Summary
holding a "[w]ithdrawal of the reference is therefore required in instances where a defendant who is entitled to a jury trial does not consent to the holding of such trial in the Bankruptcy Court"
Summary of this case from Mid-Atlantic Resources Corp.Opinion
Civil Nos. H-95-2241, H-00-1216, H-00-1569; Bankruptcy No. 00-1-1147-PM; Adversary No. 00-1180-PM.
July 24, 2000
MEMORANDUM AND ORDER
Following extended pretrial proceedings in United States ex rel. Rahman v. Oncology Associates, P.C., et al., Civil No. H-95-2241 ("Rahman"), including, inter alia, numerous rulings by the Court on many different matters, a Second Revised Scheduling Order was entered in the case on October 21, 1999. Pursuant to that Order, dates were set for the completion of discovery, for a final pretrial conference and for a jury trial. Those dates were set pursuant to the parties' Stipulation stating that, commencing in October of 1999, they wished to devote their energies during the next six to eight weeks toward the goal of reaching an expeditious settlement of the case. The parties were at the time preparing to enter into mediation before Judge Curtis E. von Kann, a former judge of the District of Columbia Superior Court.
Interlocutory appeals unsuccessfully challenging rulings of this Court resulted in two separate opinions of the Fourth Circuit. See U.S. ex rel. Rahman v. Oncology Associates, P.C., 198 F.3d 489 (4th Cir. 1999) and U.S. ex rel. Rahman v. Oncology Associates, P.C., 198 F.3d 502 (4th Cir. 1999).
On December 16, 1999, the parties submitted a further Stipulation, requesting the stay of all formal discovery until February 4, 2000. The parties stated that they had made "tremendous progress" toward a settlement of the case, and they accordingly requested a further extension of relevant deadlines in the proceeding. On December 20, 1999, the Court entered an Order staying formal discovery until February 4, 2000 and requesting that the parties file a status report no later than February 2, 2000.
In the Joint Status Report filed by the parties on February 2, 2000, they stated that substantial progress had been made in the mediation sessions but requested the Court to further stay discovery until February 18, 2000. That request was granted, as was a later one which was submitted with the parties' Joint Status Report of March 2, 2000 and which requested a further extension until March 31, 2000.
Equimed, Inc. ("Equimed") is one of the defendants in the Rahman case, as are many of its subsidiaries. On February 4, 2000, certain creditors filed an involuntary petition in bankruptcy with respect to Equimed in the United States Bankruptcy Court for the District of Maryland. In re Equimed, Inc., Bankruptcy No. 00-1-1147-PM (the "Equimed bankruptcy case"). Thereafter, Equimed was adjudicated by the Bankruptcy Court to be a debtor under Chapter 7 of the United States Bankruptcy Code. Merrill Cohen has been appointed Trustee for the bankruptcy estate of the debtor Equimed. On April 27, 2000, the Trustee filed in the Bankruptcy Court an Adversary Proceeding naming as defendants some 89 persons and entities. Adversary No. 00-1180-PM (the "Adversary Proceeding"). Many of the defendants named in the Adversary Proceeding are also defendants in the Rahman case.
Equimed has filed two appeals in this Court challenging Bankruptcy Court Orders refusing to dismiss the Equimed bankruptcy case. See Civil Nos. H-00-1279 and H-00-1555.
When this Court was advised of the Equimed bankruptcy case, it scheduled several conferences to discuss the status of the parties' settlement efforts, the effect which the Equimed bankruptcy might have on the settlement discussions and the applicability of the automatic stay provisions of 11 U.S.C. § 362 (a) to the Rahman case. The first conference was held on April 12, 2000. Because of the continuing settlement negotiations, the parties were informed at that conference that the dates set forth in the Second Revised Scheduling Order of October 21, 1999 would no longer be controlling. The Court indicated that, depending on the outcome of the settlement discussions, another Scheduling Order would be entered at a later date.
Another status conference was held on the record on April 28, 2000. On April 27, 2000, Douglas R. Colkitt, a defendant in both the Rahman case and the Adversary Proceeding, had filed a motion for withdrawal of the order of reference to the Bankruptcy Court of certain matters in the Equimed bankruptcy case. That motion was discussed with counsel at the status conference held on April 28. The Court indicated that because of the ongoing settlement discussions and because of the overlap between the Adversary Proceeding and certain matters in the Rahman case, the Court would consider the entry of an Order withdrawing the reference of certain portions of the Equimed bankruptcy case. In particular, the Court indicated that the Adversary Proceeding and matters relating to the proposed settlement of the Rahman case might be withdrawn.
A transcript of that conference has been prepared and is a part of the record in the Rahman case.
Counsel for defendant Colkitt then submitted a proposed Order for withdrawal of reference of portions of the Equimed bankruptcy case. On May 2, 2000, this Court entered an Order withdrawing reference of the Equimed bankruptcy case with respect to all matters which the proposed settlement in the Rahman action had designated for Bankruptcy Court review and with respect to the Adversary Proceeding. As withdrawn, that case has been docketed herein as In re Equimed, Inc., Civil No. H-00-1216 (the "Equimed case"). It was further provided, that any party to the Equimed bankruptcy case, to the Rahman action or to the Adversary Proceeding would be entitled to move to vacate or modify the Order not later than May 18, 2000.
There are presently pending in the Equimed case the following motions:
(1) Motion of petitioning creditors to vacate Order withdrawing from the Bankruptcy Court certain matters and proceedings;
(2) Motion of Provident Bank to vacate in part and modify Order withdrawing reference;
(3) Motion of Trustee to vacate or modify Order withdrawing reference.
There is also pending in the Equimed case the motion of Dr. Colkitt for an Order to Show Cause to be served upon the Trustee for violating this Court's Order withdrawing reference. This motion will be addressed at a later date, since it must first be determined whether this Court or the Bankruptcy Court should rule on it.
On May 19, 2000, defendant Colkitt and various other entities filed in the Bankruptcy Court a motion for withdrawal of reference of the entire bankruptcy case. That matter has now been docketed in this Court as In re Equimed, Inc., Civil No. H-00-1569.
Voluminous memoranda and numerous exhibits have been filed by the parties in support of and in opposition to these four pending motions. Following its review of the memoranda and other matters of record in these cases, this Court has determined that no hearing is necessary for a decision on these four pending motions.See Local Rule 105.6. For the reasons stated herein, the three pending motions to vacate or modify this Court's Order of May 2, 2000 will be denied, and the motion of defendant Colkitt and other entities for withdrawal of reference of the entire Equimed bankruptcy case will also be denied.
I The Motions to Vacate the Order of May 2, 2000
For this Court to exercise its discretionary power to withdraw reference of all or any part of a case filed in the Bankruptcy Court, it must comply with 28 U.S.C. § 157(d). Pursuant to Bankruptcy Rule 5011(a), a motion for withdrawal of a case or proceeding shall be heard by the District Court.
Section 157(d) provides in pertinent part as follows:
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. (Emphasis added).
The Court's Order of May 2, 2000 withdrew reference with respect to two discreet matters, first all matters which the proposed settlement in the Rahman action designated for Bankruptcy Court review and approval, and second all matters relating to the Adversary Proceeding in the Equimed bankruptcy case. The question presented by the three pending motions to vacate or modify the Order of May 2, 2000 is whether cause has been shown for the discretionary action taken by the Court.
On the record here, this Court concludes that ample cause has been shown for the partial withdrawal of reference of portions of theEquimed bankruptcy case pursuant this Court's Order of May 2, 2000. Moreover, there is no need to modify that Order. Settlements have now been negotiated between the government and the defendants in the Rahman action, and the government has now filed a motion seeking Court approval of the settlement agreements. It has been agreed that these settlements must be approved both by this Court and by the Bankruptcy Court. Were the Court's Order of May 2 to be vacated, two different judicial officers would be required to address and rule on the government's motion for approval of the settlements. Not only would there be a duplication of effort by the two courts and by the parties and their counsel, but the possibility would also exist that two different courts might render inconsistent decisions.
The record in both the Rahman case and the Equimed bankruptcy case indicate that there is an overlap in these two actions between the parties, the issues raised, and the assets of the various defendants. There can be little doubt that as a result of the numerous prior rulings made by the undersigned in the Rahman case during the past several years, this Court is much more familiar with the parties, with their claims and with the proposed settlements than is Bankruptcy Judge Mannes. Accordingly, this Court is satisfied that the interests of judicial economy will best be served by the withdrawal of reference of settlement matters pursuant to the Court's Order of May 2, 2000. Promoting judicial economy has been recognized as a significant factor to be considered by a court in deciding whether or not to withdraw the reference of all or any part of a bankruptcy case. Big Rivers Electric Corp. v. Green River Coal, Inc., 182 B.R. 751, 755 (W.D.Ky. 1995).
The Court also concludes that there should be a withdrawal of reference insofar as the Adversary Proceeding is concerned. Many of the defendants in both the Rahman action and the Adversary Proceeding are the same. Similar claims are asserted against the same defendants by the government in the Rahman action and by the Trustee in the Adversary Proceeding. As the Court noted in Big Rivers Electric Corp., 182 B.R. at 755, the overlapping of facts, transactions and issues in two separate cases is good cause for withdrawal of the reference where a proceeding in bankruptcy involves common issues of law and fact with the case pending in the district court.
Moreover, there could not be a trial of the Adversary Proceeding in the Bankruptcy Court. Several defendants in that matter have gone on record as indicating that they will demand a jury trial. A jury trial requested by a party may not be held before a bankruptcy judge absent express consent of the parties. See 28 U.S.C. § 157(e). Withdrawal of the reference is therefore required in instances where a defendant who is entitled to a jury trial does not consent to the holding of such trial in the Bankruptcy Court. See In re Stansbury Poplar Place, Inc., 13 F.3d 122, 128-29 (4th Cir. 1993).
In seeking to vacate or modify the Court's Order of May 2, 2000, the movants advance a host of different arguments. In so doing, they have failed to focus on the precise issue before the Court, namely, whether cause exists for this Court to exercise its discretionary authority to withdraw the reference of certain aspects of the bankruptcy case. As noted, ample cause exists for the action previously taken by this Court.
Counsel for the Trustee has spent a considerable amount of time and effort arguing that this Court and the Bankruptcy Court should not approve the settlements which have been reached. In so doing, the Trustee miscomprehends the issue presented and puts the cart before the horse. At this stage of these proceedings, the question presented relates solely to a determination of the judicial officer who will decide whether the proposed settlements should be approved. The Trustee and other interested parties will be given ample opportunity to argue to this Court that the settlements should not be approved in either the Rahman case or in the Equimed bankruptcy case. Were the pending motions to vacate be granted, the Trustee would be required to have two different judges hear and rule on his objections to the proposed settlements. Duplicative proceedings would result, and judicial economy would not thereby be promoted.
The Trustee has now been permitted to intervene in the Rahman case.
It is argued that the Bankruptcy Court should supervise discovery and hear motions in the Adversary Proceeding, even if trial of the issues in that matter cannot be held before a jury in the Bankruptcy Court. This Court would disagree. Much discovery already undertaken in the Rahman case relates to the question whether there have been fraudulent transfers by Equimed. Discovery has not been concluded in the Rahman case, and more discovery must occur if that case later proceeds to trial. Similar discovery will be necessary in the Adversary Proceeding. If the settlements are not approved and if both matters proceed to trial, the interests of judicial economy would not be served if two different courts monitored the same discovery proceedings and were required to rule on the same discovery disputes.
It is also argued that the automatic stay provisions of 11 U.S.C. § 362 prohibit the government from going forward with the Rahman action. However, § 362(b) sets forth exceptions to the automatic stay provisions of the Bankruptcy Code. Under § 362(b)(4), the filing of a bankruptcy petition does not operate as a stay "of the commencement or continuation of an action or proceeding by a governmental unit. . .to enforce such governmental unit's. . .police and regulatory power. . ." The Rahman case is just such a proceeding. It involves alleged violations of the False Claims Act and the Federal Debt Collection Procedures Act. Allegations of fraudulent transfers and successor liability are contained in the amended complaint. The government filed the Rahman case long before the Equimed bankruptcy proceedings commenced. That civil action is therefore not a case in which the government, as a creditor in the bankruptcy proceeding, has attempted "to artfully plead [its] way out of bankruptcy court. . ." See National Am. Ins. Co. v. Ruppert Landscaping Co., Inc., 187 F.3d 439, 442 (4th Cir. 1999).
After due consideration of the cases cited by the parties which construe § 362(b)(4), this Court will follow the Eighth Circuit decision in In re Commonwealth Companies, Inc., 913 F.2d 518 (8th Cir. 1990). The Court there held that a False Claims Act suit is a substantial and legitimate exercise of the government's police power which is exempt from the automatic stay. Id. at 526. As noted in that case, other courts have held that "§ 362(b)(4) does not exclude a governmental action to obtain the entry of a money judgment for a past violation of the law simply because money damages are the only relief sought in the action." Id. at 522-523, citing United States v. Nicolet, Inc., 857 F.2d 202, 207-09 (3d Cir. 1988); EEOC v. McLean Trucking Co., 834 F.2d 398, 400-02 (4th Cir. 1987). See also United States ex rel. Jane Doe v. X, Inc., 246 B.R. 817, 820 (E.D.Va., 2000) (holding that a False Claims Actqui tam action is excepted from the automatic stay provisions of § 362 and that a qui tam plaintiff acting on behalf of the government may proceed to judgment in the suit brought under the False Claims Act in spite of an intervening bankruptcy on the part of one or more defendants).
In his memorandum, the Trustee agrees that cases cited by the government make clear that the police power exception in the statute may allow entry of a money judgment against a bankrupt defendant (Memorandum in Support of Motion to Vacate, p. 12). The Trustee argues, however, that X, Inc. and other cases cited by the government do not extend to the enforcement of a judgment obtained by the government and that these cases emphasize that the government is not permitted by way of any such judgment to obtain a pecuniary advantage over creditors. X, Inc., 246 B.R. at 820. However, both the Rahman case and the Adversary Proceeding are now before this Court. If any enforcement of a judgment recovered by the government in the Rahman case were to improperly and adversely affect a recovery by the Trustee in the Adversary Proceeding on behalf of the bankrupt estate, this Court, pursuant to its Order of May 2, 2000, now has jurisdiction to address that problem and insure that the interests of all parties are protected. Questions relating to the enforcement of a judgment obtained by the government in the Rahman case will therefore be addressed later. There is no need to decide those questions at this time. If the proposed settlement of the Rahman case is approved and the Rahman case dismissed, there can be no conflict between that case and the Trustee's control over the property of the bankruptcy estate. If the proposed settlement is not approved and the Rahman case and the Adversary Proceeding go forward, the relationship between the claims of the Trustee in the Adversary Proceeding and the claims of the government in the Rahman case can be explored in greater depth later.
According to the Trustee, the Adversary Proceeding is a core bankruptcy proceeding which is best resolved in a bankruptcy court. However, the circumstances here are certainly unique and exceptional. As Judge Smalkin of this Court noted in In re Furniture Renters of America, Inc., 162 B.R. 728, 729 (D.Md. 1994), withdrawal of the reference at an early stage of an exceptional case is justified even as to core matters.
For these reasons, the pending motions to vacate or modify the Court's Order of May 2, 2000 will be denied.
II The Motion for Withdrawal of Reference of the Entire Bankruptcy Case
Dr. Colkitt and various other entities have filed a motion asking this Court to withdraw reference of the entire bankruptcy case. The same principles discussed hereinabove are applicable to this motion. What the Court must determine is whether, on the record here, cause exists for withdrawal by this Court of the Equimed bankruptcy case "in whole." See § 157(d).
Following its review of the parties' memoranda, this Court concludes that the movants have not shown cause for withdrawal of reference of the entire Equimed bankruptcy case. The movants have not convinced the Court that withdrawal of the entire case would promote judicial economy and the economic use of the parties' resources. Moreover, it appears from the pleadings and other matters of record that Dr. Colkitt is by this motion engaging in forum shopping. Dissatisfied with actions taken by the Bankruptcy Court which appear to be completely justified, Dr. Colkitt is attempting by this motion to have this Court address all matters that would arise during the administration of the bankruptcy estate of the debtor Equimed. In his Opinion of March 3, 2000, Judge Mannes found Dr. Colkitt to be in direct contempt under Bankruptcy Rule 9020(a) because he refused to submit during a hearing to further cross-examination after a luncheon recess. The record in the Equimed bankruptcy case discloses other examples of attempts by Dr. Colkitt to frustrate and delay the administration of the bankruptcy estate of Equimed. It is the Bankruptcy Court and not this Court which should deal with these matters.
The principal argument advanced by the movants is that since this Court has partially withdrawn reference of certain portions of theEquimed bankruptcy case, it should, in order to promote judicial economy, withdraw the entire case. There is no merit to this contention. The Court's Order of May 2, 2000 effected the withdrawal of only two discreet matters. The vast majority of other aspects of the Equimed bankruptcy case have only a tangential relationship to what has been withdrawn and involve matters traditionally handled by a bankruptcy judge.
Dr. Colkitt complains that the Bankruptcy Court has erroneously entered an Order authorizing the Trustee to operate businesses controlled by the debtor or its affiliates. A motion to vacate this Order has been filed in the Equimed bankruptcy case, has been briefed by the parties, and is awaiting a hearing before Judge Mannes. The Bankruptcy Court and not this Court should address this and all other motions dealing with the administration of the bankruptcy estate of the debtor Equimed. The Equimed bankruptcy case will in the future undoubtedly give rise to numerous, non-exceptional core proceedings which are best resolved in the Bankruptcy Court rather than in this Court. See United States Life Ins. Co. v. Selman, 1998 WL 278259 (W.D.Va. 1998).
For these reasons, the pending motion for withdrawal of reference of the entire bankruptcy case will be denied.
III Conclusion
For all the reasons stated, the four pending motions addressed herein will all be denied. Accordingly, it is this ______ day of July, 2000 by the United States District Court for the District of Maryland,
ORDERED:
1. That the motion of the petitioning creditors to vacate Order withdrawing from the Bankruptcy Court certain matters and proceedings is hereby denied;
2. That the motion of Provident Bank to vacate in part and modify Order withdrawing reference is hereby denied;
3. That the motion of the Trustee to vacate or modify Order withdrawing reference is hereby denied;
4. That the motion of defendant Colkitt and various other entities for withdrawal of reference of the entire bankruptcy case is hereby denied; and
5. That the Clerk is directed to close Civil No. H-00-1569.