Opinion ID: 652880
Heading Depth: 2
Heading Rank: 2

Heading: District Court Denial of the Motion to Withdraw the Reference

Text: 22 Before reviewing the district court's order denying the Motion to Withdraw, we must first decide whether it is appealable. 23 An order denying a motion to withdraw the reference of an adversary proceeding merges into a district court's final judgment disposing of it. See In re Ben Cooper, Inc., 924 F.2d 36, 38 (2d Cir.) (Ben Cooper II ), cert. denied, --- U.S. ----, 111 S.Ct. 2041, 114 L.Ed.2d 126 (1991). Here the bankruptcy court stated that it was dismissing the adversary proceeding without prejudice as moot. We must decide whether this was a final judgment. 24 We believe the bankruptcy court mislabeled what it was doing. The Adversary Proceeding was not moot, since no underlying facts had changed that would make a decision by the court an advisory opinion. Rather, the court simply rendered a decision in the Motion to Assume--that the key-man clause was not breached--that would have preclusive effect on the Adversary Proceeding, which by that time contained only the demand for declaratory judgment. 25 A district court has broad discretion to decide whether to render a declaratory judgment. See In re Joint E. and S. Dist. Asbestos Litig., 993 F.2d 313, 314 (2d Cir.1993); Broadview Chem. Corp. v. Loctite Corp., 417 F.2d 998, 1000 (2d Cir.1969), cert. denied, 397 U.S. 1064, 90 S.Ct. 1502, 25 L.Ed.2d 686 (1970). Where a district court has before it a declaratory judgment action and a direct action containing all of the issues in the declaratory judgment action, and decides the common issues in the direct action, it may exercise its discretion to dismiss the declaratory judgment complaint. Tyler Pharmacal Distribs., Inc. v. U.S. Dep't of Health, Educ., and Welfare, 408 F.2d 95, 97 (7th Cir.1969); see also 10A Wright, Miller & Kane, Federal Practice and Procedure Sec. 2759 (1983). We are convinced that this is what the bankruptcy court did here, regardless of its application of the mootness label in its order. 26 A discretionary dismissal of a declaratory judgment action is a final judgment reviewable on appeal. See Broadview, 417 F.2d at 1000. The district court's affirmance of the bankruptcy court's dismissal therefore was a final judgment, and we have jurisdiction to consider the district court's denial of the Motion to Withdraw since it is contained in that judgment.
27 The district court found that the Adversary Proceeding was a core proceeding, and, based on this determination, denied Showtime's Motion to Withdraw. 28 In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Supreme Court ruled that Congress could not constitutionally empower a non-Article III bankruptcy court with the authority to adjudicate a state breach-of-contract action, based on a pre-petition contract, brought by a debtor against a defendant that had not filed a claim with the bankruptcy court. The court held that our Constitution reserves for Art. III courts traditional functions of the judicial power such as adjudicating state breach-of-contract claims like that by the debtor against the defendant. Id. at 84, 102 S.Ct. 2858, 73 L.Ed.2d 598. Accordingly, the Court in Marathon found unconstitutional Congress's broad grant of jurisdiction to the bankruptcy courts to adjudicate such claims in the Bankruptcy Act of 1978. 29 In response to Marathon, Congress enacted 28 U.S.C. Sec. 157. See In re Ben Cooper, Inc., 896 F.2d 1394, 1398 (2d Cir.) (Ben Cooper I ), vacated and remanded, 498 U.S. 964, 111 S.Ct. 425, 112 L.Ed.2d 408 (1990), reinstated on remand, Ben Cooper II, supra. Section 157 classifies matters as either core proceedings, which the bankruptcy court may hear and determine and on which the court may enter appropriate orders and judgments, Sec. 157(b)(1), or non-core proceedings, which the bankruptcy court may hear, but for which the bankruptcy court is only empowered to submit proposed findings of fact and conclusions of law to the district court for de novo review, Sec. 157(c)(1). 30 Under 28 U.S.C. Sec. 157(d), a district court may withdraw ... any case or proceeding referred [to the bankruptcy court] on its own motion or on a timely motion of any party, for cause shown. Section 157(d) does not define the term cause. District courts in this circuit have considered a number of factors in evaluating cause: whether the claim or proceeding is core or non-core, whether it is legal or equitable, and considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law. See, e.g., In re Kenai Corp., 136 B.R. 59, 61 (S.D.N.Y.1992) (factors include whether action is core or non-core and issues of (1) judicial economy, (2) uniform bankruptcy administration, (3) reduction of forum shopping, (4) economical use of debtors' and creditors['] resources, (5) expediting the bankruptcy process, and (6) the presence of a jury demand); In re Century Brass Prods., Inc., No. 2:91-79, 1992 WL 22191, at  3, 1992 U.S. Dist. LEXIS 1277, at  8 (D.Conn. Jan. 7, 1992) (promotion of uniformity in bankruptcy administration, judicial economy, and the Bankruptcy Court's knowledge of the facts warranted denying motion to withdraw reference); In re Mountain View Coach Line, Inc., No. 88 Civ. 5385, 1989 WL 129479, at  1, 1989 U.S. Dist. LEXIS 12698, at  2 (S.D.N.Y. Oct. 24, 1989) (court should consider whether matter is core or non-core and issues of judicial economy); In re Wedtech Corp., 94 B.R. 293, 296 (S.D.N.Y.1988) (uniformity, forum shopping, efficiency, and jury trial considerations all are relevant); see also Holland America Ins. Co. v. Roy, 777 F.2d 992, 999 (5th Cir.1985) (The district court should consider the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtors' and creditors' resources, and expediting the bankruptcy process.); 1 Collier on Bankruptcy p 3.01[e], at 3-64. 31 A district court considering whether to withdraw the reference should first evaluate whether the claim is core or non-core, since it is upon this issue that questions of efficiency and uniformity will turn. For example, the fact that a bankruptcy court's determination on non-core matters is subject to de novo review by the district court could lead the latter to conclude that in a given case unnecessary costs could be avoided by a single proceeding in the district court. Conversely, hearing core matters in a district court could be an inefficient allocation of judicial resources given that the bankruptcy court generally will be more familiar with the facts and issues. Thus once a district court makes the core/non-core determination, it should weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors. 32 The threshold core/non-core evaluation also determines the relevance of parties' jury trial rights to deciding a motion to withdraw the reference. While we held in Ben Cooper I that a bankruptcy court has the power to hold jury trials in core proceedings, we noted in dicta that the Seventh Amendment's Reexamination Clause, which states that no fact tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common law, likely would prohibit jury trials in bankruptcy courts in non-core proceedings due to the district court's de novo review of such proceedings. See 896 F.2d at 1403; see also In re Kaiser Steel Corp., 911 F.2d 380, 391 (10th Cir.1990) (disagreeing with our holding in Ben Cooper I as to bankruptcy court jury trials of core matters, but agreeing with our dicta regarding the effect of the reexamination clause on non-core jury trials in bankruptcy court); In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir.1990); Beard v. Braunstein, 914 F.2d 434, 442-43 (3d Cir.1990). We now reach the issue reserved in Ben Cooper I, and hold that the constitution prohibits bankruptcy courts from holding jury trials in non-core matters. 33 If a case is non-core and a jury demand has been filed, a district court might find that the inability of the bankruptcy court to hold the trial constitutes cause to withdraw the reference. However, a district court also might decide that a case is unlikely to reach trial, that it will require protracted discovery and court oversight before trial, or that the jury demand is without merit, and therefore might conclude that the case at that time is best left in the bankruptcy court. 34 While the district court in the case at bar appropriately first focused its attention on whether the Adversary Proceeding was core or non-core, its erroneous conclusion that it was core infected the rest of its analysis. 35 The district court found the Adversary Proceeding to be core under the language in Sec. 157(b)(2)(A) of the Bankruptcy Code stating that matters concerning the administration of the estate are core proceedings. 28 U.S.C. Sec. 157(b)(2)(A). It relied on In re Leco Enterprises, Inc., 125 B.R. 385 (S.D.N.Y.1991), which held that an action to collect on a disputed account receivable of $101,000.00 was a core proceeding. The In re Leco court reasoned that since the claim if collected would inure to the benefit of the estate or the creditors of the estate[,] the prompt resolution of this Adversary Proceeding is essential to the administration of the estate and the adjustment of the debtor-creditor relationships since these funds are inextricably linked to the liquidation of the estate. Id. at 389-90. The district judge found that [t]his reasoning applies with equal, if not greater, force in the instant case, which involves a potential debt of $77 million, not $101,000.00. Orion's recovery of a sum that large could do nothing but affect the administration and liquidation of the estate. 36 The problem with the In re Leco approach is that it creates an exception to Marathon that would swallow the rule. Any contract action that the debtor would pursue against a defendant presumably would be expected to inure to the benefit of the debtor estate and thus concern[s] its administration. Certainly this is true here where the outcome could determine Orion's continued viability as an enterprise. Nonetheless, the Adversary Proceeding remains a pre-petition contract action that the Supreme Court held in Marathon may not be finally adjudicated by a non-Article III judge. See Beard, 914 F.2d at 443 (It is clear that to the extent that the claim is for pre-petition contract damages, it is non-core.); Cinematronics, 916 F.2d at 1450; In re K-Rom Constr. Corp., 46 B.R. 745, 749-50 (S.D.N.Y.1985); see also 1 Collier on Bankruptcy p 3.01[b][iii], at 3-49 (noting that defining pre-petition contract actions as core because the amounts allegedly due would inure to the benefit of the estate would wipe out the underpinnings of Marathon ). 37 While it is clear that Congress intended Sec. 157(b)-(2)(A)'s designation of matters relating to the administration of the estate as core to encompass a wide range of matters, there is no evidence of any Congressional intent to contravene the Supreme Court's holding in Marathon. See Ben Cooper I, 896 F.2d at 1398 (the legislative history of [Sec. 157] indicates that Congress intended that 'core proceedings' would be interpreted broadly, close to or congruent with constitutional limits) (quoting In re Arnold Print Works, Inc., 815 F.2d 165, 168 (1st Cir.1987)). Thus we hold that this breach-of-contract action by a debtor against a party to a pre-petition contract, who has filed no claim with the bankruptcy court, is non-core. Since the core/non-core determination was the pivotal issue in determining the Motion to Withdraw, we vacate the district court's denial of the motion and remand it for re-determination in light of the standards set forth in this opinion. 38 We also vacate the bankruptcy court's dismissal of the Adversary Proceeding, together with all orders of the bankruptcy court entered in the Adversary Proceeding after the district court's denial of the Motion to Withdraw. Because this includes the vacatur of the bankruptcy court's striking of Showtime's demand for a jury trial, we do not decide if the bankruptcy court erred in finding the Adversary Proceeding to be equitable. We leave it to the district court on remand to consider, as necessary to decide the Motion to Withdraw, whether Orion's claim for specific performance of Showtime's obligations under the contract is in effect just a garden-variety claim for contract damages, see Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 49 n. 7, 109 S.Ct. 2782, 2792 n. 7, 106 L.Ed.2d 26 (1989) ([A]ny distinction that might exist between 'damages' and monetary relief under a different label is purely semantic, with no relevance to the adjudication of [a] Seventh Amendment claim.), and whether the breach-of-contract action underlying the declaratory judgment claim is legal or equitable, see Simler v. Conner, 372 U.S. 221, 223, 83 S.Ct. 609, 611, 9 L.Ed.2d 691 (1963) (per curiam) (The fact that the action is in form a declaratory judgment case should not obscure the essentially legal nature of the action.).