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Adelsperger v. 3D Holographics Medical Imaging Inc.

United States District Court, N.D. Indiana

May 21, 2019

DOUGLAS R. ADELSPERGER, as Trustee for the Consolidated Bankruptcy Estate of 5 Star Commercial, LLC, et al., Plaintiff,
v.
3D HOLOGRAPHICS MEDICAL IMAGING INC., 7 HEAVENS LLC dba ECOWASHER, ASSOCIATED COUNTRIES IN TECHNOLOGY INTERNATIONAL INCUBATOR, INC., ECO II ECOWASH, LLC, GREEN RESOURCE HOMES INC., H&H REAL ESTATE HOLDINGS, LLC, JULIUS TOTH, PEDAL WHEELCHAIR, LLC, ROBERT A. FORAKER, as Trustee of the Green Resource Homes Financial Trust for the Benefit of Julius Toth, and ROBERT A. FORAKER, individually, Defendants. Adversary Proceeding No. 16-03031

          OPINION AND ORDER

          HOLLY A. BRADY UNITED STATES DISTRICT JUDGE

         This matter is before the Court on Defendant's Motion to Withdraw the Reference [ECF No. 1], filed with the Bankruptcy Court on September 29, 2016, and docketed with this Court on November 7, 2016.[1] Defendants Julius Toth and Robert Foraker request that the Court withdraw the reference to the Bankruptcy Court and move Trustee Douglas R. Adelsperger's adversary complaint to this Court. Defendants argue that withdrawal of the reference is warranted because they have asserted their right to a jury trial with respect to the claims for relief raised in the adversary complaint. Additionally, they have not consented to the entry of a final judgment by the bankruptcy court.

         Having reviewed Defendants' Motion and the Trustee's Objections, as well as Bankruptcy Judge Harry C. Dees, Jr.'s, Report and Recommendation regarding the same, the Court will grant the Motion.

         BACKGROUND

         Douglas R. Adelsperger, as Trustee of the substantively consolidated “5 Star bankruptcy estates” in Case No. 16-30078-hcd before the United States Bankruptcy Court for the Northern District of Indiana, filed a Complaint against Defendants, commencing an adversary proceeding. The Trustee alleges that between February 12, 2015, and July 13, 2015, based on misrepresentations by Foraker and Toth, the Debtors transferred over $2.2 million to various companies, without receiving reasonably equivalent value in exchange. The Trustee seeks to avoid and recover fraudulent transfers, and to avoid and recover an unauthorized post-petition fraudulent transfer. He also asserts claims against Defendants for common law fraud, false representations, deception, aiding and abetting fraud, breach of fiduciary duty, and unjust enrichment. The Trustee seeks a determination that any damages recovered are property of the 5 Star consolidated estates.

         Defendants filed a Motion seeking to withdraw the reference of this adversary proceeding pursuant to 28 U.S.C. § 157(d), Rule 5011 of the Federal Rules of Bankruptcy Procedure, and N.D. Ind. L.R. 200-1(b)(1). Defendants argue that they are entitled to a jury trial on the Trustee's claims and, because the bankruptcy court is not authorized to conduct jury trials, the reference must be withdrawn. As a second ground for withdrawal, Defendants argue that the bankruptcy court does not have constitutional or statutory authority to adjudicate the Trustee's claims against them as non-creditor Defendants who have not filed a proof of claim in the bankruptcy case.

         The Trustee filed a response to Defendants' Motion. Although implicitly conceding that good cause exists for the Court to eventually withdraw the reference of the adversary proceeding, the Trustee asserts that the Court should wait to withdraw the reference until the adversary proceeding is ready for trial. The Trustee notes that district courts routinely permit bankruptcy courts to retain jurisdiction of an adversary proceeding until the proceeding is ready for trial and that, in this case, it would be more efficient for the bankruptcy court to maintain jurisdiction of this adversary proceeding to supervise the case through discovery and any dispositive motions.

         The Bankruptcy Judge prepared a Report and Recommendation pursuant to Northern District of Indiana Local Rule 200-1(b)(1)(C). The bankruptcy court recommends that this Court grant Defendants' Motion to Withdraw pursuant to 28 U.S.C. § 157(d) because Defendants are entitled to a jury trial and the United States Bankruptcy Court for the Northern District of Indiana is not authorized to conduct jury trials. Additionally, the adversary proceeding involves both core and non-core proceedings, so it would best preserve the rights of Defendants to treat the litigation as a non-core proceeding. As such, the most the Bankruptcy Court could do is “hear proceedings and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.” (Report and Recommendation 6-7 (quoting Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 36 (2014).) Under this scenario, the bankruptcy court does not agree that it would be judicially efficient to make recommendations, including for purposes of ruling on dispositive motions, only to have another court conduct de novo review.

         DISCUSSION

         District courts have original jurisdiction over all bankruptcy proceedings arising out of Title 11 of the United States Code, see 28 U.S.C. § 1334, but a district court may “provide that any or all cases under title 11 [of the United States Code] 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). Local Rule 200-1 of the United States District Court for the Northern District of Indiana addresses bankruptcy cases and proceedings. Through Local Rule 200-1(a)(1), this Court has exercised its authority to automatically refer bankruptcy matters to the bankruptcy judges, and this automatic referral includes “all cases under Title 11 of the United States Code, and any or all proceedings arising under Title 11 or arising in or related to a case under Title 11.” Local Rule 200-1 also identifies matters to be determined by bankruptcy judges, matters to be determined or tried by district judges, and procedures that apply to motions to withdraw cases and proceedings to the district court.

         Bankruptcy courts have statutory authority to issue final orders and judgments in “core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a).” 28 U.S.C. § 157(b)(1). The statute contains a non-exhaustive list of “core proceedings” in which the bankruptcy court may enter a final order or judgment. Id. § 157(b)(2). Orders to turn over property and proceedings to determine, avoid, or recover fraudulent conveyances are listed as core proceedings. Id. § 157(b)(E) &(H).

         By contrast, when the bankruptcy court determines, under § 157(b)(3), that a claim is only “related to” the bankruptcy proceedings, the bankruptcy court may not enter final judgment but “shall submit proposed findings of fact and conclusions of law to the district court” for de novo review and final entry of final judgment. 28 U.S.C. § 157(c)(1). The proceedings in this latter category are known as “non-core” proceedings. Non-core proceedings are those only marginally related to the bankruptcy, which often are state law causes of action. In re Conseco Finance Corp., 324 B.R. 50, 53-54 (N.D. Ill. 2005). As the United States Supreme Court summarized it:

Put simply, if a matter is core, the statute empowers the bankruptcy judge to enter final judgment on the claim, subject to appellate review by the district court. If a matter is non-core, and the parties have not consented to final adjudication by the bankruptcy court, the bankruptcy judge must propose findings of fact and conclusions of law. ...

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