Opinion
No. 04 Civ. 5286 (DLC).
August 19, 2004
Bijan Amini, Avery Samet, Storch Amini Munves, PC, New York, New York, Attorney for Plaintiff.
Irvin B. Nathan, Leslie Wharton, Jonathan Batten, Ameer F. Gopalani, Arnold Porter, LLP, Washington, DC, Kent Yalowitz, Arnold Porter, LLP, New York, New York, Attorney for Defendant Ernst Young.
MEMORANDUM OPINION AND ORDER
On January 13, 2004, David Kittay, as the Chapter 7 Trustee (the "Trustee"), brought an action in Bankruptcy Court on behalf of Kleinert's, Inc. (the "Debtor") against Ernst Young, LLP ("EY") for violations of the state common law. The Trustee also brought contract and tort claims against EY in its capacity as assignee of Wachovia Bank, N.A. and others (the "Lenders," and "Lenders' claims"). On June 29, EY moved in this Court pursuant to 28 U.S.C. § 157(d) ("Section 157(d)") to withdraw the reference to the Bankruptcy Court. For the reasons cited below, the motion to withdraw is denied.
The Trustee failed to serve EY with the original Complaint. He filed an Amended Complaint, Counterclaims and a Jury Demand on May 5, which was served on EY on May 12. By a stipulation between the parties, EY's time to answer, move or otherwise respond has not expired.
The common law claims are for breach of contract, negligence, professional malpractice, negligent misrepresentation, fraud, and aiding and abetting the breach of fiduciary duties by certain of the Debtor's former directors and officers. The original Complaint asserted a federal bankruptcy law claim against EY for preference. Such claim was abandoned in the plaintiff's Second Amended Complaint filed on July 23, 2004.
These claims are for fraud, negligent misrepresentation, and aiding and abetting the breach of fiduciary duty.
Background
EY provides accounting and auditing services to its clients. In or about 2000, EY was retained by the Debtor, a closely held Pennsylvania corporation, to perform audits of its annual financial statements. The Trustee and Lenders' claims against EY arise out of audits performed by EY of the Debtor's fiscal year 2000 and 2001 financial statements, and assert,inter alia, that EY knowingly gave false assurances to the Lenders regarding specific issues of importance to them.
EY issued its audit report for the fiscal year ending in November 2000 in May 2001, and for the fiscal year ending November 2001 in May 2002.
On May 7, 2003, the Debtor filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. Between May 7 and August 14, the Bankruptcy Court presided over the reorganization of the Debtor's estate. On August 14, the Bankruptcy Court converted the case into a Chapter 7 proceeding, and appointed the Trustee. On December 8, the Lenders assigned to the Trustee all of their claims relating to and arising out of the alleged accounting fraud. With this assignment, any recovery on the assigned claims will benefit other creditors of the estate in addition to the Lenders.
On January 13, 2004, the Trustee brought an action against EY on behalf of the Debtor and as assignee of the Lenders as part of the final liquidation and distribution of the Debtor's estate. On July 8, the Bankruptcy Court granted in part and denied in part EY's motion to compel arbitration. The Bankruptcy Court found that the Trustee's contract and tort claims and the Lenders' contract claims against EY were non-core matters, and referred them to alternative dispute resolution ("ADR"). The Bankruptcy Court declined to refer the Lenders' tort claims to ADR. EY has filed a notice of appeal with respect to that ruling, which appeal is not before this Court.
As agreed by the parties and approved by the Bankruptcy Court, the Trustee filed his Second Amended Complaint on July 23. The Second Amended Complaint, among other things, dropped the Trustee's preference claim against EY, and the Lenders' third-party beneficiary claim against EY. EY now moves to withdraw the reference to the Bankruptcy Court.
Discussion
Pursuant to 28 U.S.C. § 157(a), all Chapter 11 cases are automatically referred to this district's bankruptcy judges. A party can move to withdraw the reference to the Bankruptcy Court pursuant to 28 U.S.C. § 157(d) ("Section 157(d)"), which states:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding 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.28 U.S.C. § 157(d) (emphasis supplied). The parties agree that withdrawal is not mandatory in this case. EY argues, however, that the reference to the Bankruptcy Court should be withdrawn "for cause" under the permissive standard of Section 157(d).
While Section 157(d) does not define "cause," the Second Circuit has identified a number of relevant factors; including "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." Orion Pictures Corp. v. Showtime Networks, Inc., 4 F.3d 1095, 1101 (2d Cir. 1993); see also In re Burger Boys, Inc., 94 F.3d 755, 762 (2d Cir. 1996). The threshold inquiry in evaluating a request for permissive withdrawal is whether the claim is core or non-core, "since it is upon this issue that questions of efficiency and uniformity will turn." In re Orion, 4 F.3d at 1101.
The Bankruptcy Court in this case has held, and the parties do not dispute, that the claims against EY are non-core. Although a finding that a proceeding is non-core is an important consideration in determining the appropriateness of a withdrawal motion, it is not determinative. As the Second Circuit recently confirmed in describing the Bankruptcy Code's broad removal provision, "Congress intended to grant comprehensive jurisdiction to bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate." California Public Employees' Retirement System v. WorldCom, Inc., 368 F.3d 86, 103 (2d Cir. 2004) (citation omitted) (emphasis added by WorldCom). The other factors articulated by the Second Circuit in Orion will therefore be considered as well, including "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, such as the presence of a jury demand"In re Formica Corp., 305 B.R. 147, 150 (S.D.N.Y. 2004) (citingOrion, 4 F.3d at 1101).
The Trustee has assumed for purposes of this appeal that the Lenders' claims are non-core. It asserts that it will contest that issue, however, in a cross appeal it will be filing. No such cross appeal is before this Court.
EY argues that its right to and demand for a jury trial compels withdrawing of the reference. See Orion, 4 F.3d at 1101 (holding that the Seventh Amendment prohibits bankruptcy courts from holding jury trials in non-core matters). The right to a jury trial does not always require an immediate withdrawal of the reference. "A rule that would require a district court to withdraw a reference simply because a party is entitled to a jury trial, regardless of how far along toward trial a case may be, runs counter to the policy favoring judicial economy that underlies the statutory scheme governing the relationship between the district courts and bankruptcy courts." In re Kenai Corp., 136 B.R. 59, 61 (S.D.N.Y. 1992). See also In re Formica Corp., 305 B.R. at 150 (same).
Finally, EY argues that judicial economy weighs in favor of proceeding entirely in this Court because a district court must review de novo determinations by the Bankruptcy Court in non-core matters. See Orion, 4 F.3d at 1101 (noting that, because of need for de novo review in non-core matters, judicial economy may weigh in favor of withdrawing the reference). While an important consideration, the issue of judicial economy is more complex than where the authority to make a final determination rests.
For the last fourteen months, the Bankruptcy Court has presided over the reorganization of the Debtor's estate, and is familiar with the claims and issues affecting the distribution of the estate. It has already determined which of these claims should be referred to ADR. To the extent EY seeks to lay responsibility for its work and statements at the feet of the Debtor and its officers, the Bankruptcy Court is familiar with those parties and well positioned to oversee discovery pertaining to them. Removing management of the proceedings from the Bankruptcy Court at this stage would not promote the conservation of judicial resources. Rather, judicial uniformity and efficiency will be promoted by allowing the Bankruptcy Court to continue to manage this action until such time as the case becomes ready for trial. See In re Times Circle East, Inc., No. 95 Civ. 2838 (SHS), 1995 WL 489551, at *3 (denying accountants' motion to withdraw the reference because the case "is far from trial ready, significant and time consuming discovery may be necessary, and the bankruptcy court is familiar with the issues faced by the estate"). Considering each of the factors identified in In re Orion and finding that judicial efficiency weighs strongly against this motion, and because EY has not shown that it "will suffer any measurable injury or prejudice if the case is not withdrawn now," In re Kenai Corp., 136 B.R. at 61, its motion to withdraw the reference is denied without prejudice to its renewal following the completion of discovery.
Conclusion
For the reasons stated above, the motion to withdraw the reference to the Bankruptcy Court is denied without prejudice.
SO ORDERED.