bankruptcy proceedings and the bankruptcy court was familiar with the facts of the

case).

IT IS ORDERED that L&C’s motion (Dkt. #2 at 1-7) is denied without prejudice

to be reasserted once pretrial matters have been completed and the case is ready for trial.

DATED this 8th day of July, 2008.

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