Daily Bankruptcy & Restructuring Newsletter for March 3, 2015

Caesars Files a Proposed Plan of Reorganization…

Court Docket (Bankr. N.D. Ill.): Debtors’ Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code

Court Docket (Bankr. N.D. Ill.): Disclosure Statement for the Debtors’ Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code

Wall Street Journal: Lifestyle Lift Shuts Down Most of Its Business, Considers Bankruptcy

ABF Journal: NACM Credit Index Falls to One-Year Low

Press Release: Ocwen Financial Amends Senior Secured Term Loan, Retains Moelis & Company and Barclays Capital Inc. to Explore Strategic Options

BloombergBusiness: Bain’s Sankaty Seeks Up to $3.5 Billion for Credit Fund

Boston Globe: Bankruptcy trustee offers details on alleged TelexFree fraud

The Oregonian: Earth Class Mail, once a highly touted Oregon startup, files bankruptcy ahead of planned sale

Bond Buyer: Counties Finalizing Indiana Toll Road Bid

Reuters: China developer Kaisa announces onshore debt restructuring plan

CH Aviation: Romania’s Ten Airways files for insolvency protection

Business Standard: Excess fleet holding dry bulk freight rates at historic low

Reuters: Heta creditors may face haircuts, insolvency – Austria’s FMA

Journal Star: Nebraska Book financials improve

Weil, Gotshal & Manges: No Security by Obscurity: The Importance of Clearly Identifying Collateral

Daily Bankruptcy & Restructuring Newsletter for March 2, 2015

Press Release: University General Health System, Inc. Initiates Restructuring Through A Chapter 11 Filing

Court Docket (Bankr. S.D. Tex.): Declaration of Director, General Counsel and Secretary of University General Health System, Inc. in Support of Chapter 11 Petitions & First Day Filings

Press Release: A. M. Castle & Co. (NYSE: CAS) Engages Conway MacKenzie, Appoints A. Jeffrey Zappone of Conway MacKenzie as Interim COO

BloombergBusiness: Ginnie Mae’s Financial Statements Are Unreliable, Auditor Says

High Yield Bond: JC Penney credit default protection cost widens on quarterly results, 2015 outlook

WKYT News: U.S. Coal idles mines in Magoffin, Breathitt Counties

FDIC Press Release: Banco Popular De Puerto Rico, Hato Rey, Puerto Rico, Assumes all of the Deposits of Doral Bank, San Juan, Puerto Rico

Reuters: Doral Financial to appeal Puerto Rico court ruling

Detroit Free Press: Rodney O’Neal transformed Delphi, regrets pension cuts

MuniNet Guide: James Spiotto: Should Congress Pass HR 870 Allowing Puerto Rico to Authorize Its Municipalities Including Public Corporations to File Chapter 9?

Wall Street Journal: Debevoise Lawyer is Newest New York Bankruptcy Judge

BloombergBusiness: Loeb Sees Disappointment for Funds Seeking Energy Distress

Trepp: Small Chain Grocers Going Stale?

Weil, Gotshal & Manges: Gary Holtzer Interviewed on Top Issues PE Firms Should Consider When Faced with Trouble

Wicked Local Marlborough: SEC accuses company of running pyramid scheme

New Bankruptcy Opinion: RESIDENTIAL FUNDING COMPANY, LLC v. SUNTRUST MORTGAGE, INC. – Dist. Court, SD New York, 2015





Case No. 12-12020 (MG), Adv. Proc. No. 13-01820 (MG), No. 14-CV-6015 (RA).

United States District Court, S.D. New York.

February 20, 2015.


RONNIE ABRAMS, District Judge.

Plaintiff Residential Funding Company, LLC (“RFC”) brings this adversarial proceeding, a state-law action for breach of contract and indemnification, against Defendant SunTrust Mortgage, Inc. (“SunTrust”). (Residential Funding Co. v. SunTrust Mortg., Inc., No. 13 Civ. 8938 (“Original Action”).) [1] RFC filed its Complaint on December 17, 2013 (Original Action, Dkt. 1), the same day on which RFC’s assets were assigned to a Liquidating Trust pursuant to a Second Amended Joint Chapter 11 Plan ((“Plan”) Bankr. Case, Dkt. 6030) confirmed by Judge Martin Glenn of the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) on December 11, 2013, ((“Confirmation Order”) Bankr. Case, Dkt. 6065). After SunTrust filed a motion to dismiss (Original Action, Dkt. 14), RFC amended its complaint to include 28 U.S.C. § 1334 as a basis for the Court’s subject matter jurisdiction, ((“Am. Compl.”) Original Action, Dkt. 32).

Upon RFC’s motion (Original Action, Dkt. 30), the Court found this matter related to RFC’s bankruptcy case, and referred it to the Bankruptcy Court ((“Referral Order”) Original Action, Dkt. 42) pursuant to this District’s January 31, 2012 Amended Standing Order of Reference for Title 11 Cases (the “Standing Order”). Now pending before the Court is SunTrust’s motion for a withdrawal of this reference. (Dkt. 1.) For the reasons that follow, SunTrust’s motion is denied.


The Court assumes the parties’ familiarity with the underlying facts of this case, a detailed account of which is provided in the Court’s Referral Order. Only a summary of those facts directly relevant to the disposition of this motion is included below:

Prior to its bankruptcy, RFC acquired and securitized residential mortgage loans. (Am. Compl. ¶ 2.) It purchased the loans from originators, including SunTrust, and then either sold them in pools to whole loan investors or placed them into securitization trusts. (Id. ¶¶ 3, 20-22.) After many of the loans defaulted or became delinquent, these trusts lost considerable amounts of money, with RFC facing billions of dollars in claims from investors and insurers seeking to recoup their losses. (Id. ¶¶ 1, 6-9, 48-50.)

In response, RFC and fifty of its affiliated entities filed bankruptcy petitions under Chapter 11, 11 U.S.C. § 1101 et seq. (Id. ¶ 74.) On December 11, 2013, after RFC reached a global settlement (the “Global Settlement”) with investors in its securitization trusts, Judge Glenn confirmed the Plan. (Confirmation Order.) The Plan became effective six days later, on December 17, 2013, at which time RFC’s remaining assets—including causes of action—were assigned to the Liquidating Trust. ((“Effective Date Notice”) Bankr. Case, Dkt. 6137.) Breach of contract claims and indemnification claims based on contracts to which RFC is a party are among the causes of action expressly preserved under the Plan. (Plan Ex. 13 at 3-4.)

On December 17, 2013, RFC filed this adversarial proceeding against SunTrust, a mortgage originator, alleging breach of contract and seeking indemnification. (Original Action, Dkt. 1.) RFC has filed dozens of similar actions against other mortgage originators in this Court, as well as in Federal and state courts in Minnesota. (Def.’s Mem. (Dkt. 2) at 5.) Here, RFC alleges that it purchased over 10,000 mortgage loans from SunTrust (Am. Compl. ¶ 17), and that many of these loans did not comply with contractually required representations and warranties (id. ¶¶ 36-54). In addition, RFC asserts that SunTrust is contractually required to indemnify it and seeks compensation for losses and damages—what it was required to pay to third-party investors as part of the Global Settlement—allegedly suffered as a result of SunTrust’s non-conforming loans. (Id. ¶¶ 87-88, 90-92.) Importantly, SunTrust did not file a proof of claim in the bankruptcy proceedings, and RFC’s claims arise from contracts formed prior to RFC’s bankruptcy petition. (Def.’s Mem. at 3.) Prior to the Court’s Referral Order, SunTrust alleges that the parties jointly demanded a jury trial (Def.’s Mem. at 11 n. 16), although this demand is not reflected on the docket. Regardless, SunTrust has since indicated that it would refuse to consent to a jury trial conducted by the Bankruptcy Court (id.), and RFC did not contest that there was a jury demand at oral argument.

Upon referral to the Bankruptcy Court, Judge Glenn combined this action with several of RFC’s other state-law contract actions into a single adversarial proceeding (the “Joint Adversarial Proceeding”) ((“JP”) In re Rescap Liquidating Trust Mortg. Purchase Litig., No. 14-7900), [2] which he has indicated he intends to expedite, (Pl.’s Opp. Mem. (Dkt. 8) at 5.) Judge Glenn required defendants to coordinate motions to dismiss by submitting a collective memorandum of law as to common legal issues (JP, Dkt. 1), has coordinated discovery and mediation (id.), and recently approved a common expert loan sampling methodology intended to streamline discovery, (JP, Dkt. 56). Of the six actions now pending in the Joint Adversarial Proceeding, five will proceed to a bench trial before the Bankruptcy Court; only in this action have the parties demanded a jury trial.

Consistent with these case management procedures, defendants—jointly and individually—filed motions to dismiss, which Judge Glenn granted in part and denied in part on February 3, 2015. ((“MTD Op.”) JP, Dkt. 64.) But for breach of contract claims related to loans sold by RFC prior to May 14, 2006, RFC’s claims survived defendants’ motions to dismiss. (Id. at 41.) Judge Glenn also rejected SunTrust’s argument that RFC lacks standing to sue, and granted RFC leave to substitute the Liquidating Trust as the real party in interest pursuant to Fed. R. Civ. P. 17(a). (Id. at 21.)


I. Subject Matter Jurisdiction

In its Amended Complaint, RFC alleges that this Court has federal question jurisdiction over its claims pursuant to 28 U.S.C. § 1334. Section 1334 grants district courts jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11″ of the bankruptcy code. 28 U.S.C. § 1334(b). Proceedings that fall within this jurisdictional grant can be referred by the district court to bankruptcy court, 28 U.S.C. § 157(a), and later withdrawn “for cause shown,” 28 U.S.C. § 157(d).

Section 157 divides those proceedings that can be referred to bankruptcy court—those within a district court’s Section 1334 jurisdiction—into two categories: “core” and “non-core.” See generally 28 U.S.C. § 157. “Core” proceedings are those “arising under” or “arising in . . . cases under title 11,” an exemplary, but non-exclusive list of which is provided in Section 157(b)(2). “Non-core” proceedings are those “otherwise related to a case under title 11.” 28 U.S.C. § 157(b)(3).

This distinction between “core” and “non-core” proceedings is substantive: but for a constitutional exception announced by the Supreme Court in Stern v. Marshall, 131 S. Ct. 2594 (2011) and Executive Benefits Ins. Agency v. Arkinson, 134 S. Ct. 2165 (2014), [3] bankruptcy courts may enter final judgments in “core proceedings,” 28 U.S.C. § 157(b)(1 ), but may not do so in “non-core” cases, where they are limited to submitting “proposed findings of fact and conclusions of law” for de novo review by the district court, 28 U.S.C. § 157(c). Similarly, while bankruptcy courts may conduct jury trials in “core” cases, they may not do so, absent the consent of the parties, in “non-core” cases.” See 28 U.S.C. § 157(e); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026 (1994) (“[T]he constitution prohibits bankruptcy courts from holding jury trials in non-core matters.”).

Here, as noted in the Court’s Referral Order, “this case is at least `related to’ RFC’s pending bankruptcy case,” such that the Court has federal question jurisdiction over this matter pursuant to Section 1334. (Referral Order at 3.) In post-confirmation liquidation proceedings, as here, the Second Circuit has not yet determined which of two approaches courts should use to assess whether a proceeding is “related to” a title 11 case. [4] Some courts have found that a “civil proceeding is related to a title 11 case if the action’s outcome might have any conceivable effect on the bankrupt estate.” Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 578 (2d Cir. 2011) (citations and internal quotation marks omitted). Other courts have adopted the “close nexus” test, which requires, first, that “the matter . . . have a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution or administration of the confirmed plan and second, [that] the plan . . . provide for the retention of jurisdiction over the dispute.” Savoy Senior Hous. Corp. v. TRBC Ministries, LLC, 401 B.R. 589, 597 (S.D.N. Y. 2009) (citations and quotations omitted).

Resolving this split is not necessary here, as this action satisfies the more onerous “close nexus” standard. See In re Refco, Inc. Sec. Litig., 628 F. Supp. 2d 432, 441-44 (S.D.N.Y .). As noted in the Court’s Referral Order, the Liquidation Plan expressly preserves RFC’s claims against SunTrust, transfers them from RFC to the Liquidating Trust, and provides for creditors to share in any recovery. (Plan Ex. 13; Referral Order at 2.) RFC’s claims against SunTrust thus directly affect the “implementation, consummation, execution or administration” of the Liquidation Plan such that there is a “close nexus” to the underlying bankruptcy proceeding. The Liquidation Plan also provides for the bankruptcy court’s continuing jurisdiction over these claims. (Plan at 110, 112.) Because RFC’s claims satisfy at least the “close nexus” test and are thus proceedings “related to” a case under title 11, jurisdiction is proper here pursuant to Section 1334.

II. Standing

As part of its motion to dismiss RFC’s Amended Complaint (Original Action, Dkt. 36 at 7-12), which was mooted by the Court’s Referral Order, as well as in its individual motion to dismiss filed in the Joint Adversarial Proceeding (AP, Dkt. 19), and in its withdrawal papers (Def.’s Mem. at 4 n. 8), SunTrust challenges RFC’s standing to bring this action. First, SunTrust argues that RFC’s claims were assigned to the Liquidating Trust prior to the filing of RFC’s original complaint. (See, e.g., Original Action, Dkt. 36 at 7-12). Alternatively, SunTrust argues that RFC assigned all of its contractual rights, including the right to sue SunTrust for breach and indemnification, to third parties. (Id.) Because lack of standing deprives a court of subject matter jurisdiction, In re U.S. Catholic Conference, 885 F.2d 1020, 1023 (2d Cir. 1989), and courts are required to sua sponte investigate their own jurisdictional authority, D’ Amico Dry Ltd. v. Primera Mar. (Hellas) Ltd., 756 F.3d 151, 161 (2d Cir. 2014), the Court will briefly address SunTrust’s arguments here.

SunTrust’s second argument is of no moment: whether RFC assigned its right to sue to third parties is a question of fact that cannot be ascertained at this stage without significant reference to documents well beyond the pleadings—and certainly not without the support of briefing by the parties. See Residential Funding Co., LLC v. Cmty. W. Bank, N.A., No. Civ. 13-3468, 2014 WL 5207485, at *12 (D. Minn. Oct. 14, 2014). SunTrust’s first argument is more complicated: RFC was required to show that subject matter jurisdiction over its complaint was proper by a preponderance of the evidence. Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000) . RFC, however, has alleged no facts that would establish that its original Complaint was filed prior to the Effective Date Notice, at which time all of its assets—including causes of action—devolved to the Liquidating Trust. In its motion papers before Judge Glenn, it only pointed to language in the Confirmation Order suggesting that the timing of this assignment might be flexible and could occur after—and not just on—the Effective Date of the Plan. (AP, Dkt. 24 at 2.)

RFC’s failure to produce sufficient evidence is ultimately rendered moot by the permissiveness of Fed R. Civ. P. 17(a), however, which allows parties to cure standing defects by substituting into the action, where reasonable, the “real party in interest.” (See MTD Op. at 14-21.) Consistent with this approach, the Court finds—as did Judge Glenn—that substitution of the Liquidating Trust as the real party in interest is appropriate and sufficient to cure any defects in standing. (Id.) Thus, the Court has subject matter jurisdiction here.

III. Withdrawal

A “district court may withdraw, in whole or in part, any case or proceeding referred under this section . . . on timely motion of any party, for cause shown.” 28 U.S.C. § 175(d). To determine whether a party has shown “cause” sufficient to merit withdrawal, courts in this Circuit use the multi-factor framework developed by the Second Circuit in Orion, 4 F.3d 1095 at 1101 . Under this framework, courts consider: “(1) whether the claim is core or non-core, (2) what is the most efficient use of judicial resources, (3) what is the delay and what are the costs to the parties, (4) what will promote uniformity of bankruptcy administration, (5) what will prevent forum shopping, and (6) other related factors.” In re Burger Boys, Inc., 94 F.3d 755, 762 (2d Cir. 1996) (citing Orion, 4 F.3d at 1101 ).

“Core” v. “Non-core”

In two letters to the Court, one submitted on August 29, 2014 (Dkt. 14), and one submitted on September 10, 2014 (Dkt. 19), RFC argues that the bankruptcy court should determine, in the first instance, whether its claims are “core” or “non-core.” A minority of courts in this Circuit agree with RFC, finding in the language of Section 157 a requirement that the bankruptcy court— and only the bankruptcy court—make this determination in the first instance. See 28 U.S.C. § 157(b)(3) (“The bankruptcy judge shall determine . . . whether a proceeding is a core proceeding.”); Veyance Techs., Inc. v. Lehman Bros. Special Fin., No. 09 Civ. 8851 (BSJ), 2009 WL 4496051, at *2 (S.D.N.Y. Dec. 3, 2009); In re Pied Piper Casuals, Inc., 48 B.R. 294, 294-95 (S.D.N.Y. 1985) . The majority of courts confronted with this question, however, have held otherwise, finding both that this constricted reading of Section 157 is refuted by the plain language of Orion and unsupported by the statutory text. See, e.g., Distefano v. Law Offices of Barbara H. Katsos, P.C., No. 10-MC-0564, 2011 WL 2446318, at *2-3 (E.D.N.Y. June 15, 2011) (collecting cases). The Court is swayed by the sound reasoning of those courts in the majority, and rejects RFC’s contention that the “core” versus “non-core” determination must be made first by the bankruptcy court, as well as RFC’s argument that the Court should nonetheless defer to the bankruptcy court on prudential grounds. Instead, as suggested by Orion, the Court will make this determination itself.

Section 157(b)(2) offers a non-exclusive list of “core” proceedings. Although courts “construe the concept of core proceedings broadly,” In re Millenium Seacarriers, Inc., 458 F.3d 92, 95 (2d Cir. 2006), the Second Circuit has recognized that this construction should not be limitless, and that “determination of whether a matter is `core’ depends on the nature of the proceeding,” In re Best Prods. Co., Inc., 68 F.3d 26, 31 (2d Cir. 1995) . “[P]roceedings can be core . . . if either ( 1) the type of proceeding is unique to or uniquely affected by the bankruptcy proceedings . . . or (2) the proceedings directly affect a core bankruptcy function.” In re U.S. Lines, Inc., 197 F.3d 631, 637 (2d Cir. 1999) (internal citations omitted).

“[W]hether a contract proceeding is core depends on (1) whether the contract is antecedent to the reorganization petition; and (2) the degree to which the proceeding is independent of the reorganization.” Id. Thus, the Second Circuit has found that a “breach-of-contract action by a debtor against a party to a pre-petition contract, who has filed no claim with the bankruptcy court, is non-core.” Orion, 4 F.3d at 1102 . Here, the procedural posture is the same as in Orion: RFC’s state-law contract claims arise from a pre-petition contract, and SunTrust did not file a claim with the bankruptcy court. The proceedings here are “non-core,” notwithstanding RFC’s arguments to the contrary.

RFC first argues that this is a “core” proceeding because “it requires application and enforcement of a bankruptcy court’s own orders.” (Pl.’s Opp. Mem. at 15.) The cases it marshals in support of this argument, however, stand only for the uncontroversial proposition that courts retain jurisdiction to enforce their own orders. (See id. at 15-16.) RFC has not identified any specific order of the bankruptcy court on which this proceeding bears, and even if it had, because bankruptcy courts also have jurisdiction over “non-core” matters, 28 U.S.C. §§ 157, 1334, “the mere fact that a bankruptcy court has jurisdiction over a matter cannot establish that the matter is core.” Residential Funding Co. LLC v. Greenpoint Mortg. Funding, Inc. (In re Residential Capital, LLC), 519 B.R. 593, 601(S.D.N.Y.2014).

RFC’s argument that this proceeding is “core” because it touches upon the administration of the bankruptcy estate and “is a fundamental part of the Trust’s efforts to liquidate assets of RFC’s estate” (Pl.’s Mem. at 16), also fails. As an initial matter, finding that Section 157(b)(2) encompassed “[a]ny [breach of] contract action that the debtor would pursue . . . [and that) would be expected to inure to the benefit of the debtor estate would create an exception to Marathon [5] that would swallow the rule.” In re Best Products Co., Inc., 68 F.3d at 32 (alterations in original) (quotations omitted) (citing Orion, 4 F.3d at 1102 ). Here, moreover, RFC’s action is just one of scores of suits against mortgage originators, and thus would “only augment the assets of the estate for general distribution, [such that] the effect on the administration of the estate [would be] insufficient to render the proceedings core.” In re U.S. Lines, Inc., 197 F.3d at 638 . These claims would not have such “a significant impact on the administration of the estate,” id., that deviation from the general principle announced in Orion would be proper.

Finally, RFC argues that the Court’s finding, in its Referral Order, that RFC’s claims satisfy the “close nexus” standard for “related to” jurisdiction, “buttress[es] the case for core jurisdiction here.” (Pl.’s Opp. Mem. at 18.) This argument is erroneous, however, as the “close nexus” standard is a test for “related to,” “non-core” proceedings, and not whether a proceeding is “core.” See Residential Funding Co., LLC v. UBS Real Estate Secs. (In re Residential Capital, LLC), 515 B.R. at 63 n.12.

In sum, the Court finds, as have numerous other judges on this court, that RFC’s claims are “non-core.” Thus, the bankruptcy court is not constitutionally permitted to enter final judgment in this action and RFC’s claims will need to be withdrawn from the Bankruptcy Court for trial, even if they are not withdrawn now.

Judicial Efficiency

The question of what is the most efficient use of judicial resources is a more difficult one. On balance, however, the Court concludes that judicial efficiency concerns favor keeping the proceeding before the Bankruptcy Court until trial.

A number of other courts presiding over similar actions brought by RFC or the Liquidating Trust have ordered withdrawal, finding that adjudication in district court would best serve the interests of judicial efficiency. (See MTD Op. at 5 n.3 (collecting cases).) In many of these cases, however, this analysis was informed at least in part by forum selection clauses requiring the application of Minnesota law, over which the Bankruptcy Court can claim no special expertise. See, e.g., Mem. Order, Rescap Liquidating Trust v. Primary Capital Advisors, LLC (In re Residential Capital, LLC), No. 14 Civ. 5224 (S.D.N.Y. September 16, 2014), Dkt. 31 at 8-9 (withdrawing the reference).

It is true that, as in many of the other cases in which the reference has been withdrawn, RFC’s claims sound in garden-variety state contract law. And while the Bankruptcy Court does possess significant expertise in RMBS actions, as well as in the complex discovery and expert sampling methods they require, these are not areas of expertise unique to bankruptcy. It is also true that adjudicating this case does not require an intimate familiarity with the underlying bankruptcy proceedings or the terms of the Global Settlement, as RFC contends. (Pl.’s Opp. Mem. at 17-18.) At oral argument, counsel for RFC proved unable to articulate, at least with any specificity, how or why such expertise is necessary. (See generally Dkt. ___ (“Oral Arg. Tr.”).) [6]

Withdrawal is not merited, however, solely because of the constitutional and statutory limitations placed on bankruptcy courts in “non-core” cases, as SunTrust concedes. (Id. at 5:6-7.) Although judicial efficiency often “turn[s]” on the Court’s “non-core” determination, Orion, 4 F.3d at 1101, even in “non-core” cases with a jury demand, the efficiency calculus can favor a proceeding remaining in bankruptcy court, id. at 1102 (noting that a court could “decide . . . a case is unlikely to reach trial, that it will require protracted discovery and court oversight before trial, or that the jury demand is without merit, and therefore might conclude that the case at that time is best left in the bankruptcy court”). This is such a case.

At this point, it is too early to determine whether RFC’s claims are likely to reach trial. In addition, this action will require protracted discovery and significant court oversight before trial. As SunTrust acknowledges, this is a “fact-intensive” case that will require the adjudication of numerous complex discovery and expert loan sampling issues. (Def.’s Mem. at 2.) Indeed, even if the Court were to withdraw this case, it is quite possible that discovery would be overseen by a magistrate judge and, as with proceedings in Bankruptcy Court, require this Court’s de novo review.

These discovery issues, moreover, are shared by the “multiplicity of other adversary proceedings pending before the Bankruptcy Court,” in the Joint Administrative Proceeding. Enron Power Mktg., Inc. v. Holcim, Inc. (In re Enron Corp.), No. 04 Civ. 509 (MBM), 2004 WL 2149124, at *3 (S.D.N.Y. Sept. 23, 2004). As these proceedings would otherwise be overseen by at least four separate district court judges, their joint administration in the Bankruptcy Court necessarily conserves judicial resources and promotes judicial economy. That Judge Glenn has set an aggressive schedule for pre-trial discovery proceedings only enhances the efficiencies associated with leaving this case before the Bankruptcy Court.

The Court has seriously considered, and appreciates, the proposal SunTrust made at oral argument: that the proceeding remain before the Bankruptcy Court until the close of fact discovery early next year, at which time it be withdrawn for expert discovery and all other pre-trial purposes. (Oral Arg. Tr. at 4:23-5:23.) The Court is particularly sensitive to the fact that, of the six actions pending before the Bankruptcy Court in the Joint Adversarial Proceeding, this is the only one in which the parties have requested a jury trial, and that—at some point—the judicial considerations entailed in preparing for a bench trial, with findings of fact and conclusions of law more easily reviewable de novo by a district court, might diverge from those entailed in preparing for what is likely to be a lengthy jury trial.

Ultimately, however, even expert discovery will center on methodological questions common to all six actions in the Joint Adversarial Proceeding. The Bankruptcy Court has already approved a common expert loan sampling methodology (JP, Dkt. 56), and although the questions of liability and damages will turn in the end on individual loans specific to each defendant, these individualized determinations will be made by damages and underwriting experts employing overlapping, if not identical, methodologies.

SunTrust is right that, at some point, the Court will need to act as a “gatekeeper,” policing, among other things, the admissibility of expert testimony anticipated for trial. (Oral Arg. Tr. 5: 16-21, 7:12-9:13.) But these are true trial and trial-related functions, and are not required during discovery while the parties amass and sift through the documentary and evidentiary troves on which trial strategy will, eventually, be based.

In sum, while the Court is not swayed by RFC’s judicial expertise arguments, it finds that judicial efficiency is better furthered by leaving the proceeding before the Bankruptcy Court.

Other Factors

For the reasons articulated above, considerations of judicial efficiency favor leaving the proceeding before the Bankruptcy Court, while the Court’s determination that this proceeding is “non-core” favors withdrawal. It is thus necessary to address the remaining Orion factors.

RFC’s initial Complaint included only 28 U.S.C. § 1332 as a basis for this Court’s exercise of subject matter jurisdiction, making no mention of federal question jurisdiction under 28 U.S.C. § 1334. (Complaint ¶ 14.) Only after SunTrust filed a motion to dismiss did RFC amend its complaint to include Section 1334 as a basis for subject matter jurisdiction, thus availing itself of this District’s Standing Order. (Am. Compl. ¶ 15.) This “jurisdictional about-face” is suggestive of forum shopping, and weighs in favor of withdrawal, In re Residential Capital, LLC, 519 B.R. at 606, although the Court notes RFC’s explanation, offered at oral argument, that this “about-face” resulted from a change in counsel and not from a more insidious strategy.

Orion’s uniformity factor is more neutral, but weighs against withdrawal: It is true that “[c]ourts routinely have found no [uniformity] benefit where claims are based on state law.” Dynegy Danskammer, L.L.C. v. Peabody COALTRADE Int’l Ltd., 905 F. Supp. 2d 526, 533 (S.D.N.Y. 2012) . And here, RFC’s claims are garden-variety state law contract claims. Nevertheless, at least three other—and potentially a total of six—proceedings by RFC against other mortgage originators will be adjudicated in the Bankruptcy Court, all of which share similar issues of fact and law and will augment the assets available for distribution to creditors.

Moreover, although dozens of similar actions by RFC were filed in or transferred to the District of Minnesota and will be overseen there by district, not bankruptcy, judges—arguably resulting in some degree of dis-uniformity—in those actions, the parties expressly selected Minnesota as the forum for any litigation. (See, e.g., Mem. & Order, Rescap Liquidating Trust v. CMG Mortg., Inc. (In re Residential Capital, LLC), No. 14 Civ. 4950, Dkt. 21.) By contrast, all of the RFC actions without forum selection clauses are part of the Joint Adversarial Proceeding administered by Judge Glenn in the Bankruptcy Court. Maintaining the present action in the Bankruptcy Court would thus further the aim of uniformity, even if only incrementally.

Considerations of delay and expense are neutral: Judge Glenn has decided the motions to dismiss of the defendants to the Joint Adversarial Proceeding (JP, Dkt. 64), and recently approved RFC’s proposed expert sampling methodology, (JP, Dkt. 56). At the same time, a case management plan setting a detailed timeline for discovery was only entered on January 15, 2015 (JP, Dkt. 57), and the parties to the Joint Adversarial Proceeding do not appear to have otherwise engaged in significant fact discovery at this time. Thus, withdrawal would not require significant duplication of effort or expense, and might well reduce the need for duplication by avoiding the necessity of this Court’s de novo review. Nevertheless, as noted above and as even SunTrust acknowledges, Judge Glenn’s administration of the Joint Adversarial Proceeding—particularly in light of its expedited case management plan—is likely to prevent delay. (Oral Arg. Tr. at 5:6-14; Def.’s Mem. at 12-13 (noting that the “Bankruptcy Court has set an aggressive schedule for pre-trial discovery proceedings and is requiring defendant within a matter of weeks to start to undertake massive discovery, retain expert witnesses, and to state whether it consents to plaintiffs proposed expert loan sampling methodology to be used at trial.”).)

In sum, the Court’s analysis of the Orion factors suggests that this proceeding should remain before the Bankruptcy Court until trial, and that there is not good cause for withdrawal of the reference.


For the reasons stated above, Defendant SunTrust’s motion to withdraw the bankruptcy reference is denied. The Clerk of Court is requested to close the motion pending at Dkt. 1.


[1] The underlying bankruptcy case is captioned as In re Residential Capital, LLC, et al., No. 12-12020 [hereinafter “Bankr. Case”].

[2] The Joint Adversarial Proceeding currently consists of six separate actions: Residential Liquidating Trust v. Summit Fin. Mortg. LLC et ano., No. 14-1996 (motion to withdraw pending); Residential Liquidating Trust v. Mortg. Investors Group., Inc., et al., No. 14-2004; Residential Liquidating Trust v. HSBC Mortg. Corp. (USA), No. 14-1915; Residential Funding Co., LLC v. Green point Mortg. Funding, Inc., 14-1916; Residential Funding Co., LLC v. UBS Real Estate Secs., Inc., No. 14-1926 (motion to withdraw pending); and the present action, Residential Liquidating Trust v. SunTrust Mortg., Inc., No. 13-1820 [hereinafter “AP”] (Residential Liquidating Trust substituted for Residential Funding Company pursuant to Judge Glenn’s February 3, 2015 opinion).

[3] This constitutional bar to final adjudication of some otherwise statutorily “core” proceedings, as articulated in Stern and Arkinson, is not relevant here, given the Court’s finding that this case is “non-core.”

[4] For a detailed discussion of the two approaches, see Residential Funding Co., LLC v. UBS Real Estate Secs. (in re Residential Capital, LLC), 515 B.R. 52, 63 n.12 (Bankr. S.D.N.Y. 2014).

[5] In N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 76 (1982), the Supreme Court held that Congress was constitutionally barred from vesting Article I bankruptcy courts with the power to finally adjudicate “non-core” state-created private rights of action.

[6] Even RFC acknowledges that the value of the Bankruptcy Court’s expertise would be incidental, at best. (Pl.’s Opp. Mem. at 7.) In its opposition papers, it recognized that only “in the event” that SunTrust challenged “what was settled, why it has settled, the terms on which it was settled, the reasonableness of the settlements, and/or the proper allocation of those settlement liabilities and losses” would the Bankruptcy Court’s “expertise . . . be invaluable.” (Id., (emphasis in original).)

At oral argument, SunTrust indicated that it did not expect to challenge the terms or reasonableness of the Global Settlement. (Oral Arg. Tr. at 35:9-14.) Even ifit did—to show that RFC settled for too much, that it should be indemnified for far less, if at all, or that it should look to the other originator defendants for the losses faced by its pooled and securitized products—these questions would be decided by reference to the individual loans sold by SunTrust to RFC. The Court would determine which loans failed, which did not, and what percentage of the loss on complex products comprised of thousands of individual loans from multiple originators is fairly attributable to those mortgages actually originated by SunTrust. These are difficult, complex questions, but they are not, at their core, questions of bankruptcy law. Indeed, they are those questions the Court would likely need to address in adjudicating the state-law issues of breach, indemnification, and damages on which RFC’s claims turn.

In any event, even if deep fa mi Iiarity with the Global Settlement beyond consulting the schedule of settlement values accompanying the Plan were required, the Settlement’s approval did not, as a matter of law, rely on expertise unique to bankruptcy court: the Bankruptcy Court was not required to comprehensively review the settlement, only to determine that it did not fall beneath the lowest level of reasonableness. See In re W.T. Grant Co., 699 F.2d 599, 613 (2d Cir. 1983) . Thus, the expertise of the Bankruptcy Court cannot justify keeping this proceeding there on judicial efficiency grounds.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: MILL STEEL COMPANY v. SOUTHEASTERN STUD & COMPONENT, INC. – Dist. Court, MD Alabama, 2015

THE MILL STEEL COMPANY, et al., Plaintiffs,



Case No. 2:14-CV-1023-WKW. (WO)

United States District Court, M.D. Alabama, Northern Division.

February 19, 2015.


W. KEITH WATKINS, Chief District Judge.

Upon consideration of Plaintiffs’ Motion to Lift Stay (Doc. # 54), and for good cause shown, it is ORDERED that the motion is GRANTED. On October 27, 2014, Defendant Southeastern Stud and Components, Inc. (“Southeastern Stud”) provided notice that it had filed a voluntary petition under Chapter 11 of the Bankruptcy Code. [1] (Doc. # 26.) When Southeastern Stud filed for bankruptcy — regardless of precipitating events — an automatic stay was triggered, prohibiting “the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy petition].” U.S.C. § 362(a)(1). In light of the automatic stay’s shield of Southeastern Stud’s estate, and upon the motion of Plaintiffs, a stay over the entirety of this litigation was ordered in the hopes that a controlled and efficient bankruptcy proceeding would preserve the debtor-estate while presenting all parties with an opportunity for judicial resolution of the competing claims. (Doc. # 52.)

As the bankruptcy proceeding has moved forward, however, Plaintiffs no longer wish to refrain from pursuing their claims against the non-debtor Defendants [2] and have requested that the stay be lifted as to all Defendants except Southeastern Stud. [3] Defendants counter with allegations of Plaintiffs’ bad faith and good engineering (alleging that Plaintiffs wish to “capitalize on the default which Mill Steel itself engineered.” (Doc. # 56, at 2.)) The cure for the ills of all parties (excluding the debtor in bankruptcy, Southeastern Stud) is litigation, which will proceed in this court. Because Mr. Whaley is a party, the court concludes that, at least on the information currently available, his presence in the litigation gives a potential avenue of relief as an equity owner of Southeastern Stud and most of the non-debtor Defendants for the alleged wrongful conduct of Plaintiffs.

Therefore, after thoroughly reviewing the Trustee Report submitted to the Bankruptcy Court on January 2, 2015, the arguments of the parties, and the record, it is apparent that the continuation of the present litigation is warranted as to the claims of Plaintiffs and all non-debtor Defendants. [4]

Accordingly, it is ORDERED that the stay imposed by Order dated November, 26, 2014, is LIFTED as to all parties, with the exception of Southeastern Stud & Components, Inc. It is further ORDERED, that Plaintiffs file a Third Amended Complaint on or before February 25, 2015, to reflect the current status of the litigation. Defendants are DIRECTED to answer, counterclaim, or otherwise respond to Plaintiffs’ Third Amended Complaint on or before March 9, 2015.

[1] The events that led to Southeastern Stud’s Chapter 11 bankruptcy petition remain fiercely contested.

[2] “Non-debtor Defendants” refers to all Defendants in this action who are not in bankruptcy. Of course, it is alleged that they are debtors to Plaintiffs.

[3] The stay was initially extended to encompass the non-debtor Defendants in light of this court’s authority to orderly and expeditiously manage its docket. See Equity Lifestyle Props. Inc. v. Fla. Mowing and Landscape Serv., Inc., 556 F.3d 1232, 1240 (11th Cir. 2009) .

[4] It is not likely the court would appoint Mr. Alexander, trustee in bankruptcy for Southeastern Stud, as receiver of non-debtor Defendants, should appointment of a receiver be appropriate. This is due to a potential conflict of interest in the event it is determined by the bankruptcy court that preferences may have been paid to some or all of the non-debtor Defendants, or allegations here or there that Mr. Whaley is the alter ego of one or more of all the entities.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: MERCHANTS AUTOMOTIVE GROUP, INC. v. ADVANTAGE OPCO, LLC – Dist. Court, D. New Hampshire, 2015

Merchants Automotive Group, Inc.


Advantage Opco, LLC.

Case 1:14-cv-00318-JD, Opinion No. 2015 DNH 029.

United States District Court, D. New Hampshire.

February 19, 2015.


JOSEPH A. DICLERICO, Jr., District Judge.

Merchants Automotive Group, Inc. (“Merchants”) brought suit in state court, seeking a declaratory judgment as to the obligations of Advantage Opco, LLC (“Advantage”) under an agreement for leasing vehicles to use in the rental car business. Advantage removed the case to this court and now moves to have the case transferred to the Southern District of Mississippi. Merchants objects to transfer.

Background [1]

Advantage operated a national rental car company, Advantage-Rent-A-Car, and was owned by Simply Wheelz, LLC. In April of 2013, Wheelz and Merchants signed the Master Lease Agreement for Merchants to lease vehicles with certain financing for Advantage-Rent-A-Car. A few months later, in November of 2013, Wheelz filed a voluntary petition for bankruptcy protection under Chapter 11 in the United States Bankruptcy Court for the Southern District of Mississippi, In re: Simply Wheelz LLC, d/b/a Advantage-Rent-A-Car, Case No. 13-03332-EE (Bankr. S.D. Miss.)

A week after filing the petition, Wheelz moved for permission to sell all of its assets. The bankruptcy court set a procedure for the sale, which included bidding and an auction. Catalyst Capital Group, Inc. (“Catalyst”), a private equity firm based in Canada, successfully bid to acquire certain assets from Wheelz. Catalyst and Wheelz entered into an asset purchase agreement (“APA”). The bankruptcy court held a hearing on Wheelz’s motion to sell its assets and reviewed the APA. On January 2, 2014, the bankruptcy court issued an order (“Sale Order”) that granted Wheelz’s motion to sell the designated assets and approved the APA. The parties appear to agree that, under the terms of the APA, the Master Lease Agreement between Wheelz and Merchants was not one of the assets purchased by Catalyst.

Wheelz closed the asset sale to Catalyst on April 30, 2014, and Catalyst designated Advantage as the purchaser of the assets. Merchants alleges that just before the closing of the asset sale, Wheelz leased approximately 3400 vehicles from Merchants. Advantage contends that Wheelz terminated the Master Lease on April 29, 2014, the day before closing the asset sale. After the closing, Advantage and Wheelz entered a transition services agreement (“TSA”) through which Wheelz allowed Advantage, for payment, to use certain assets that had not been purchased through the APA, which included the leased vehicles.

Advantage represents that Wheelz, Merchants, and Advantage engaged in negotiations before and after the sale closing to arrive at a lease arrangement, but the negotiations were unsuccessful. Advantage also represents that Wheelz has continued to make payments to Merchants for the leased vehicles.

Merchants brought suit in June of 2014, seeking a declaratory judgment that Advantage is the successor to Wheelz’s obligations under the Master Lease, that Advantage is the “Customer” as that term is defined and used in the Master Lease, and that Advantage is liable to Merchants as the Customer under the Master Lease. In response, Wheelz filed a motion in the bankruptcy proceeding titled: “Motion of Debtor for Entry of an Order Approving the Assumption and Assignment and Sale, Pursuant to Bankruptcy Code Sections 105(a), 363, and 365 and Bankruptcy Rules 2002, 6004, and 6006, of Certain Vehicle Leases of the Debtor with Merchants Automotive Group, Inc. and Granting Related Relief” (“Assignment Motion”). The Assignment Motion remains pending in the bankruptcy proceeding.


Advantage moves to transfer this case to the Southern District of Mississippi on grounds that the bankruptcy court in the Wheelz proceeding has exclusive jurisdiction over this case, that the automatic stay applies to this case, and that the Southern District of Mississippi would be a more convenient forum. Merchants objects to transfer and asserts that this court has jurisdiction, that the automatic stay does not apply to this case, and that transfer is not appropriate.

I. Jurisdiction

In its notice of removal, Advantage asserted that this court has subject matter jurisdiction under 28 U.S.C. § 1332. As the removing party, Advantage has the burden of showing that jurisdiction exists. Gross v. Sun Life Assurance Co., 734 F.3d 1, 7 (1st Cir. 2013) . Now, in support of its motion to transfer the case to the Southern District of Mississippi, Advantage has changed course and argues that this court lacks subject matter jurisdiction over the dispute. Advantage now asserts that the bankruptcy court has exclusive jurisdiction over the case based on its Sale Order and 28 U.S.C. § 1334. [2]

Section 1334 provides that “the district courts shall have original and exclusive jurisdiction of all cases under title 11″ and “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” § 1334(a) & (b). A case is “related to” a bankruptcy case if the case has “some potential effect on the bankruptcy estate.” In re Paolo, 619 F.3d 100, 102 n.2 (1st Cir. 2010) . In addition, “[t]he district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction — (1) of all property, wherever located, of the debtor as of the commencement of such case, and of property of the estate;. . . .” § 1334(e).

Merchants’s suit is not a case under title 11. Therefore, the bankruptcy court does not have exclusive jurisdiction under § 1334(a).

Advantage argues, however, that the Sale Order precludes Merchants’s claim in this case and that the bankruptcy court is the only court that can interpret the Sale Order. Advantage provides no developed argument and no citation to authority to show that this court is precluded from interpreting the Sale Order. In essence, Advantage is challenging the merits of Merchants’s claim, not the court’s jurisdiction to hear the case. To the extent Advantage argues that this case is related to the bankruptcy proceeding, within the meaning of § 1334(b), that circumstance would not divest this court of jurisdiction.

Advantage mentions in passing that § 1334(e) confers exclusive jurisdiction in the Southern District of Mississippi. In support, Advantage states only that Merchants’s claim “concerns the Master Agreement, or more accurately, the contractual provisions that survived the Debtor’s notice of termination (i.e., the Remaining Vehicle Leases), and hence the Debtor’s rights and obligations thereunder indisputably constitute property of its bankruptcy estate subject to the exclusive jurisdiction provisions of 28 U.S.C. 1334(e).” Advantage’s statement falls far short of a persuasive analysis of the jurisdictional significance of the Master Lease in the context of Merchants’s claim in this case. To the extent Advantage challenges the jurisdiction of this court based on § 1334(e), it may file a properly supported motion to that effect within the time allowed below.

The court is satisfied that subject matter jurisdiction exists under § 1332.

II. Automatic Stay

Advantage supports its motion for transfer, in part, on the ground that this case is subject to an automatic stay under § 362(a), arising from Wheelz’s bankruptcy proceeding. Advantage does not explain, however, by what means the case could be transferred if it were stayed. Instead, it appears, once stayed, the case would remain in this district until the stay was lifted. Although the automatic stay issue does not appear to support Advantage’s motion to transfer, the court must determine whether the case must be stayed or may proceed.

The filing of a bankruptcy petition may trigger automatic stay provisions in the Bankruptcy Code that bar actions against the debtor or actions to obtain or gain control over property of the estate. 11 U.S.C. § 362(a). “[T]he automatic stay creates `breathing room’ for debtors, at least temporarily. . . .” Soto-Rios v. Banco Popular de P.R., 662 F.3d 112, 116 (1st Cir. 2011) . Once imposed, the automatic stay continues until “the stay is lifted by the bankruptcy court or dissolved by operation of law.” In re Shamus Holdings, LLC, 642 F.3d 263, 265 (1st Cir. 2011) .

In support of its motion to transfer the case, Advantage states that Wheelz is a necessary party and the real party in interest in this case. Although Advantage cites no part of § 362(a) or any case law in support of that assertion, it appears Advantage may have intended to invoke an exception to § 362(a)(1). Advantage also relies on § 362(a)(3).

A. Section 362(a)(1)

By its terms, § 362(a)(1) applies to “action[s] or proceeding[s] against the debtor” and to actions “to recover a claim against the debtor. . . .” § 362(a)(1) (emphasis added); see Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 979 (1st Cir. 1995) ; In re Two Appeals Arising Out of San Juan Dupont Plaza Hotel Fire Litig., 994 F.2d 956, 969 (1st Cir. 1993) (“As a general rule, section 362(a)’s automatic stay provisions apply only to the debtor in bankruptcy.”). Wheelz, the bankruptcy debtor, is not a party in this case.

To the extent Advantage may have intended to argue that the stay applies because Wheelz is a necessary party under Federal Rule of Civil Procedure 19, that argument was not sufficiently developed to be addressed. See Coons v. Indus. Knife Co., Inc., 620 F.3d 38, 44 (1st Cir. 2010) ; Higgins v. New Balance Ath. Shoe, Inc., 194 F.3d 252, 260 (1st Cir. 1999) . In addition, Wheelz has not moved to intervene, and Advantage has not moved to join Wheelz as a party in this case.

Courts have recognized an exception to the general rule that § 362(a)(1) applies only to actions or proceedings against the debtor in rare and unusual circumstances when the debtor is not named but is the real party in interest. See, e.g., Kreisler v. Goldberg, 478 F.3d 209, 213 (4th Cir. 2007) ; In re Panther Mountain Land Dev., LLC, 686 F.3d 916, 922 (8th Cir. 2012) ; Reliant Energy Servs. v. Enron Canada Corp., 349 F.3d 816, 825 (5th Cir. 2003) . Advantage has fallen far short of showing that the exception would apply here.

B. Section 362(a)(3)

Advantage argues that an automatic stay under § 362(a)(3) applies because Merchants’s declaratory judgment claim would adversely affect Wheelz’s interests in the Master Lease, the APA, and the TSA and would violate an injunction issued by the Bankruptcy Court in the Sale Order. Merchants responds, arguing that its claim does not seek control over any property or interest of Wheelz and that the TSA and the Sale Order have no effect on this case.

Section 362(a)(3) provides that a stay shall issue against “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” “Property of the estate” is defined broadly to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1); In re The Ground Round, Inc., 482 F.3d 15, 17 (1st Cir. 2007) .

1. Contract Interests

Advantage contends that if Merchants were successful on its declaratory judgment claim, the result would invalidate Wheelz’s termination of the Master Lease which would have substantial financial consequences to Wheelz, would violate the terms of the APA, and would be contrary to the parties’ intent in the TSA. Advantage contends that, in effect, Merchants is attempting to force Wheelz to assume the Master Lease and assign it to Advantage. In response, Merchants states that it is not seeking to compel Wheelz to do anything but, instead, is seeking a declaratory judgment that Advantage, by its own conduct, has assumed Wheelz’s obligations under the Master Lease.

At this stage, Advantage’s theories about the possible harm to Wheelz’s contract interests are too hypothetical and speculative to support imposition of an automatic stay. See, e.g., In re Downey Fin. Corp., 428 B.R. 595, 610 (Bankr. D. Del. 2010) ; In re Medex Regional Labs., LLC, 314 B.R. 716, 722-23 (E.D. Tenn. 2004) .

Advantage also argues that if Merchants were successful on its claim in this case, the resulting collateral estoppel effect would force Wheelz to assume the Master Lease and then to assign the lease to Advantage. A forced assignment of the Master Lease, Advantage asserts, “is an act of control over property of the Debtor’s estate that contravenes the automatic stay.” In support, Advantage relies on In re Jefferson County, Ala., 491 B.R. 277 (Bankr. N.D. Ala. 2013) .

In Jefferson County, the bankruptcy court denied a motion to lift or modify the stay, under § 362(a), imposed in one of two related state court lawsuits that did not name the debtor as a party. 491 B.R. at 281 . The court noted that although the debtor was not named as a party in one of the two suits, the debtor was a party in the other related suit, which was proceeding before the same judge, with the same claims arising out of the same facts, and with coordinated discovery. Id. The court also found that the debtor’s and the non-debtor party’s interests were “inextricably interwoven” because of their indemnification agreements and claims for common law indemnification and contribution, because discovery in the case against the non-debtor would burden the debtor and hinder the adjustment of its debts, and because the preclusive effect against the debtor of findings in the suit against the non-debtor party would require the debtor’s participation. Id. at 293-94.

The unusual circumstances in Jefferson County are not present here. This case is the only case involving the issues between Merchants and Advantage pending in this court. [3] Advantage has not suggested that Advantage and Wheelz have indemnification or contribution agreements between them as the parties did in Jefferson County. Advantage has not shown that discovery in this case could burden Wheelz or that findings in this case would have an adverse preclusive effect on Wheelz in the bankruptcy case. As such, the circumstances and reasoning in Jefferson County are inapposite here.

2. Injunction

In its supplemental memorandum, Advantage asserts that the bankruptcy court issued an injunction in the Sale Order that “squarely prohibited Merchants or any other creditor from asserting successor liability claims against Advantage Opco.” Merchants responds that Advantage’s invocation of the Sale Order is a red herring.

“Every order granting an injunction and every restraining order must: (A) state the reasons why it issued; (B) state its terms specifically; and (C) describe in reasonable detail—and not by referring to the complaint or other document—the act or acts restrained or required.” Fed. R. Civ. P. 65(d). An injunction is not enforceable unless it meets the specificity required by Rule 65(d). Healey v. Spencer, 765 F.3d 65, 74 (1st Cir. 2014) .

Advantage did not cite any part of the Sale Order to show that an injunction issued or make any developed argument to show that an injunction exists and that it is enforceable against Merchants. Even if the Sale Order included an injunction, Advantage does not explain how an injunction would require the imposition of an automatic stay under § 362(a)(3). Therefore, Advantage has not shown that any injunction in the Sale Order requires an automatic stay in this case.

This case is not stayed under § 362(a).

III. Transfer

Advantage moves to transfer the case to the United States District Court for the Southern District of Mississippi, relying on both 28 U.S.C. § 1404 and § 1412. In support, Advantage asserts that the issues raised by Merchants here are similar to the issues raised by Wheelz in the Assignment Motion in the bankruptcy proceeding, that transfer would be convenient for the parties, and that transfer would promote efficient adjudication of the dispute. Merchants objects, contending that venue is proper in this district and that no grounds exist to transfer the case to the Southern District of Mississippi.

A. Section 1404

“For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district . . . where it might have been brought.” § 1404(a). “`Section 1404(a) is intended to place discretion in the district court to adjudicate motions for transfer according to individualized, case-by-case considerations of convenience and fairness.'” Astro-Med, Inc. v. Nihon Kohden Am., Inc., 591 F.3d 1, 12 (1st Cir. 2009) (quoting Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29 (1988) ) (further internal quotation marks omitted)). The pertinent considerations include the convenience of parties and witnesses, the availability of documentary evidence, the possibility of consolidation with another case, the relative costs, public interest in having a local controversy adjudicated in the local forum, where the underlying incidents occurred, and whether a forum selection clause exists. Coady v. Ashcraft & Gerel, 223 F.3d 1, 11 (1st Cir. 2000) ; CFTC v. Cromwell Fin. Servs., Inc., 2006 WL 435451, at2 (D.N.H. Feb. 22, 2006) (citing Moore’s Federal Practice § 111.13(1)(b)). “The burden of proof rests with the party seeking transfer; there is a strong presumption in favor of the plaintiff’s choice of forum.” Coady, 223 F.3d at 11 .

1. Venue

As a threshold issue, “[i]n order for the court to transfer under § 1404(a), it must be shown that the case could have been properly brought in the transferee forum.” CardiAO Valve Techs., Inc. v. Neovasc, Inc., ___ F. Supp. 3d ___, 2014 WL 5151320, at *1 (D. Mass. Oct. 3, 2014). “A civil action may be brought in — (1) a judicial district in which any defendant resides, if all defendants are residents of the State in which the district is located; (2) a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred . . .; or (3) if there is no district in which an action may otherwise be brought . . . any judicial district in which an action may otherwise be brought. . . .” 28 U.S.C. § 1391(b).

Advantage, the moving party with the burden of proof, did not address the question of whether Merchants could have properly brought this case in the Southern District of Mississippi. For that reason alone, the motion must be denied.

In addition, based on the parties’ allegations, it appears that Advantage is a Florida limited liability company and that its sole member is a Delaware corporation with its principal place of business in Florida. As such, Advantage does not appear to reside in Mississippi. There are no allegations that any of the incidents that gave rise to Merchants’s claim occurred in Mississippi. Therefore, it appears that venue would not be proper in Mississippi.

2. Considerations for Transfer

Even if Advantage had made the necessary showing for venue in Mississippi, the circumstances do not support transfer. Neither Merchants nor Advantage is located in Mississippi. Advantage has not shown that any witnesses or evidence is located in Mississippi or that underlying incidents occurred there. The dispute between Merchants and Advantage appears to have no local interest in Mississippi and there is no suggestion that costs wold be minimized by proceeding there.

Based on the current record, the case cannot be transferred to the Southern District of Mississippi in the absence of a showing that venue would be proper in that district.

B. Section 1412

Advantage argues in a perfunctory manner for transfer pursuant to § 1412. Section 1412 provides that “[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”

This suit was not brought under Title 11. “[A]uthorities are divided on whether Section 1412 applies to actions related to cases under Title 11 or only actions under Title 11 or arising in cases under Title 11.” New Eng. Wood Pellet, LLC v. New Eng. Pellet, LLC, 419 B.R. 133, 148 (D.N.H. 2009) . It is not necessary to decide whether this case could be construed as a case related to a case under Title 11 and whether § 1412 would apply because transfer would be based on the same analysis that was used for § 1404. Id. Advantage has not shown any plausible reason to transfer this case to the Southern District of Mississippi.


For the foregoing reasons, the defendant’s motion to transfer (document no. 9) is denied.

If Advantage intends to pursue exclusive jurisdiction under 28 U.S.C. § 1334(e), it shall file a motion with appropriate support and addressing the issue of remand under 28 U.S.C. § 1447(c) on or before March 5, 2015.


[1] The background facts are taken from Merchants’s complaint and the parties’ filings in support of and in opposition to the motion to transfer.

[2] If, as Advantage asserts, this court lacked subject matter jurisdiction at the time of removal, the case would be remanded to the New Hampshire state court from which it was removed, an outcome Advantage opposed. See 28 U.S.C. § 1447(c). Advantage has not shown that the jurisdictional argument supports transferring the case to the Southern District of Mississippi.

[3] Apparently, Advantage is asserting that the Assignment Motion makes the bankruptcy case and this case identical as in Jefferson County. The analogy is unpersuasive given the different jurisdictions, different claims, and different parties.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: IN RE TRUMP ENTERTAINMENT RESORTS, INC. – Bankr. Court, D. Delaware, 2015

In re: TRUMP ENTERTAINMENT RESORTS, INC., et al., Chapter 11, Debtors.

Case No. 14-12103 (KG) Jointly Administered.

United States Bankruptcy Court, D. Delaware.

February 20, 2015.


Re: Dkt. No. 111

KEVIN GROSS, Bankruptcy Judge.

The Court is deciding the motion of Trump AC Casino Marks, LLC (“Trump AC”) which seeks relief from the automatic stay pursuant to Section 362(d)(1) of the Bankruptcy Code [1] in order to proceed with an action in the Superior Court of New Jersey (the “State Court Action”). Trump AC is attempting to terminate the Trademark License Agreement (defined below) under which Trump Entertainment Resorts., Inc. and certain of its affiliates (collectively, the “Debtors”) are licensees. Because, for the reasons set forth below, under Section 365(c)(1) of the Bankruptcy Code the Debtors may not assume or assign the Trademark License Agreement absent Trump AC’s consent and Trump AC has withheld such consent, the Court finds that cause exists pursuant to Section 362(d)(1) to lift the automatic stay. See In re West Elecs. Inc., 852 F.2d 79, 82-84 (3d Cir. 1988) . Accordingly, the Court will grant Trump AC’s motion and lift the automatic stay in order to allow it to proceed with the State Court Action.


The Court has jurisdiction over this matter and the judicial authority to issue a final order pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b).


The limited facts which are material to the resolution of this matter are not the subject of genuine dispute. Prior to the Petition Date (defined below), Donald and Ivanka Trump (the “Trumps”) and the Debtors entered into the Second Amended and Restated Trademark License Agreement (the “Trademark License Agreement”), dated July 16, 2010. The Trumps subsequently assigned all of their rights and obligations thereunder to Trump AC. Under the terms of the Trademark License Agreement, the Trumps granted the Debtors a royalty-free license to use the Trumps’ names, likenesses, and other enumerated marks (the “Trump Marks”) in connection with the operation of three hotel casinos located in Atlantic City, New Jersey. The Trademark License Agreement provides for three categories of uses of the Trump Marks: (1) over 200 “current uses,” for which the Debtors need no prior approval and which cover a wide range of products and activities associated with the operation of a hotel casino; (2) “similar uses,” which are similar to the 200+ current uses and for which the Debtors need no prior approval but which are subject to Trump AC’s 10-day right to object; and (3) “proposed uses,” which are neither current nor similar uses and for which the Debtors must obtain prior approval.

The Trademark License Agreement is exclusive as to a defined, six-state territory [2] and perpetual, subject to the parties’ termination rights as defined therein. Under the terms of the Trademark License Agreement, the Debtors may terminate at any time on 30 days’ notice. The process by which Trump AC may terminate the Trademark License Agreement is somewhat more complex. In simple terms, the Trademark License Agreement requires that the Debtors use the Trump Marks in a manner consistent with a certain standard of quality and provides a mechanism for Trump AC to exercise quality control over the Debtors’ use of the Trump Marks. Under the terms of the Trademark License Agreement, upon Trump AC’s request, the parties must cooperate to appoint a neutral third party to conduct a review of the quality of the Debtors’ properties (a “Quality Assurance Review”). If a property fails a Quality Assurance Review and the Debtors fail to cure any deficiencies within the applicable cure period (or if the Debtors breach any other provision of the Trademark License Agreement), Trump AC has the right to initiate an action in the Superior Court of New Jersey which, setting aside certain complexities not relevant here, could ultimately result in the termination of the Trademark License Agreement.

Finally, the Trademark License Agreement provides with respect to “Assignments and Sublicenses” that “without the prior written consent of [Trump AC], in their sole and absolute discretion, none of the [Debtors] may assign, sublicense or pledge any of their rights or obligations under [the Trademark License Agreement]” subject to certain exceptions not applicable here. [3]

On July 16, 2010, the same day the Trumps and the Debtors executed the Trademark License Agreement, the Trumps, the Debtors, and the Debtors’ most significant secured creditor (the “First Lien Lender”) [4] entered into an agreement ancillary to the Trademark License Agreement styled “Consent and Agreement” (the “Consent Agreement”). As of the Petition Date, the Debtors owed the First Lien Lender approximately $292 million under the terms of a pre-petition credit facility (the “Pre-Petition Credit Agreement”). Amounts due under the Pre-Petition Credit Agreement are secured by a lien on substantially all of the Debtors’ assets and make up the vast majority of the Debtors’ pre-petition capital structure and total outstanding debt. As is relevant here, under the terms of the Consent Agreement, Trump AC consented to “transfers . . . from time to time of the rights of any one or more of the [Debtors] under the [Trademark License Agreement] upon and following the enforcement by the [First Lien Lender] of its rights under the [Pre-Petition Credit Agreement] (each, an “Enforcement Action”). . . .” (emphasis in original). Under the terms of the Consent Agreement, following an “Enforcement Action,” Trump AC “shall recognize” the First Lien Lender as a licensee under the Trademark License Agreement in the place of the Debtor or Debtors which were the subject of the Enforcement Action.

On August 5, 2014, Trump AC initiated the State Court Action alleging that the Debtors had failed a Quality Assurance Review and failed to timely cure any deficiencies, as well as other breaches of the Trademark License Agreement. Ultimately, in the State Court Action Trump AC seeks to terminate the Trademark License Agreement in accordance with the procedure contemplated therein. [5]

Stepping back, on September 9, 2014 (the “Petition Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code, thus staying the State Court Action. As of the Petition Date, the Debtors operated two of the three hotel casinos which were originally subject to the Trademark License Agreement: the Trump Plaza Hotel and Casino (the “Plaza”) and the Trump Taj Mahal Casino Resort (the “Taj Mahal”). [6] Shortly after the Petition Date, on September 16, 2014, the Debtors closed the Plaza. The Taj Mahal remains open for business and the Debtors have represented that they have no immediate plans for its closure. According to the Debtors, use of the Trump Marks is “ubiquitous” throughout the Taj Mahal and it would be costly and problematic to remove the Trump Marks. The Debtors’ proposed but not yet confirmed chapter 11 plan of reorganization (the “Plan”) does not contemplate any sort of significant asset transfer. Instead, the Plan contemplates cancellation of pre-existing equity, a nominal distribution to unsecured creditors, and a debt-for-equity swap of substantially all amounts owing under the Pre-Petition Credit Agreement. The Plan further contemplates assumption of the Trademark License Agreement.

On September 24, 2014, Trump AC filed its motion seeking relief from the automatic stay to proceed with the State Court Action (the “Stay Motion”). On October 16, 2014, the Debtors filed an objection the Stay Motion, to which the First Lien Lender filed a joinder. On December 11, 2014, the Court held a hearing on the Stay Motion (the “Stay Motion Hearing”) and thereafter took the matter under advisement.


A. Stay Relief Under Section 362(d)(1)

In the Stay Motion, Trump AC seeks relief from the automatic stay pursuant to Section 362(d)(1), which provides that the Court “shall” grant relief from the automatic stay “for cause.” “Except for lack of adequate protection, `cause’ is not defined by § 362(d)(1). Cause is a flexible concept and courts often conduct a fact intensive, case-by-case balancing test, examining the totality of the circumstances to determine whether sufficient cause exists to lift the stay.” In re The SCO Group, Inc., 395 B.R. 852, 856 (Bankr. D. Del. 2007) (citing cases). In a Section 362(d)(1) analysis, the Court would look to the three-pronged Rexene balancing test:

1. Whether any great prejudice to either the bankrupt estate or the debtor will result from continuation of the civil suit;

2. Whether the hardship to the non-bankrupt party by maintenance of the stay considerably outweighs the hardship to the debtor; and

3. The probability of the creditor prevailing on the merits.

Izzarelli v. Rexene Prods. Co. (In re Rexene Prods. Co.), 141 B.R. 574, 576 (Bankr. D. Del 1992) . As stated on the record of the Stay Motion Hearing, the Court finds that Trump AC is not entitled to relief from the automatic stay under a traditional Rexene analysis. The Court’s finding is based predominantly on Trump AC’s failure to demonstrate that any significant hardship would result from maintenance of the stay as well as the Court’s observation that continuation of the State Court Action would impose a substantial burden on the Debtors’ reorganizational efforts.

Cause under Section 362(d)(1), though, is a flexible concept and not confined solely to the Rexene factors. In addition to its Rexene-based arguments, Trump AC argues that cause exists for the Court to lift the automatic stay under the decision of the United States Court of Appeals for the Third Circuit in West Electronics, 852 F.2d at 82-84, because the Trademark License Agreement is not assignable absent Trump AC’s consent under applicable non-bankruptcy law and thus is not assumable or assignable by the Debtors under Section 365(c)(1) of the Bankruptcy Code. For the reasons that follow, the Court agrees.

B. Application of Section 365

Section 365(a) of the Bankruptcy Code provides that the Debtors, “subject to the court’s approval, may assume or reject any executory contract or unexpired lease.” While the term “executory contract” is not defined in the Bankruptcy Code, the Third Circuit has adopted the following definition: “[An executory contract is] a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” Sharon Steel Corp. v. Nat’l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989) (citing Countryman, Executory Contracts in Bankruptcy, Part 1, 57 MINN. L. REV. 439, 460 (1973)).

The Trademark License Agreement is an executory contract of the kind generally subject to assumption under Section 365(a), a point neither the Debtors nor Trump AC has disputed. Indeed, this Court has previously found patent and copyright licenses to be executory contracts within the meaning of Section 365. See In re Valley Media, Inc., 279 B.R. 105, 135 (Bankr. D. Del. 2002) ; In re Golden Books Entm’t, Inc., 269 B.R. 311, 314 (Bankr. D. Del. 2001) ; In re Access Beyond Techs., Inc., 237 B.R. 32, 42-45 (Bankr. D. Del. 1999) . The reasoning in those decisions with respect to whether an intellectual property license is an executory contract applies with equal force in the context of a trademark license.

The Debtors’ right to assume the Trademark License Agreement, however, is subject to the limitation set forth in Section 365(c)(1), which provides:

(c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if—

(1) (A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and

(B) such party does not consent to such assumption or assignment . . . .

The Section 365(c)(1) limitation on the assumption of executory contracts applies whenever the contract is “subject to a legal prohibition against assignment” to a third party and the non-debtor party to the contact does not consent to assignment. West Elecs., 852 F.2d at 83 . Ultimately, the Third Circuit concluded in West Electronics that where an executory contract is subject to the limitation on assumption set forth in Section 365(c)(1), the non-debtor party to the contract is entitled to relief from the automatic stay pursuant to Section 362(d)(1) in order to seek termination of the contract. Id. at 83-84. Accord Valley Media, 279 B.R. at 138 (“The remedy of the non-debtor party is a motion to lift the automatic stay in order to terminate the non-assumable contract.”).

It is important to note that Section 365(c)(1) limits a debtor in possession’s ability to assume an executory contract based on its ability to assign that executory contract to a third party and makes no reference to whether a debtor or debtor in possession actually intends to assign the executory contract to a third party. See In re Catapult Entm’t, Inc., 165 F.3d 747, 750 (9th Cir. 1999) . Thus, the plain language of Section 365(c)(1) establishes what courts have come to refer to as the “Hypothetical Test.” See, e.g., id. at 750; West Elecs., 852 F.2d at 83 . In other words, “a debtor in possession may not assume an executory contract over the nondebtor’s objection if applicable law would bar assignment to a hypothetical third party, even where the debtor in possession has no intention of assigning the contract in question to any such third party.” Catapult, 165 F.3d at 750 (emphasis added). The Third Circuit has adopted the Hypothetical Test. See West Elecs., 852 F.2d at 83 (“the relevant inquiry is not whether [applicable non-bankruptcy law] would preclude an assignment from . . . a debtor to . . . a debtor in possession, but whether it would foreclose an assignment by [a debtor] to [a third party]”).

It is also important to read Section 365(c)(1) in conjunction with Section 365(f)(1), which provides:

Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection (emphasis added).

Under Section 365(f)(1), a debtor may assign a contract notwithstanding any provision in the contract or applicable non-bankruptcy law which would prohibit such an assignment. Section 365(f)(1), though, is expressly subject to any alternative rule provided in Section 365(c). As set forth above, Section 365(c)(1) provides that a debtor may not assume or assign an executory contract if assignment is prohibited by applicable non-bankruptcy law, seemingly eviscerating the rule with respect to “applicable law” set forth in Section 365(f)(1). See Rieser v. The Dayton Country Club Co. (In re Magness), 972 F.2d 689, 698 (6th Cir. 1992) (Guy, J., concurring) (“section 365(c), the recognized exception to 365(f), appears at first to resuscitate in full the very anti-assignment `applicable law’ which 365(f) nullifies”); In re ANC Rental Corp., 277 B.R. 226, 235 (Bankr. D. Del. 2002) .

The United States Court of Appeals for the Ninth Circuit recognized the internal inconsistency of Section 365 in its Catapult decision and persuasively reconciled the conflict as follows:

The Sixth Circuit has credibly reconciled the warring provisions by noting that “each subsection recognizes an `applicable law’ of markedly different scope.” Subsection (f)(1) states the broad rule—a law that, as a general matter, “prohibits, restricts, or conditions the assignment” of executory contracts is trumped by the provisions of subsection (f)(1). Subsection (c)(1), however, states a carefully crafted exception to the broad rule—where applicable law does not merely recite a general ban on assignment, but instead more specifically “excuses a party . . . from accepting performance from or rendering performance to an entity” different from the one with which the party originally contracted, the applicable law prevails over subsection (f)(1). In other words, in determining whether an “applicable law” stands or falls under § 365(f)(1), a court must ask why the “applicable law” prohibits assignment.

Catapult, 165 F.3d at 752 (citations omitted). Accord City of Jamestown v. James Cable Partners, L.P. (James Cable Partners, L.P.), 27 F.3d 534, 538 (11th Cir. 1994); Magness, 972 F.2d at 695-96 ; ANC Rental, 277 B.R. at 235-36 . In line with the Ninth Circuit’s reasoning, the Court is persuaded that “for section 365(c)(1) to apply, the applicable law must specifically state that the contracting party is excused from accepting performance from a third party under circumstances where it is clear from the statute that the identity of the contracting party is crucial to the contract . . . .” ANC Rental, 277 B.R. at 236 .

C. Application to Trademarks

In applying the forgoing principles, the Court must first determine what the “applicable law” is in this instance. “The term `applicable law’ means any law applicable to a contract, other than bankruptcy law . . . .” In re XMH Corp., 647 F.3d 690, 695 (7th Cir. 2011) . Since the Trademark License Agreement is just that, a trademark license agreement, it is clear that the applicable law here is federal trademark law. [7] Based on the Court’s research and cases cited by Trump AC, it appears that the substantial weight of authority holds that under federal trademark law, trademark licenses are not assignable in the absence of some express authorization from the licensor, such as a clause in the license agreement itself. See, e.g., XMH, 647 F.3d at 695 (“as far as we’ve been able to determine, the universal rule is that trademark licenses are not assignable in the absence of a clause expressly authorizing assignment”); Miller v. Glenn Miller Prods., Inc., 454 F.3d 975, 988, 992-93 (9th Cir. 2006) ; N.C.P. Mktg. Group, Inc. v. Billy Blanks (In re N.C.P. Mktg. Group, Inc.), 337 B.R. 230, 235-37 (D. Nev. 2005) ; 3 McCarthy on Trademarks § 18:43 (4th ed. 2010).

However, as recognized in the Ninth Circuit’s Catapult decision, it is not sufficient to simply recognize a general ban on contract assignment under the applicable non-bankruptcy law, the Court must understand why the applicable non-bankruptcy law bans assignment. As explained by the Seventh Circuit in XMH:

Often the owner of a trademark will find that the most efficient way to exploit it is to license the production of the trademarked good to another company, which may have lower costs of production or other advantages over the trademark’s owner. Normally the owner who does this will not want the licensee to be allowed to assign the license (that is, sublicense the trademark) without the owner’s consent, because while the owner will have picked his licensee because of confidence that he will not degrade the quality of the trademarked product he can have no similar assurance with respect to some unknown future sublicensee.

647 F.3d at 696 . “The purpose of a trademark, after all, is to identify a good or service to the consumer, and identity implies consistency and a correlative duty to make sure that the good or service really is of consistent quality, i.e., really is the same good or service.” Id. at 695. Accord 4 McCarthy on Trademarks § 25:33 (4th ed. 2010) (“Since the licensor-trademark owner has the duty to control the quality of goods sold under its mark, it must have the right to pass upon the abilities of new potential licensees.”).

In other words, federal trademark law generally bans assignment of trademark licenses absent the licensor’s consent because, in order to ensure that all products bearing its trademark are of uniform quality, the identity of the licensee is crucially important to the licensor. But this is only a default rule, which the parties to a license agreement are free to contract around. See XMH, 647 F.3d at 696 . Nothing in the Trademark License Agreement indicates that the parties intended to contract around the default rule. In fact, the terms of the Trademark License Agreement provide just the opposite. Subject to certain narrow exceptions not applicable here, the Trademark License Agreement expressly prohibits the Debtors from sublicensing or assigning their rights thereunder absent Trump AC’s consent. While such a provision is unenforceable in bankruptcy pursuant to Section 365(f)(1), it certainly underscores that the parties did not intend, at least at the time the Trademark License Agreement was drafted, to alter the default rule of non-assignability.

The Debtors argue, however, that even if the default rule is that the Trademark License Agreement is not assignable absent Trump AC’s consent, under the terms of the Consent Agreement, Trump AC has provided the necessary consent. In the Consent Agreement, Trump AC consented to transfer of the license agreement to the First Lien Lender “upon and following” the enforcement of its rights under the Pre-Petition Credit Agreement. The Consent Agreement applies to only a narrow class of potential assignees, and only after the First Lien Lender initiates an “Enforcement Action.” It is clear to the Court that in this context “Enforcement Action” refers to the First Lien Lender’s state law rights to pursue its collateral under the terms of the Pre-Petition Credit Agreement. The First Lien Lender has initiated no such action. Bankruptcy is a collective proceeding initiated by the Debtors and while the First Lien Lender has taken steps to preserve its rights with respect to the Pre-Petition Credit Agreement, those actions to not rise to the level of an Enforcement Action as contemplated by the Consent Agreement.

While it appears that Trump AC viewed the First Lien Lender as a suitable licensee in the event of, for example, a state-law foreclosure, that does not change the facts that (1) the First Lien Lender has commenced no such action and (2) under the Consent Agreement, consent is only effective upon the commencement of such an action. Consent with respect to an isolated assignee, which is effective only upon the occurrence of some future event which, under the terms of the Plan, is all but certain to never occur is simply not enough to override the default rule of non-assignability applicable to trademark licenses.

Accordingly, the Court finds that under applicable non-bankruptcy law the Trademark License Agreement is not assignable. The Court further finds that federal trademark law prohibits assignment of trademark licenses under circumstances where it is clear that the identity of the licensee is crucial to the agreement. Thus, the requirement of Section 365(c)(1)(A) is satisfied.

As for Section 365(c)(1)(B), Trump AC clearly does not consent to the assumption or assignment of the Trademark License Agreement, as is evident from its filing of the Stay Motion. The Debtors argue again that Trump AC has provided the necessary consent under the terms of the Consent Agreement. First, as set forth above, under the terms of the Consent Agreement, consent is not effective unless and until the First Lien Lender initiates an Enforcement Action, which it has not. Second, the Consent Agreement deals with consent to assignment in the context of a state law enforcement action and not with consent to assumption and assignment under Section 365, which is a technical process specific to bankruptcy. And finally, even if the consent set forth in the Consent Agreement was effective, it would merely operate to override the default rule with respect to the non-assignability of trademark licenses thus making the Trademark License Agreement assignable under applicable law and obviating the need to apply Section 365(c)(1) at all.

For these reasons, the Court finds that under the Section 365(c)(1) Hypothetical Test adopted by the Third Circuit, the Debtors are prohibited from assuming or assigning the Trademark License Agreement, despite the fact that the Debtors have no immediate plans to assign the agreement to a third party. Consequently, under the Third Circuit’s West Electronics decision, Trump AC is entitled to relief from the automatic stay pursuant to Section 362(d)(1).

D. Distinguishing Other Cases

Seeking a different result, the Debtors direct the Court’s attention to a number of decisions which it argues support its position that the Trademark License Agreement is assumable notwithstanding Section 365(c)(1). The Court finds each of the decisions cited by the Debtors to be either unpersuasive or factually distinguishable.

First, the Debtors cite this Court’s bench ruling in Global Home Products, issued August 14, 2006, in which the Court found that an exclusive trademark license which “did not restrict assignment to any particular entity” was assignable. The licensor sought a stay pending appeal of the Court’s bench ruling, which the United States District Court for the District of Delaware denied, finding that “the Bankruptcy Court correctly concluded that the [trademark license] was not a personal services contract and was freely assignable as an exclusive license that places no restriction on assignments.” Regal Ware, Inc. v. Global Home Prods., LLC (In re Global Home Prods., LLC), No. 06-508, 2006 WL 2381918, at *1 (D. Del. Aug 17, 2006) (emphasis added). At first blush, the Global Home Products decision appears to support the Debtors’ position.

Upon further inspection of the trademark license agreement at issue in Global Home Products, though, the Court finds the decision to be distinguishable. The Global Home Products license agreement granted the licensee an unfettered right to sublicense its rights under the agreement to any third party. The Global Home Products license agreement further granted the licensee a broad right to assign its rights thereunder to any third party in connection with the transfer of substantially all of the licensee’s assets “by merger, consolidation, sale of stock or assets or otherwise.” In other words, the parties to the Global Home Products license agreement contracted around the default rule of non-assignability applicable to trademark license agreements. Thus, the Court had no occasion to apply Section 365(c)(1) in Global Home Products since under applicable law, i.e. the terms of the agreement itself, the license was assignable. It would perhaps have been more accurate for the Court and the District Court to say that the Global Home Products license agreement “expressly allows assignments” as opposed to “places no restriction on assignments,” but the breadth of the sublicensing and assignment clause was clearly important to both courts. The Trademark License Agreement does not contain a similar provision and therefore the Court does not find Section 365(c)(1) to be inapplicable here.

The Debtors next point to the Rooster decision. See In re Rooster, Inc., 100 B.R. 228 (Bankr. E.D. Pa. 1989) . The license agreement at issue in Rooster governed the use of the Bill Blass name and trademark in connection with the production of neckties. Id. at 229. Under the terms of the agreement, the licensee had limited authority to select patterns for the neckties as an initial matter, but each necktie was examined and approved by the licensor prior to production or distribution. Id. at 229-30. In practice, the licensee was subject to considerable supervision and control by the licensor; indeed, the licensor reviewed all proposed neckties and expressly approved only those which were acceptable to licensor. Id. at 230. The Rooster court did not examine whether the license was non-assignable as a matter of trademark law, but instead examined whether the license was non-assignable as a personal services contract under state law. Id. at 231-35. The Rooster court ultimately found that, due to the extreme level of oversight exercised by the licensor, the license agreement did not “bespeak of any personal ability, integrity, credit or responsibility” and was thus not a personal services contract nor subject to the limitation on assumption set forth in Section 365(c)(1).

First, Rooster was decided in 1989, while the rule that trademark licenses are not assignable absent the consent of the licensor appears to have gained traction in the case law in the mid-1990’s. See Miller, 454 F.3d at 988 (citing cases). Second, the licensee in Rooster was subject to a level of oversight by the licensor which is not present here. And finally, the Court is simply not persuaded that the Rooster court conducted the proper analysis. The term “applicable law” as used in Section 365(c)(1) clearly encompasses federal trademark law. See XMH, 647 F.3d at 695 . The Court finds the general prohibition against assignment in trademark law to be well reasoned and within the scope of applicable law as contemplated by Section 365(c)(1).

The remaining cases cited by the Debtors in support of their position deal with either patent or copyright license agreements and are thus distinguishable. See Catapult, 165 F.3d at 750-51 (non-exclusive patent license); Golden Books, 269 B.R. at 316-19 (exclusive copyright license). Non-exclusive patent and copyright licenses create only personal and not property rights in the licensed intellectual property and so are not assignable. See Golden Books, 269 B.R. at 314-16 ; 4 McCarthy on Trademarks § 25:33 (4th ed. 2010) (“The rule as to nonexclusive licenses of patents and copyrights is the same: the license is a personal right and cannot be transferred by the licensee to another without the permission of the licensor.”). However, at least one court in this district has found an exclusive copyright license to be assignable. Golden Books, 269 B.R. at 318-19 . The Debtors urge the Court to apply such a rule to trademark licenses, distinguishing between exclusive and non-exclusive, and ask the Court to find that the Trademark License Agreement is assignable as an exclusive trademark license.

The distinction between exclusive and non-exclusive licenses is simply not relevant in the trademark context. The general prohibition against the assignment of trademark licenses absent the licensor’s consent is equally applicable to both exclusive and non-exclusive trademark licenses. A trademark licensor would have the same concerns with respect to the identity of the licensee and the quality of products bearing its trademark whether the trademark license is exclusive or non-exclusive. Thus, a rule distinguishing between exclusive and non-exclusive licenses for purposes of assignability makes little sense in the trademark context. Further, trademarks, copyrights, and patents are governed by different sets of laws and influenced by different policy concerns. “[W]hile the basic policies underlying copyright and patent protection are to encourage creative authorship and invention, the purposes of trademark protection are to protect the public’s expectation regarding the source and quality of goods.” Miller, 454 F.3d at 938. The Catapult and Golden Books decisions, while persuasive so far as they apply, simply address different circumstances than are before the Court here.


For the reasons set forth above, the Court finds that the Trademark License Agreement is not assignable under applicable non-bankruptcy law and is thus not assumable or assignable under Section 365(c)(1). Accordingly, under the Third Circuit’s West Electronics decision, Trump AC is entitled to relief from the automatic stay pursuant to Section 362(d)(1) in order to proceed with the State Court Action. The Court will enter a separate order. [8]

[1] 11 U.S.C. §§ 101 et seq.

[2] The states are New York, New Jersey, Connecticut, Pennsylvania, Maryland, and Delaware.

[3] The foregoing is a simplified summary of certain core terms of the Trademark License Agreement which are relevant herein. As the Court’s decision does not turn on the minutiae of the Trademark License Agreement, a more complete recitation of its terms is not necessary.

[4] The First Lien Lender is actually three lenders under common control: Icahn Partners LP, Icahn Partners Master Fund LP, and IEH Investments I LLC.

[5] As the Court’s decision does not turn on the merits of the State Court Action, a more detailed summary of Trump AC’s allegations is unnecessary. The Court notes that the Debtors refute the allegations set forth in the State Court Action complaint.

[6] The Debtors sold the third hotel casino, the Trump Marina Hotel Casino, in 2011.


[8] With respect to the assumption of the Trademark License Agreement, the Plan provides as follows: “if the Court determines that the Trademark License Agreement cannot be assumed by the Debtors or Reorganized Debtors without the consent of [Trump AC], then the automatic stay is hereby modified to permit the [First Lien Lender] to, and on the Effective Date the [First Lien Lender] shall and shall be deemed to, enforce its rights under the [Pre-Petition Credit Agreement] and designate the Reorganized Debtors as transferees of each of the Casino Properties (as defined in the Trademark License Agreement) as Licensee Entities (as defined in the Trademark License Agreement) under the Trademark License Agreement” (the “Assumption Provision”). Plan § 10.5. In essence, the Assumption Provision provides that if the Court determines that under the facts currently before it the Trademark License Agreement is not assumable, the Debtors will simply change the facts to make it assumable. While not addressed in the Stay Motion or at the Stay Motion Hearing, the Court is aware of the Assumption Provision and will address any issues related thereto at the Plan confirmation hearing.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: IN RE SERVO CORPORATION OF AMERICA, INC. – Bankr. Court, ED New York, 2015

In re: Servo Corporation of America, Inc., Chapter 7, Debtor.

Allan B. Mendelsohn, as Chapter 7 Trustee of the Estate of Servo Corporation of America, Inc., Plaintiff,


Stephen A. Barre and Charles S. Holmes, Defendants.

Case No. 12-76993-ast, Adv. Pro. No. 14-08048-ast.

United States Bankruptcy Court, E.D. New York.

February 20, 2015.


ALAN S. TRUST, Bankruptcy Judge.

Background and Procedural History

On March 10, 2014, the plaintiff, Allan B. Mendelsohn, as Chapter 7 Trustee (the “Plaintiff” or “Trustee”) of the estate of Servo Corporation of America, Inc. (“Debtor”), commenced the above-captioned adversary proceeding against the defendants, Stephen A. Barre (“Barre”) and Charles S. Holmes (“Holmes” and collectively, the “Defendants”), by the filing of a complaint (the “Complaint”).

In the Complaint, the Plaintiff alleged six causes of action against Barre, Debtor’s purported 50% shareholder and sole director, seeking to avoid and recover transfers of the Debtor’s assets pursuant to 11 U.S.C. §§ 105, 502(d), 510, 541, 542, 544(b), 547, 549, 550 and 551, the New York State Business Corporation Law §§ 510, 513, 520, 713, 714, 715, 717, 719 and 720, the Delaware General Corporation Law §§ 160, 170, 173 and 174, and Rules 6009 and 7001 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”). Plaintiff also asserted one cause of action against Holmes, Debtor’s other purported 50% shareholder, for the same violations of the provisions of the New York State Business Corporation Law that were asserted against Barre.

On April 28, 2014, Holmes filed an answer to the Complaint. [dkt item 4]

On May 21, 2014, Barre filed an answer to the Complaint in which he asserted a demand for a trial by jury. [dkt item 9]

On July 28, 2014, the parties filed a joint discovery control plan (the “JDCP”). [dkt item 15]

On September 26, 2014, the Court issued an Adversary Pre-trial Scheduling Order (the “Pre-trial Order”). [dkt item 18] Consistent with the parties’ JDCP, the Pre-trial Order set a deadline for all fact discovery to conclude by November 28, 2014, and scheduled a pre-trial conference for December 2, 2014, at 2:00 p.m.

On October 6, 2014, Barre withdrew his demand for a jury trial. [dkt item 21]

On December 2, 2014, the Court held a pre-trial conference at which all of the parties appeared. Based upon Barre’s withdrawal of his jury demand and for the reasons more fully stated on the record of the conference, the Court directed the parties to file an amended JDCP by December 16, 2014.

On December 9, 2014, the parties filed an amended JDCP in which, among other things, the parties agreed to a fact discovery cut-off date of February 13, 2015, a dispositive motion deadline of February 27, 2015, and a trial date after March 30, 2015 (the “Amended JDCP”). [dkt item 24]

On December 22, 2014, consistent with the Amended JDCP, the Court issued an amended Adversary Pre-trial Scheduling Order (the “Amended Pre-trial Order”). [dkt item 26] The Amended Pre-trial Order set a deadline for all fact discovery to conclude by February 13, 2015, for dispositive motions to be filed by March 13, and scheduled a final pre-trial conference for February 3, at 2:00 p.m. The Amended Pre-trial Order set May 12 and May 13 as the trial dates, and allocated four hours of trial time to Plaintiff and three hours for each Defendant.

On February 3, the Court held a final pre-trial conference. Plaintiff and Holmes each appeared by their counsel; Barre did not appear. Plaintiff announced that Barre had agreed to consent to the entry of a judgment in Plaintiff’s favor. Plaintiff then made an oral application to extend the February 13 discovery deadline by two weeks so that he could proceed with certain depositions scheduled for February 25 and 26. Holmes objected. At the conclusion of the conference, the Court directed Plaintiff to file a letter by February 5 outlining his reasons for seeking an extension. Holmes was given until February 10 to file a response, after which the Court would take the matter on submission.

On February 5, Plaintiff filed a letter requesting a two-week extension of the fact discovery deadline so that he could depose two former officers and a former board member of the Debtor on February 25 and 26 (the “Extension Request”). [dkt item 27] Plaintiff asserts that cause exists to extend the deadline for the following reasons: (1) Plaintiff has previously consented to Holmes’ numerous requests for extensions of time, but Holmes has refused to extend the same professional courtesy; (2) Holmes delayed in responding to document demands for several months (from August 2014 to October 2014); (3) Holmes has not yet reviewed and returned his deposition transcript, despite Holmes having been served with the transcript on November 14, 2014, and notwithstanding Holmes’ obligation under Rule 30(e) of the Federal Rules of Civil Procedure (“Rules”) to review and return the transcript within thirty days; (4) the Trustee is not seeking an adjournment of the trial date and has consented to a corresponding extension of the time to file dispositive motions, such that an extension of the discovery deadline would not prejudice Holmes; and (5) the Trustee believes that the prospective deponents have personal knowledge of the claims asserted against Holmes and may be essential to the Trustee’s trial preparations. Plaintiff also advised the Court that he had engaged in settlement negotiations with Holmes but that those negotiations did not result in a settlement. [1]

On February 9, Holmes filed an objection to Plaintiff’s Extension Request. [dkt item 29] Holmes contends that the extension is not a matter of extending a professional courtesy to complete outstanding discovery but rather a “last-minute request” which “seems to be the Trustee’s retribution for Mr. Holmes’ refusal to pay an exorbitant unreasonable settlement amount.” Holmes further contends, inter alia, that he has indisputably demonstrated to Plaintiff that he should prevail in the litigation, and that Plaintiff’s delay in conducting discovery is a result of Plaintiff’s litigation strategy to negotiate with and settle the claims against Barre rather than pursue discovery in earnest, a choice which should not alter the Court’s schedule. In addition, Holmes states that he was contacted by one of the prospective deponents, who would be unavailable to appear for a deposition until the week of March 9. Holmes does not address his alleged failure to timely respond to Plaintiff’s document requests or to review and return his deposition transcript.

On February 10, Plaintiff filed a reply, in which he states that he was unaware of the deponent’s scheduling conflict and would be willing to reschedule his examination to a later date. [dkt item 30] Attached to the reply is a proposed further amended pre-trial scheduling order that would extend fact discovery for a month beyond the previous discovery cut-off, until March 16, and extend the dispositive motion deadline to March 31. [2]


Rule 16(b)(1), as incorporated by Bankruptcy Rule 7016, mandates that a federal court issue a pre-trial scheduling to control the proceedings before it. Rule 16(b)(3) provides that a scheduling order “must limit the time to join other parties, amend the pleadings, complete discovery, and file motions.” FED. R. CIV. P. 16(b)(3)

Once the court has issued a scheduling order, Rule 16 requires that the party seeking to modify the pretrial schedule demonstrate “good cause” and obtain the court’s consent to the modification. FED. R. CIV. P. 16(b)(4). “Whether good cause exists turns on the diligence of the moving party.” Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009) (internal quotation marks and citations omitted). Stated differently, the moving party must demonstrate that “the deadline cannot reasonably be met despite the diligence of the party seeking the extension.” Parker v. Columbia Pictures Indus., 204 F.3d 326, 340 (2d Cir. 2000) . Moreover, if the moving party has had a sufficient opportunity to obtain the evidence sought during the discovery period, an extension should not be granted. Wingates, LLC v. Commonwealth Ins. Co. of Am., 21 F. Supp. 3d 206, 215 (E.D.N.Y. 2014) (collecting cases). The court may also consider other relevant factors, including whether the nonmoving party will suffer prejudice by the modification. See Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 244 (2d Cir. 2007) .

Here, the Court finds that Plaintiff has established good cause for a two-week extension of the February 13 discovery deadline set out in the Amended Pre-Trial Order. Holmes did delay in producing documents and in reviewing and returning his deposition transcript. Although Plaintiff has not specifically demonstrated how these delays precluded him from conducting the depositions he now seeks within the time agreed by the parties and ordered by the Court, a two-week extension of the discovery deadline and a corresponding extension of the dispositive motion deadline would not be prejudicial to Holmes or disruptive to the Court’s oversight of this adversary; however, any further extensions would be.

Bankruptcy Rule 7056 provides that, as a general rule, summary judgment motions should be filed at least 30 days before the initial date set for trial:

Rule 56 F.R.Civ.P. applies in adversary proceedings, except that any motion for summary judgment must be made at least 30 days before the initial date set for an evidentiary hearing on any issue for which summary judgment is sought, unless a different time is set by local rule or the court orders otherwise.

FED. R. BANKR. P. 7056. The initial deadline for dispositive motions set by this Court was 60 days before the trial. [3] With only the sole claim now remaining against Holmes, dispositive motions in this case should be filed no later than 45 days before trial, so as to allow the Court adequate time to make a meaningful review of such a motion(s) and any response(s) thereto. Because a response would not be due until 21 days after filing and service of the Motion, further truncating the motion deadline would unduly shorten this Court’s review time while it is otherwise preparing for the trial. [4] Thus, with trial set for May 12, dispositive motions should be filed by March 27.

Therefore, while Plaintiff has established good cause for a two (2) week extension of time to conduct depositions, and for either side to file dispositive motions, good cause has not been demonstrated to further extend either period, and to do so would be disruptive to this Court’s management of this adversary proceeding.

Based thereon, it is hereby

ORDERED, that pursuant to Rule 16(b)(4) the Court finds good cause for and consents to a two week extension of the deadlines to conduct fact discovery and to file dispositive motions; and it is further

ORDERED, that fact discovery shall conclude on or before February 27, 2015 and it is further

ORDERED, that any dispositive motions must be filed on or before March 27, 2015 or the relief sought in such motions shall be deemed to have been waived; and it is further

ORDERED, that, because Barre is no longer a defendant in this adversary proceeding, the trial date and time limits shall be modified as follows:

Trial in the above matter is scheduled for May 12, 2015 at 9:30 a.m.; Plaintiff will be given three (3) hours and Holmes will be given three (3) hours to present all argument and evidence. The Plaintiff may reserve a portion of this time for rebuttal; and it is further

ORDERED, that all other deadlines set forth in the Court’s Amended Pre-trial Order shall remain in effect.

[1] On February 9, Plaintiff filed a proposed stipulation between Plaintiff and Barre in which Barre consented to entry of judgment against him in the sum of $396,027.01, the amount alleged in the Complaint. [dkt item 28]

[2] On February 11 and 12, 2015, the Court approved the stipulation between Plaintiff and Barre and entered judgment in Plaintiff’s favor. [dkt items 31, 32]

[3] As part of its case management practices, this Court generally requires dispositive motions to be filed no less than 60 days before trial.

[4] The undersigned’s published procedures provide that a response to a summary judgment motion shall be due twenty-one (21) days after the date of filing plus any extension of time pursuant to Bankruptcy Rule 9006 or E.D.N.Y. Local Bankruptcy Rule 9006-1. See http://www.nyeb.uscourts.gov/judge-trusts-procedures.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: IN RE SCH CORP. – Court of Appeals, 3rd Circuit, 2015

In re: SCH CORP., et al., Debtors.



No. 14-2888.

United States Court of Appeals, Third Circuit.

Argued December 9, 2014.
Filed: February 24, 2015.

Irv Ackelsberg, Esq., (Argued), Howard I. Langer, Esq., Langer, Grogan & Diver, 1717, Arch Street, Suite 4130, The Bell Atlantic Tower, Philadelphia, PA 19103, Christopher D. Loizides, Esq., Loizides, 1225, King Street, Suite 800, Wilmington, DE 19801, Counsel for Appellant.

Thomas H. Kovach, Esq., Anthony M. Saccullo, Esq., A.M. Saccullo Legal, 27, Crimson King Drive, Bear, DE 19701, John D. McLaughlin, Jr., Esq., (Argued), Ciardi, Ciardi & Astin, 1204 North King Street, Wilmington, DE 19801, Counsel for Appellee




COWEN, Circuit Judge.

For the second time, this Court must address an appeal filed by the “CFI Claimants” with respect to post-confirmation bankruptcy proceedings arising out of the Chapter 11 bankruptcy of SCH Corp., American Corrective Counseling Services, Inc., and ACCS Corp. (“Debtors”). The District Court affirmed the order of the Bankruptcy Court granting the motion filed by Appellee Carl Singley, the Debtors’ disbursing agent, litigation designee, and responsible officer (“Responsible Officer”), to approve the settlement he reached with the plan funder, National Corrective Group, Inc. (“NCG”), pursuant to Federal Rule of Bankruptcy Procedure 9019. We determine that this purported settlement really constituted a plan modification governed by 11 U.S.C. § 1127. Accordingly, we will vacate the District Court’s order and remand with instructions for the District Court to vacate the Bankruptcy Court’s order and to direct the Bankruptcy Court to consider the purported settlement as a request for a plan modification pursuant to § 1127. [1]


The Debtors were in the debt collection business when they filed for Chapter 11 bankruptcy in the District of Delaware in January 2009. Previously, class action proceedings were filed against the Debtors in California, Florida, Indiana, and Pennsylvania, alleging, inter alia, violations of the Fair Debt Collection Practices Act (“FDCPA”). The plaintiffs in the class action cases filed in the Northern District of California, the Middle District of Florida, and the Northern District of Indiana shared a common legal team (“CFI Counsel”). These “CFI Claimants” constituted the largest group of unsecured creditors in the bankruptcy cases.

On February 10, 2009, the Bankruptcy Court approved the Debtors’ motion to conduct an auction for the sale of their operating assets. The Debtors then filed a motion to approve the sale of substantially all of their assets to Levine Leichtman Capital Partners III, L.P. (“LLCP”), an investment firm and the Debtors’ largest secured creditor. The CFI Claimants objected and moved to dismiss the bankruptcy cases. On March 31, 2009, the Bankruptcy Court denied the CFI Claimants’ motion to dismiss and authorized the transfer of the Debtors’ assets to NCG. NCG is a subsidiary of LLCP. The sale was consummated on April 11, 2009.

After the CFI Claimants rejected the initial proposed plan of liquidation because it included third-party releases that would have barred claims against LLCP and NCG, LLCP filed a proposed amended plan. With some changes, this revised plan was actively supported by the CFI Claimants. The plan was confirmed by the Bankruptcy Court in a November 2, 2009 order. LLCP served as the plan proponent and sponsor, while NCG functioned as the plan funder. NCG agreed to pay up to $200,000 per year for five years—with the first payment to be made in April 2010 and the final payment due in April 2014. However, these payments were subject to offsets for unpaid professional fees and up to $500,000 for “Post-Sale Losses” incurred by LLCP or NCG in defending against future consumer lawsuits. The Bankruptcy Court approved Singley’s appointment as the Responsible Officer. It also expressly retained jurisdiction to administer and interpret the plan’s provisions, modify any provisions of the plan to the extent permitted by the Bankruptcy Code, and enter such orders as may be necessary or appropriate in furtherance of the successful implementation of the plan.

CFI Counsel filed a lawsuit in the Northern District of California against NCG (which was now operating the Debtors’ debt collection business) and LLCP, alleging, inter alia, violations of the FDCPA. CFI Counsel also assisted in a class action lawsuit filed in the Middle District of Pennsylvania against NCG and LLCP. “To their dismay, based on their dual representation of the CFI Claimants and the plaintiffs in the new California litigation, NCG moved to disqualify CFI Counsel in both the pre- and post-bankruptcy litigation in that State. The motions in both cases were granted.” In re SCH Corp., 569 F. App’x 119, 120 (3d Cir. 2014). The Ninth Circuit also denied CFI Counsel’s petition for a writ of mandamus. CFI Counsel withdrew from both the California and Pennsylvania proceedings. A CFI Class Claimant filed a class action malpractice suit in the California state courts alleging conflicts of interest against several members of the CFI legal team and their law firms, and the Responsible Officer commenced a similar adversary action against CFI Counsel who filed the post-bankruptcy California case against NCG and LLCP (as well as their clients). The Bankruptcy Court subsequently dismissed this adversary proceeding.

NCG asserted its offset rights with respect to the annual Post-Sale Payments, and, therefore, very little, if any, funds have been distributed to unsecured creditors under the confirmed plan. In particular, it claimed offsets for litigation expenses reimbursed by insurance. The CFI Claimants moved to dismiss the bankruptcy cases for lack of good faith or, in the alternative, to enforce the terms of the confirmed plan. The Responsible Officer filed a motion to approve a settlement he reached with NCG to resolve the funding dispute. Under this proposed settlement, NCG’s payment obligation for the period ending in April 2014 was fixed at $233,631. NCG also agreed to make three additional annual payments of up to $100,000 in 2015, 2016, and 2017. Although NCG waived its rights to take offsets for any expenses that may or have been reimbursed through insurance coverage or to apply historic offset rights (i.e., those arising before the effective date of the settlement) against the future payments, these future payments were still subject to offsets for future litigation expenses “provided, however, that such Post-Sale Losses shall not reduce the annual payment on the sixth, seventh and eighth anniversaries beyond a $25,000 `floor.'” (A212 (emphasis omitted).) In addition, the Responsible Officer, LLCP, and the Responsible Officer’s own counsel agreed to certain monetary concessions.

The CFI Claimants objected to the proposed settlement on a number of grounds. According to them, “[t]he proposed three-year extension of the Plan is, in effect, a proposed, post-confirmation request to modify the Plan” that “would be governed by 11 U.S.C. § 1127(b), and, by incorporation, 11 U.S.C. § 1129.” (A77.) Noting that the Bankruptcy Court must review a proposed settlement under the four-factor standard established by this Court in In re Martin, 91 F.3d 389 (3d Cir. 1999), the CFI Claimants argued that “`the paramount interest of the creditors’—the fourth Martin factor—would not be furthered in any way by the compromise.” (A75.) The CFI Claimants also questioned whether the settlement was the result of arms-length negotiations. [2] The Responsible Officer, in turn, moved to disqualify CFI Counsel. However, his motion was subsequently withdrawn.

The Bankruptcy Court conducted an evidentiary hearing on the CFI Claimants’ motion to dismiss as well as the Responsible Officer’s motion to approve the settlement. In an October 12, 2012 order, the Bankruptcy Court granted the Responsible Officer’s motion, approved and authorized the parties to execute and implement the settlement, and retained jurisdiction to interpret and enforce the settlement. It also entered a separate order denying the CFI Claimants’ motion to dismiss. In an oral decision delivered by telephone on September 14, 2012, the Bankruptcy Court considered the settlement under the Martin standard (i.e., the probability of success in the underlying litigation, likely collection difficulties, the complexity of the litigation as well as the expense, inconvenience, and delay necessarily attending it, and the paramount interest of the creditors). In addition to disposing of the CFI Claimants’ challenge to the “bonafieties [phonetic] of the settlement as a threshold matter” (A109) and their contention that the settlement should be rejected because “no distribution will ever be made to unsecured creditors” (A112), the Bankruptcy Court determined that the Responsible Officer satisfied the first, third, and fourth Martin factors (and indicated that the second factor likewise weighed, at least in part, in his favor).

The CFI Claimants appealed to the District Court from the denial of their motion to dismiss. The District Court dismissed the appeal as equitably moot in a July 8, 2013 order. On June 17, 2014, we vacated the District Court’s dismissal order and remanded for further proceedings “[b]ecause the District Court dismissed the appeal despite a finding that reversing the plan of liquidation would not result in any inequity, and because our opinion [addressing the equitable mootness doctrine] in In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013), came after the District Court’s decision in this case.” SCH Corp., 569 F. App’x at 122. We also questioned whether the District Court considered the full range of relief the CFI Claimants sought in their motion (e.g., enforcement of the terms of the confirmed plan, removal of the Responsible Officer, and sanctions against NCG) and the specific effect such relief would have on third parties.

The CFI Claimants likewise appealed to the District Court from the Bankruptcy Court’s order granting the Responsible Officer’s motion to approve the settlement. On April 2, 2014, the District Court dismissed their appeal and affirmed the order of the Bankruptcy Court. According to the District Court, the Bankruptcy Court properly applied the Martin factors to determine that the settlement at issue here was fair and equitable and adequately addressed the CFI Claimants’ allegations of collusion as well as their theory that “`NCG began a multi-forum strategy to use the anticipated litigation and plan provisions concerning offsets as weapons to drive a wedge between the CFI consumers and their counsel.'” In re: SCH Corp., Bank. No. 09-10198 (BLS), Civ. Nos. 12-1576-SLR, 2014 WL 1340234, at *4 (D. Del. Apr. 2, 2014) (citation omitted). In a footnote, the District Court disposed of the CFI Claimants’ argument that the settlement was actually a plan modification subject to § 1127. According to the District Court, the CFI Claimants offered little support for this argument, which “does not appear to have been raised before.” Id. at *4 n.5. “[The Responsible Officer’s] response that the settlement resolves a funding dispute and does not modify the amended plan is consistent with the bankruptcy court’s statement that, `[t]rying the issue would therefore likely involve witnesses’ recollections as to the parties’ intentions and expectations in negotiations and a deal that is now three years past.'” [3] Id. (quoting A110-A111).


Under § 1127(b), the plan proponent or reorganized debtor may at any time modify a confirmed plan “before substantial consummation of such plan.” [4] However, “[s]uch plan as modified under this subsection becomes the plan only if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of this title.” Although “`modification’ is not defined in the Bankruptcy Code, courts that have analyzed the issue of whether a subsequent change to a confirmed plan of reorganization constitutes a `modification’ distinguish between the courts’ inability to `modify’ a plan and their ability to `clarify a plan where it is silent or ambiguous'; and/or `interpret’ plan provisions to further equitable concerns.'” [5] In re Ampace Corp., 279 B.R. 145, 152-53 (Bankr. D. Del. 2002) (citing In re Beal Bank, S.S.B., 201 B.R. 376, 380 (E.D. Pa. 1996) ; In re Harness, 218 B.R. 163, 166 (D. Kan. 1998) ).

The Bankruptcy Court abused its discretion by failing to consider the purported settlement as a modification of a confirmed plan governed by § 1127. According to the Responsible Officer and the District Court, the proposed settlement simply resolved a dispute concerning the interpretation of the plan confirmed by the Bankruptcy Court, which was silent on the specific issue of whether insurance coverage would negate NCG’s offset rights. The CFI Claimants acknowledge that, if the settlement merely provided for compromised payments within the five-year time period specified in the confirmed plan, such an agreement would not rise to the level of an impermissible plan modification. However, the Responsible Officer and NCG actually negotiated what the Responsible Officer calls an “extension of the plan funding period.” (Appellee’s Brief at 41.) In short, the confirmed plan required NCG to make five annual payments, subject to offsets for litigation expenses, by April 2014, while the purported settlement approved by the Bankruptcy Court provided for three additional payments subject to the same basic offset mechanism in 2015, 2016, and 2017. According to the Responsible Officer, this arrangement did not modify any terms of the confirmed plan because it left unchanged the basic nature of the economic relationship with NCG and allegedly provided the estate the benefit of up to $300,000 that would have been otherwise offset by NCG under the confirmed plan. However, a plan modification that allegedly provides greater economic benefits for the estate and its creditors remains a plan modification governed by § 1127— not a settlement to be reviewed under Rule 9109. According to the CFI Claimants, this three-year extension of the plan funding period actually had the practical effect of preventing CFI Counsel from litigating class action consumer claims against LLCP and NCG for an additional three years. Given the circumstances, we believe that the extension of (what the Bankruptcy Court at the evidentiary hearing called) “the life of the economic relationships that we have” (A515) rises to the level of a plan modification subject to § 1127. In other words, turning a five-year plan into an eight-year plan constitutes a modification of the plan itself.

Furthermore, the case law generally weighs in support of our determination that the purported settlement at issue in this case really constituted a plan modification. See, e.g., In re Braniff Airways, Inc., 700 F.2d 935, 940 (5th Cir. 1983) (“This provision [of the PSA agreement] not only changed the composition of Braniff’s assets, the contemplated result under [11 U.S.C.] § 363(b), it also had the practical effect of dictating some of the terms of any future reorganization plan. The reorganization plan would have to allocate the scrip according to the terms of the PSA agreement or forfeit a valuable asset. The debtor and the Bankruptcy Court should not be able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with the sale of assets.”); Enterprise Fin. Group, Inc. v. Curtis Mathes Corp., 197 B.R. 40, 45 (E.D. Tex. 1996) (concluding that, even if proposed change more accurately reflected intent of plan, change that allowed reorganized debtor to pursue some third-party claims modified material and unambiguous term of confirmed plan that provided that all claims were retained by liquidating trust, and could not be considered as mere clarification); In re Reserve Capital Corp., Nos. 03-60071 to 03-60078, 2007 WL 1989285, at *2 (Bankr. N.D.N.Y. Jul. 6, 2007) (summarizing remand order that directed bankruptcy court to evaluate whether approved settlement, although found to be fair, reasonable, and in best interest of estate under Rule 9019, nevertheless constituted improper post-confirmation modification of confirmed plan), aff’d sub nom. Hawkins v. Chapter 11 Tr, Dist. Ct. Civil Action No. 6:07-CV-0766 (LEK), 2009 WL 701115 (N.D.N.Y. Mar. 13, 2009); Ampace Corp., 279 B.R. at 151-54 (concluding that extension of deadline for claim objections constituted plan modification under § 1127); In re Concrete Designers, Inc., 173 B.R. 354, 355-59 (Bankr. S.D. Ohio 1994) (refusing to confirm proposed second amended plan because second amended disclosure statement provided for dividend to unsecured creditors of 100% over five years or lump sum payment of 40% but second amended proposed plan provided for either dividend of 80% over four years or lump sum payment of 50%).

The Responsible Officer turns for support to an unpublished ruling by the Ninth Circuit as well as an Eastern District of Pennsylvania decision. Both opinions are distinguishable, and, in any event, they are not binding on this Court (or, for that matter, the Ninth Circuit). In in re Acequia, Inc., 996 F.2d 1223, 1993 WL 219865 (9th Cir. 1993) (memorandum) (unpublished opinion), the confirmed plan required the debtor to execute an amended note with an eight-year maturity date in favor of its largest creditor, but, due to state court litigation regarding the terms of the note, execution was delayed for five years, id. at *1-*2. The debtor and the creditor entered a settlement agreement that extended the maturity date. Id. at *1. The Ninth Circuit determined that the second amended note executed pursuant to the settlement agreement did not constitute an impermissible plan modification. Id. at *1-*3. According to the Acequia court, “`the Amended Note is of the same duration as called for in the Plan, and that since its creation was anticipated in the Plan, it does not alter any material terms of the Plan and is not subject to the provisions of § 1127.'” Id. at *2 (quoting district court opinion). Likewise, the district court in In re Beal Bank, S.S.B., 201 B.R. 376 (E.D. Pa. 1996), upheld the bankruptcy court’s exercise of its equitable powers to extend a payment deadline by a relatively short period of time (i.e., for sixty days), noting that this extension did not alter substantive rights or frustrate legitimate claims and that the objecting party shared some responsibility for the delay, id. at 380. In contrast to the note with the same duration at issue in Acequia as well as the brief extension of a payment deadline addressed in Beal Bank, the purported settlement at issue in this case added three years to a five-year plan. Such a drastic step should not be taken under the guise of either a plan interpretation, the exercise of equitable powers, or a Rule 9019 settlement.

Because the purported settlement constituted a plan modification, we will remand this matter to the Bankruptcy Court to consider this purported settlement as a modification request pursuant to § 1127. The CFI Claimants question whether, “in the third year of a five-year plan, with the plan funder (NCG) taking the position with Appellee that it had fully complied with its payment obligations under the plan, that Appellee would argue that the plan had not been `substantially consummated.'” (Appellants’ Brief at 38 (footnote omitted).) They further observe that the Responsible Officer asked the District Court to dismiss the CFI Claimants’ appeal from the order denying the motion to dismiss the bankruptcy cases on the grounds that the plan had been consummated (and that the District Court did dismiss the appeal as equitably moot). In addition to noting that the substantial consummation determination would be made “as of the time of the modification (i.e., the Settlement),” the Responsible Officer suggests in passing that this Court “can determine that the requirements of Section 1127 of the Bankruptcy Code were satisfied through the hearing before the Bankruptcy Court on the Settlement.” (Appellee’s Brief at 40 n.13 (citing Beal Bank, 201 B.R. at 380 n.4 ).) However, we believe that it is appropriate for the Bankruptcy Court to conduct the requisite inquiry under § 1127.


We will vacate the District Court’s order and remand with instructions for the District Court to vacate the Bankruptcy Court’s order and to direct the Bankruptcy Court to consider the purported settlement as a request for a plan modification pursuant to § 1127.

[*] This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent.

[1] Alternatively, the CFI Claimants argue that the Bankruptcy Court misapplied the standard governing the review of proposed settlements under Rule 9019 and approved a fundamentally flawed settlement. Because the purported settlement should have been treated as a request for a plan modification in the first place, we need not—and do not— reach their additional contentions.

[2] It appears that Singley was “Of Counsel” to Ciardi, Ciardi & Austin (“CC & A”). CC&A previously represented LLCP in the bankruptcy proceedings. In connection with Singley’s appointment as the Responsible Officer, it was agreed that CC&A and LLCP would execute a conflicts waiver, CC&A would terminate its representation of LLCP in the bankruptcy cases, neither CC&A nor the Responsible Officer would represent LLCP in such cases, and, if a matter arises in these cases that may be adverse to LLCP, the Responsible Officer would obtain conflicts counsel. In a waiver letter, CC&A agreed not to bring any causes of action against NCG (or its affiliates) on behalf of the Responsible Officer in the bankruptcy cases or in any other matter. Furthermore, “Ciardi will also not disclose any Confidential Information [which includes “all information of which unauthorized disclosure could be detrimental to the interests of NCG”] of NCG or information protected by the attorney-client privilege of NCG to Singley.” (A228.) CC&A represented LLCP as local counsel in litigation in the Middle District of Pennsylvania, represented LLCP as local counsel in the bankruptcy cases, and “currently represents LLCP on various matter that are not related to the Bankruptcy Case or the matters for which Singley has retained Ciardi.” (A229.) CC&A represented the Responsible Officer in the settlement negotiations (and has continued to represent the Responsible Officer in the post-confirmation Bankruptcy Court proceedings as well as in the appellate proceedings before both the District Court and this Court).

[3] The CFI Claimants filed a motion for rehearing with the District Court. The District Court denied their motion in a May 7, 2014 order, explaining that it addressed “the CFI claimants’ argument that the bankruptcy court’s extension of the term of the confirmed plan violated 11 U.S.C. § 1127(d).” (A59 (citing SCH Corp., 2014 WL 1340234, at *4).)

[4] The District Court had jurisdiction over the CFI Claimants’ appeal from the Bankruptcy Court’s order granting the Responsible Officer’s motion to approve the settlement pursuant to 28 U.S.C. § 158(a)(1). We possess appellate jurisdiction over their appeal from the District Court’s order under § 158(d)(1) and 28 U.S.C. § 1291. It is uncontested that bankruptcy court orders are generally reviewed under an abuse of discretion standard. “Our review of the District Court’s decision effectively amounts to review of the bankruptcy court’s opinion in the first instance.” In re Hechinger Inv. Co. of Del., 298 F.3d 219, 224 (3d Cir. 2002) (citing In re Telegroup, Inc., 281 F.3d 133, 136 (3d Cir. 133, 136 (3d Cir. 2002)). An abuse of discretion is committed if the bankruptcy court’s ruling “`rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact.'” In re 15375 Mem’l Corp., 589 F.3d 605, 616 (3d Cir. 2009) (citing In re SGL Carbon Corp., 200 F.3d 154, 159 (3d Cir. 1999) ).

Evidently suggesting that this case is now moot, the Responsible Officer claims that “the `CFI’ acronym is no longer applicable” and that it is unclear what will happen to any funds that may be distributable to those purported CFI Claimants. (Appellee’s Brief at 16.) He notes that a final report was filed in the bankruptcy cases and that, on October 16, 2013, a final decree and order was entered administratively closing these cases. According to the Responsible Officer, the California pre-bankruptcy proceeding was dismissed with prejudice (and the class itself was de-certified), the Florida case was settled prior to class certification, and “the lone remaining class members are those in the class certified in [Indiana], which is currently dismissed pending re-opening.” (Id. at 17.) It appears that a settlement was approved in the post-bankruptcy lawsuit filed in California against NCG and LLCP (and that this settlement disposed of the Pennsylvania proceeding against these two entities). However, we agree with the CFI Claimants that such circumstances have not mooted their current appeal. The terms “CFI Class Actions,” “CFI Class Action Claimants,” and “CFI Action Monetary Claims” were expressly defined in the confirmed plan itself, and it appears that these categories were not made contingent on the outcome of the various class action proceedings. After all, any claims against the Debtors in the California, Florida, and Indiana cases were stayed as a result of their Chapter 11 filings, and these class action cases then went forward against the remaining co-defendants.

[5] The District Court suggested that the CFI Claimants failed to raise their plan modification argument before the Bankruptcy Court, and the Responsible Officer likewise indicates that it was addressed only in passing at the District Court level. However, it is uncontested that (as the Responsible Officer put it), “the Appellant’s initial Objection contained a five-line single paragraph concerning this issue” and, “[i]n the 57 pages of briefing in the District Court, the Appellant addressed this issue in 3 paragraphs, which amount to approximately 2 pages.” (Appellee’s Brief at 39 n.12 (citing A77).) For his part, the Responsible Officer has addressed the merits of this plan modification issue before the Bankruptcy Court, the District Court, and this Court itself (and, in fact, the Responsible Officer does not expressly claim in the appellate brief he filed with this Court that it has been waived). The District Court disposed of the issue on its merits. Although the CFI Claimants could (and should) have addressed this plan modification issue in more detail before the Bankruptcy and District Courts, we follow the District Court’s example and address the merits of the CFI Claimants’ theory that the settlement constituted a plan modification subject to § 1127.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: IN RE RACING SERVICES, INC. – Court of Appeals, 8th Circuit, 2015

In re: Racing Services, Inc. Debtor.

PW Enterprises, Inc., a Nevada corporation Appellee


State of North Dakota, a governmental entity; North Dakota Racing Commission, a regulatory agency; North Dakota Breeders Fund, a special fund; North Dakota Purse Fund, a special fund; North Dakota Promotions Fund, a special fund Appellants.

No. 14-1077.

United States Court of Appeals, Eighth Circuit.

Submitted: October 6, 2014.
Filed: February 20, 2015.

Before RILEY, Chief Judge, WOLLMAN and BYE, Circuit Judges.

RILEY, Chief Judge.

North Dakota, the North Dakota Racing Commission, and three special funds administered by the commission (collectively, state) appeal from a district court [1] decision reversing the bankruptcy court’s grant of summary judgment to the state against PW Enterprises, Inc. (PWE)—the largest non-governmental creditor of Racing Services, Inc. (RSI), formerly a state-licensed horse racing simulcast service provider. After RSI filed bankruptcy, PWE derivatively brought this suit on behalf of all creditors to recover the money the state collected from RSI as taxes on parimutuel [2] account wagering. See In re Racing Servs., Inc., 540 F.3d 892, 901-02 (8th Cir. 2008) . On appeal, the district court concluded “[t]he money collected from RSI in the form of taxes on account wagering must be returned to the bankruptcy estate” because North Dakota law did not authorize the state “to collect taxes on account wagering during the time period in question.” With appellate jurisdiction under 28 U.S.C. § 158, [3] we affirm.


In 1987, the North Dakota legislature authorized parimutuel betting for live horse races in North Dakota. See N.D. Cent. Code § 53-06.2-10 (1987); 1987 N.D. Laws ch. 618, § 10. In what the state calls the “Takeout Statute,” N.D. Cent. Code § 53-06.2-11, the legislature established formulas for deducting from the wager pool to (1) offset the licensed service provider’s expenses, and (2) make revenue payments to the state treasurer—i.e., taxes. See 1987 N.D. Laws ch. 618, § 11. The balance of the pool went to the winning bettors. Id. Beginning in 1989, the state allowed “off track” parimutuel wagering for races inside and outside of North Dakota—later reclassified as “simulcast wagering”—and modified the takeout formulas to include this new type of wagering. See N.D. Cent. Code § 53-06.2-10.1 (1989); 1989 N.D. Laws ch. 624, § 8; 1991 N.D. Laws ch. 556, §§ 5, 6.

In 2001, the state legislature authorized “account wagering,” which is “a form of parimutuel wagering in which an individual deposits money in an account and uses the account balance to pay for parimutuel wagers.” 2001 N.D. Laws ch. 466, § 1. But, as the state concedes, the legislature did not amend § 53-06.2-11 to include deductions for account wagering. Id. The legislature adjusted the takeout formulas in 2003 and 2005, but again did not amend the statute to include account wagering. See 2003 N.D. Laws ch. 452, § 1; 2005 N.D. Laws ch. 469, § 1. In 2007, the legislature amended § 53-06.2-11 to create a new subsection for account wagering and included specific formulas for account wagering that charged, at certain wagering levels, lower rates than live-race wagering and simulcast wagering. See 2007 N.D. Laws ch. 448, § 7, ch. 449, § 2.

RSI, the debtor in this case, was a licensed simulcast service provider that assumed responsibility for paying the required taxes to the state. Starting in 1999, PWE used RSI’s services to place a high volume of parimutuel wagers on North Dakota horse races. PWE’s bets were very successful. By 2003, PWE had accumulated an account balance at RSI of $2,248,100.86.

In July 2003, when PWE learned RSI was being investigated by the federal government for illegal gaming, PWE stopped betting through RSI and demanded its account balance. PWE also contacted the state to discuss RSI. After several detailed discussions, PWE believed the state would protect PWE’s interests, in part to prompt PWE to resume wagering in North Dakota.

On August 21, 2003, the state sued RSI and secured a court-appointed receiver to stabilize the floundering company. PWE originally cooperated with the receiver, but grew dissatisfied with the receiver’s performance. When the state, without notice to PWE, drew on an RSI letter of credit secured by a $225,000 certificate of deposit PWE had pledged, the bank liquidated PWE’s certificate and paid its funds to the state. PWE felt betrayed. PWE later learned that in the year before RSI filed bankruptcy, the state had also inconspicuously collected $5,270,101.20 in taxes from RSI.

On February 3, 2004, RSI filed a voluntary Chapter 11 reorganization petition, later converted to a Chapter 7 bankruptcy. PWE submitted a proof of claim for the $2,248,100.86 balance of its account with RSI. The state ultimately submitted a proof of claim for $6,422,243.58.

In early 2006, PWE asked the bankruptcy trustee to initiate an adversary proceeding against the state to avoid the taxes the state had collected as preferential and fraudulent transfers. See In re Racing Servs., 540 F.3d at 896 . When the trustee declined, PWE, through litigation, obtained “derivative standing” to bring this adversary proceeding against the state on behalf of all RSI’s creditors. Id. at 902, 905.

In its complaint, PWE asked the bankruptcy court to (1) disallow the state’s claim against the bankruptcy estate for unpaid taxes, (2) deny priority to the state’s claim, (3) avoid and recover allegedly preferential and fraudulent transfers to the state, and (4) equitably subordinate the state’s claim. On cross-motions for summary judgment, the bankruptcy court granted the state’s motion with respect to PWE’s challenge to the state’s tax claim, but denied summary judgment as to the remaining claims. This appeal concerns only the first claim.

In rejecting PWE’s claim, the bankruptcy court “conclude[d] that during the times relevant to this case, N.D. [Cent. Code] § 53-06.2-11 authorized taxation on account wagering.” The bankruptcy court reasoned,

When the legislature amended N.D. [Cent. Code] § 53-06.2-10.1 to authorize account wagering in 2001, it characterized account wagering as a form of simulcast parimut[u]el wagering. Although the 2002-2003 version of N.D. [Cent. Code] § 53-06.2-11 did not expressly reference account wagering activity, it did apply to simulcast wagering. By virtue of N.D. [Cent. Code] § 53-06.2-10.1, account wagering was simulcast wagering, and the tax for simulcast wagering was authorized under N.D. [Cent. Code] § 53-06.2-11.

The bankruptcy court further decided that “[e]ven if N.D. [Cent. Code] § 53-06.2-11 were ambiguous as to whether it applied to account wagering,” ordinary rules of statutory construction indicated the state had authority to collect taxes for account wagering.

PWE appealed the grant of summary judgment. The district court reversed and remanded for further proceedings. Finding “North Dakota’s gambling laws [] plain and unambiguous,” the district court determined “[t]here was no legislative authority to collect taxes on account wagering during the time period in question and there is no legal basis to infer or imply authorization to do so.” The state now appeals the district court’s order that the money the state “collected from RSI in the form of taxes on account wagering must be returned to the bankruptcy estate.”


A. Standard of Review

Sitting “as a second court of review in bankruptcy matters, [we] generally apply[] the same standards of review as the district court and review[] the bankruptcy court’s factual findings for clear error and its conclusions of law de novo.” In re M & S Grading, Inc., 526 F.3d 363, 367 (8th Cir. 2008) . “The interpretation of a statute is a question of law for the trial court, subject to de novo review on appeal.” In re Graven, 936 F.2d 378, 384-85 (8th Cir. 1991) ; accord Salve Regina Coll. v. Russell, 499 U.S. 225, 239 (1991) . “Because th[is] case presents a matter of first impression in [North Dakota], we must predict, as best we can, how the [North Dakota] Supreme Court would decide it.” JPMorgan Chase Bank, N.A. v. Johnson, 719 F.3d 1010, 1015 (8th Cir. 2013) .

B. Plain Meaning

In 2001, the North Dakota legislature amended § 53-06.2-10.1 to authorize “account wagering.” As amended, § 53-06.2-10.1 provided in relevant part,

53-06.2-10.1. Simulcast wagering. In addition to racing under the certificate system, as authorized by this chapter, and conducted upon the premises of a racetrack, simulcast parimutuel wagering may be conducted in accordance with this chapter and interim standards that need not comply with chapter 28-32, or rules adopted by the commission under this chapter. . . . The certificate system also permits parimutuel wagering to be conducted through account wagering. As used in this section, “account wagering” means a form of parimutuel wagering in which an individual deposits money in an account and uses the account balance to pay for parimutuel wagers. An account wager made on an account established in this state may only be made through the licensed simulcast service provider authorized by the commission to operate the simulcast parimutuel wagering system under the certificate system. An account wager may be made in person, by direct telephone communication, or through other electronic communication in accordance with rules adopted by the commission.

2001 N.D. Laws ch. 466, § 1. The state concedes that in amending § 53-06.2-10.1 to allow account wagering in 2001, the legislature did not, as it had with prior amendments, make any corresponding changes to § 53-06.2-11 or otherwise alter the statutory takeout formulas. The legislature did not specifically amend § 53-06.2-11 to authorize a tax on account wagering until 2007—several years after the state collected the taxes at issue in this case. See 2007 N.D. Laws ch. 448, § 7.

The contested issue in this appeal is whether North Dakota law impliedly authorized the state to collect taxes from RSI for account wagering during the period preceding RSI’s bankruptcy, even though, as the district court observed, “there was no direct legislative authority to collect a tax on account wagering prior to the 2007 amendments.” Based on the plain meaning of the relevant statutes and fundamental principles of North Dakota law, we agree with the district court and conclude North Dakota law did not expressly or impliedly authorize the state to collect taxes for account wagering during the time period in dispute here.

The state—though acknowledging the clear and unambiguous meaning of § 53-06.2-11 and the absence of affirmative legislative action to tax account wagering—urges the court to infer an implied tax on account wagering. Yet the state fails to provide any compelling legal basis for taking such an unprecedented step.

The North Dakota Constitution provides, “No tax shall be levied except in pursuance of law, and every law imposing a tax shall state distinctly the object of the same, to which only it shall be applied.” N.D. Const. art. X, § 3. The North Dakota Supreme Court has long held, “The power to impose taxes should not be extended beyond the clear meaning of the statutes.” Great N. Ry. Co. v. Flaten, 225 N.W.2d 75, 78 (N.D. 1974) ; accord Rice v. United States, 53 F. 910, 912 (8th Cir. 1893) (“`It is a general rule, in the interpretation of all statutes levying taxes or duties upon subjects or citizens, not to extend their provisions by implication beyond the clear import of the language used, or to enlarge their operation so as to embrace matters not specially pointed out, although standing upon a close analogy.'” (quoting United States v. Wigglesworth, 28 F. Cas. 595, 596-97 (Story, Circuit Justice, C.C.D. Mass. 1842) (No. 16,690))).

Our review of North Dakota tax law “is limited by the doctrine of separation of powers. Taxation of property is a legislative function, not a judicial function, and courts may not substitute their judgment for that of the” legislature. Dakota Nw. Assocs. Ltd. v. Burleigh Cnty. Bd. of Cnty. Comm’rs, 616 N.W.2d 349, 350-51 (N.D. 2000) (internal citations omitted). Under North Dakota law, our “primary objective is `to ascertain the intent of the Legislature by looking at the language of the statute itself and giving it its plain, ordinary, and commonly understood meaning.'” City of Fargo v. White, 839 N.W.2d 829, 832 (N.D. 2013) (quoting McDowell v. Gillie, 626 N.W.2d 666, 671 (N.D. 2001) ). We first must “look[] to the statutory language, and if the language is clear and unambiguous, the legislative intent is presumed clear from the face of the statute.” Id.

“If, however, the statute is ambiguous or if adherence to the strict letter of the statute would lead to an absurd or ludicrous result, a court may resort to extrinsic aids, such as legislative history, to interpret the statute.” State v. Fasteen, 740 N.W.2d 60, 63 (N.D. 2007) . “When other means of ascertaining the legislature’s intentions have failed,” the North Dakota Supreme Court strictly construes ambiguous tax statutes in favor of the taxpayer. See Amerada Hess Corp. v. State ex rel. Tax Comm’r, 704 N.W.2d 8, 17 (N.D. 2005) ; Great N. Ry. Co., 225 N.W.2d at 78 (“Where legislative intention is doubtful with respect to the meaning of the statutes granting taxing authority, the doubt must be resolved against the government and in favor of the taxpayer.”).

As relevant to this appeal, [5] the bankruptcy court determined “application of the rules of statutory construction . . . lead[s] to the conclusion that [N.D. Cent. Code § 53-06.2-11] did apply to account wagering.” As the bankruptcy court saw it, “[h]ad the legislature not intended for account wagering to be subject to taxation under N.D. [Cent. Code] § 53-06.2-11, the activity authorized by the legislature in N.D. [Cent. Code] § 53-06.2-10.1 would have been in contravention of the prohibition against games of chance without a charitable purpose as delineated in the North Dakota Constitution.” See N.D. Const. art. XI, § 25 (“[T]he entire net proceeds of such games of chance are to be devoted to educational, charitable, patriotic, fraternal, religious, or other public-spirited uses.”). The bankruptcy court thought such a result would be “absurd.”

The state advances that argument on appeal, contending account wagering “requires a bet payoff formula to accomplish that [constitutional] goal” of a charitable purpose and “[t]he Takeout Statute [§ 53-06.2-11] is the only such available mechanism that would serve that purpose.” The state does not contend taxes satisfy the constitutional requirement, [6] rather it argues taxes are “inseparably intertwined” with the statutory directive to pay the balance of the wager pool to charitable organizations. According to the state, “to avoid the absurd result of authorizing a form of parimutuel wagering without a corresponding bet payoff formula that would satisfy the constitutional requirements, even despite requiring the payment of revenues to the State,” this court—notwithstanding admittedly unambiguous statutory language to the contrary—should consider § 53-06.2-11 “to have been amended by implication to include account wagering within its scope of coverage.”

The state asks too much. “The function of the courts is to interpret the law, not to legislate.” CybrCollect, Inc. v. N.D. Dep’t of Fin. Insts., 703 N.W.2d 285, 294 (N.D. 2005) . We are “not free to `amend’ or `clarify’ the clear language of the statute,” Estate of Christeson v. Gilstad, 829 N.W.2d 453, 457 (N.D. 2013), nor can we disregard the letter of a “clear and unambiguous” statute “`under the pretext of pursuing its spirit.'” Gadeco, LLC v. Indus. Comm’n of State, 830 N.W.2d 535, 541 (N.D. 2013) (quoting N.D. Cent. Code § 1-02-05); accord Little v. Tracy, 497 N.W.2d 700, 705 (N.D. 1993) (“[T]he law is what the Legislature says, not what is unsaid.”).

The state has not provided, and we have not found, any authority recognizing a judicial power to infer an implied tax under North Dakota law. To the contrary, the North Dakota Supreme Court has routinely rejected similar “invitation[s] to rewrite the statute to express [a party’s] interpretation of the legislature’s alleged `true’ intent.” Gilstad, 829 N.W.2d at 457 ; see also, e.g., Doyle ex rel. Doyle v. Sprynczynatyk, 621 N.W.2d 353, 357 (N.D. 2001) (“We have said many times if changes are to be made in the statute, we leave that matter to the legislature.”). Not only must this court “presume the legislature meant what it said and said all it intended to say,” but also “that the legislature made no mistake in expressing its purpose and intent.” Gilstad, 829 N.W.2d at 457 . “`If the rule is wrong, the Legislature has ample power to change it. It is the duty of the courts to enforce the law as it exists.'” Fetzer v. Minot Park Dist., 138 N.W.2d 601, 604 (N.D. 1965) (quoting Anderson v. Bd. of Ed. of Fargo, 190 N.W. 807, 811 (N.D. 1922) (Christianson, J., concurring) ). “`Consequently, we will not correct an alleged legislative “oversight” by rewriting unambiguous statutes to cover the situation at hand.'” Gilstad, 829 N.W.2d at 457 (quoting Pub. Serv. Comm’n v. Wimbledon Grain Co., 663 N.W.2d 186, 196 (N.D. 2003) ).

To be clear, the state does not ask us to adopt an alternative interpretation of the relevant statutory language. It asks us to infer an alternative legislative intent despite the clear and unambiguous statutory language, and thereby amend § 53-06.2-11 to carry out that unstated intent. “It is for the legislature, not the courts, to amend a statute if the plain language of the statute does not accurately reflect the legislature’s intent.” Olson v. Workforce Safety & Ins., 747 N.W.2d 71, 78 (N.D. 2008) . The legislature ostensibly did that here in 2007, notably imposing lower tax rates on account wagering under § 53-06.2-11. See 2007 N.D. Laws ch. 448, § 7. Taxes the state collected from RSI on account wagering before that time were unauthorized under North Dakota law and must be repaid to the bankruptcy estate.

C. Legislative History

The state’s appeal to what it broadly refers to as “legislative history” does not convince us otherwise. See Little, 497 N.W.2d at 705 (“Usually, when the plain meaning of a statute is apparent, it is unwise and unnecessary to delve further.”). In the state’s view, “it is apparent from the legislative history that the Legislature approved account wagering legislation with the understanding that the new form of wagering would generate revenue for the State `under the existing charitable system’ — i.e., including the Takeout Statute.”

To the extent, if at all, extrinsic aids are proper here, where the state admits the statute is unambiguous, see Schaefer v. N.D. Workers Comp. Bureau, 462 N.W.2d 179, 182 (N.D. 1990) (“[W]hen a statute is clear and unambiguous it is improper for courts to attempt to go behind the express terms of the provision so as to legislate that which the words of the statute do not themselves provide.”), the state’s evidence of legislative history “provides little insight,” Metric Constr., Inc. v. Great Plains Props., 344 N.W.2d 679, 683 (N.D. 1984), much less an intimation so compelling it would justify a federal court taking the unprecedented step of inferring an implied tax under North Dakota law.

In support of its proposed intent, the state primarily relies on the following: statements RSI’s owner made while lobbying to get the account wagering bill passed; “legislative points” RSI provided to “several state senators”; a senate notice of intent; and a statement about revenue from one of the bill’s sponsors. This evidence is far from convincing. “Random statements by legislative committee members, while possibly useful if they are consistent with the statutory language and other legislative history, are of little value in fixing legislative intent.” Little, 497 N.W.2d at 705 . And we are especially wary of divining legislative intent from statements by RSI’s owner, who lobbied for account wagering legislation but was not a member of the legislature and did not vote on the bill. Cf. Metric Constr., 344 N.W.2d at 683 (questioning the value of extrinsic evidence that “mostly consist[ed] of sponsor testimony or citizen testimony preserved in the form of sparse committee notes”).

Though some members of the legislature may have understood account wagering would be taxed similarly to existing forms of parimutuel wagering, the state fails to establish that understanding was widely held or that it necessarily follows from the scant legislative history. The state’s belief also does not make the statute as written ambiguous or require this court to strain to infer a legislative intent to tax that is entirely absent from the statutory language. See Olson, 747 N.W.2d at 78 . Obliged as we are to apply what is undisputed plain language, see id., our diversion into legislative history reveals no reason to doubt the plain meaning of the statute’s text.

D. Constitutional Avoidance

Finally, the state points out the North Dakota Supreme Court generally “construe[s] statutes, if possible, in a manner to avoid constitutional infirmities.” Ellis v. N.D. State Univ., 764 N.W.2d 192, 202 (N.D. 2009) ; accord Ash v. Traynor, 579 N.W.2d 180, 182 (N.D. 1998) (“If a statute may be construed in two ways, one that renders it of doubtful constitutionality and one that does not, we adopt the construction that avoids constitutional conflict.”). This canon cuts both ways.

First, we are not convinced, under a natural reading of § 53-06.2-10.1, that the absence of a tax levy or “corresponding bet payoff formula” necessarily makes the legislative authorization of account wagering unconstitutional under N.D. Const. art. XI, § 25. See Paluck v. Bd. of Cnty. Comm’rs, Stark Cnty., 307 N.W.2d 852, 857 (N.D. 1981) (“[A]n enactment of the Legislature is presumed to be constitutional; the courts will construe statutes so as to harmonize their provisions with the Constitution if it is possible to do so.”). As long as “the entire net proceeds” of account wagering serve “educational, charitable, patriotic, fraternal, religious, or other public-spirited uses,” account wagering does not violate N.D. Const. art. X, § 25, regardless of the absence of a specific statutory payoff formula. Without the assessment of taxes, more money is available for the beneficent purposes. If the state were to determine some part of the net proceeds of statutorily authorized account wagering were not serving such purposes, the state could simply stop those unconstitutional activities. We fail to see any absurdity here.

Second, assuming the requisite statutory ambiguity, avoiding constitutional infirmities is not so easy where, as here, two constitutional provisions are pitted against each other. The state urges the court to infer an implied tax on account wagering because “unless parimutuel account wagering was subject to taxation during the period of time relevant to this case, account wagering would have been contrary to the constitutional prohibition against games of chance under N.D. Const. art XI, § 25.” In contrast, PWE suggests a judicially implied tax, which also requires an implied tax rate and collection method, violates the requirements of N.D. Const. art. X, § 3. By PWE’s measure, we cannot “imply authority to tax and an amount of tax to avoid [the state’s] perceived unconstitutionality” because “if the Court were to imply a tax, this implied tax would, itself, be unconstitutional.”

Confronted with the requirements of N.D. Const. art. X, § 3, the state proposes it is “trying to address the constitutional provision after [it] impl[ies] the account wagering into the taxation.” (Emphasis added). That is, once the tax is “inferred or implied,” the requirements of N.D. Const. art. X, § 3 are met. The state’s analysis puts the cart before the horse. And at any rate, “[t]he canon of constitutional avoidance does not supplant traditional modes of statutory interpretation,” Boumediene v. Bush, 553 U.S. 723, 787 (2008), and “is not a license for the judiciary to rewrite language enacted by the legislature.” Salinas v. United States, 522 U.S. 52, 59-60 (1997) (quoting United States v. Albertini, 472 U.S. 675, 680 (1985) ). Here, the unambiguous statutory language did not authorize the taxes the state collected on account wagering.


We affirm the judgment of the district court and remand to the bankruptcy court for the calculation of the amount of unauthorized taxes the state must return to the bankruptcy estate.

[1] The Honorable Ralph R. Erickson, Chief Judge, United States District Court for the District of North Dakota.

[2] Parimutuel wagering is “a system of betting (as on a horse race) in which those who bet on the winner share the total stakes minus a small percent for the management.” See Webster’s Third New International Dictionary 1642 (1993).

[3] Under § 158(d)(1), we “have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered” by the district court. (Emphasis added). In reversing the bankruptcy court’s judgment for the state, the district court ordered remand to calculate the amount the state must return to the bankruptcy estate, but the state appealed before remand. See In re Vekco, Inc., 792 F.2d 744, 745 (8th Cir. 1986) (“[A] district court decision involving remand normally will not be considered final for purposes of appeal to this court.”). We may consider “a decision requiring remand . . . final if the district court has effectively resolved the merits of the controversy, and on remand all that remains is a purely mechanical, computational, or in short, ministerial task, whose performance is unlikely to generate a new appeal or to affect the issue that the disappointed party wants to raise on appeal from the order of remand.” Id. (quotation and internal citation omitted). Based on our thorough review of the record and the parties’ agreement that a relatively simple mathematical calculation is all that remains for remand, we conclude the district court’s order is final within the meaning of § 158(d)(1).

[4] Neither party challenges the bankruptcy court’s factual findings for the purposes of this appeal.

[5] On appeal, the state concedes the bankruptcy court erroneously concluded “account wagering was simulcast wagering, and the tax for simulcast wagering was authorized under N.D. [Cent. Code] § 53-06.2-11.”

[6] The district court noted “[t]axes are not enumerated” in N.D. Const. art. XI, § 25. PWE argues horse racing is not a game of chance and thus not subject to the restrictions in N.D. Const. art. XI, § 25 at all. We assume for the purposes of this appeal that N.D. Const. art. XI, § 25 applies to parimutuel wagering.

Save trees – read court opinions online on Google Scholar.


New Bankruptcy Opinion: IN RE ORGANIZED CONFUSION, LLP – Dist. Court, MD Florida, 2015




SYNOVUS BANK, Defendant.




SYNOVUS BANK, Defendant.

In re: WESTWARD HO, LLC, Debtor.



SYNOVUS BANK, Defendant.

In re: WESTWARD HO II, LLC, Debtor.



SYNOVUS BANK, Defendant.

In re: YJNK II, INC., Debtor.



SYNOVUS BANK, Defendant.

In re: YJNK III, INC., Debtor.







SYNOVUS BANK, Defendant.

Case Nos. 8:14-cv-3226-T-24, 8:14-cv-3227-T-24, 8:14-cv-3228-T-24, 8:14-cv-3229-T-24, 8:14-cv-3230-T-24, 8:14-cv-3231-T-24, 8:14-cv-3232-T-24

United States District Court, M.D. Florida, Tampa Division.

February 19, 2015.


SUSAN C. BUCKLEW, District Judge.

This cause comes before the Court on Plaintiff’s motions to withdraw the reference and Defendant’s responses in opposition. [1] The Court, having reviewed the motions, responses, and being otherwise advised, concludes that the motions to withdraw the reference should be denied.


These are seven of nine related adversary proceedings currently pending before Judge Caryl E. Delano in the United States Bankruptcy Court for the Middle District of Florida. [2] The adversary proceedings were commenced by Christine L. Herendeen, the Chapter 7 Trustee of several bankrupt entities, against Synovus Bank.

The related adversary proceedings all arise from allegedly fraudulent transfers made by bankrupt debtor, Frank Mongelluzzi (“Mongelluzzi”), and several bankrupt entities he owned with his wife, Angela Mongelluzzi (together with Mongelluzzi, the “Mongelluzzis”). The Mongelluzzis owned and operated several temporary labor staffing businesses from approximately 1986 to 2010. [3] The Mongelluzzis also had other personal and business interests, including construction companies, restaurants, pawn shops, real estate holdings, aircraft, and yachts (together with the Staffing Businesses, the “Mongelluzzi Entities”). [4] The Mongelluzzi Entities held approximately 77 bank accounts with Defendant Synovus Bank (“Synovus”) from 2007 to 2011. The Staffing Businesses also had a $35 million asset-based revolving line of credit with Synovus (the “Credit Line”), from 2008 to 2010 that was personally guaranteed by the Mongelluzzis, and secured by the assets of the Staffing Businesses. The terms of the Credit Line required the Staffing Businesses to use loan proceeds only for their working capital needs.

On May 24, 2013, the Staffing Businesses, Organized Confusion, LLP and YJNK II, Inc. (collectively, the “Bankrupt Entities”) filed voluntary petitions for relief under Chapter 7 of the United States Bankruptcy Code. Plaintiff Christine Herendeen was appointed as the Chapter 7 Trustee of the Bankrupt Entities’ estates. On October 31, 2014, Plaintiff filed complaints on behalf of the Bankrupt Entities against Synovus in the bankruptcy court. The complaints all seek to avoid allegedly fraudulent transfers made by the Bankrupt Entities to or for the benefit of Synovus under 11 U.S.C. § 544(b) of the United States Bankruptcy Code, and the Florida Uniform Fraudulent Transfer Act (“FUFTA”). Florida Statutes §§ 726.106(1); 726.108. Plaintiff also asserts claims against Synovus for unjust enrichment and aiding and abetting breach of fiduciary duty.

The complaints allege Mongelluzzi and others engaged in an elaborate check kiting scheme that hindered, delayed, and defrauded the Bankrupt Entities’ creditors in the period of 2007 through 2010. Plaintiff asserts Synovus benefitted from the alleged scheme by assessing considerable overdraft fees, charges, interest, and by receiving substantial purchase price consideration when the Staffing Businesses were eventually sold in 2010.

The alleged scheme involved Mongelluzzi and others continuously issuing checks drawn on accounts which lacked sufficient funds to cover them, which allowed the Bankrupt Entities access to interest-free loans created by the false account balances during the float period. Mongelluzzi and others would subsequently write checks drawn on the Bankrupt Entities’ and other of the Mongelluzzi Entities’ accounts and deposit said checks in the Mongelluzzi Entities’ accounts before the float period expired. Plaintiff also alleges Mongelluzzi and the Staffing Businesses utilized loan proceeds from the Credit Line to cover checks issued in connection with the scheme.

The complaints allege that as a result of Synovus’ monitoring of the Mongelluzzi Entities’ accounts and its financial oversight in connection with the administration of the Credit Line, Synovus acquired intimate and thorough knowledge of the Bankrupt Entities’ insolvency and the check kiting scheme. Plaintiff alleges that after Synovus’ purported discovery of the Mongelluzzi Entities’ scheme, Synovus continued its banking relationship with the Mongelluzzi Entities and continued to collect substantial fees, charges, interest, and other forms of revenue to the detriment of the Bankrupt Entities’ creditors. Plaintiff also alleges Synovus eventually forced the sale of the Staffing Businesses by choking off their access to loan proceeds from the Credit Line.

On September 2, 2010, the Staffing Businesses were sold to Michael D. Traina and MDT Personnel, LLC (“MDT”) pursuant to an asset purchase agreement (the “Asset Purchase Agreement”). The Asset Purchase Agreement provided for a purchase price equivalent to the then current outstanding senior indebtedness of the Staffing Businesses, the vast majority of which was owed to Synovus. In connection with the closing of the Asset Purchase Agreement, MDT satisfied approximately $39 million of the Staffing Businesses’ outstanding senior liabilities to Synovus, and the Credit Line was restructured, making MDT an obligor to Synovus (the “Restructured Credit Line”). The Restructured Credit Line was secured by the assets MDT acquired from the Staffing Businesses as a result of the Asset Purchase Agreement. Significantly, Plaintiff alleges Synovus’ active role in forcing the sale of the Staffing Businesses resulted in Synovus having essentially the same loan and the same collateral both before and after the Mongelluzzis sold the Staffing Businesses’ assets to Traina and MDT, with the exception that the new obligors were MDT and Traina. On the basis of the foregoing, Plaintiff asserts the transfers Synovus received from the Asset Purchase Agreement, along with the substantial fees, charges, interest, and other forms of revenue it received in continuing its banking relationship with the Mongelluzzi entities are partially or entirely subject to avoidance and recovery by Plaintiff for the benefit of the Bankrupt Entities’ legitimate creditors.

Plaintiff now moves for the entry of an order withdrawing the reference pursuant to 28 U.S.C. § 157(d), Rule 5011(a) of the Federal Rules of Bankruptcy Procedure, and Local Rule 5011-1(b)(2) of the United States Bankruptcy Court for the Middle District of Florida.


Bankruptcy Court Jurisdiction

The United States Code grants bankruptcy jurisdiction to Article III district courts. Specifically, 28 U.S.C. § 1334(b) states that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” Congress provided in 28 U.S.C. § 157(a) that each district court may refer all cases “arising under,” “arising in,” or “related to” Title 11 proceedings to the bankruptcy judges for the district. This Court has a standing order referring all bankruptcy matters to the bankruptcy courts. A finding that a matter is “related to” a bankruptcy case confers subject matter jurisdiction to the bankruptcy court and empowers it to hear the non-core matter. In re Happy Hocker Pawn Shop, Inc., 212 Fed. App’x 811, 817 (11th Cir. 2006) . However, under § 157(c), the bankruptcy court’s power to determine a non-core matter is limited, as compared to its power to hear and determine core matters under § 157(b)(l). Specifically, the bankruptcy court has the power to determine matters properly before it under Title 11, but with respect to “related to” or non-core matters, an Article III court must render final judgment unless the parties consent to allow the bankruptcy court to handle the matter. 28 U.S.C. § 157(b) and (c).


The standard for permissive withdrawal is stated in 28 U.S.C. § 157(d): “[t]he district court may withdraw, in whole or in part, any case or proceeding referred under [§ 157], on its own motion or on timely motion of any party, for cause shown.” Congress has not given a definition or explanation of the “cause” required for permissive withdrawal, but the Eleventh Circuit has stated that cause “is not an empty requirement.” In re Parklane/Atlanta Joint Venture, 927 F.2d 532, 536 (11th Cir. 1991) . In determining whether the movant has established sufficient cause to withdraw the reference, “a district court should consider such goals as advancing uniformity in bankruptcy administration, decreasing forum shopping and confusion, promoting the economical use of the parties’ resources, and facilitating the bankruptcy process.” In re Advanced Telecomm. Network, Inc., 2014 WL 2528844, at *1 (M.D. Fla. June 4, 2014) (citing In re Simmons, 200 F.3d 738, 742 (11th Cir. 2000) (citations omitted)). Additional factors to consider include: (1) whether the claim is core or non-core; (2) efficient use of judicial resources; (3) a jury demand; and (4) prevention of delay. Control Ctr., L.L.C. v. Lauer, 288 B.R. 269, 274 (M.D. Fla. 2002) (citations omitted).

The Eleventh Circuit has noted that “the cause prerequisite should not be used to prevent the district court from properly withdrawing reference either to ensure that the judicial power of the United States is exercised by an Article III court or in order to fulfill its supervisory function over the bankruptcy courts.” Parklane, 927 F.2d at 538 . The determination of whether to grant a motion for permissive withdrawal is within the court’s discretion. See In re Fundamental Long Term Care, Inc., 2014 WL 4452711, at *1 (M.D. Fla. Sept. 9, 2014) (citing In re TPI lnt’l Airways, 222 B.R. 663, 668 (S.D.Ga.1998) (citations omitted)).


Plaintiff argues that the reference should be withdrawn for the following reasons: (1) the complaints’ claims are non-core because they arose before the bankruptcy; and (2) withdrawing the reference would promote the efficient use of economic and judicial resources. Additionally, Plaintiff has demanded a jury trial, and as such, Plaintiff contends this is another factor in support of withdrawal. As discussed below, the Court determines it is appropriate for the reference to remain with the bankruptcy court, and for the bankruptcy court to address all matters at this time.

Core or Non-Core Status of the Proceedings

The first factor the Court considers is whether the claims are core or non-core. The Court has stated that the determination of whether a matter is core or non-core “`should first be made by the bankruptcy court.'” In re Fundamental Long Term Care, Inc., 2014 WL 2882522, at *2 (M.D. Fla. June 25, 2014) (citing In re Stone, 2010 WL 5069698, at *1 (M.D. Fla. Dec. 7, 2010) (citations omitted)); see also 28 U.S.C. § 157(b)(3) (“The bankruptcy judge shall determine, on the judge’s own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11.”); Welch v. Regions Bank, Case No. 8:14-cv-00188-T-EAK-TGW (Dkt. 31) (“the bankruptcy judge is responsible for determining whether a proceeding is core or non-core.”) (citation omitted). Neither party has argued that the bankruptcy court has made a determination regarding whether the adversary proceedings at issue are core or non-core proceedings, and this Court is not inclined to make that determination. As such, the Court will not consider this factor in its analysis of the propriety of withdrawal. See id. (citing TPI Int’l, 222 B.R. at 668 n. 3 ) (stating that the court would not consider this factor due to the fact that the bankruptcy court has not determined whether the proceedings were core or non-core).

Efficient Use of Economic and Judicial Resources

Next, the Court considers how to most efficiently use judicial resources. A district court can allow the bankruptcy court to retain jurisdiction to address all pretrial matters, from discovery through dispositive motions on non-core claims. See In re Gunnallen Financial, Inc., 2011 WL 398054, at *4 (citing In re Stone, 2010 WL 5069698, at *1 (M.D.Fla.2010) (finding that the case did not need to be immediately withdrawn from the bankruptcy court and that the bankruptcy court could handle all pretrial matters)). However, Plaintiff asserts adjudication of the matter by the district court in the first instance would be more efficient, because the bankruptcy court would have to make proposed findings of fact and conclusions of law on non-core claims, which would then be submitted to the district court for de novo review. Plaintiff also asserts that the potential submission of findings of fact and conclusions of law to the district court will delay the conclusion of this adversary proceeding.

The bankruptcy court’s familiarity with the similar facts in the related adversary proceedings place the bankruptcy court at an informational advantage. Two of the related adversary proceedings brought by a different plaintiff have been pending before the bankruptcy court since July 2014 and the bankruptcy court has since held numerous hearings therein. The bankruptcy court has also held hearings and ruled on motions to dismiss in the adversary proceedings underlying the instant motions to withdraw the reference. Therefore, it is the Court’s conclusion that allowing these adversary proceedings to continue in the bankruptcy court for all pretrial matters promotes the efficient use of judicial resources and will not result in delay.

Jury Demand

Plaintiff has demanded a jury trial on all claims asserted in the adversary proceedings. Plaintiff states she does not intend to consent to a jury trial before the bankruptcy court. In response, Defendant argues that Plaintiff is not entitled to a jury trial because (1) Plaintiff is bound by jury trial waivers contained in two security agreements [5] and a modification agreement [6] between Synovus and six Bankrupt Entities; (2) Plaintiff’s unjust enrichment claim is equitable in nature and does not trigger a jury trial right; and (3) Plaintiff, as bankruptcy trustee may not be entitled to a jury trial in an avoidance action.

The Court will consider the issue of jury trial waivers first. The case of In re Pearlman, 493 B.R. 878, 885 (M.D. Fla. 2013) is instructive. In Pearlman, a chapter 11 trustee requested a jury trial in an adversary proceeding to avoid alleged fraudulent transfers by the debtors and to bring a fraudulent conveyance claim on behalf of prepetition creditors pursuant to § 544 of the Bankruptcy Code. The bankruptcy court determined that the trustee was not entitled to a jury trial on the fraudulent transfer or fraudulent conveyance claims because the debtors had waived the right to a jury trial in a related loan agreement. The court explained:

A trustee represents the interests of a debtor . . . which includes bringing any action that the debtor could have brought had it not filed for bankruptcy. The Trustee is correct that pre-bankruptcy, only a creditor had the right to assert a state-law fraudulent conveyance claim. However, once the Debtors’ petitions were filed, any fraudulent conveyance claim became the exclusive right of the Trustee to pursue. The Trustee, who has the same rights and defenses as the Debtors, is bound by the Debtors’ waiver and is precluded from asserting a jury trial demand in this case.

Id. (emphasis in original).

The Eleventh Circuit has held “[a] party may validly waive its Seventh Amendment right to a jury trial so long as waiver is knowing and voluntary.” Bakrac, Inc. v. Villager Franchise Sys. Inc., 164 Fed. App’x 820, 823 (11th Cir.2006) . Generally, “[i]n making this assessment, courts consider the conspicuousness of the waiver provision, the parties’ relative bargaining power, the sophistication of the party challenging the waiver, and whether the terms of the contract were negotiable.” Id at 824. The court considers these factors and then determines “whether, in light of all the circumstances, the [c]ourt finds the waiver to be unconscionable, contrary to public policy, or simply unfair.” Allyn v. W. United Life Assur. Co., 347 F.Supp.2d 1246, 1252 (M.D. Fla. 2004) .

It is apparent that the six of the Bankrupt Entities waived their right to a jury trial in the security agreement and the modification agreement. The security agreement, which was signed by Mongelluzzi, as President of Professional Staffing—A.B.T.S., Inc., YJNK II, Inc., YJNK III, Inc., Able Body Gulf Coast, Inc., and as manager of Westward Ho II, LLC, includes a paragraph entitled “WAIVER OF JURY TRIAL”. The paragraph regarding the waiver of jury trial appears in uppercase and bold-face font, and provides in part that the bankrupt entities and Synovus:


(Bkrtcy. Case No. 8:14-ap-00973-CED (Dkt. 7, Ex. U)). [7] The modification agreement, which was also signed by Mongelluzzi on behalf of the same six Bankrupt Entities, also contains a jury trial waiver, which again in uppercase and bold-face font provides:


(Bkrtcy. Case No. 8:14-ap-00973-CED (Dkt. 7, Ex. S)). The waiver provisions are conspicuous and there is no suggestion that the parties had unequal bargaining power or that the terms of the agreements were not negotiable. In light of these circumstances, the Court does not find the waivers to be unconscionable, contrary to public policy, or simply unfair. Therefore, it is the Court’s conclusion that Plaintiff is bound by the jury trial waivers found in the security agreements and the modification agreement, and thus, is precluded from asserting a jury trial demand with regard to the bankrupt entities who were parties thereto. See In re Pearlman, 493 B.R. at 885 . Accordingly, Plaintiff’s request for a jury trial is not a sufficient reason for the Court to withdraw the reference for said bankrupt entities.

With regard to bankrupt entity Organized Confusion, LLP, the only bankrupt entity that did not agree to waive a jury trial in any relevant agreement, the Court must consider Defendant’s arguments that Plaintiff is not entitled to a jury trial on her unjust enrichment claim and that Plaintiff, as bankruptcy trustee, may not be entitled to a jury trial in an avoidance action.

As to Defendant’s argument that Plaintiff is not entitled to a jury trial on her unjust enrichment claim, Defendant is correct that Plaintiff’s claim for unjust enrichment is an equitable one that is heard by the Court and not a jury. See Goldberg v. Chong, No. 07-20931-CIV-HUCK, 2007 WL 2028792, at *10, n. 9 (S.D. Fla. July 11, 2007) (citation omitted). However, it is not clear whether Plaintiff, as bankruptcy trustee, is entitled a jury trial in an avoidance action.

The Florida bankruptcy courts differ on whether a bankruptcy trustee may elect a jury trial under these circumstances. Cf. In re Pearlman, 493 B.R. at 878 (holding a bankruptcy trustee is never entitled to a jury trial in avoidance actions); Mukamal v. BMO Harris Bank, N.A., 501 B.R. 792 (S.D. Fla.2013) (holding a bankruptcy trustee had a right to jury trial in an avoidance action where a defendant had not filed a proof of claim). Notwithstanding that Florida law is uncertain on this issue, it remains appropriate for the bankruptcy court to address all pretrial matters. Should it become necessary, the Court will revisit Plaintiff’s entitlement to a jury trial in the case of In re Organized Confusion, LLP. [8]


Accordingly, it is ORDERED AND ADJUDGED that Plaintiff’s Motions to Withdraw the Reference are DENIED. The Clerk is directed to CLOSE case numbers 8:14-cv-03226-SCB; 8:14-cv-03227-SCB; 8:14-cv-03228-SCB; 8:14-cv-03229-SCB; 8:14-cv-03230-SCB; 8:14-cv-03231-SCB; and 8:14-cv-03232-SCB.


[1] See In re: Organized Confusion, LLP, Case No. 8:14-cv-03226-SCB (Dkts. 1 and 2); In re Professional Staffing— A.B.T.S., Inc. v. Synovus Bank, Case No. 8:14-cv-03227-SCB (Dkts. 1 and 2); In re Westward Ho, LLC, Case No. 8:14-cv-3228-SCB (Dkts. 1 and 2); In re Westward Ho, II, Case No. 8:14-cv-03229-SCB (Dkts. 1 and 2); In re YJNK II, Inc., 8:14-cv-03230-SCB (Dkts. 1 and 2); In re YJNK III, Inc., Case No. 8:14-cv-03231-SCB (Dkts. 1 and 2); and In re Able Body Gulf Coast, Inc., Case No. 8:14-cv-03232-SCB(Dkts. 1 and 2).

[2] In re Organized Confusion, LLP, Case No. 8:14-ap-00972-CED; In re Professional Staffing—A.B.T.S., Inc. v. Synovus Bank, Case No. 8:14-ap-00973-CED; Westward Ho, LLC, Case No. 8:14-ap-00974-CED; In re Westward Ho II, LLC, Case No. 8:14-ap-00975-CED; In re In re YJNK II, Inc., Case No. 8:14-ap-00976-CED; In re YJNK III, Inc., Case No. 8:14-ap-00977-CED; In re: Able Body Gulf Coast, Inc., Case No. 8:14-ap-00978-CED; Welch v. Synovus Bank et al., Case No. 8:14-ap-00645-CED; and Welch v. Regions Bank, Case No. 8:14-ap-00653-CED (collectively the “related adversary proceedings”).

[3] These temporary labor staffing businesses included Professional Staffing—A.B.T.S., Inc., Able Body Gulf Coast, Inc., Westward Ho, LLC, Westward Ho II, LLC, and YJNK III, Inc. (collectively, the “Staffing Businesses”).

[4] The Mongelluzzi Entities included Organized Confusion, LLP and YJNK II, Inc.

[5] Professional Staffing—A.B.T.S., Inc., YJNK II, Inc., YJNK III, Inc., Able Body Gulf Coast, Inc., and Westward Ho II, LLC were parties to one security agreement. See Bkrtcy. Case No. 8:14-ap-00973-CED (Dkt. 7, Ex. U). Westward Ho, LLC was party to a second security agreement. See Bkrtcy. Case No. 8:14-ap-00973-CED (Dkt. 7, Ex. T).

[6] Professional Staffing—A.B.T.S., Inc., YJNK II, Inc., YJNK III, Inc., Able Body Gulf Coast, Inc., Westward Ho, LLC and Westward Ho II, LLC were parties to the modification agreement. See Bkrtcy. Case No. 8:14-ap-00973-CED (Dkt. 7, Ex. S).

[7] The jury trial waiver in the security agreement between Westward Ho, LLC and Synovus, which was signed by Mongelluzzi as manager of Westward Ho, LLC, contains substantially similar language. See Bkrtcy. Case No. 8:14-ap-00973-CED (Dkt. 7, Ex. T).

[8] Because the bankruptcy court cannot issue a final judgment as to non-core matters, should the bankruptcy court determine that the adversary proceedings contain non-core claims and any of the parties refuse to consent to the bankruptcy court’s conducting trial in the matter, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to this Court, and any final order or judgment shall be entered by this Court after considering the bankruptcy judge’s proposed findings and conclusions pursuant to 28 U.S.C. § 157(c).

Save trees – read court opinions online on Google Scholar.


News, Analysis & Bankruptcy Court Filings

%d bloggers like this: