Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_07-cv-03713/USCOURTS-cand-4_07-cv-03713-1/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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United States District Court

For the Northern District of California

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1The facts described in this section are taken from the

allegations in the complaint and the materials submitted in support

of the present motion.

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

JOHN T. KENDALL, Chapter 7 Trustee,

Plaintiff,

 v.

HARTFORD FIRE INSURANCE COMPANY,

Defendant. /

No. C 07-3713 CW

ORDER TENTATIVELY

GRANTING IN PART

DEFENDANT’S MOTION TO

WITHDRAW REFERENCE

AND REQUESTING

RECOMMENDATION FROM

BANKRUPTCY JUDGE

Defendant Hartford Fire Insurance Co. moves to withdraw the

reference to the U.S. Bankruptcy Court of Plaintiff John T.

Kendall’s claim against it. Plaintiff opposes Defendant’s motion. 

The matter was taken under submission on the papers. Having

considered all of the papers submitted by the parties, the Court

tentatively grants Defendant’s motion in part and denies it in

part.

BACKGROUND1

This action arises out of a fraudulent scheme executed by

Francis Reimers. In or about 1996, Reimers founded Plan Compliance

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United States District Court

For the Northern District of California

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Group (PCG). PCG provided investment services on behalf of federal

employees and employees of state and local educational

institutions. These services included collecting and remitting

money designated by employees for deposit in their personal

retirement plans.

Reimers also held himself out as the representative of a

business called Advisory Services Group (ASG), which purportedly

provided financial services to individual investors. It is not

known whether ASG actually existed as a separate entity. Pursuant

to the fraudulent scheme, Reimers diverted funds obtained through

PCG’s operations to pay guaranteed monthly dividends to ASG

investors and to cover his own personal expenses. In late 2005, an

investigation led to the discovery that Reimers was embezzling PCG

funds. Reimers subsequently plead guilty to federal criminal

charges and was sentenced to nine years in prison. PCG became the

subject of a voluntary Chapter 7 bankruptcy case. Plaintiff is the

trustee in that action.

In his role as trustee, Plaintiff learned that PCG had

purchased a bond from Defendant in 1999, pursuant to which

Defendant agreed to pay PCG up to two million dollars for any loss

resulting from theft by a PCG employee. Plaintiff sought

reimbursement from Defendant for losses caused by Reimers’

misappropriation of PCG funds. Defendant investigated PCG’s claim,

but never issued a determination on PCG’s eligibility for

reimbursement under the bond.

On May 18, 2007, Plaintiff filed an adversary complaint

against Defendant in the bankruptcy proceedings. The complaint

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United States District Court

For the Northern District of California

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2The Court grants Defendant’s request that it take judicial

notice of the complaint filed in the bankruptcy proceedings.

3

Defendant has not yet answered the complaint or demanded a

jury trial. This order is premised on the assumption that

Defendant will timely file a jury demand within ten days of its

answer, as required by Rule 38(b) of the Federal Rules of Civil

Procedure.

3

asserts one claim only, seeking “declaratory relief” in the form of

“a declaration that under the terms of the bond, Defendant has an

obligation to Plaintiff to fully and completely reimburse PGC in

the amount of $2 million in connection with Reimers’ defalcations.” 

Req. for Judicial Notice Ex. 1 at 5.2 On or about June 29, 2007,

Defendant filed a motion for withdrawal of the reference of this

claim to the bankruptcy court. On or about July 19, 2007, the

bankruptcy court transferred the motion to the district court for

determination. On October 24, 2007, Defendant made its motion in

the district court for withdrawal of the reference. The case was

recently reassigned to the undersigned.

DISCUSSION

Defendant argues that, because Plaintiff’s claim against it is

a non-core proceeding in which Defendant intends to demand a jury

trial,3 and because Defendant does not consent to a jury trial

before the bankruptcy court, the Court should withdraw the

reference of Plaintiff’s claim to the bankruptcy court.

Title 28 U.S.C. § 157 classifies matters in bankruptcy cases

as either “‘core proceedings,’ in which the bankruptcy court ‘may

enter appropriate orders and judgments,’ or ‘non-core proceedings,’

which the court may hear but for which it may only submit proposed

findings of fact and conclusions of law to the district court for

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de novo review.” Security Farms v. Int’l Bhd. of Teamsters, 124

F.3d 999, 1008 (9th Cir. 1997) (quoting 28 U.S.C. § 157).

Claims “arising under” or “arising in” Title 11 of the United

States Code are core proceedings. In re Harris Pine Mills, 44 F.3d

1431, 1435 (9th Cir. 1995). A claim arises under Title 11 if it

involves “a cause of action created or determined by a statutory

provision of Title 11,” while a claim arises in Title 11 if it is

an administrative matter that arises only in bankruptcy cases. Id.

(quoting In re Wood, 825 F.2d 90, 96-97 (5th Cir. 1987)). “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.” Id. (quoting In re Wood,

825 F.2d at 97).

Section 157(c)(1) requires de novo review by the district

court of all non-core matters. As a result, “holding jury trials

in bankruptcy court on non-core matters would necessarily result in

reexamination of the jury’s fact-finding, thereby violating the

Seventh Amendment’s prohibition on such reexamination.” In re

Daewoo Motor Am., Inc., 302 B.R. 308, 314 (Bankr. C.D. Cal. 2003). 

Thus, “bankruptcy courts cannot conduct jury trials on noncore

matters, where the parties have not consented.” In re

Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 1990).

Plaintiff’s claim for payment pursuant to the terms of the

bond is one for breach of contract under the common law. It does

not “arise under” or “arise in” Title 11 because Plaintiff’s

substantive right to recovery was not created by the bankruptcy

laws. Therefore, the claim appears to be a non-core proceeding. 

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United States District Court

For the Northern District of California

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4The cases Plaintiff cites from the Second Circuit are not

applicable here; the Ninth Circuit takes a narrower view than the

Second Circuit of what constitutes a core proceeding. See In re

Daewoo Motor, 302 B.R. at 311-12.

5

This is true even though, as Plaintiff notes, insurance proceeds

under the bond may represent the largest potentially available

asset from which to pay the claims of PCG’s creditors. While the

potential effect of the breach of contract claim on a resolution of

the matters before the bankruptcy court renders the claim “related

to” the core proceedings, see In re Harris Pine Mills, 44 F.3d at

1435, it does not convert the claim into a core proceeding itself.4

Plaintiff argues that, even if his claim is found to be a noncore proceeding, Defendant has no right to a jury trial because the

claim is one for declaratory judgment and seeks equitable relief. 

Nonetheless, the claim appears to be fundamentally one for breach

of contract, despite the fact that it is styled as one for

declaratory relief and does not contain the phrase “breach of

contract.” A true declaratory judgment action anticipates a future

lawsuit brought by the defendant against the plaintiff. It

provides the plaintiff with the opportunity to establish that his

or her present conduct does not give rise to liability, thereby

allowing the plaintiff to carry on with that conduct without the

fear of being sued by the defendant in the future. This is not the

case here. Plaintiff is not trying to ward off a future lawsuit by

Defendant. To the contrary, he claims that Defendant is presently

in breach of its contractual obligation to reimburse PCG for its

losses. Nor is the requested relief equitable in nature, despite

Plaintiff’s characterization of it as such; a “declaration that

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United States District Court

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under the terms of the bond, Defendant has an obligation to

Plaintiff to fully and completely reimburse PGC in the amount of $2

million” is tantamount to a money judgment.

Accordingly, it appears that Defendant has the right to a jury

trial. Because Defendant does not consent to a jury trial before

the bankruptcy court on this non-core proceeding, the trial may not

be conducted in the bankruptcy court. Therefore, the Court is

inclined to withdraw the reference to the bankruptcy court for the

purposes of the trial of this action.

However, a “valid right to a Seventh Amendment jury trial in

the district court does not mean the bankruptcy court must

instantly give up jurisdiction and that the action must be

transferred to the district court. Instead, . . . the bankruptcy

court may retain jurisdiction over the action for pre-trial

matters.” In re Healthcentral.com, 504 F.3d 775, 788 (9th Cir.

2007). Because Plaintiff’s breach of contract claim is “related

to” the bankruptcy proceedings in that insurance proceeds under the

bond may represent PCG’s largest available asset, the interest of

judicial economy would likely favor a resolution of all pre-trial

matters in the bankruptcy court, which is already familiar with the

background of this case. Accordingly, the Court is inclined to

withdraw the reference only after the bankruptcy court has

adjudicated all pre-trial matters.

However, the Court requests the bankruptcy court’s

recommendation on this matter, and will refrain from issuing a

final order on this motion until the bankruptcy court has had an

opportunity to provide such a recommendation.

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United States District Court

For the Northern District of California

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CONCLUSION

For the foregoing reasons, the Court tentatively GRANTS IN

PART and DENIES IN PART Defendant’s motion to withdraw the

reference to the U.S. Bankruptcy Court. The Court is inclined to

withdraw the reference, but only after the bankruptcy court has

adjudicated all pre-trial matters. The Court will enter a final

order after the bankruptcy court has had an opportunity to issue

its recommendation.

IT IS SO ORDERED.

Dated: 3/19/08 

CLAUDIA WILKEN

United States District Judge

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