MDIG Creditor Trust v. Wittenberg

• Court: District Court, D. Arizona
• Decided: April 14, 2022
• Docket: 2:21-cv-01463
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 MDIG Creditor Trust, No. CV-21-01463-PHX-GMS

10 Plaintiff, ADV PRO NO. 2:21-ap-00148-DPC

11 v. ORDER

12 Aaron Wittenberg, et al.,

13 Defendants. 14 15 16 Before the Court is a Motion to Withdraw the Reference of Adversary Proceeding 17 (Doc. 2) brought by Defendants Aaron Wittenberg, Stacie Wittenberg, Peter Steinberg, 18 Deborah Davis-Steinberg, Abjihit Shah, Neepa Shah, John Eelkema, Bart Hovey, Waheed 19 Jalalzai, Orlando Micheli, William Romano, and Tamim Sultani (“Defendants”). For the 20 following reasons, Defendants’ Motion is denied. 21 BACKGROUND 22 This case comes to the Court from the United States Bankruptcy Court for the 23 District of Arizona, where Jeremiah Foster, liquidating trustee (“Trustee”) for the MDIG 24 Creditor Trust (“Plaintiff”), has brought an adversary proceeding against Defendants. See 25 Complaint, Foster v. Wittenberg et al. (In re Med. Diagnostic Imaging Grp., Ltd.), No. 21- 26 ap-00148-DPC (Bankr. D. Ariz., May 27, 2021), ECF No. 1. Plaintiff alleges that 27 Defendants, in their capacity as directors and insiders of the Medical Diagnostic Imaging 28 Group, Ltd. (“MDIG” or “Debtor”), caused Debtor to, inter alia, make over $1.8 million 1 in payments to insiders and to incur losses all while Debtor was insolvent. Id. ¶ 1. 2 According to the complaint, Defendants (1) breached their fiduciary duties to Debtor and 3 (2) benefitted from a series of preferential and fraudulent transfers, which Plaintiff now 4 seeks to avoid and recover. Id. at 19–24. Plaintiff also objects to claims made by 5 Defendants Jalalzai, Romano, Sultani, and Wittenberg against the bankruptcy estate. Id. 6 at 25. Defendants have moved to withdraw the reference, arguing that this Court ought to 7 preside over the entire adversary proceeding. (Doc. 2.) 8 DISCUSSION 9 I. Legal Standard 10 28 U.S.C. § 157 states, “Each district court may provide that any or all cases under 11 title 11 and any or all proceedings arising under title 11 or arising in or related to a case 12 under title 11 shall be referred to the bankruptcy judges for the district.” 28 U.S.C. 13 § 157(a). This District refers all bankruptcy cases to the Bankruptcy Court. See General 14 Order 01-15 (June 29, 2001). However, district courts “may withdraw, in whole or in part, 15 any case or proceeding referred [to the bankruptcy court] under this section, on its own 16 motion or on timely motion of any party, for cause shown.” 28 U.S.C. § 157(d). 17 When determining whether cause to withdraw exists, “a district court should 18 consider the efficient use of judicial resources, delay and costs to the parties, uniformity of 19 bankruptcy administration, the prevention of forum shopping, and other related factors.” 20 Sec. Farms v. Int’l Bhd. of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 21 1008 (9th Cir. 1997) (citing Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion 22 Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir. 1993)). 23 II. Analysis 24 A. Core vs. Non-Core 25 In determining whether there is cause to withdraw, courts “should first evaluate 26 whether the claim is core or non-core, since it is upon this issue that questions of efficiency 27 and uniformity will turn.” In re Orion Pictures, 4 F.3d at 1101 (cited approvingly by the 28 Ninth Circuit in Sec. Farms, 124 F.3d at 1008). “Hearing core matters in a district court 1 could be an inefficient allocation of judicial resources given that the bankruptcy court 2 generally will be more familiar with the facts and issues” and “may enter appropriate orders 3 and judgments.” Id. (internal quotation and citation omitted). 4 However, a determination that a claim is non-core does not necessarily mandate 5 withdrawal because a bankruptcy court may also hear “a proceeding that is not a core 6 proceeding but that is otherwise related to a case under title 11.” 28 U.S.C. § 157(c)(1). 7 Where a bankruptcy court hears a case under its “related to” jurisdiction, the bankruptcy 8 court cannot issue a final decision on the case. The bankruptcy court instead 9 shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be 10 entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing 11 de novo those matters to which any party has timely and specifically objected. 12 13 Id. “[A] civil proceeding is ‘related to’ bankruptcy if its outcome could conceivably have 14 any effect on the bankruptcy estate.” Bethlahmy v. Kuhlman (In re ACI-HDT Supply Co.), 15 205 B.R. 231, 237 (B.A.P. 9th Cir. 1997). 16 To determine whether a proceeding is core or non-core, courts look to see if the 17 proceeding “is created by title 11 or . . . depends upon resolution of a substantial question 18 of bankruptcy law.” Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 219 (D. 19 Haw. 2006) (citations omitted); see also Eastport Assocs. v. City of Los Angeles (In re 20 Eastport Assocs.), 935 F.2d 1071, 1076-77 (9th Cir. 1991). 28 U.S.C. § 157, which 21 contains a non-exhaustive list of matters considered core, also includes catch-all provisions 22 stating that “matters concerning the administration of the estate,” 28 U.S.C. § 157(b)(2)(A), 23 and “other proceedings affecting the liquidation of the assets of the estate” are core 24 proceedings. Id. § 157(b)(2)(O); Everett v. Art Brand Studios, LLC, 556 B.R. 437, 443 25 (N.D. Cal. 2016). However, as courts recognize a broad definition of what is core may 26 pose constitutional problems, the catch-all provisions in § 157 are construed narrowly. See 27 Piombo Corp. v. Castlerock Props. (In re Castlerock Props.), 781 F.2d 159, 162 (9th Cir. 28 1986); Harris v. Wittman (In re Harris), 590 F.3d 730, 740 (9th Cir. 2009). By contrast, 1 “[i]f the proceeding does not invoke a substantive right created by the federal bankruptcy 2 law and is one that could exist outside of bankruptcy[,] it is not a core proceeding; it may 3 be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it 4 is an ‘otherwise related’ or non-core proceeding.” In re Wood, 825 F.2d 90, 97 (5th Cir. 5 1987). 6 Additionally, bankruptcy courts lack constitutional authority to finally adjudicate a 7 subset of statutorily defined core claims. See Stern v. Marshall, 564 U.S. 462, 482 (2011). 8 For instance, § 157(b)(2)(H) expressly classifies actions to “determine, avoid, or recover 9 fraudulent conveyances” as core claims, but bankruptcy courts may not render final 10 judgments as to those claims because doing so would violate Article III. 28 U.S.C. 11 § 157(b)(2)(H); see also Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. 12 Agency, Inc.), 702 F.3d 553, 562 (9th Cir. 2012), aff’d sub nom. Exec. Benefits Ins. Agency 13 v. Arkison, 573 U.S. 25 (2014). These Stern claims are effectively treated like non-core 14 claims: A bankruptcy court may hear the matter and issue proposed findings of fact and 15 conclusions of law, subject to de novo review by a district court. Arkison, 573 U.S. at 36. 16 If the parties consent, the bankruptcy court may still render final judgments as to both Stern 17 and non-core claims. Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665, 674 (2015). 18 The complaint in the adversary proceeding sets forth five causes of action: 19 (1) Breach of Fiduciary Duty; (2) Avoidance of Preferential Transfers, 11 U.S.C. § 547; 20 (3) Fraudulent Transfers, 11 U.S.C. §§ 544, 548; (4) Recovery of Avoided Transfers, 11 21 U.S.C. § 550, and (5) objections to claims filed by Defendants Jalalzai, Romano, Sultani, 22 and Wittenberg. In re Med. Diagnostic Imaging Grp., Ltd., No. 21-ap-00148-DPC, ECF 23 No. 1. The parties do not contest that while the second, third, fourth, and fifth causes of 24 action are core proceedings, the cause of action for breach of fiduciary duty is non-core. 25 (Doc. 2 at 5); (Doc. 7 at 11.) 26 A claim for breach of fiduciary duty arises under state law and is regularly 27 considered outside of bankruptcy. See Everett, 556 B.R. at 444 (finding claim for breach 28 of fiduciary duty under California law to be non-core). However, as the claim could 1 nevertheless “conceivably have [an] effect on the bankruptcy estate,” it is “related to” the 2 underlying bankruptcy. ACI-HDT Supply, 205 B.R. at 237. By contrast, the other four 3 causes of action arise under Title 11. Because they “invoke a substantive right created by 4 the federal bankruptcy law,” they are core proceedings. In re Eastport Assocs., 935 F.2d 5 at 1076 (quoting In re Wood, 825 F.2d at 97). 6 B. Cause for Withdrawal 7 1. Efficiency 8 Interests of judicial economy and efficiency would be best served in this action by 9 allowing the bankruptcy court to retain jurisdiction over the adversary proceeding. For 10 one, the bankruptcy court has far greater experience with the underlying bankruptcy estate 11 and the parties’ claims, having presided over both the bankruptcy case since 2019 and the 12 associated adversary proceeding since 2021. Allowing the bankruptcy court to continue 13 presiding over the adversary proceeding, even if the proceeding itself remains in the early 14 stages, would allow the parties to benefit from “the bankruptcy court’s unique knowledge 15 of Title 11 and familiarity with the actions before them” and promote “judicial economy 16 and efficiency.” See Sigma Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 17 504 F.3d 775, 787–88 (9th Cir. 2007). Further, while Defendants are correct that there is 18 a matter related to the adversary proceeding pending with the Court, the matter has been 19 stayed since January 2020 because of the bankruptcy. See Patel v. MDIG Ltd., No. CV 19- 20 4983-GMS (D. Ariz. Jan. 10, 2020), ECF No. 70. No decisions have been made on the 21 merits, no discovery has been taken, and the parties represented to the Court at a status 22 conference on February 25, 2022 that they were exploring whether the matter could be 23 dismissed and wholly resolved in the bankruptcy court. Id., ECF No. 86. 24 Defendants additionally argue that their jury trial demands weigh in favor of a 25 finding that efficiency would be best served by withdrawal of the reference. Defendants 26 are correct that a valid demand for a trial by jury may “have the effect of mandating 27 withdrawal to the District Court for trial.” Growe ex rel. Great N. Paper, Inc. v. Bilodard 28 Inc., 325 B.R. 490, 492 (D. Me. 2005). But “a Seventh Amendment jury trial right does 1 not mean the bankruptcy court must instantly give up jurisdiction and that the case must be 2 transferred to the district court.” In re Healthcentral.com, 504 F.3d at 787. “Instead, the 3 bankruptcy court is permitted to retain jurisdiction over the action for pre-trial matters,” 4 because only “by allowing the bankruptcy court to retain jurisdiction over the action until 5 trial is actually ready do we ensure that our bankruptcy system is carried out.” Id. at 787– 6 88; see also In re Castlerock Props., 781 F.2d at 161 (“In noncore matters, the bankruptcy 7 court acts as an adjunct to the district court, in a fashion similar to that of a magistrate or 8 special master.”). 9 Further, Defendants admit that four from their ranks—Defendants Jalalzai, 10 Romano, Sultani, and Wittenberg—have made claims on the estate. When a party “submits 11 a proof of claim against the bankruptcy estate . . . , it submits to the equitable jurisdiction 12 of the bankruptcy court and waives its Seventh Amendment right to a jury trial” Star 13 Mountain Plan Tr. v. Titan Mining (US) Corp., 635 B.R. 789, 794 (D. Ariz. 2021); 14 Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58 (1989); Langenkamp v. Culp, 498 U.S. 15 42, 44–45 (1990). However, this waiver of the Seventh Amendment applies only to core 16 claims; a party preserves a right to a jury trial on non-core claims if a jury trial was properly 17 demanded. See Burdette v. Emerald Partners LLC, No. C15-816-JCC, 2015 WL 4394859, 18 at *4 (W.D. Wash. July 16, 2016) (“Defendants should not be deemed to have forfeited the 19 right to a jury trial on the non-core claims because of the proof of claim filed in the 20 bankruptcy proceeding.”); see also Germain v. Conn. Nat’l Bank, 988 F.2d 1323, 1330 (2d 21 Cir. 1993). Thus, not all issues will go to a jury: Some Defendants have asserted a right to 22 a jury trial as to all claims, core and non-core, while others are only eligible for a jury trial 23 on the single non-core claim in the adversary proceeding. The bankruptcy court will 24 therefore be able to issue final judgments against some Defendants on some claims, 25 reducing the scope of the issues this Court will ultimately confront when either reviewing 26 the bankruptcy court’s proposed findings of fact and conclusions of law or conducting a 27 jury trial on disputed issues of fact. 28 Finally, Defendants argue that the breach of fiduciary duty claim substantially 1 predominates over the core claims to the point that it would be more efficient to have the 2 Court consider all claims at the first instance. Nevertheless, the single non-core claim 3 arises out of the same set of facts as the four core claims, namely the conduct of Defendants 4 in their roles as directors of the Debtor. Cf. Everett, 556 B.R. at 445 (finding non-core 5 claims substantially predominated when they were “factually, legally, and temporally 6 distinct” from other issues considered by the bankruptcy court, and the bankruptcy judge 7 had already severed the non-core claims into a separate adversary proceeding). 8 Additionally, the core claims before the bankruptcy court will require factual discovery as 9 to each claim that will likely overlap with discovery on the fiduciary duty claim, and 10 Plaintiff represents that it will likely amend its complaint to state additional core claims as 11 it conducts discovery. (Doc. 7 at 3.) And as stated above, by allowing the bankruptcy 12 court to preside over the adversary proceeding for as long as it is able, the Court and the 13 parties will benefit from its knowledge of the estate, the parties’ claims, and the applicable 14 law as the case develops. Therefore, efficiency concerns counsel against withdrawing the 15 reference at this time. 16 2. Delay and Costs to the Parties. 17 Considering the potential of delay and costs to the parties, it is true that the parties 18 may incur additional costs should they seek review of pretrial decisions made by the 19 bankruptcy court in this Court, and that the Court’s review of such decisions may cause 20 delay. However, “it is unclear that any delay or costs associated with declining to withdraw 21 the bankruptcy reference outweigh the efficiencies gained by having the bankruptcy court 22 preside over all pretrial matters in the first instance,” given the bankruptcy judge’s 23 “familiarity with the issues in this case.” In re Howrey LLP, No. C 13-3910 SBA, 2014 24 WL 3725483, at *3 (N.D. Cal. July 15, 2014). And as the Patel action remains stayed 25 indefinitely due to the bankruptcy proceeding, consolidation of both matters in this Court 26 is unlikely to reduce costs in any meaningful way. Therefore, this factor weighs against 27 withdrawal of the reference. 28 1 3. Uniformity of Bankruptcy Administration 2 Withdrawal of the reference would adversely affect the uniformity of bankruptcy || administration. The fifth cause of action in the Complaint objects to Proofs of Claim filed 4|| by four Defendants in the adversary proceeding. See Complaint, In re Med. Diagnostic 5|| Imaging Grp., Ltd., No. 21-ap-00148-DPC, ECF No. 1, at 25. There are at least 63 Proofs || of Claim filed by creditors in the underlying bankruptcy. (Doc. 7-1 at 4.) Withdrawal of 7\| the reference would lead to piecemeal adjudication of Proofs of Claim, some in the 8 || bankruptcy court and some in this Court. The interest of uniform bankruptcy || administration is best served by the adjudication of all Proofs of Claim in the same forum || by the same judge. As uniformity would not be served by withdrawal of the reference, this 11 |} factor likewise weighs against granting Defendants’ motion. 12 4. Forum Shopping 13 Finally, “the prevention of forum shopping is not a concern here as only this Court has the power to enter final judgment on” the non-core claim and conduct a jury trial as || needed. Everett, 556 B.R. at 445. Therefore, this factor is neutral and neither weighs in || favor nor against withdrawal of the reference. 17 In sum, the Court concludes that permissive withdrawal of the reference is not 18 || warranted at this time because only one cause of action is non-core, and efficiency does || not favor withdrawal of the reference. 20 CONCLUSION 21 For the foregoing reasons, 22 IT IS ORDERED that Defendants’ Motion to Withdraw the Reference of 23 || Adversary Proceeding (Doc. 2) is DENIED without prejudice. 24 IT IS FURTHER ORDERED directing the Clerk of Court to terminate this action. 25 Dated this 14th day of April, 2022. Matas for) 27 G. Murray Snow 28 Chief United States District Judge

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