What Are the Odds?

Permissive Withdrawal Provisions

Similarly, permissive withdrawal provisions are subject to many considerations to determine if cause exists for withdrawing the reference. The standards (which often overlap) include: 1) whether the claim or proceeding is core or non-core; 2) whether the claims are legal or equitable; 3) judicial efficiency; 4) prevention of forum shopping; 5) uniformity in the administration of bankruptcy law; 6) economical use of the debtor's resources; 7) efficient and expeditious resolution of the bankruptcy process; and 8) whether a jury trial has been demanded. Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir. 1993); Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir. 1985); In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990); Statutory Comm. of Unsecured Creditors on behalf of Iridium Operating LLC v. Motorola, Inc. (In re Iridium Operating LLC), 285 B.R. 822, 834 (S.D.N.Y. 2002). Generally, courts consider the core/non-core determination as the primary inquiry, Orion, 4 F.3d at 1101, because in non-core matters the Bankruptcy Judge cannot enter final rulings absent consent of all parties. Instead, all determinations require de novo District Court review. 28 U.S.C. ' 157(c); Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 403 (4th Cir. 1992); McFarland v. Leyh (In re Tex. Gen. Petroleum Corp.), 52 F.3d 1330, 1337 (5th Cir. 1995).

Deciding whether something is core often depends on whether it arises solely under bankruptcy law, or whether the claim is a counterclaim to a proof of claim and thus part of the claims allowance process. Wood v. Wood (In re Wood), 825 F.2d 90, 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; it may be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it is an “otherwise related” or non-core proceeding.”); Cont'l Nat'l Bank v. Sanchez (In re Toledo), 170 F.3d 1340, 1348 (11th Cir. 1999) (extent, validity and priority dispute over non-estate property was not core proceeding); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1102 (2d Cir. 1993) (“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.” The court so held although the related Section 365 contract assumption issue was core but whether there had been a contract breach was non-core.); see also 28 U.S.C. ' 157(b). Even if a case is core, absent a jury trial waiver (such as by filing a proof of claim), the reference may still be withdrawn because of the Bankruptcy Court's inability to conduct a jury trial absent all parties' consent. 28 U.S.C. ' 157(e). However, a jury trial right is not an automatic ticket to withdrawal of the reference. In re Kenai, 136 B.R. 59, 61 (S.D.N.Y. 1992); Enron, 2003 WL 68036, at *6-*7.

The key practical question is: Will the pre-trial issues be left by the District Court before the Bankruptcy Court, if the District Court withdraws the reference? And, while not common, even if a proof of claim or core matter has been asserted, the reference may still be withdrawn where the issues raised involve non-bankruptcy law. See, e.g., Lifemark Hospitals of Louisiana, Inc. v. Liljeberg Enterprises, Inc., 161 B.R. 21 (E.D. La. 1993), (reference withdrawn on mandatory grounds where a motion to assume a contract was met with an antitrust counterclaim); Burger King Corp. v. B-K of Kansas, Inc., 64 B.R. 728 (D. Kan. 1986) (antitrust and RICO counterclaims served as the basis for mandatory withdrawal of a complaint objecting to the dischargeability of debt); Michigan Milk Producers, Ass'n. v. Hunter, 46 B.R. 214 (N.D. Ohio 1985) (reference withdrawn of core proceeding to determine the extent, validity, and priority of liens on the basis of the assertion of antitrust counterclaims).

More Art Than Science

Predicting how withdrawal of the reference will work in a given case is more art than science. Two recent decisions in high-profile cases indicate what factors are important when the case features claims at law to be tried to a jury. For example, in Adelphia Communications Corp. v. Rigas (In re Adelphia Communications Corp.), No. 02 Civ. 8495, 2003 WL 21297258, at *2 (S.D.N.Y. June 4, 2003) (Daniels, J.), the District Court did not withdraw the reference in a case brought by the debtor where some claims were core and some were non-core. The court's reasoning was that all claims were related to the bankruptcy proceeding and certain interrelated facts.

Here, the core claims relate to whether the Rigas defendants hold property that is actually property of the bankruptcy estate. The non-core claims relate to whether the Rigas defendants obtained that property in a fraudulent manner. The same discovery, therefore, applies to both groups of claims. The non-core and core claims are interrelated, such that dividing these claims between two different forums would not promote judicial economy, and would only lead to increased delay and costs to the parties.

Adelphia

Adelphia, 2003 WL 21297258, at *2. is buttressed by the almost identical analysis in Enron Power Marketing v. City of Santa Clara (In re Enron Power Mktg.), 2003 WL 68036 (S.D.N.Y. Jan. 8, 2003), where District Judge Baer also denied a motion to withdraw the reference. In Enron Power Marketing, the bankruptcy court was handling at least a dozen other cases involving analogous claims and issues, and “the most efficient use of judicial resources would be to keep the case before (the bankruptcy court), at least for pre-trial discovery purposes.” Id. at *10-*11.

The results in Adelphia and Enron should be compared with Mishkin v. Ageloff, 220 B.R. 784 (S.D.N.Y. 1998) where almost identical arguments were rejected and the reference was withdrawn without any pre-trial matters left before the Bankruptcy Court. The court reasoned:

“The Trustee also points out that in addition to being related to each other, these three proceedings are related to other proceedings before the bankruptcy court in which the parties have not sought withdrawal. See Id. While these factors weigh against withdrawal, they do not ultimately dissuade me from doing so. The Ageloff Proceeding must be withdrawn, regardless of these concerns, because it involves significant and substantial consideration of non-bankruptcy law. Having reached that conclusion, to leave the Gurian and National Union Proceedings before the bankruptcy court would, on balance, result in greater inefficiency than withdrawing them here, in spite of whatever related actions may continue before the bankruptcy court.”

220 B.R. at 800. See also Official Committee of Unsecured Creditors ex rel. Estate of Stansbury Poplar Place, Inc. v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122, 125, 128 (4th Cir. 1993) (“While the bankruptcy court may be uniquely qualified to conduct pre-trial matters in some core proceedings, in other cases such a referral would be a 'futile detour, requiring substantial duplication of judicial effort.'”).

Adelphia and Enron lead to the inference that the reference will not be withdrawn if there are numerous similar cases against numerous defendants. In such a situation, if the reference were withdrawn, there would be substantially similar cases in front of different Federal courts dealing with the same facts and issues. The District Court could avoid this by withdrawing the reference of all the cases, whether or not a request had been made (since withdrawal can occur sua sponte), or not withdrawing the reference in any cases, to keep them before one judge. Of course, if the cases go to trial and a party still asserted its jury trial right, that case would be tried before the District Court with all the duplication of judicial effort that would entail even if other cases would remain before the Bankruptcy Court. For this reason, among others, district courts sometimes reason that duplication and inefficiency justifies withdrawal of the reference. See, e.g., Mishkin; Semi-Tech Litig., LLC v. Bankers Trust Co. (In re Graeme, Ltd.), No. 02 Civ. 0711, 2001 U.S. Dist. LEXIS 22848, at *5 (S.D.N.Y. Feb. 25, 2001) (“(T)he plaintiff's suggestion that pretrial proceedings be left in the Bankruptcy Court with the reference withdrawn only for the purpose of trial would create the worst of both worlds by ensuring that all pretrial rulings of any substance would be considered in both courts ' the Bankruptcy Court in the first instance and this Court on appeal.”).

While the use of a Bankruptcy Judge as a Magistrate to deal with non-dispositive pre-trial issues is often proposed or ordered, the question of efficient use of judicial resources is a real issue when the Bankruptcy Court must consider questions beyond its usual area of expertise. Of course, on non-core issues, the Bankruptcy Court is further limited by the inability to issue final rulings. 28 U.S.C. ' 157(c).

The Practical Side

The practical side of the coin is thus the inference that withdrawal of the reference is easier to obtain where there are not numerous similar suits, or if there are, where not all the parties have sought withdrawal. Then again, Mishkin goes the other way. This is not to suggest foregoing the motion to withdraw the reference. It does indicate, however, that in advising clients, appropriate consideration be given to the likelihood of success (complete or partial withdrawal) of a motion to withdraw the reference, in the same way litigants strategize about whether to seek a jury trial, whether to consent to the entry of final orders by the Bankruptcy Court on non-core matters, or even whether to file a proof of claim in the first instance.

28 U.S.C. ' 157(d) contains the standards for mandatory or permissive withdrawal of the reference from the Bankruptcy Court to the District Court, which are well known to bankruptcy lawyers. It provides for 1) mandatory withdrawal ” … 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” and 2) permissive withdrawal of the reference “ for cause shown.” The application of these standards creates conditions, considerations, and complications for the practitioner in asking the District Court to withdraw the reference and assessing the odds of success on such a motion.

Mandatory Withdrawal

Mandatory withdrawal requires an evaluation of the extent of the consideration of non-bankruptcy law. Withdrawal is appropriate where the case requires “significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes.” City of New York v. Exxon Corp ., 932 F.2d 1020, 1026 (2d Cir. 1991) (analysis of various federal environmental statutes would likely warrant mandatory withdrawal of the reference). See also In re Vicars Ins. Agency, Inc., 96 F.3d 949, 952-954 (7th Cir. 1996) (the court affirmed denial of withdrawal of the reference where application of civil RICO liability would not require substantial and material consideration of federal non-bankruptcy law); Enron Power Mktg., Inc. v. City of Santa Clara (In re Enron Power Mktg. Inc.), No. 01 Civ. 7964, 2003 WL 68036, at *5 (S.D.N.Y. Jan. 8, 2003) (declining to withdraw the reference, and noting that “I do not agree that the federal issues are substantial, let alone substantial issues of 'first impression' that preclude resolution by a bankruptcy court judge.”). Technically, the statute would not require withdrawal of the reference on a mandatory basis if the claims were only based on federal non-bankruptcy law, or only state law, such as where no claims were asserted for preferences, fraudulent conveyances, or other bankruptcy actions. Of course, that would be inconsistent with the statutory structure of the Bankruptcy Court being a unit of the District Court (28 U.S.C. ' 151) to deal with the Constitutional infirmities of the Bankruptcy Court's jurisdiction addressed in Northern Pipeline Construction Co. v. Marathon Pipe Line Co. , 458 U.S. 50 (1982). It would also be inconsistent with the concepts behind withdrawal of the reference, namely, allowing the Article III District Court of general jurisdiction to consider issues beyond the specialized purview of the Article I Bankruptcy Judge. See In re Vicars Ins. Agency.

Permissive Withdrawal Provisions

Similarly, permissive withdrawal provisions are subject to many considerations to determine if cause exists for withdrawing the reference. The standards (which often overlap) include: 1) whether the claim or proceeding is core or non-core; 2) whether the claims are legal or equitable; 3) judicial efficiency; 4) prevention of forum shopping; 5) uniformity in the administration of bankruptcy law; 6) economical use of the debtor's resources; 7) efficient and expeditious resolution of the bankruptcy process; and 8) whether a jury trial has been demanded. Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir. 1993); Holland Am. Ins. Co. v. Succession of Roy , 777 F.2d 992, 999 (5th Cir. 1985); In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990); Statutory Comm. of Unsecured Creditors on behalf of Iridium Operating LLC v. Motorola, Inc. (In re Iridium Operating LLC), 285 B.R. 822, 834 (S.D.N.Y. 2002). Generally, courts consider the core/non-core determination as the primary inquiry, Orion, 4 F.3d at 1101, because in non-core matters the Bankruptcy Judge cannot enter final rulings absent consent of all parties. Instead, all determinations require de novo District Court review. 28 U.S.C. ' 157(c); Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 403 (4th Cir. 1992); McFarland v. Leyh (In re Tex. Gen. Petroleum Corp.), 52 F.3d 1330, 1337 (5th Cir. 1995).

Deciding whether something is core often depends on whether it arises solely under bankruptcy law, or whether the claim is a counterclaim to a proof of claim and thus part of the claims allowance process. Wood v. Wood (In re Wood), 825 F.2d 90, 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; it may be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it is an “otherwise related” or non-core proceeding.”); Cont'l Nat'l Bank v. Sanchez (In re Toledo), 170 F.3d 1340, 1348 (11th Cir. 1999) (extent, validity and priority dispute over non-estate property was not core proceeding); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1102 (2d Cir. 1993) (“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.” The court so held although the related Section 365 contract assumption issue was core but whether there had been a contract breach was non-core.); see also 28 U.S.C. ' 157(b). Even if a case is core, absent a jury trial waiver (such as by filing a proof of claim), the reference may still be withdrawn because of the Bankruptcy Court's inability to conduct a jury trial absent all parties' consent. 28 U.S.C. ' 157(e). However, a jury trial right is not an automatic ticket to withdrawal of the reference. In re Kenai, 136 B.R. 59, 61 (S.D.N.Y. 1992); Enron, 2003 WL 68036, at *6-*7.

The key practical question is: Will the pre-trial issues be left by the District Court before the Bankruptcy Court, if the District Court withdraws the reference? And, while not common, even if a proof of claim or core matter has been asserted, the reference may still be withdrawn where the issues raised involve non-bankruptcy law. See, e.g. , Lifemark Hospitals of Louisiana, Inc. v. Liljeberg Enterprises, Inc., 161 B.R. 21 (E.D. La. 1993), (reference withdrawn on mandatory grounds where a motion to assume a contract was met with an antitrust counterclaim); Burger King Corp. v. B-K of Kansas, Inc., 64 B.R. 728 (D. Kan. 1986) (antitrust and RICO counterclaims served as the basis for mandatory withdrawal of a complaint objecting to the dischargeability of debt); Michigan Milk Producers, Ass'n. v. Hunter , 46 B.R. 214 (N.D. Ohio 1985) (reference withdrawn of core proceeding to determine the extent, validity, and priority of liens on the basis of the assertion of antitrust counterclaims).

More Art Than Science

Predicting how withdrawal of the reference will work in a given case is more art than science. Two recent decisions in high-profile cases indicate what factors are important when the case features claims at law to be tried to a jury. For example, in Adelphia Communications Corp. v. Rigas (In re Adelphia Communications Corp.), No. 02 Civ. 8495, 2003 WL 21297258, at *2 (S.D.N.Y. June 4, 2003) (Daniels, J.), the District Court did not withdraw the reference in a case brought by the debtor where some claims were core and some were non-core. The court's reasoning was that all claims were related to the bankruptcy proceeding and certain interrelated facts.

Here, the core claims relate to whether the Rigas defendants hold property that is actually property of the bankruptcy estate. The non-core claims relate to whether the Rigas defendants obtained that property in a fraudulent manner. The same discovery, therefore, applies to both groups of claims. The non-core and core claims are interrelated, such that dividing these claims between two different forums would not promote judicial economy, and would only lead to increased delay and costs to the parties.

Adelphia

Adelphia, 2003 WL 21297258, at *2. is buttressed by the almost identical analysis in Enron Power Marketing v. City of Santa Clara (In re Enron Power Mktg.), 2003 WL 68036 (S.D.N.Y. Jan. 8, 2003), where District Judge Baer also denied a motion to withdraw the reference. In Enron Power Marketing, the bankruptcy court was handling at least a dozen other cases involving analogous claims and issues, and “the most efficient use of judicial resources would be to keep the case before (the bankruptcy court), at least for pre-trial discovery purposes.” Id. at *10-*11.

The results in Adelphia and Enron should be compared with Mishkin v. Ageloff , 220 B.R. 784 (S.D.N.Y. 1998) where almost identical arguments were rejected and the reference was withdrawn without any pre-trial matters left before the Bankruptcy Court. The court reasoned:

“The Trustee also points out that in addition to being related to each other, these three proceedings are related to other proceedings before the bankruptcy court in which the parties have not sought withdrawal. See Id. While these factors weigh against withdrawal, they do not ultimately dissuade me from doing so. The Ageloff Proceeding must be withdrawn, regardless of these concerns, because it involves significant and substantial consideration of non-bankruptcy law. Having reached that conclusion, to leave the Gurian and National Union Proceedings before the bankruptcy court would, on balance, result in greater inefficiency than withdrawing them here, in spite of whatever related actions may continue before the bankruptcy court.”

220 B.R. at 800. See also Official Committee of Unsecured Creditors ex rel. Estate of Stansbury Poplar Place, Inc. v. Schwartzman (In re Stansbury Poplar Place, Inc.), 13 F.3d 122, 125, 128 (4th Cir. 1993) (“While the bankruptcy court may be uniquely qualified to conduct pre-trial matters in some core proceedings, in other cases such a referral would be a 'futile detour, requiring substantial duplication of judicial effort.'”).

Adelphia and Enron lead to the inference that the reference will not be withdrawn if there are numerous similar cases against numerous defendants. In such a situation, if the reference were withdrawn, there would be substantially similar cases in front of different Federal courts dealing with the same facts and issues. The District Court could avoid this by withdrawing the reference of all the cases, whether or not a request had been made (since withdrawal can occur sua sponte), or not withdrawing the reference in any cases, to keep them before one judge. Of course, if the cases go to trial and a party still asserted its jury trial right, that case would be tried before the District Court with all the duplication of judicial effort that would entail even if other cases would remain before the Bankruptcy Court. For this reason, among others, district courts sometimes reason that duplication and inefficiency justifies withdrawal of the reference. See, e.g., Mishkin; Semi-Tech Litig., LLC v. Bankers Trust Co. (In re Graeme, Ltd.), No. 02 Civ. 0711, 2001 U.S. Dist. LEXIS 22848, at *5 (S.D.N.Y. Feb. 25, 2001) (“(T)he plaintiff's suggestion that pretrial proceedings be left in the Bankruptcy Court with the reference withdrawn only for the purpose of trial would create the worst of both worlds by ensuring that all pretrial rulings of any substance would be considered in both courts ' the Bankruptcy Court in the first instance and this Court on appeal.”).

While the use of a Bankruptcy Judge as a Magistrate to deal with non-dispositive pre-trial issues is often proposed or ordered, the question of efficient use of judicial resources is a real issue when the Bankruptcy Court must consider questions beyond its usual area of expertise. Of course, on non-core issues, the Bankruptcy Court is further limited by the inability to issue final rulings. 28 U.S.C. ' 157(c).

The Practical Side

The practical side of the coin is thus the inference that withdrawal of the reference is easier to obtain where there are not numerous similar suits, or if there are, where not all the parties have sought withdrawal. Then again, Mishkin goes the other way. This is not to suggest foregoing the motion to withdraw the reference. It does indicate, however, that in advising clients, appropriate consideration be given to the likelihood of success (complete or partial withdrawal) of a motion to withdraw the reference, in the same way litigants strategize about whether to seek a jury trial, whether to consent to the entry of final orders by the Bankruptcy Court on non-core matters, or even whether to file a proof of claim in the first instance.