In re City of Detroit

• Citation: 498 B.R. 776
• Decision Date: 26 September 2013
• Docket Number: No. 13–53846.,13–53846.
• Parties: In re CITY OF DETROIT, MICHIGAN, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

498 B.R. 776

In re CITY OF DETROIT, MICHIGAN, Debtor.

No. 13–53846.

United States Bankruptcy Court,

E.D. Michigan,

Southern Division.

Sept. 26, 2013.

Bruce Bennett, Los Angeles, CA, Eric D. Carlson, Timothy A. Fusco, Jonathan S. Green, Stephen S. LaPlante, Marc N. Swanson, Detroit, MI, David Gilbert Heiman, Cleveland, OH, Robert S. Hertzberg, Deborah Kovsky–Apap, Kay Standridge Kress, Southfield, MI, Heather Lennox, New York, NY, for Debtor.

Sean M. Cowley (UST), United States Trustee, Detroit, MI, for U.S. Trustee.

Opinion and Order Denying Motion to Stay Proceedings Pending Determination of Motion to Withdraw the Reference

STEVEN RHODES, Bankruptcy Judge.

On September 11, 2013, the Official Committee of Retirees filed a motion to withdraw the reference on its objection to eligibility. (Dkt. # 806) On September 13, 2013, the Committee filed a motion to stay this Court's deadlines and hearings concerning the determination of eligibility, pending the district court's decision on the motion to withdraw the reference. (Dkt. # 837) Several parties, including Detroit Retired City Employees and Retired Detroit Police and Fire Fighters Association, filed a joint concurrence. (Dkt. # 922)

On September 18, 2013, the City filed an objection to the motion for stay. (Dkt. # 925)

The Court heard argument on the motion on September 19, 2013, and took the matter under advisement.

I. Summary of Decision

The Court finds that none of the four factors to be considered on the Committee's motion for stay weigh in favor of granting the motion. Specifically, the Court finds that:

1. The Committee is not likely to succeed on the merits of its motion to withdraw the reference.

2. The Committee will not suffer any harm, let alone irreparable harm, if the stay is denied.

3. The City will suffer substantial harm if the stay is granted.

4. The public interest would not be served by granting the stay.

For these reasons, the motion for stay is denied.

II. The Law Applicable to the Committee's Motion for Stay

Bankruptcy Rule 5011(c) governs a motion for a stay of proceedings pending the determination of a motion to withdraw the reference.

The filing of a motion for withdrawal of a case or proceeding or for abstention pursuant to 28 U.S.C. § 1334(c) shall not stay the administration of the case or any proceeding therein before the bankruptcy judge except that the bankruptcy judge may stay, on such terms and conditions as are proper, proceedings pending disposition of the motion.

Fed. R. Bankr.P. 5011(c).

“Although BR 5011(c) provides little guidance as to the circumstances under which a bankruptcy court should stay a proceeding, it is clear from the plain language of the Rule that the granting of a stay should be the exception—not the general rule.” In re The Antioch Co., 435 B.R. 493, 496 (Bankr.S.D.Ohio 2010). The Antioch court further observed:

While the term “may” in the Rule appears to grant the bankruptcy court broad discretion in determining such a motion, the case law applying the Rule has limited the circumstances under which a stay may be granted to essentially the circumstances under which a preliminary injunction would be appropriate under Federal Rule of Civil Procedure 65.

Id. at 497.

Accordingly, when considering the Committee's motion for a stay, the Court considers whether “(1) [the Committee] is likely to prevail on the merits of the withdrawal motion; (2) [the Committee] is likely to suffer irreparable harm if the motion is denied; (3) the debtor [or other parties] will not be harmed by a stay; and (4) the public interest will be served by granting a stay.” F.D.I.C. v. Imperial Capital Bancorp, Inc., 2011 WL 5600542, at *1 (S.D.Cal. Nov. 17, 2011).¹ The parties agree that these are the factors to be considered.

This statement of the factors to consider on the Committee's motion for stay is consistentwith the factors that the Sixth Circuit has approved when considering a motion for a preliminary injunction. See, e.g., Moltan Co. v. Eagle–Picher Indus., Inc., 55 F.3d 1171, 1175 (6th Cir.1995). “These factors are to be balanced against one another and should not be considered prerequisites to the grant of a preliminary injunction.” Leary v. Daeschner, 228 F.3d 729, 736 (6th Cir.2000).

The Committee bears the burden of establishing that a stay is appropriate. See, e.g., In re New Energy Corp., 2013 WL 1192774, at *10 (Bankr.N.D.Ind. Mar. 14, 2013).²

Ultimately, the issue of whether to grant a stay is left to the court's discretion. See, e.g., In re Chrysler LLC, 2009 WL 7386569, at *1 (Bankr.S.D.N.Y. May 20, 2009).³

III. Whether the Committee Is Likely to Succeed on Its Motion to Withdraw the Reference

The parties agree, and the Court concurs, that the issue here is the Committee's likelihood of success on the motion to withdraw the reference, not the likelihood of success on the Committee's eligibility objections.

The Committee's motion to withdraw the reference asserts three grounds: ⁴

A. Stern v. Marshall requires withdrawal of the reference of the eligibility objection independently of 28 U.S.C. § 157(d).

B. Withdrawal of the reference is mandatory under 28 U.S.C. § 157(d).

C. Withdrawal for “cause” is warranted under 28 U.S.C. § 157(d).

The Court will review the likelihood of success of each of these three grounds.⁵

A. Stern v. Marshall

The Committee's eligibility objection challenges the constitutionality of both chapter 9 of the bankruptcy code under the Federal Constitution and Michigan PA 436 (2012) under the Michigan Constitution. It asserts that therefore the Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), requires the district court to withdraw the reference.⁶

In Stern v. Marshall, the Supreme Court held that the “judicial power of the United States” can only be exercised by an Article III court and “that in general, Congress may not withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” 131 S.Ct. at 2608–12. The Court held that a bankruptcy court therefore lacks the constitutional authority to enter a final judgment on a debtor's counterclaim that is based on a private right when resolution of the counterclaim is not necessary to fix the creditor's claim. 131 S.Ct. at 2611–19. The Court described the issue before it as “narrow.” ⁷131 S.Ct. at 2620.

The Sixth Circuit has adhered to a narrow reading of Stern in the two cases that have addressed the issue: Onkyo Europe Elect. GMBH v. Global Technovations Inc. ( In re Global Technovations Inc.), 694 F.3d 705 (6th Cir.2012), and Waldman v. Stone, 698 F.3d 910 (6th Cir.2012).

In Global Technovations, the Sixth Circuit summarized Stern as follows:

Stern's limited holding stated the following: When a claim is “a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor's proof of claim in bankruptcy,” the bankruptcy court cannot enter final judgment. Id. at 2611. In those cases, the bankruptcy court may only enter proposed findings of fact and conclusions of law. Ibid.

694 F.3d at 722. Based on this view of Stern, the Global Technovations court held that the bankruptcy court did have the authority to rule on the debtor's fraudulent transfer counterclaim against a creditor that had filed a proof of claim. Id.

In Waldman, the Sixth Circuit summarized the holding of Stern as follows:

When a debtor pleads an action under federal bankruptcy law and seeks disallowance of a creditor's proof of claim against the estate—as in Katchen [ v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) ]—the bankruptcy court's authority is at its constitutional maximum. 131 S.Ct. at 2617–18. But when a debtor pleads an action arising only under state-law, as in Northern Pipeline [ v. Marathon Pipe Line Co. 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) ]; or when the debtor pleads an action that would augment the bankrupt estate, but not “necessarily be resolved in the claims allowance process[,]” 131 S.Ct. at 2618; then the bankruptcy court is constitutionally prohibited from entering final judgment. Id. at 2614.

698 F.3d at 919. Based on this view of Stern, the Waldman court held that the bankruptcy court lacked authority to enter a final judgment on the debtor's prepetition fraud claim against a creditor that was not necessary to resolve in adjudicating the creditor's claim.

These cases recognize the crucial difference to which Stern adhered. A bankruptcy court may determine matters that arise directly under the bankruptcy code, such as fixing a creditor's claim in the claims allowance process. However, a bankruptcy court may not determine more tangential matters, such as a state law claim for relief asserted by a debtor or the estate that arises outside of the bankruptcy process, unless it is necessary to resolve that claim as part of the claims allowance process. See City of Cent. Falls, R.I. v. Central Falls Teachers' Union ( In re City of Cent. Falls, R.I.), 468 B.R. 36, 52(Bankr.D.R.I.2012) (“[A]lthough the counterclaim at issue in Stern arose under state law, the determinative feature of that counterclaim was that it did not arise under the Bankruptcy Code.”).

The matter on which the Committee has moved for withdrawal of the reference is the debtor's eligibility to file this chapter 9 case. A debtor's eligibility to file bankruptcy stems directly from rights established by the bankruptcy code. As quoted above, Waldman expressly held, “When a debtor pleads an action under federal bankruptcy law,” the bankruptcy court's authority is constitutional. 698 F.3d at 919. In this case, the debtor has done precisely that. In seeking relief under chapter 9, it has pled “an action under federal bankruptcy law.”

The Committee's federal and state constitutional challenges are simply legal arguments in support of its objection to the debtor's request for bankruptcy relief. Nothing...