The opinion of the court was delivered by: George C. Smith United States District Judge
Nicole Energy Marketing, Inc., Nicole Gas Production, Ltd., Synaversa Energy Services, Inc., Synaversa, Ltd., Seaburyson Properties, Ltd., and Fred Fulson filed a motion in this Court, which was assigned case number 2:06-cv-0162, asking the Court to withdraw the reference of an adversary proceeding from the United States Bankruptcy Court for the Southern District of Ohio. The motion advances three reasons for the withdrawal: that it is required under 28 U.S.C. §157(d), that the Court is permitted to withdraw the case under that statutory section, and because the movants, who are defendants in the adversary proceeding at issue, have demanded a jury trial which cannot be conducted in the bankruptcy court. For the following reasons, the motion will be denied at this time, although the movants may again petition the Court for a removal of the adversary proceeding if it appears that a jury trial will be conducted in that court and if the parties do not consent to the bankruptcy judge's presiding at that trial.
The facts of this case are straightforward. In 2003, Columbia Gas of Ohio and several related entities filed an involuntary Chapter 7 proceeding naming Nicole Energy Services, Inc. as the debtor. Nicole Energy Services is one of a number of companies owned or controlled by Fred Fulson, and is related in some way to all of the movants in this case. Mr. Fulson initially contested the involuntary proceeding but later filed a voluntary Chapter 11 petition, resulting in a consolidation of the two bankruptcy proceedings in what was then treated as a voluntary Chapter 11. Larry J. McClatchey was appointed as the Chapter 11 Trustee.
In his capacity as trustee, Mr. McClatchey filed an adversary proceeding against the movants, alleging that they engaged in a related series of transactions from 1989 through 2003 which could not be unraveled or separated. As a result, he asked the bankruptcy court to order a "substantive consolidation" of all of the entities and also requested that one or more of them be designated as a successor-in-interest to the debtor. As alternative relief, the complaint in the adversary proceeding requested the bankruptcy court to undo certain alleged preferential transfers or fraudulent conveyances between the debtor and one or more of the movants.
The movants have now requested that the adversary proceeding be withdrawn from the bankruptcy court to which it was referred by virtue of this court's standing order of reference. They assert that such removal is either mandatory or permissive under 28 U.S.C. §157(d) and, in addition, point out that they have demanded a jury trial in the adversary proceeding and have not consented to having the bankruptcy judge preside over the jury trial. The trustee has opposed the removal. The movants have also requested the Court to stay the bankruptcy proceedings while the motion to remove is under consideration, a motion the trustee has also opposed. Because the Court will decide the motion for removal in this opinion and order, the motion to stay will become moot.
The parties agree that the case involving Nicole Energy Services was appropriately filed in the bankruptcy court and that the adversary proceeding arises out of that filing. Therefore, it was automatically referred to the bankruptcy court. The only question before this court is whether it should be removed from the bankruptcy court to the district court.
The statute governing such removal is 28 U.S.C. §157. In particular, §157(d) provides that a district court may "withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court] on its own motion or on timely motion of any party, for cause shown." In addition to this permissive language, §157(d) mandates removal "if the court determines resolution of the proceeding requires consideration of both Title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." The Court turns first to the question of whether the mandatory removal provision of §157(d) applies here.
By its plain language, §157(d) compels the removal of a case from the bankruptcy court if, in order to resolve the proceeding (in this case, the adversary proceeding filed by the trustee), the bankruptcy court must give "consideration" both to bankruptcy law and to some other law of the United States which affects interstate commerce. This statutory language has been described as less than clear, especially with respect to the term "consideration." Courts have taken different views on what it means for the bankruptcy court to give "consideration" to some law other than bankruptcy law in resolving a matter which is pending before it. Generally, the courts have agreed that this provision ought not to be read broadly because a broad reading would result in the transfer of many cases from the bankruptcy court to the district court, preventing the bankruptcy court from dealing with relatively routine bankruptcy matters. See Matter Vicars Ins. Agency, 986 F.3d 949, 952 (7th Cir. 1996). In order to prevent that consequence, a number of courts have concluded that the bankruptcy court's consideration of non-bankruptcy law must, in addition to being necessary for the resolution of the case, be "substantial and material." See id., citing In re White Motor Corp., 42 B.R. 693 (N.D. Ohio 1984). These modifiers of the statutory language "ha[ve] been accepted as an appropriate reading of the statute and effectuation of Congress' intent by most courts" and were accepted by the Court of Appeals for the Seventh Circuit in Matter of Vicars, supra. At least one judge of this Court has reached the same conclusion. See In re Federated Department Stores, 189 B.R. 142, 144 (S.D. Ohio 1995)(Kinneary, J.).
Although the "substantial and material" standard has been criticized as unhelpful, it does illustrate that in order for the mandatory withdrawal provision to apply, the bankruptcy court is required to make more than a passing or incidental reference to non-bankruptcy law in order to decide the matter before it. In other words, "even courts which reject the 'substantial and material' standard agree that 'mandatory withdrawal is not warranted unless the bankruptcy court must decide a question under non-bankruptcy federal law in order to resolve the proceeding.'" In re U.S. Airways Group, Inc., 296 B.R. 673, 679 (E.D. Va. 2003). Here, as the trustee correctly points out, the adversary proceeding which the trustee filed does not raise any issues of non-bankruptcy federal law and it would not appear that even passing reference to such laws would be necessary in order to decide the claims sounding in substantive consolidation, declaration of a successor-in-interest, preferential transfers, or fraudulent conveyances. The movants do not argue otherwise, but assert that federal antitrust statutes might be implicated if the bankruptcy court chooses to order substantive consolidation. They do not elaborate on that assertion. They also argue that because state court litigation involving some of these parties involved interpretation of orders issued by the Federal Energy Regulatory Commission, the bankruptcy court might be required to review or consider those orders in resolving the adversary proceeding.
Regardless of which standard is applied, the Court concludes that the adversary proceeding at issue in this case is not one which will necessarily involve decisions under non-bankruptcy federal law in order to resolve the trustee's claims. The movants do not contend that they have raised any defenses under federal law which would have to be determined by the bankruptcy court as part of its resolution of the merits of the trustee's claims. Further, it is clear that in a situation such as this, the movants have the burden of demonstrating that mandatory withdrawal applies. Holland v. LTV Steel Co., 288 B.R. 770 (N.D. Ohio 2002). The movants have simply not met their burden by their passing and non-specific reference to potential federal law issues involved in the adversary case.
Alternatively, the movants argue that the Court should exercise its discretion to withdraw the adversary proceeding from the bankruptcy court. The argument on this point is even less specific. They simply argue that the Court may do so for "cause" and that it is left to this Court to determine whether appropriate cause has been demonstrated.
The permissive withdrawal provision of §157(d) is, again, not intended to permit the wholesale withdrawal of references of matters to the bankruptcy courts. Rather, there must be some compelling or extraordinary circumstances which would compel the district court to take such an extraordinary step. Typically, the Court considers such factors as whether the withdrawal would contravene the goal of uniformity and efficiency in the administration of bankruptcy law, whether it would prevent a dissatisfied litigant from engaging in forum shopping, whether the parties' resources would be unnecessarily expended if the matter were withdrawn, and whether the withdrawal would facilitate the bankruptcy process. Holmes v. Grubman, 315 F.Supp.2d 1376, 1381 (M.D. Ga. 2004). The movants do not address any of these factors, and it is evident to this court that it would contravene the orderly and efficient administration of this case by the bankruptcy court to withdraw this particular adversary proceeding where the bankruptcy court is intimately familiar with the details of the parties and the transactions involved and the litigation is so closely related to other matters which have already been adjudicated by the bankruptcy court. Consequently, the requisite showing of cause has not been made and permissive withdrawal is not appropriate.
Finally, the movants argue that because they have demanded a jury trial in the adversary proceeding, the bankruptcy court may not proceed with the case. They argue, incorrectly, that the bankruptcy court cannot conduct a jury trial under any circumstances. See 28 U.S.C. §157(e), which gives the bankruptcy court the ability to conduct a jury trial with consent of the parties. However, they are correct that if they have appropriately demanded a jury trial and ...