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Tow v. Park Lake Communities, LP

United States District Court, S.D. Texas, Houston Division

January 4, 2018



          Lee H. Rosenthal, Chief United States District Judge.

         In September 2017, the court denied John Speer's emergency motion to declare the trustee, Rodney Tow, in civil contempt for violating the parties' settlement agreement by seeking to recover assets from the defendant, Park Lake. (See Civil Action No. H-11-3700, Docket Entry No. 491). The parties returned to bankruptcy court to address the motion pending in Tow's adversary action, (No. 17-03322), to recover assets from Park Lake. Tow asserts a claim under 11 U.S.C. § 542(b), requesting the court to order Park Lake to pay down its debt by remitting proceeds from the Montgomery County Municipal Utility District Reimbursement it recently received.

         Park Lake asked the bankruptcy court to recommend that the district court withdraw the reference. The trustee “vigorously” opposed withdrawing the reference. (Docket Entry No. 1). The bankruptcy court held a hearing on October 18, 2017 and issued a Report and Recommendation recommending against withdrawal. Park Lake moved this court to withdraw and filed objections to the Report and Recommendation on November 3, 2017. Tow did not respond.

         Withdrawal may be either mandatory or permissive. “Courts generally interpret the mandatory withdrawal provision restrictively, granting withdrawal of the reference when the claim and defense entail material and substantial consideration of non-Bankruptcy Code federal law.” Levine v. M&A Custom Home Builder & Developer, LLC, 400 B.R. 200, 203 (S.D. Tex. 2008) (citing Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21, 24 (E.D. La.1993) (withdrawing reference when the case necessarily involved determining antitrust claims); U.S. Gypsum Co. v. Nat'l Gypsum Co., 145 B.R. 539, 541 (N.D. Tex.1992) (withdrawing reference when the case necessarily involved determining patent claims); In re Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y.1986) (withdrawing reference when the case necessarily involved determining CERCLA claims); In re White Motor Corp., 42 B. R. 693, 704 (N.D. Ohio 1984) (no withdrawal of reference based on speculation about issues under ERISA and Internal Revenue Code that might or might not be germane to the core proceeding)).

         There are no causes of action in this case based in federal law other than the Bankruptcy Code. The only claim is based on § 524(b). Mandatory withdrawal is inapplicable.

         “The permissive withdrawal provision of § 157(d) provides: ‘The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown.'” In re Morrison, 409 B.R. 384 (S.D. Tex. 2009) (citing 28 U.S.C. § 157(d)). “The party seeking withdrawal of the reference bears the burden of establishing grounds for permissive withdrawal.” Id. “Cause for withdrawal can exist only if premised upon a sound articulated foundation.” Id. (citing Vela v. Enron Oil & Gas Co., 2007 U.S. Dist. LEXIS 38997, 2007 WL 1564562 at * 2 (S.D. Tex. May 29, 2007)). “Permissive withdrawal for cause shown requires a court to examine the following factors: is the matter core or noncore? Do the proceedings involve a jury demand? Would withdrawal further uniformity in bankruptcy administration? Would withdrawal reduce forum-shopping and confusion? Would withdrawal foster economical use of resources? Would withdrawal expedite the bankruptcy process?” Levine, 400 B.R. at 203 (citing Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir.1985)). The Bankruptcy Court analyzed the permissive-withdrawal factors and concluded that withdrawal was inappropriate. The court agrees.

         Each factor is discussed below.

         A. Core Proceeding

         Title 28 U.S.C. § 157(b)(2)(E) provides that “[c]ore proceedings include, but are not limited to-(E) orders to turn over property of the estate.” Park Lake argues that this case is a non-core proceeding because it is based on state collection law. The Bankruptcy Court acknowledged a line of trial-court cases supporting this argument. These cases hold “that an action by a trustee to recover an account receivable based on state contract law does not fall within the scope of turnover actions contemplated by § 542(b) and 28 U.S.C. § 157(b)(2)(E), and therefore such an action is a non-core proceeding.” (Docket Entry No. 1 at 12); see, e.g., In re Satelco, Inc., 58 B.R. 781, 789 Bankr. N.D. Tex. 1986) (“[T]his Court holds that actions to collect accounts receivable based upon state law contract principles do not fall within the scope of turnover actions as contemplated by § 542 and § 157(b)(2)(E), absent a final judgment from a court of competent jurisdiction, a stipulation, or some other binding determination of liability.”). But the Bankruptcy Court correctly identified a second line of cases, including circuit-court precedent, standing for the opposite proposition. See, e.g., In re Willington Convalescent Home, Inc., 850 F.2d 50, 52 n.2 (2d Cir. 1988) (“Although ‘actions on account and debt and contract generally arise under state law, ' § 542(b) ‘sufficient[ly] . . . arrogate[s] the general law concepts and transform[s] them into bankruptcy law.' ‘The mere fact that' Connecticut denies that it owes the matured debt for Willington's services because of a recoupment right ‘does not take the trustee's action outside the scope of section 542(b).'”).

         The account receivable at issue is property owed to the estate that the trustee seeks to collect through this turnover suit. This claim is expressly covered by § 157(b)(2)(E) of the Bankruptcy Code, making this a core proceeding.

         And, as the Bankruptcy Court explained, this result is consistent with Stern v. Marshall, 564 U.S. 462 (2011). In Stern, the Court held that certain “core” claims may not be adjudicated in bankruptcy court when they are “in no way derived from or dependent upon bankruptcy law.” Id. at 499. The claim at issue in Stern was a counterclaim based solely on state law. The Court determined that it could not be adjudicated by the bankruptcy court, despite the fact that it was otherwise a “core claim” under § 157(b)(2)(C). Here, by contrast, Tow's only claim is under a specific Code provision, not state law. Unlike in Stern, this claim has a sufficient nexus to the resolution of the Chapter 7 case and therefore can be adjudicated fully by the Bankruptcy Court.

         The first factor-that this is a core proceeding-weighs against withdrawal.

         B. Uniform Administration of the Bankruptcy Code

         The Bankruptcy Court explained that because it has already spent substantial time reviewing the pleadings and holding hearings in this case, it is very familiar with the facts, legal arguments, and applicable law. The Bankruptcy Court is in the best position to quickly and efficiently adjudicate the case, which will promote ...

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