New Bankruptcy Opinion: IN RE KSL MEDIA, INC. – Dist. Court, CD California, 2016

In re: KSL MEDIA, INC., T.V. 10’s. LLC and FULCRUM 5, INC., Debtors.

Affects all Debtors

DAVID K. GOTTLIEB, as Chapter 7 Trustee for KSL Media, Inc.; DAVID K. GOTTLIEB, as Chapter 7 Trustee for T.V. 10’s, LLC; and DAVID K. GOTTLIEB, as Chapter 7 Trustee for Fulcrum 5, Inc. Plaintiffs,

v.

RODGER M. LANDAU and LANDAU GOTTFRIED & BERGER LLP, Defendants.

Case Nos. 2:15-cv-08748-AB, 1:13-Bk-15930-MB, No. 1:13-Bk-15931-MB, Adv. No. 1:15-ap-01212-GM.

United States District Court, C.D. California, Western Division.

January 6, 2016.

NOTICE OF MOTION AND MOTION BY DEFENDANTS TO WITHDRAW REFERENCE TO BANKRUPTCY COURT; MEMORANDUM OF POINTS AND AUTHORITIES; DECLARATION OF PETER L. ISOLA & EXHIBITS

DEMAND FOR TRIAL BY JURY

ANDRE BIROTTE Jr., District Judge.

TO THE COURT, AND TO PLAINTIFF DAVID K. GOTTLIEB, AS CHAPTER 7 TRUSTEE FOR KSL MEDIA, INC.; DAVID K. GOTTLIEB, AS CHAPTER 7 TRUSTEE FOR T.V. 10’S, LLC; AND DAVID K. GOTTLIEB, AS CHAPTER 7 TRUSTEE FOR FULCRUM 5, INC., AND HIS ATTORNEYS OF RECORD:

PLEASE TAKE NOTICE THAT on the date and time set forth above, Defendants Rodger M. Landau (“Mr. Landau”) and Landau Gottfried & Berger LLP (“LGB”) (together, “Defendants”) will and hereby do move jointly to withdraw the reference of the captioned adversary proceeding (“Adversary Proceeding”) to the United States Bankruptcy Court for the Central District of California, San Fernando Division (“Bankruptcy Court”). This motion is brought pursuant to 28 U.S.C. § 157(d), Rule 5011 of the Federal Rule of Bankruptcy Procedure, Rule 5011-1 of the Local Bankruptcy Rules — Central District of California, and Rule 9 (5011-9) of Chapter IV of the Local Civil Rules — Central District of California.

There is good cause for this Court to immediately withdraw the reference of the Adversary Proceeding to the Bankruptcy Court for the following reasons:

1. The Complaint commencing this litigation asserts seven claims for relief against Defendants, all of which claims are based on the same operative facts — essentially that Defendants committed professional negligence, breach of fiduciary duty and breach of contract under California law in their pre-bankruptcy and post-bankruptcy representation of the above-identified Debtors. These three claims and a fourth claim for the recovery of purported fraudulent transfers are claims as to which the Bankruptcy Court may not enter a final order.

2. Defendants assert their right to a jury trial as to the Complaint’s four predominant claims for relief — all of which are properly triable to a jury — and do not consent to a jury trial in the Bankruptcy Court. Moreover, the three non-jury trial claims for relief are based on the same set of facts as the jury trial claims. Accordingly, the four jury trial claims must be decided before the Court may address the three non-jury trial claims.

3. To date there have not been any substantive proceedings in the Adversary Proceeding, which was commenced on September 9, 2015. Defendants have not filed a response to the Complaint and no response is currently due until November 12, 2015. The first status conference before the Bankruptcy Court is yet to occur. Also, the Adversary Proceeding has been reassigned to a Bankruptcy Judge who has no knowledge about and has had no involvement whatsoever with the Debtors’ bankruptcy case or the Adversary Proceeding. Accordingly, this Court and the Bankruptcy Court will be in the same position in learning the relevant facts and administering the Adversary Proceeding. Because the Bankruptcy Court will not be able to enter a final order in the case, judicial economy militates in favor of withdrawal of the reference at this time.

This motion is based on this Notice of Motion and Motion, the Memorandum of Points and Authorities and Declaration of Peter L. Isola and the exhibits attached thereto, the complete files and records in this matter, the argument of counsel and such other and further matters as this Court may consider at or before the hearing on this motion.

This motion is brought following the conference of counsel pursuant to Local Rule 7-3, which occurred on October 30, 2015.

DEMAND FOR JURY TRIAL

Pursuant to Federal Rule of Civil Procedure 38(b), Defendants Rodger M. Landau and Landau Gottfried & Berger LLP (collectively, “Defendants”) demand a jury trial on all issues triable by jury. Defendants do not consent to a jury trial held before the bankruptcy court.

TABLE OF CONTENTS

TABLE OF CONTENTS

Page(s)

I. INTRODUCTION………………………………………………….. 1

II. STATEMENT OF FACTS…………………………………………….. 3

III. ARGUMENT……………………………………………………… 5

A. Applicable Legal Standard…………………………………… 5
B. This Motion to Withdraw the Reference is Timely……………….. 5
C. Non-Core Claims and Claims as to Which the Bankruptcy Court
May Not Enter a Final Judgment Dominate the Adversary
Proceeding………………………………………………… 6
1. The First, Second and Third Claims for Relief Are Non-Core
Claims………………………………………………… 6
2. The Fraudulent Transfer Claim…………………………….. 8
D. Withdrawal of the Reference is Appropriate Because the Claims
in the Complaint are Predominantly Legal, Not Equitable, and
Defendants Have Requested and Are Entitled to a Jury Trial on
Those Claims………………………………………………. 10
E. Judicial Efficiency Supports Withdrawing the Reference Because
Non-Core Claims and Claims as to which the Bankruptcy Court
Cannot Enter a Final Order Predominate……………………….. 12
F. Withdrawal of the Reference will not Encourage Forum Shopping…… 13
G. Uniformity of Bankruptcy Administration will not be Disrupted
by Withdrawal of the Reference………………………………. 14
H. Withdrawal of the Reference will Conserve Court and Party
Resources…………………………………………………. 15

IV. CONCLUSION……………………………………………………. 16

TABLE OF AUTHORITIES

Page(s)

Cases

Addison v. United States Dep’t of Educ. (In re Addison),
240 B.R. 47 (Bankr. CD. Cal. 1999) ………………………………………… 6

Allied Systems Holdings, Inc. v. Yucaipa American Alliance Fund I,
L.P.,
524 B.R. 598 (Bankr. D. Del. 2015) ………………………………………… 10

Am. Coal Co. v. Enron N. Am. Corp. (In re Enron Corp.),
No. 03 Civ. 1727 (LTS), 2003 U.S. Dist. LEXIS 19543 (S.D.N.Y.
2003)………………………………………………………………….. 5

Burdette v. Emerald Partners LLC,
NO. C15-0816-JCC, 2015 U.S. Dist. LEXIS 93127 (W.D. Wash.
July 16, 2015)………………………………………………………….. 9

Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc.),
466 B.R. 626 (Bankr. D. Del. 2012) ………………………………………… 11

Canter v. Canter (In re Canter),
299 F.3d 1150 (9th Cir. 2002) …………………………………………….. 13

In re Com 21,
No. C-04-03396, 2005 U.S. Dist. LEXIS 34339 (N.D. Cal. July 6,
2005)………………………………………………………………….. 7

In re Daewoo Motor America, Inc.,
302 B.R. 308 (Bankr. CD. Cal. 2003) ……………………………………….. 5, 7, 12

DePinto v. Provident Security Life Ins. Co.,
323 F.2d 826 (9th Cir. 1963) ……………………………………………… 10

Dunmorev. United States,
358 F.3d 1107 (9th Cir. 2004) …………………………………………….. 7

Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.),
935 F.2d 1071 (9th Cir. 1991) …………………………………………….. 7

Eide v. Haas (In re H & WMotor Express Co.),
343 B.R. 208 (N.D, Towa 2006)…………………………………………….. 6

Granflnanciera, S.A. v. Nordberg,
492 U.S. 33 (1989) ………………………………………………………. 2, 10, 11

Granite Rock Co. v. Int’l Bhd. of Teamsters,
649 F.3d 1067 (9th Cir. 2011), cert, denied, Teamsters Local 287 v.
Granite Rock Co., 2011 U.S. LEXIS 8779 (U.S., Dec. 5, 2011)……………… 8, 10

Grant African Methodist Episcopal Church of Los Angeles v. White,
No. CV 10-2845 AHM, 2010 U.S. Dist. LEXIS 53038 (CD. Cal.
May 11,2010)……………………………………………………………. 7

Gruntz v. County of Los Angeles (In re Gruntz),
202 F.3d 1074 (9th Cir. 2000) …………………………………………….. 7

In re Hall, Bayoutree Associates, Ltd.,
939 F.2d 802 (9th Cir. 1991) ……………………………………………… 5

Hanfling v. Epstein, Becker & Green (In re ATG Catalytics),
No. C-04-1450, 2004 Dist LEXIS 23617 (N.D. Cal. July 19,2004)………………… 12

Herbst Gaming, Inc. v. Insurcorp (In re Zante, Inc.),
No. 3:10-cv-00231-RCJ-RAM, 2010 U.S. Dist. LEXIS 137691 (D.
Nev. Dec. 29, 2010)……………………………………………………… 15

Lara v. Casimiro (In re Casimiro),
No. CIV-F-06-0028 AWI SMS, 2006 U.S. Dist. LEXIS 41176 (E.D.
Cal. June 6, 2006)………………………………………………………. 13

Mastro v. Rigby,
764 F.3d 1090 (9th Cir. 2014) …………………………………………….. 8

Official Committee of Unsecured Creditors of Appalachian Fuels, LLC
v. Energy Coal Resources, Inc. (In re Appalachian Fuels, LLC),
472 B.R. 731 (E.D. Ky. 2012) ……………………………………………… 6

Okla. Natural Gas Co., Div. of ONEOK, Inc. v. Mahan & Rowsey, Inc.,
48 B.R. 767 (Bankr. W.D, Okla. 1985) aff’d, 786 F.2d 1004 (10th
Cir. 1986) ……………………………………………………………… 15

Pereira v. Farace,
413 R3d 330 (2d Cir. 2005), cert denied, 126 S. Ct. 2286, 164 L. Ed.
2d 812, 2006 U.S. LEXIS 3965 (U.S., 2006) …………………………………… 8, 10

Piombo Corp, v. Castlerock Props, (In re Castlerock Props.),
781 F.2d 159 (9th Cir. 1986) ………………………………………………. 6

Ross v. Yaspan,
No. CV 12-07048 DDP, 2013 U.S. Dist. LEXIS 95710 (CD. Cal
July 9, 2013)……………………………………………………………. 7

Security Farms v. Int’l Bhd. Of Teamsters, etc.,
124 F.3d 999 (9th Cir. 1997) ………………………………………………. 5, 12, 14

Stern v. Marshall,
___ U.S. ___, 131 S. Ct. 2594, 180 L. Ed. 475, 2011 U.S. LEXIS 4791,
rehearing denied, ___ U.S. ___, 132 S. Ct. 56, 180 L. Ed. 2d 924, 2011
U.S. LEXIS 5143 (2011) …………………………………………………… 8, 9, 11

Taxel v. Electronic Sports Research (In re Cinematronics, Inc.),
916 F.2d 1444 (9th Cir. 1990) …………………………………………….. 2, 10

In re U.S. Brass Corp.,
110 F.3d 1261 (7th Cir. 1997) …………………………………………….. 7

Veys v, Riske,
No. C07-5625BHS, 2007 U.S. Dist. LEXIS 90623 (W.D. Wash. Nov.
28, 2007)………………………………………………………………. 14, 15

Statutes

11 U.S.C. § 157(b)(2)………………………………………………….. 8

11 U.S.C. § 157(b)(2)(H)……………………………………………….. 8, 14

11 U.S.C. § 157(c)…………………………………………………….. 15

28 U.S.C. § 157(c)(1)………………………………………………….. 6

28 U.S.C § 157(d)……………………………………………………… 1, 5

Bankruptcy Code Section 329…………………………………………………. 4, 9

Bankruptcy Code Section 510(c)(1)……………………………………………. 4

Bankruptcy Code Section 548………………………………………………….. 9, 11, 13

Other Authorities

Federal Rule of Bankruptcy Procedure 5011……………………………………… 1, 5

Local Bankruptcy Rule 5011-1………………………………………………….. 1

MEMORANDUM OF POINTS AND AUTHORITIES

I. INTRODUCTION

Pursuant to 28 U.S.C. § 157(d), Rule 5011 of the Federal Rule of Bankruptcy Procedure, Rule 5011-1 of the Local Bankruptcy Rules — Central District of California, and Rule 9 (5011-9) of Chapter IV of the Local Civil Rules — Central District of California, defendants Rodger M. Landau (“Mr. Landau”) and Landau Gottfried & Berger LLP (“LGB”) (together, “Defendants”) submit this Memorandum of Points and Authorities in support of their motion (the “Motion”) for an order withdrawing the reference of this adversary proceeding (“Adversary Proceeding”) to the United States Bankruptcy Court for the Central District of California, San Fernando Valley Division (“Bankruptcy Court”).

The Complaint commencing this Adversary Proceeding [1] was filed on September 9, 2015. Defendants have not yet filed a response to the Complaint, and the initial status conference has not yet taken place and presently is set for December 8, 2015 in the Bankruptcy Court. There have been no other proceedings in the Adversary Proceeding. [2] Although they have not yet filed a response to the Complaint, Defendants will, and hereby do, demand trial by jury, and do not consent to a jury trial in the Bankruptcy Court.

In the Complaint, Plaintiff, David K. Gottlieb, in his capacity as the chapter 7 trustee for each of KSL Media, Inc. (“KSL”), T.V. 10’s, LLC (“TV 10s”) and Fulcrum 5, Inc. (“Fulcrum 5” and, together with KSL and TV 10s, the “Debtors”), asserts claims for pre-bankruptcy and post-bankruptcy professional negligence, breach of fiduciary duty and breach of contract — all of which are based on substantive California law and are non-core claims as to which Defendants are entitled to a jury trial — together with claims for pre-bankruptcy constructively fraudulent transfers (also a jury trial claim), disgorgement of fees, disallowance of fees and equitable subordination of fees — all of which are predicated on the claims for professional negligence, breach of fiduciary duty and breach of contract and the same set of facts that underlie those state law claims. Moreover, Mr. Landau is a defendant only as to those claims on which he is entitled to a jury trial. [3]

The Adversary Proceeding was automatically assigned to Bankruptcy Judge Martin R. Barash, the presiding judge in the Debtors’ bankruptcy cases. Judge Barash recently recused himself from presiding over the Adversary Proceeding, which has been reassigned to Bankruptcy Judge Geraldine Mund. Judge Mund has not participated in any aspect of the Debtors’ bankruptcy cases or this Adversary Proceeding (other than to set a status conference).

Withdrawing the reference at this time will promote the interests of judicial efficiency and economy and is warranted in light of the predominant non-core claims, and the fact that the claims for fraudulent transfer, disgorgement of fees, disallowance of fees and equitable subordination of fees are themselves based on the same set of factual allegations as are the non-core claims. Furthermore, the right to a jury trial exists for the non-core state law claims and (because Defendants have not filed proofs of claim in the Bankruptcy Cases) for the constructive fraudulent transfers claim. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58-59 (1989) . Because Defendants have requested a jury trial and do not consent to the Bankruptcy Court conducting that trial, the trial must be conducted by the District Court, an Article III court. Taxel v. Electronic Sports Research (In re Cinematronics, Inc.), 916 F.2d 1444, 1451 (9th Cir. 1990) .

Moreover, because the Adversary Proceeding has only just been commenced and has been reassigned from Bankruptcy Judge Martin Barash, who presides over the Debtors’ bankruptcy cases, to Bankruptcy Judge Geraldine Mund, who has no prior experience with the Debtors’ cases or the Adversary Proceeding, the Bankruptcy Court has no greater familiarity with the facts and issues of the Adversary Proceeding than will this Court. In addition, as set forth in greater detail in Defendants’ concurrently-filed Notice of Related Case (L.R. 83-1.3), this action is related to In Re KSL Media, Inc., David K. Gottlieb, as Chapter 7 Trustee for KSL Media, Inc. v. Kalman Liebowitz et al., Central District Case No. CV 15-02143-AB, pending before the Hon. Andre Birotte Jr. (the “Liebowitz Action”). Defendants believe that the Liebowitz Action is a related case because both cases (a) arise from a closely-related transaction, happening or event (the insolvency and bankruptcy of the KSL Entities), (b) call for a determination of substantially related or similar questions of law or fact (whether the KSL insiders breached their fiduciary duties or negligently caused damage to KSL pre-bankruptcy or to the Debtors’ estates in bankruptcy), and (c) would entail substantial duplication of labor if heard by different judges. L.R. 83-1.3.1. Defendants in the Liebowitz Action filed a motion to withdraw the reference, which was granted by Judge Birotte on April 15, 2015. The Liebowitz Action has been pending before Judge Birotte since that time. Accordingly, withdrawing the reference at this time will promote the interests of judicial efficiency and economy, and will not have any effect on the uniform administration of bankruptcy law.

II. STATEMENT OF FACTS

The Debtors commenced their bankruptcy cases by filing voluntary petitions for relief under chapter 11 on September 11, 2013. By a Bankruptcy Court order entered on October 10, 2013, the bankruptcy cases are jointly administered. (D. E. 134; Exh. 4 to Isola Decl.). Following the Debtors’ motions, the cases were converted from chapter 11 to chapter 7 by Bankruptcy Court order entered on December 30, 2013. (D. E. 430; Exh. 5 to Isola Decl.).

Plaintiff filed the Complaint on September 9, 2015. Defendants have not yet filed a response to the Complaint. By a stipulation between Defendants and Plaintiff dated October 8, 2015 and approved by a Bankruptcy Court order entered on October 14, 2015, [4] Defendants have until November 12, 2015 to file their response to the Complaint. The initial status conference in the Bankruptcy Court is set for December 8, 2015. There have been no other proceedings in the Adversary Proceeding.

The Complaint asserts claims for (1) professional negligence (Complaint ¶¶ 103-114), (2) breach of fiduciary duty (¶¶ 115-122), (3) breach of contract (¶¶ 123-134), (4) constructively fraudulent transfer (¶¶ 135-140), (5) disgorgement of pre-petition fees pursuant to Section 329 of the Bankruptcy Code (¶¶ 141-149), (6) disallowance of post-petition fees, also pursuant to Section 329 of the Bankruptcy Code (¶¶ 150-154), and (7) equitable subordination of fees pursuant to Section 510(c)(1) of the Bankruptcy Code (¶¶ 155-160). By a further Stipulation between the parties [5] , Plaintiff has confirmed that Mr. Landau is a defendant only in the first, second and fourth claims.

The alleged facts giving rise to these claims are set forth at length in pages 4-16 of the Complaint. Generally, the allegations are that Defendants failed to adequately perform as counsel to the Debtors prior to the commencement of the bankruptcy cases, and thereafter until the bankruptcy cases were voluntarily converted from chapter 11 to chapter 7, thereby breaching their professional, fiduciary and contractual duties to the Debtors. [6] These allegations are directed not only to the claims for professional negligence, breach of fiduciary duty and breach of contract; they also are made the basis for the remaining claims as well; and they are expressly incorporated by reference at the beginning of each of the seven claims for relief set forth in the Complaint. Complaint ¶¶ 103, 115, 123, 135, 141, 150 and 155.

III. ARGUMENT

A. Applicable Legal Standard

At its discretion, the District Court may, on its own motion or on motion timely filed by any party for cause shown, withdraw any case or proceeding referred to the bankruptcy court. See 28 U.S.C. § 157(d); Fed. R. Bankr. P. 5011. Although Section 157(d) does not define “cause,” in Security Farms v. Int’l Bhd. Of Teamsters, etc., 124 F.3d 999 (9th Cir. 1997), the Ninth Circuit held that the District Court “should consider the efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors,” in determining whether cause to withdraw the reference exists. Id. at 1008. Other relevant factors include: (a) whether the claim is core or non-core; (b) whether the claim is legal or equitable; (c) whether the claim is triable by a jury; (d) the most efficient use of judicial resources; (e) reduction of forum shopping; (f) conservation of estate and non-debtor resources; and (g) uniformity of bankruptcy administration. In re Daewoo Motor America, Inc., 302 B.R. 308, 310 (Bankr. C.D. Cal. 2003), citing Orion Pictures Corp. v. Showtime Networks, 4 F.3d 1095, 1101 (2d Cir. 1993), cert. dismissed, 511 U.S. 1026, 128 L. Ed. 2d 88, 114 S. Ct. 1418 (1994) . Analysis of these factors strongly supports withdrawal of the reference of the Adversary Proceeding.

B. This Motion to Withdraw the Reference is Timely

There is no specific deadline or timetable for bringing a motion to withdraw the reference in Section 157(d). Am. Coal Co. v. Enron N. Am. Corp. (In re Enron Corp.), No. 03 Civ. 1727 (LTS), 2003 U.S. Dist. LEXIS 19543, at *10 n.4 (S.D.N.Y. 2003). Indeed, it has been held that the reference may be withdrawn at any time. In re Hall, Bayoutree Associates, Ltd., 939 F.2d 802, 805 (9th Cir. 1991) . In general, the party seeking withdrawal of the reference should file its motion as early as is practicable, and the court will determine whether the timing of the motion is reasonable under the circumstances. Eide v. Haas (In re H & W Motor Express Co.), 343 B.R. 208, 213 (N.D. Iowa 2006).

In this case, the Complaint was filed very recently, on September 9, 2015, and has been reassigned to Bankruptcy Judge Mund, who has no prior experience with any aspect of the facts or issues. The Defendants have not yet responded to the Complaint and their time to do so has been extended to November 12, 2015. The first status conference is currently set for December 8, 2015. As such, this Motion is brought before any substantive decisions have been made in the Adversary Proceeding. Accordingly, there can be no doubt that the Motion is timely. See, Addison v. United States Dep’t of Educ. (In re Addison), 240 B.R. 47, 49, n.1 (Bankr. C.D. Cal. 1999) (motion to withdraw the reference was timely when filed within two months after complaint was filed); Official Committee of Unsecured Creditors of Appalachian Fuels, LLC v. Energy Coal Resources, Inc. (In re Appalachian Fuels, LLC), 472 B.R. 731, 736-37 (E.D. Ky. 2012) (motion filed three months after amended complaint was timely).

C. Non-Core Claims and Claims as to Which the Bankruptcy Court May Not Enter a Final Judgment Dominate the Adversary Proceeding

1. The First, Second and Third Claims for Relief Are Non-Core Claims

The Bankruptcy Court cannot issue a final order on non-core claims, but is instead required to make proposed findings of fact and conclusions of law for de novo review by the District Court. 28 U.S.C. § 157(c)(1); Piombo Corp. v. Castlerock Props. (In re Castlerock Props.), 781 F.2d 159, 161-62 (9th Cir. 1986) . It therefore is helpful to first determine whether a claim is “core” or “non-core” in considering in determining whether the reference should be withdrawn, because this determination implicates the efficiency and uniformity factors. In re Daewoo Motor America, Inc., supra, 302 B.R. at 311 (citing Orion Pictures Corp, supra, 4 F.3d at 1101 ). Nonetheless “[w]hether the claim is core or non-core is not dispositive of the motion to withdraw, but merely a factor to consider.” Id. at 310.

In the Complaint, the claims for relief are erroneously alleged to be entirely “core.” Complaint, ¶ 1. An examination of the claims asserted, however, reveals a different reality, one that supports withdrawal of the reference.

The Ninth Circuit has adopted a “relatively narrow interpretation” of what should be considered a “core proceeding.” In re Com 21, No. C-04-03396, 2005 U.S. Dist. LEXIS 34339, at *13 (N.D. Cal. July 6, 2005). In the Ninth Circuit, a core proceeding is one that “invokes a substantive right provided by title 11 or . . . a proceeding that, by its nature, could arise only in the context of a bankruptcy case.” Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1081 (9th Cir. 2000) ; accord, Grant African Methodist Episcopal Church of Los Angeles v. White, No. CV 10-2845 AHM, 2010 U.S. Dist. LEXIS 53038, at *3 (C.D. Cal. May 11, 2010). Noncore proceedings are those not integral to the restructuring of debtor-creditor relations and not involving a cause of action arising under title 11.” Grant African Methodist Episcopal Church of Los Angeles, supra, at *3-*4. Thus, where a lawsuit could just as easily have been brought in a state court, it is not a core proceeding. Eastport Assocs. v. City of Los Angeles (In re Eastport Assocs.), 935 F.2d 1071, 1077 (9th Cir. 1991) ; see also, Dunmore v. United States, 358 F.3d 1107, 1115 (9th Cir. 2004) ; In re U.S. Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997) .

The Complaint’s first three claims for relief are for professional negligence, breach of fiduciary duty and breach of contract (an “Engagement Agreement”). There can be no doubt that these are non-core claims that arise solely under California law and could have been brought in state court. See, e.g., Ross v. Yaspan, No. CV 12-07048 DDP (FFMx), 2013 U.S. Dist. LEXIS 95710, at *12 (C.D. Cal July 9, 2013) (” legal malpractice claims are state law causes of action”); Pereira v. Farace, 413 F.3d 330, 339-40 (2d Cir. 2005), cert. denied, 126 S. Ct. 2286, 164 L. Ed. 2d 812, 2006 U.S. LEXIS 3965 (U.S., 2006) (breach of fiduciary duty claim is legal where damages are sought; see discussion below); and Granite Rock Co. v. Int’l Bhd. of Teamsters, 649 F.3d 1067, 1069 (9th Cir. 2011), cert. denied, Teamsters Local 287 v. Granite Rock Co., 2011 U.S. LEXIS 8779 (U.S., Dec. 5, 2011) (contract claim is legal). The Bankruptcy Court cannot enter a final order on any of these claims.

2. The Fraudulent Transfer Claim

Section 157(b)(2) sets forth a non-exclusive list of core proceedings. 11 U.S.C. § 157(b)(2). However, the Supreme Court held, in Stern v. Marshall, ___ U.S. ___, 131 S. Ct. 2594, 180 L. Ed. 475, 2011 U.S. LEXIS 4791, rehearing denied, ___ U.S. ___, 132 S. Ct. 56, 180 L. Ed. 2d 924, 2011 U.S. LEXIS 5143 (2011) (“Stern”), that with respect to at least one of the enumerated core proceedings, the statutory authority granted to bankruptcy courts to enter final orders by Section 157(b)(2) may not meet constitutional muster. In Stern, the Supreme Court held that, notwithstanding the inclusion in Section 157(b)(2)(C) of “counterclaims by the estate against persons filing claims against the estate” as “core,” a bankruptcy court would not have the constitutional authority to enter a final order on a state law counterclaim for tortious interference asserted by the debtor against a defendant who had filed a proof of claim in the bankruptcy case for defamation. Stern, 131 S. Ct. at 2615-6 ; 180 L. Ed. 2d at 501. While Stern dealt only with counterclaims under Section 157(b)(2)(C), the Ninth Circuit has extended its scope to fraudulent transfer claims, such as those asserted in the fourth claim for relief in the Complaint, notwithstanding their designation as “core” under Section 157(b)(2)(H). Mastro v. Rigby, 764 F.3d 1090, 1093-94 (9th Cir. 2014) (fraudulent transfer claims are “Stern claims” that are “defined as `core’ under § 157(b) but may not, as a constitutional matter, be adjudicated as such.”).

As a result, despite its being designated as a “core” claim in Section 157(b)(2)(H), the Bankruptcy Court cannot enter a final order with respect to the fourth claim for relief because that claim to recover fraudulent transfers under Section 548 is a “Stern claim.” Instead, as with the three non-core claims, the Bankruptcy Court is limited to making proposed findings of fact and conclusions of law which must be reviewed de novo and then entered by the District Court.

The presence of core claims in a complaint that also includes non-core claims does not mandate denial of a motion to withdraw the reference. See, Burdette v. Emerald Partners LLC, NO. C15-0816-JCC, 2015 U.S. Dist. LEXIS 93127, at *6-*7 (W.D. Wash. July 16, 2015) (granting motion to withdraw reference where complaint included core claims for fraudulent transfer and improper post-petition transfer together with other non-core claims).

Here, the non-core claims and the fraudulent transfer claim as to which the Bankruptcy Court cannot enter a final judgment dominate the adversary proceeding. The same factual allegations in the Complaint on which the non-core claims and the Bankruptcy Code section 548 fraudulent transfer claim are based also underpin the remaining claims for disgorgement and disallowance of fees under section 329 and equitable subordination of fees under section 510. Compare, Burdette, supra, at *4, in which it appears that allegations of breach of contract/lease underlay both core and non-core claims.

Accordingly, withdrawal of the reference in this case is warranted, given the predominance of the three non-core claims and the fraudulent transfer claim as to which no final judgment may be issued by the Bankruptcy Court, and that the alleged conduct that would need to be proven to succeed on those claims also must be proven for Plaintiff to prevail on the remaining, arguably core, claims.

D. Withdrawal of the Reference is Appropriate Because the Claims in the Complaint are Predominantly Legal, Not Equitable, and Defendants Have Requested and Are Entitled to a Jury Trial on Those Claims

Defendants are entitled to and have requested a jury trial on all claims for relief properly triable to a jury. They do not, however, consent to a jury trial in the Bankruptcy Court. Taxel v. Electronics Sports Research (In re Cinematronics, Inc.), 916 F.2d at 1451 (“[B]ankruptcy courts cannot conduct jury trials on noncore matters, where the parties have not consented.”). Accordingly, only this Court, as an Article III court, may conduct the trial in this case. Because each of the seven claims for relief asserted by Plaintiff is based on the same set of disputed facts which will require a jury trial, withdrawal of the reference is appropriate now.

Defendants’ right to a jury trial applies to each of the first three claims for relief in the Complaint, for professional negligence, breach of fiduciary duty and breach of contract, because these claims are legal and the remedy sought is damages, not any form of equitable relief. See, Complaint ¶¶ 114, 122 and 124 (each alleging, with regard to the first, second and third claims for relief, respectively, that “Debtors have sustained substantial economic harm”); Complaint p. 22:, 1. 3 (requesting an award of compensatory damages). See, Granfinanciera, 492 U.S. 33, 48 (1989) (“[W]here an action is simply for the recovery . . . of a money judgment, the action is one at law”) (internal citation and quotation marks omitted); see also, Pereira, 413 F.3d at 340 (breach of fiduciary duty claim that seeks compensatory damages is legal, not equitable, entitling defendant to jury trial); Allied Systems Holdings, Inc. v. Yucaipa American Alliance Fund I, L.P., 524 B.R. 598, 614 (Bankr. D. Del. 2015) (same); DePinto v. Provident Security Life Ins. Co., 323 F.2d 826, 837 (9th Cir. 1963) (“[W]e hold that where a claim of breach of fiduciary duty is predicated upon underlying conduct, such as negligence, which is actionable in a direct suit at common law, the issue of whether there has been such a breach is . . . a jury question.”); Granite Rock Co., 649 F.3d at 1070 (claim for monetary damages for a breach of contract is “an essentially legal claim” entitled to jury trial).

Moreover, a defendant in a fraudulent transfer claim brought under Section 548 of the Bankruptcy Code (as is the case with the Defendants in the Adversary Proceeding) who has not filed a proof of claim in the underlying bankruptcy case (and no proof of claim has been filed by Defendants) [7] is entitled to a jury trial. Granfinanciera, supra, 492 U.S. at 64 . Accordingly, Defendants also are entitled to a jury trial with respect to the fourth claim for relief, for constructive fraudulent transfer.

In addition, Mr. Landau is named as a defendant in only the first through fourth claims for relief, which will require a jury trial. He is not a defendant in any of the remaining claims for which a jury trial is not required.

Finally, each of Plaintiff’s seven claims for relief is based upon the identical operative facts — specifically that Defendants purportedly failed to meet the applicable standard of care in representing KSL pre-petition and the Debtors in the bankruptcy case. Complaint ¶¶ 108, 115, 123, 135, 141, 150 and 155. Based on the allegations of the Complaint, Plaintiff must first prove the jury trial claims that Defendants committed legal malpractice (i.e., the first claim for relief) to prevail on the second through fourth claims for relief (for breach of fiduciary duty, breach of contract and to recover constructive fraudulent transfers) [8] before Plaintiff can prevail on his non-jury trial fifth through seventh claims (for disgorgement, disallowance and subordination of fees) [9] .

For each of the above-stated reasons, judicial efficiency and consistency are enhanced by withdrawing the reference to this Court where a full jury trial can be conducted. See, In re Daewoo Motor America, Inc., 302 B.R. at 314 (existence of a right to jury trial militates strongly in favor of withdrawing the reference).

E. Judicial Efficiency Supports Withdrawing the Reference Because Non-Core Claims and Claims as to which the Bankruptcy Court Cannot Enter a Final Order Predominate

Where, as here, non-core issues and claims as to which the Bankruptcy Court may not enter a final order predominate, judicial efficiency is enhanced by withdrawing the reference because the District Court will, in any event, be required to review the Bankruptcy Court’s decision de novo. Security Farms, 124 F.3d at 1008 ; see also, Hanfling v. Epstein, Becker & Green (In re ATG Catalytics), No. C-04-1450, 2004 Dist. LEXIS 23617, at *5 (N.D. Cal. July 19, 2004) (“Judicial efficiency is enhanced by withdrawing the reference because non-core issues predominate”). “Inasmuch as a bankruptcy court’s determinations on non-core matters are subject to de novo review by the district court, unnecessary costs could be avoided by a single proceeding in the district court.” Security Farms, 24 F.3d at 1009. Rather than having the Bankruptcy Court go through the process of making decisions which then must be reviewed de novo in this Court, judicial efficiency is served by having the disputes decided in the first instance by this Court, which may constitutionally enter a final judgment.

Moreover, as set forth in greater detail in Defendants’ concurrently-filed Notice of Related Case (L.R. 83-1.3), [10] this action is related to the Liebowitz Action, Central District Case No. CV 15-02143-AB. The cases are related because both actions (a) arise from a closely-related transaction, happening or event (the insolvency and bankruptcy of the KSL Entities), (b) call for a determination of substantially related or similar questions of law or fact (whether the KSL insiders breached their fiduciary duties or negligently caused damage to KSL pre-bankruptcy or to the Debtors’ estates in bankruptcy), and (c) would entail substantial duplication of labor if heard by different judges. L.R. 83-1.3.1. Defendants in the Liebowitz Action filed a motion to withdraw the reference, which was granted by Judge Birotte on April 15, 2015. The Liebowitz Action has been pending before Judge Birotte since that time.

Thus, consideration of this factor also weighs in favor of withdrawal of the reference in this Adversary Proceeding.

F. Withdrawal of the Reference Will Not Encourage Forum Shopping

A motion to withdraw the reference may promote forum shopping where withdrawal of the reference will “essentially reverse the bankruptcy court’s prior determinations.” Canter v. Canter (In re Canter), 299 F.3d 1150, 1154 (9th Cir. 2002) . There can be no such concerns here. The Adversary Proceeding has just commenced, and no substantive determinations of any kind have been made by the Bankruptcy Court. See, Lara v. Casimiro (In re Casimiro), No. CIV-F-06-0028 AWI SMS, 2006 U.S. Dist. LEXIS 41176, at *17 (E.D. Cal. June 6, 2006) (forum shopping not implicated where the withdrawal of the reference occurs before any “substantive ruling from the bankruptcy court which would give [the movant] any indication as to whether that court might tend to be favorable or unfavorable to their claims”). This logic is, if anything, even more compelling here, given that Bankruptcy Judge Barash, who presides over the Debtors’ bankruptcy cases, has recused himself from presiding over the Adversary Proceeding and that action has now been reassigned to Bankruptcy Judge Mund who has had no prior involvement whatsoever in the bankruptcy cases or the Adversary Proceeding. Isola Decl., Ex. 7.

Moreover, because the non-core claims and the fraudulent transfer claim under section 548, as to which the Bankruptcy Court may not enter final orders, predominate in the Adversary Proceeding, any decisions by the Bankruptcy Court on those claims will, in any case, be subject to de novo review by this Court, and there thus can be no suggestion of forum shopping. See, Security Farms, 124 F.3d at 1009 (effect of district court’s withdrawal of the reference was not to promote forum shopping because “without regard to withdrawal, the bankruptcy court’s order . . . inevitably was subject to the approval of the district court.”).

It follows that forum shopping is not implicated by the Motion, and the reference should be withdrawn.

G. Uniformity of Bankruptcy Administration will not be Disrupted by Withdrawal of the Reference

Consideration by this Court of non-core claims involving only the application of state law such as the claims in the Complaint for professional negligence, breach of fiduciary duty and breach of contract does not, and cannot, cause any disruption to the uniformity of bankruptcy administration, because such claims do not implicate such issues. Veys v. Riske, No. C07-5625BHS, 2007 U.S. Dist. LEXIS 90623, at *3 (W.D. Wash. Nov. 28, 2007) (complaint asserting non-core state law issues “would not disrupt the uniformity of bankruptcy administration because . . . [it] is largely independent from issues of bankruptcy administration”).

While the Complaint does contain claims that are arguably core in nature, this does not, on balance, militate against withdrawal of the reference. For reasons set forth above, the fraudulent transfer claim alleged in the Complaint, while a statutory core claim under 11 U.S.C. § 157(b)(2)(H), is a Stern claim as to which the Bankruptcy Court cannot, in any case, enter a final order. Moreover, all of the claims for relief in the Complaint are based, expressly by their incorporation in each of the claims for relief, on the same factual allegations that underlie the non-core claims. In other words, to prevail on any of the claims for relief, the Plaintiff must first show that he is entitled to prevail on these non-core state laws claims, a determination that does not implicate any issues peculiar to bankruptcy administration, and one that this Court is in at least as good a position to make as the Bankruptcy Court.

On balance, then, withdrawal of the reference in the Adversary Proceeding will not disrupt the uniformity of bankruptcy administration and is warranted.

H. Withdrawal of the Reference will Conserve Court and Party Resources

As an initial matter, withdrawal of the reference at this time would not cause unnecessary delay or cost because there have been no substantive proceedings, and no meaningful costs incurred, in the Bankruptcy Court. See, Veys, supra, 2007 U.S. Dist. LEXIS 90263, at *10 (“It appears that delay and costs associated with withdrawal would be insignificant because [the] adversary complaint is in its early stages.”).

On the other hand, because of the Complaint is predominantly for claims on which the Bankruptcy Court cannot enter a final order, not withdrawing the reference will inevitably cause additional costs to the parties and expenditure of additional court resources because whatever decision may be reached by the Bankruptcy Court will be reviewed de novo by this Court, a process that can be obviated if the reference is withdrawn. Herbst Gaming, Inc. v. Insurcorp (In re Zante, Inc.), No. 3:10-cv-00231-RCJ-RAM, 2010 U.S. Dist. LEXIS 137691, at *18 (D. Nev. Dec. 29, 2010) (withdrawing reference will save time and money where non-core claims “will have to be finally determined by the [District] Court after a second round of briefing in response to the bankruptcy court’s eventual recommendation.”); see also Okla. Natural Gas Co., Div. of ONEOK, Inc. v. Mahan & Rowsey, Inc., 48 B.R. 767, 771-72 (Bankr. W.D, Okla. 1985) aff’d, 786 F.2d 1004 (10th Cir. 1986) (no deference is owed by the district court to the bankruptcy court’s legal or factual findings, and may take its own evidence on de novo review under 11 U.S.C. § 157(c)).

Thus, consideration of the costs to the parties and the impact on the resources of the court supports withdrawal of the reference in this instance.

IV. CONCLUSION

Consideration of all of the relevant factors strongly favors withdrawal of the reference of in this case. Defendants therefore respectfully request that this Court enter its order withdrawing the reference of the Adversary Proceeding to the Bankruptcy Court.

DECLARATION OF PETER L. ISOLA

I, Peter L. Isola, declare as follows:

1. I am an attorney and partner with the law firm of Hinshaw & Culbertson LLP, counsel for defendants RODGER M. LANDAU and LANDAU GOTTFRIED & BERGER LLP. I submit this declaration in support of the above-named defendants’ Motion to Withdraw Reference to Bankruptcy Court. The matters in this declaration are based upon my own personal knowledge or upon my review of the court records in the above-captioned actions. If called as a witness, I could and would testify competently hereto under oath.

2. Attached hereto as Exhibit 1 is a true and correct copy of the Complaint filed on or about September 9, 2015 by plaintiffs in the adversary proceeding entitled Gottlieb, etc. v. Landau et al., case number 1:15-ap-01212-GM, United States Bankruptcy Court, Central District of California (San Fernando Valley Division) (the “Adversary Proceeding”). Attached hereto as Exhibit 2 is a true and correct copy of the Docket in the Adversary Proceeding, which was printed from the Bankruptcy Court’s PACER site on November 6, 2015.

3. Attached hereto as Exhibit 3 is a true and correct copy of the Stipulation Regarding Defendants Named In Claims For Relief In Complaint Filed By Plaintiff, filed in the Adversary Proceeding (D. E. 23). I obtained this document from the Bankruptcy Court’s PACER site.

4. Attached hereto as Exhibit 4 is a true and correct copy of the Bankruptcy Court order entered on October 10, 2013 declaring that the main bankruptcy cases are jointly administered. I obtained this document (D. E. 42, in the main case) from the Bankruptcy Court’s PACER site.

5. Attached hereto as Exhibit 5 is a true and correct copy of the Bankruptcy Court order entered on the Debtors’ filed motions to voluntarily convert their chapter 11 cases to chapter 7. The Order converting the cases to chapter 7 was entered by the Bankruptcy Court on December 30, 2013. I obtained this document (D. E. 430, in the main case) from the Bankruptcy Court’s PACER site.

6. Attached hereto as Exhibit 6 is a true and correct copy of the October 14, 2015 Bankruptcy Court order confirming that the Defendants’ response in the adversary proceeding is due November 12, 2015. I obtained this document (D. E. 15, in the Adversary Proceeding) from the Bankruptcy Court’s PACER site.

7. Attached hereto as Exhibit 7 is a true and correct copy of the October 22, 2015 Recusal Order that reassigned the Adversary Proceeding to Judge Geraldine Mund. I obtained this document (D. E. 18, in the Adversary Proceeding) from the Bankruptcy Court’s PACER site.

8. Attached hereto as Exhibit 8 is a true and correct copy of the Notice of Related Case that my office is filing today in this action on behalf of Defendants.

9. The Adversary Proceeding has a status conference scheduled for December 8, 2015 at 10:00 AM before Judge Mund. There has been no discovery or other activity in this matter.

I declare under penalty of perjury of the laws of the United States that the foregoing is true and correct. Executed this 9th day of November, 2015 in San Francisco, California.

Exhibit 1

Eric R. Wilson (CA Bar No. 192220)
William S. Gyves (Pro Hac Vice Application Pending)
KELLEY DRYE & WARREN LLP
101 Park Avenue
New York, NY 10178
Telephone: (212) 808-7800
Facsimile: (212) 808-7897
Email: [email protected]

Special Counsel to David K. Gottlieb,
Chapter 7 Trustee

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION

In re: Chapter 7

KSL MEDIA, INC., T.V. 10’s, LLC and Case No. 1:13-Bk-15929-MB
FULCRUM 5, INC.,
Jointly Administered with Case Nos.: 1:13-Bk-15930-MB
Debtors. and 1:13-Bk-15931-MB

[] Affects KSL Media, Inc.

[] Affects T.V. 10’s, LLC

[] Affects Fulcrum 5, Inc.

[X] Affects all Debtors

DAVID K. GOTTLIEB, as Chapter 7 Trustee Adv. No. _________
for KSL Media, Inc.; DAVID K. GOTTLIEB,
as Chapter 7 Trustee for T.V. 10’s, LLC; and
DAVID K. GOTTLIEB, as Chapter 7 Trustee COMPLAINT FOR PROFESSIONAL
for Fulcrum 5, Inc. NEGLIGENCE; BREACH OF
FIDUCIARY DUTY; BREACH OF
CONTRACT; CONSTRUCTIVELY
Plaintiffs, FRAUDULENT TRANSFER;
DISGORGEMENT OF FEES; AND
v. EQUITABLE SUBORDINATION

RODGER M. LANDAU and LANDAU
GOTTFRIED & BERGER LLP,

Defendants.

Plaintiff David K. Gottlieb (“Trustee” or “Plaintiff”), in his capacity as Chapter 7 Trustee in the above-captioned jointly administered bankruptcy cases (“Cases”) of debtors KSL Media, Inc., T.V.10’s, LLC and Fulcrum 5, Inc. (collectively, “Debtors”), by and through his undersigned counsel, as and for his Complaint against defendants Rodger M. Landau (“Landau”) and Landau Gottfried & Berger LLP (“Landau Gottfried”) (Landau and Landau Gottfried collectively, the “Defendants”), hereby alleges as follows:

JURISDICTION AND VENUE

1. This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. Venue in this Court is proper pursuant to 28 U.S.C. § 1409(a) and 1409(c). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E) and (H), and 11 U.S.C. §§ 329(b) and 510(c)(1).

2. The Trustee consents to the entry of final orders or judgment by this Court in this core proceeding if it is determined that this Court, absent the parties’ consent, cannot enter final orders or judgment consistent with Article III of the United States Constitution.

3. To the extent any of the claims in this Complaint are determined to be non-core, the Trustee consents to the entry of final orders or judgment by this Court.

NATURE OF THE ACTION

4. This action arises out of the Defendants’ negligent, disloyal and otherwise improper conduct through which they exploited their retention as the Debtors’ counsel while wholly abandoning their professional obligations to those clients. Indeed, throughout the course of their engagement, the Defendants pursued a course of conduct designed primarily to advance their interests and those of their preferred bankruptcy professionals to the detriment of the Debtors and their creditors.

5. In the pre-petition phase, the Defendants incurred excessive fees as they scrambled to position themselves to secure control of the Cases after the inevitable bankruptcy filing. Notwithstanding fees exceeding $500,000.00, the Defendants engaged in decidedly few of the pre-petition activities that reasonably would be expected of experienced bankruptcy counsel intent on serving their clients’ interests as opposed to their own.

6. Moreover, the Defendants’ representation of the Debtors in the pre-petition phase was marred by wasteful services and negligent counsel. Among other things, the Defendants orchestrated and blessed a $2 million preferential payment based on a patently incorrect legal analysis of the relevant law and facts, compelling the Trustee to incur substantial legal fees to avoid and recover that preference.

7. In the post-petition phase, the Defendants at every turn sought to minimize creditor recovery and maximize their fees while completely disrupting what should have been an efficient and expeditious proceeding. Incurring nearly $600,000.00 in additional fees during the post-petition period, the Defendants continued to negligently advise the Debtors and engage in conduct benefitting primarily themselves and their favored bankruptcy professionals to the detriment of the Debtors and their creditors.

8. In short, through an egregious pattern of negligence, self-dealing and disloyalty, the Defendants turned what should have been a straightforward proceeding into a contentious quagmire, utterly abandoning their professional obligations to provide the Debtors with sound and prudent legal advice.

9. The Trustee brings this action to recover for the damages sustained as a direct result of Defendants’ professional negligence, breach of fiduciary duty and breach of contract.

10. Further, the Trustee brings this action to (i) avoid amounts the Debtors paid to the Defendants pre-petition as constructively fraudulent transfers pursuant to 11 U.S.C. § 548(a)(1)(B), because the Debtors made such payments when they were insolvent and received less than reasonably equivalent value in exchange therefore; (ii) disgorge the Retainer (as defined below) pursuant to 11 U.S.C. § 329(b) due to the Defendants’ numerous breaches of their fiduciary and ethical obligations to the Debtors during the entire course of the Defendants’ engagement by the Debtors; (iii) disallow any claim for post-petition fees and expenses the Defendants may assert against the Debtors’ estates (any such claim or claims collectively, the “Fee Claim”) because such fees were excessive, unreasonable and unnecessary and were earned on account of professionally negligent and/or disloyal conduct that was not reasonably likely to benefit the Debtors’ estates or necessary to the administration of the Cases; and (iv) equitably subordinate any Fee Claim pursuant to 11 U.S.C. § 510(c)(1) because of the Defendants’ unfair and disloyal treatment of the Debtors.

THE PARTIES

The Trustee

11. On September 11, 2013, (the “Petition Date”), the Debtors filed their Chapter 11 petitions with this Court.

12. On December 30, 2013, the Court granted the Debtors’ motion to convert these cases to cases under Chapter 7 and David K. Gottlieb was appointed as Chapter 7 trustee for the bankruptcy estate of each of the Debtors.

Defendants

13. Landau Gottfried is a California limited liability partnership engaged in the practice of law.

14. Landau Gottfried holds itself out as being a “pre-eminent” insolvency boutique.

15. Landau at all relevant times was the Managing Partner of Landau Gottfried.

16. Landau Gottfried at all relevant times was counsel to the Debtors.

17. At all relevant times, Landau was the attorney at Landau Gottfried with primary responsibility for that firm’s representation of the Debtors.

FACTUAL BACKGROUND

KSL’s Rise and Fall

18. Advertising industry veteran Kalman S. Liebowitz founded KSL Media, Inc. (“KSL”) in or about 1981 to engage in the business of providing media planning and purchasing services.

19. KSL and debtors T.V. 10’s, LLC (“TV 10’s”) and Fulcrum 5, Inc. (“Fulcrum 5”) were affiliated entities substantially beneficially owned by Liebowitz. TV 10’s and Fulcrum 5 were formed to buy and re-sell specific types of media. KSL was the primary customer of TV 10’s and Fulcrum 5.

20. KSL was one of the first advertising firms to offer clients stand-alone media planning and purchasing services. At the time KSL was founded, the advertising industry was largely dominated by companies that offered creative services “bundled” with media buying services.

21. KSL focused on the media buying side of the business. It worked with each of its clients to develop a media buying plan detailing the placement of advertisements on a variety of media including television, radio, print, digital and billboards to ensure maximum exposure of that client’s products and services to consumers. Once a media plan was agreed to, KSL would purchase the media necessary to execute upon the plan.

22. Over three decades, KSL grew into one of the country’s largest independent media-buying companies. KSL’s client roster eventually came to include such high profile entities as Bacardi, Sweet’N Low, Boeing, Grey Goose Vodka, Countrywide Financial, PetSmart, City National Bank, Toshiba America Information Systems, Inc., Guitar Center, Inc., Frontier Communications and Sapporo USA. At its peak, KSL was annually placing between $250 million and $350 million of media advertising on behalf of its clients.

23. By all outward appearances, KSL was a thriving operation. The reality of KSL’s business and financial affairs, however, was entirely different.

24. From approximately 2002 forward KSL operated on a cash-negative basis. It had been insolvent for no less than six years prior to the Petition Date.

25. Indeed, for years KSL was able to maintain its operations only by using pre-paid advertising dollars from its clients to fund expenses and operating losses. Historically, KSL required most of its clients to pre-pay to KSL the estimated amount of the planned media purchases. These substantial pre-payments were made at or about the time KSL made the media purchases but well in advance of the time the media vendors would actually invoice KSL for those purchases.

26. Given the considerable delay between KSL’s receipt of client pre-payments and the due date for payment on the media purchases, on an ongoing basis KSL had access to substantial amounts of pre-paid funds from clients. For years, it tapped into that ready and substantial pool of cash in order to remain in business and project to its clients, creditors and the public at large the appearance of success. Were it not for this pool of available cash, for years KSL would not have been able to sustain either its operations or the illusion of success.

27. KSL’s gross mismanagement further complicated its precarious financial condition. KSL allowed its corporate controller to embezzle substantial sums of money from the company. Among other things, over time the controller improperly transferred an estimated $2-4 million of the Debtors’ funds to credit card accounts held by him and his wife for their personal use.

28. In addition, KSL’s management permitted the company’s financial records to fall into such a state of disarray that it was impossible to accurately track receipts and expenditures over a period of several years.

Debtors File for Relief Under Chapter 11

29. The death knell for KSL came in May 2013 when Bacardi, KSL’s largest client, pulled its $130 million account from the company. The loss of this revenue rendered KSL unable to continue its operations.

30. In or about May 2013, KSL and the other Debtors retained Landau and his firm, Landau Gottfried, to provide insolvency, bankruptcy and work-out advice.

31. Landau Gottfried subsequently secured from KSL and the other Debtors an $875,000.00 retainer (the “Retainer”).

32. For a short time, the Defendants also counseled the Debtors in connection with an attempt to sell their businesses. This plan was short-lived. Given the Debtors’ dire financial condition, management departures and the fact that their financial records were in complete disarray, the businesses quickly proved to be unmarketable.

33. The Defendants then returned their focus to advising their insolvent clients with regard to winding down their operations and preparing to file for bankruptcy protection.

34. Under the Defendants’ guidance, the Debtors ceased business operations, stopped making payments to media vendors and halted all further media purchases. They laid off nearly all of their employees. They also closed their New York and Las Vegas offices.

35. As was all but inevitable for months if not years, on September 11, 2013, each of the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.

36. The Defendants continued to represent each of the Debtors in the Chapter 11 proceedings.

37. Given the Debtors’ dire financial condition and virtually non-existent options, the administration of the Cases should have proceeded efficiently and expeditiously. Instead, due largely to the Defendants’ negligent, disloyal and otherwise improper acts and/or omissions as detailed below, the process unfolded in an unusually acrimonious and inefficient manner.

38. On October 2, 2013, the Debtors’ filed a proposed Chapter 11 liquidation plan with a projected effective date and liquidating trustee appointment extending six months into the future (the “Initial Chapter 11 Plan”). No proposed Disclosure Statement was filed in support of that plan.

39. On October 9, 2013, the U.S. Trustee formed an official committee of unsecured creditors (the “Committee”) consisting of Fox Cable Network Services, LLC, MacDonald Media, LLC, NBC Universal LLC, Telebrands Corp., TV Guide Networks, LLC, Valassis and Viacom Media Networks.

40. Almost immediately thereafter, administration of the Cases bogged down amidst extraordinary acrimony between the Committee and Debtors triggered by the Defendants’ unprofessional and self-serving conduct. The Defendants consistently staked out positions lacking any basis in fact or law. These positions were designed to advance the Defendants’ agenda rather than the interests of the Debtors or their creditors.

41. The situation soon became untenable. On December 27, 2013, the U.S. Trustee filed a motion to immediately appoint a Chapter 11 trustee to oversee the liquidation of the Debtors’ estates and maximize their remaining assets for the benefit of creditors.

42. In his motion, the U.S. Trustee noted the lack of progress Debtors, under the Defendants’ guidance, had made since commencing the Chapter 11 proceedings more than three months earlier.

43. Specifically, the U.S. Trustee noted that in what he described as a “straightforward liquidation case,” there already should have been a disclosure statement on file and scheduled for a hearing. Yet under the Defendants’ guidance, the U.S. Trustee noted, no disclosure statement had been filed and the proceedings had become “fraught with delay over matters such as whether Debtors or creditors will object to claims, and whether exculpatory clauses” will be provided to the KSL employee placed in charge of the wind-down.

44. The U.S. Trustee also noted that more than three months into the Chapter 11 proceedings, the Debtors still had not provided accurate information about the Cases to the Court or creditors. Instead, the U.S. Trustee stated, the Debtors, acting under the Defendants’ advice and counsel, filed “two complete sets of inaccurate voluminous schedules and statements of financial affairs, signed under penalty of perjury.”

45. Further, the U.S. Trustee maintained that “critical decisions” affecting the Chapter 11 proceedings were being made by persons other than the Debtors’ principals.

Defendants Scramble to Convert to Chapter 7

46. The U.S. Trustee’s application to appoint a Chapter 11 trustee was scheduled to be heard on January 22, 2014. The hearing never came to pass. Instead, one business day after the U.S. Trustee filed the application, the Debtors rushed to file a motion to convert the Cases to Chapter 7.

47. That same day, the Court entered orders converting each of the Cases to Chapter 7 and appointing the Trustee as Chapter 7 trustee in each of the Cases.

48. The decision to convert to Chapter 7, as orchestrated by the Defendants, was designed in part to disrupt the Committee’s efforts in these Cases without consulting with the Debtors’ other professionals, the Committee or the Committee’s professionals. Specifically, by advising the Debtors’ remaining employees to immediately resign following the conversion of the Cases, the Defendants caused tremendous hardship to the employees and disruption to the Chapter 7 trustee’s ability to efficiently transition the Cases from Chapter 11 to Chapter 7. At the time, the Defendants knew that the Chapter 7 trustee would require the employees’ services to effectively and efficiently reconcile the Debtors’ accounts. The Defendants’ conduct is best described as an attempt to burn down the house on their way out the door, causing harm to the Debtors and their creditors.

The Trustee’s Investigation of Defendants

49. On September 12, 2014, the Trustee filed an application to retain special counsel (“Special Counsel”) to, among other things, investigate the pre-petition and post-petition activities of the Debtors’ and Committee’s professionals and advisors, including the Defendants.

50. The investigation was prompted, in part, by allegations raised in the U.S. Trustee’s motion to appoint a Chapter 11 Trustee. Therein, the U.S. Trustee maintained that dysfunction and acrimony between the Debtors and the Committee, as well as their respective counsel, appeared to have significantly hindered the administration of the Cases.

51. On October 1, 2014, the Court approved the Trustee’s retention of Special Counsel, nunc pro tunc to August 15, 2014.

52. Special Counsel was tasked with, among other things, investigating the pre-petition and post-petition activities of the Debtors and other interested parties, as well as their professionals and advisors. Special Counsel was directed to evaluate, resolve and, if necessary, prosecute any and all viable legal claims against those persons.

53. Over the next several months, Special Counsel conducted extensive diligence on numerous potential claims and issues regarding the activities of the Debtors’ and Committee’s professionals and advisors.

54. The investigation included informal interviews of persons with relevant knowledge, as well as the review of tens of thousands of pages of documents and pleadings.

55. With the exception of Landau Gottfried, the Trustee has amicably resolved all disputes with those professional firms whose fees were deemed excessive or otherwise questionable.

56. Special Counsel made numerous attempts to interview Landau as part of its investigation. The Defendants refused, ultimately insisting that the Trustee obtain a Rule 2004 order if he wished to examine Landau.

57. At considerable additional and unnecessary expense, the Trustee on June 4, 2015 did secure a Rule 2004 order. Special Counsel conducted Landau’s examination on June 30, 2015.

58. Based on Special Counsel’s investigation, including its extensive examination of Landau, the Trustee determined that the fees accrued by Landau Gottfried both before and after the bankruptcy filings were excessive and that Defendants’ conduct in material respects was improper or otherwise actionable.

59. The Defendants have rebuffed the Trustee’s attempt to effect an amicable resolution to the issues raised with respect to, and claims arising out of, their acts and/or omissions as set forth below.

Defendants’ Improper Pre-petition Conduct

60. Despite the fundamentally straightforward nature of the Cases, by the Petition Date Landau Gottfried already had applied $511,627.27 from the Retainer to its fees and expenses relating to services rendered between May 22, 2013 and September 11, 2013 (collectively, the “Pre-petition Fees”). Landau Gottfried returned the balance of the Retainer to the Debtors.

61. These pre-petition services provided little or no material benefit to the Debtors. To the contrary, those services were intended primarily to advance the interests and did advance the interests of only the Defendants and their favored bankruptcy professionals.

62. Indeed, during the pre-petition period Landau Gottfried attorneys, including Landau, conferred regarding a strategy designed to ensure that the Defendants retained control of the proceedings after the Debtors’ inevitable bankruptcy filing. It was this strategy that preoccupied the Defendants throughout the pre-petition period rather than a good faith attempt to fulfill their professional and contractual obligations to advance the interests of the Debtors.

63. Notwithstanding Pre-petition Fees exceeding half a million dollars, the Defendants engaged in decidedly few of the pre-petition activities that reasonably may have justified the incurrence of such significant fees.

64. For example, the Defendants neither facilitated nor engaged in any good faith efforts to negotiate an out-of-court resolution with creditors.

65. Similarly, the Defendants prepared no significant first-day motions.

66. Moreover, the Defendants did not have to negotiate with a secured lender and did nothing to assist the Debtors in securing debtor-in-possession financing.

67. Further, the Defendants took no steps to position the Debtors to enter Chapter 11 with any coherent strategy other than to retain control for the Defendants’ own benefit and to delay at any and all costs the confirmation of a liquidation plan.

68. Indeed, throughout the pre-petition period the Defendants did little more than spin wheels. For example, the Defendants devoted time to advising on a potential sale of the Debtors’ businesses. They did so although they knew or should have known that the Debtors had been insolvent for years and were, in fact, wholly unmarketable.

69. In another particularly wasteful exercise, the Defendants ran up significant fees in connection with revising and updating schedules that they knew or should have known were based on incomplete and largely unreliable financial data. This financial data was in a near-constant state of flux while efforts to make sense of the Debtors’ financial records were ongoing.

70. The Defendants’ efforts devoted to revising and updating these schedules were unnecessary and the related fees were wholly unjustified. Indeed, the time spent on, and the fees relating to, these tasks could and should have been avoided altogether simply by filing interim schedules subject to amendment upon completion of a reconciliation of the Debtors’ clients’ accounts. Such interim schedules could and should have simply listed the Debtors’ liabilities as being contingent, unliquidated or disputed.

71. Similarly self-serving and wasteful were the Defendants’ efforts in directing the reconstruction of the Debtors’ books and records. These services were rendered not for the benefit of the Debtors or their creditors; instead, they were designed to lock-in the role of the Defendants and their favored bankruptcy professionals after the bankruptcy filing that was all but inevitable.

72. No less self-serving and improper was the Defendants’ role in advising the Debtors to enter bankruptcy with their former bookkeeper — Janet Miller-Allen — as their newly appointed controller. Just one month prior to the Petition Date, Landau coordinated and endorsed Miller-Allen’s elevation to the controller position and appointment as the person with ultimate responsibility for the Debtors’ wind-down process.

73. Miller-Allen plainly was not qualified to oversee the winding-down of one of the country’s largest media buying companies.

74. Outmatched and woefully ill-equipped for her position, Miller-Allen was easily influenced and exploited by the Defendants. Landau, rather than the Debtors themselves, thus was able to make key business decisions relating to the chapter 11 cases. With no sophisticated executive or restructuring professional available to rein them in, the Defendants essentially had carte blanche and were able to orchestrate decisions holding no cognizable benefit for the Debtors or their creditors.

75. For example, in August 2013 — on the eve of the bankruptcy filings — Landau advised on and blessed a massive preferential payment to Cumberland Packing Corp. (“Cumberland Packing”), the manufacturer and distributor of Sweet’N Low, intended primarily to benefit the Debtors’ insiders.

76. The nearly $2 million payment related to a 2012 settlement agreement between Cumberland Packing and KSL concerning a dispute between those parties. The $2 million payment was a pre-payment of the remaining amounts due under the agreement.

77. A resolution of the Debtors’ Board of Directors dated August 9, 2013 reflects that KSL made the nearly $2 million payment to Cumberland Packing in reliance upon Landau’s advice and counsel.

78. Landau had advised KSL that the debt owed to Cumberland Packing constituted a perfected secured obligation on which Cumberland Packing likely would be paid in full upon a bankruptcy filing. Specifically, Landau advised KSL that Cumberland Packing was “a secured creditor with perfected security interests.”

79. This legal advice was patently incorrect. It did not constitute or reflect a reasoned exercise of informed legal judgment grounded upon a diligent and professional evaluation of the relevant facts and controlling legal principles.

80. In fact, the $2 million payment was made to benefit Liebowitz and Harold Cohen, KSL’s majority beneficial owner and its Chief Executive Officer, rather than for the benefit of KSL or its creditors.

81. Pursuant to KSL’s settlement with Cumberland Packing, Liebowitz and Cohen would be personally liable for the $2 million payment if KSL defaulted in making payments to Cumberland Packing.

82. The sole and wholly improper purpose of the $2 million payment approved by Landau was to shield Liebowitz and Cohen from personal liability for the payment.

83. As cover for the impropriety of the $2 million payment, Landau opined that it would significantly benefit KSL because the pre-petition payment would avoid an expensive cash collateral fight when KSL eventually filed for bankruptcy protection, and Cumberland Packing was fully secured in any event.

84. Landau’s cash collateral fight justification was baseless and simply not credible because as of the Petition Date, KSL held in excess of $30 million in cash in its accounts, and Cumberland Packing held no perfected security interest therein.

85. As a result of the Defendants’ negligence and unprofessionalism in approving of the payment, the Trustee ultimately was compelled to commence litigation to recover the $2 million payment, incurring hundreds of thousands of dollars in legal fees as a result.

Defendants’ Improper Post-petition Conduct

86. The Defendants’ negligent, disloyal, unprofessional and otherwise improper conduct continued well beyond the Petition Date as Landau and his firm strained at every turn to disrupt the proceedings and minimize creditor recovery.

87. Running up nearly $600,000.00 in additional fees and expenses during the post-petition period (collectively, all such amounts the “Post-petition Fees”), the Defendants continued to perform services that benefitted primarily themselves to the considerable detriment of the Debtors’ estates and creditors.

88. As they did in the pre-petition period, the Defendants continued to coordinate the unnecessary preparation and amendment of schedules that they knew or should have known were subject to constant and material change as the reconciliation process proceeded.

89. Until the reconciliation process was completed, the figures on the schedules to which the Defendants were devoting considerable time were subject to multi-million dollar swings, literally on a daily basis. Nonetheless, the Defendants incurred substantial bills continually modifying these schedules that essentially were obsolete and useless the day they were generated.

90. The preparation and filing of the Initial Chapter 11 Plan was similarly wasteful because it was unconfirmable.

91. The Defendants ran up additional fees for services that not only were unnecessary but unauthorized and unwanted. For example, the Defendants caused the Debtors to incur substantial fees tied to the ongoing reconstruction of Debtors’ books and records. The Committee never authorized this work, which was performed over the Committee’s repeated objections.

92. Significantly, despite the Defendants’ insistence that the reconstruction of the books and records was urgently necessary, they have refused to produce to the Trustee a memorandum they claim to have prepared — at considerable additional expense — allegedly outlining for the Debtors the pressing need for this work.

93. In addition to performing unnecessary work at considerable expense, the Defendants sought to disrupt and did, in fact, disrupt the Cases at every turn.

94. For months the Committee had pressed the Debtors to implement an incentive plan to help retain employees possessing the specialized skills necessary to effectively and efficiently reconcile the Debtors’ client accounts. After an inexplicable delay, the Debtors on December 18, 2013 finally obtained Court approval for the incentive plan.

95. Incredibly, the Defendants never informed the Debtors’ key employees that the plan was in place. To the contrary, upon the Chapter 7 conversion on December 30, 2013, the Defendants advised the Debtors’ remaining employees to resign immediately.

96. The resulting resignations caused substantial disruption to the critically important effort to reconcile the Debtors’ client accounts. In addition, because the incentive plan did not apply to employees who voluntarily terminated their employment, those who resigned at the Defendants’ recommendation lost their benefits.

97. The Trustee, at considerable expense, was forced to reach out to the affected employees; determine who was willing and able to return to their positions and at what cost; and then obtain emergency court authority to bring many of those employees back as consultants to assist in the reconciliation process.

98. The Defendants’ gamesmanship extended to their efforts to upset the Court approved agreement between the Debtors and the Committee regarding the selection of a liquidating plan trustee. After committing to a liquidating plan trustee, the Defendants refused to agree to confirm the plan unless it had an effective date almost one year out from the stipulation order entry date in a continuing effort to improperly retain control.

99. As justification for this refusal, Landau manufactured a phantom conflict by the Committee that he also imputed to the proposed jointly selected liquidating plan trustee. With no factual basis whatsoever, Landau claimed that members of the Committee collectively would file administrative claims of up to $20 million. Landau maintained that these ultimately phantom administrative claims precluded the entire Committee and the liquidating trustee, an independent jointly selected fiduciary, from fulfilling their respective fiduciary duties. On this basis, Landau refused to allow confirmation of the plan until October 15, 2014.

100. The $20 million in administrative claims was a total fiction that never materialized. Indeed, Committee members ultimately filed administrative claims of less than $200,000 — approximately 1 percent of Landau’s baseless estimate.

101. There was no legal basis for Landau’s position that any such administrative claims conflicted the Committee, much less a jointly selected liquidating plan trustee, from fulfilling their fiduciary duties.

[1] A true and correct copy of the complaint (“Complaint”) is attached as Exhibit 1 to the accompanying Declaration of Peter L. Isola (“Isola Decl.”).

[2] Isola. Decl. ¶¶ 9, 2 & Ex. 2 (copy of Docket in the Adversary Proceeding).

[3] See Stipulation Regarding Defendants Named In Claims For Relief In Complaint Filed By Plaintiff, Exhibit 3 to Isola Decl.

[4] See Ex. 6, Isola Decl. (copy of Bankruptcy Court’s Order confirming the response date of November 12, 2015).

[5] Exhibit 3 to Isola Decl.

[6] Defendants vigorously dispute these allegations set forth in the Complaint. The breach of contract claim is asserted only against LGB.

[7] In light of the Supreme Court’s decision in Stern, the right to a jury trial in a fraudulent transfer claim likely no longer depends on whether or not the defendant seeking the jury trial has filed a claim in the underlying bankruptcy case. See, Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 466 B.R. 626, 641 n.9 (Bankr. D. Del. 2012) (discussing Stern and Granfinanciera).

[8] The claims for Breach of the Engagement Agreement and recovery of legal fees paid apply only to pre-petition legal services.

[9] As will be explained in their upcoming Rule 12 motion to dismiss, Defendants believe that the sixth and seventh claims for relief for, respectively, the disallowance and the equitable subordination of post-bankruptcy fees are not ripe for adjudication.

[10] See Ex. 8, Isola Decl. (copy of Notice of Related Case being filed November 9, 2015).

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