Cipollone v. Va. True Corp.

• Decision Date: 25 May 2021
• Docket Number: Case No. 1:20-cv-972-FB
• Parties: ANTHONY CIPOLLONE; and DOMENICK CIPOLLONE, Movants, v. VIRGINIA TRUE CORPORATION; and DIATOMITE CORPORATION OF AMERICA, Respondents.
• Court: U.S. District Court — Eastern District of New York

ANTHONY CIPOLLONE; and DOMENICK CIPOLLONE, Movants, v. VIRGINIA TRUE CORPORATION; and DIATOMITE CORPORATION OF AMERICA, Respondents.

Case No. 1:20-cv-972-FB

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

May 25, 2021

MEMORANDUM AND ORDER

Appearances:

For the Movants:

STEPHEN ZOLTAN STARR

Starr & Starr, PLLC

260 Madison Ave.

17th Floor

New York, NY 10016

For the Respondents:

DOUGLAS J. PICK

Pick & Zabicki, LLP

369 Lexington Ave

12th Floor

New York, NY 10017

****

Rishi Kapoor

Venable LLP

1270 Ave. of the Americas

24th Floor

New York, NY 10017

BLOCK, Senior District Judge:

Movants-Claimants Anthony and Domenick Cipollone("the Cipollones") are former shareholders and directors of Respondent-Debtor Virginia True Corporation("Virginia True" or "the Corporation"), an insolvent real estate development corporation.¹The Cipollones invested $5,000,000.00 in Virginia True in exchange for a 32% equity interest, two seats on the company's board and the right to convert their ownership interest to a secured debt within 18 months of their investment.

In 2018, the Cipollones concluded that they would not recover their investment and attempted to exercise their option to convert their equity to secured debt.To this end, they filed suit against Virginia True in Virginia state court and obtained a promissory note for $5,000,000 plus interest, which was secured by a first priority lien on the Property.SeeECF No. 1, Ex. 2at 34-6.See alsoBankr.ECF No. 35, Ex. 6-7.²Virginia True made no payments on the note, which matured in April of 2019.Instead, it declared bankruptcy, and the Cipollones submitted proofs of claim, asserting that the $5,000,000 debt owed them should take priority in the distribution of Virginia True's assets.ECF No. 1,Ex. 2at 76-87.See alsoIn re. Virginia TrueCorp., No. 1-19-42769-nhl (Bankr. E.D.N.Y.May3, 2019).

In response, Virginia True instituted an adversary proceeding against the Cipollones in the bankruptcy court, in which RespondentDiatomite Corporation of America ("Diatomite") intervened.³SeeVirginia True Corporation. v. Anthony Cipollone and Domenick Cipollone, No. 1-19-01118-nhl (Bankr.E.D.N.Y. Sept. 4, 2019).The Corporation argues that, under Virginia and federal law, (1) it may avoid its obligation to pay the Cipollones' secured debt, since that debt was created by a fraudulent transfer; (2) the Cipollones' secured debt must be reverted to an equity interest in the company; (3) that interest must be subordinated to the interest of outside creditors, including Diatomite; and (4) the Cipollones' lien on the Property must be voided and the documents securing it returned to Virginia True's estate.It further argues that the Virginia Stock Corporation Act entitles it to damages from the Cipollones.

The Cipollones have moved to dismiss Virginia True's complaint and seek a jury trial on any counts that survive dismissal.They ask this Court to "withdraw the reference" to the bankruptcy court and conduct all further proceedings, including those related to their motion to dismiss.In the alternative, they ask theCourt to abstain from hearing the case and allow it to be decided in the Virginia state courts.⁴Their requests to withdraw the reference and for abstention are denied.

I.

A.Mandatory Withdrawal

A "district court may withdraw. . . any case or proceeding referred to the bankruptcy court on its own motion or on a timely motion of any party, for cause shown."In re. Orion Pictures Corp., 4 F.3d 1095, 1101(2d Cir.1993)(quoting28 U.S.C. § 157(d)).Withdrawal may be either mandatory or permissive.28 U.S.C. § 157(d).Withdrawal is mandatory "if the court determines that resolution of the proceeding requires [substantial] consideration of both [Title] 11 and other laws of the United States regulating organizations or . . . interstate commerce."Nisselson v. Salim, No. 12 Civ. 92 (PGG), 2013 WL 1245548, at *2(S.D.N.Y.Mar. 25, 2013);see alsoIn re. Ionosphere Clubs, Inc., 922 F.2d 984, 995(2d Cir.1990)(limiting mandatory withdrawal to cases requiring "substantial and material consideration of non-Bankruptcy Code federal statutes").

B.Permissive Withdrawal

By contrast, the Court has "broad discretion" to decide whether permissive withdrawal is warranted.Nisselson, 2013 WL 1245548, at *3(citingSec. Investor Protection Corp. v. Bernard L. Madoff Inv. Sec., LLC, No. 12 Civ. 9408(VM), 486 B.R. 579, 584(S.D.N.Y.2013)).When exercising this discretion, the Court's "first inquiry is whether the bankruptcy court has final adjudicative authority over the claim[s]" at issue.Dynegy Danskammer, L.L.C. v. Peabody Coaltrade Intern. Ltd., 905 F. Supp. 2d 526, 530(S.D.N.Y.2012);see alsoStern v. Marshall, 564 U.S. 462, 462(2011)(setting limits of bankruptcy court adjudicative authority).After this inquiry, the Court may consider a range of other factors (the "Stern-Orion" factors), including (1) judicial economy, (2) uniform bankruptcy administration, (3) reducing forum shopping, (4) economical use of debtor and creditor resources, (5) expediting the bankruptcy process, and (6) the presence (or absence) of a jury demand.Orion, 4 F.3d at 1101.

The Court may deny a motion to withdraw the reference based on these factors even if it determines that the bankruptcy court lacks final adjudicative authority.Id. at 1101-02("a district court might decide that a case is unlikely to reach trial, that it will require protracted discovery and court oversight before trial, or that [a] jury demand is without merit and therefore might conclude that the case is. . .best left in the bankruptcy court" until it is trial ready);see alsoNisselson, 2013 WL 1245548, at **5-6(denying motion to withdraw the reference in casewhere "the bankruptcy court lacks constitutional authority to enter final judgment").

A bankruptcy court that lacks "final adjudicatory authority" may nonetheless preside over pretrial proceedings.Orion, 4 F.3d at 1101-02;see alsoIn re. Enron Corp., No. 03 Civ. 5078(DLC), 2003 WL 22171695, at *3(S.D.N.Y.Sept. 22, 2003).If a bankruptcy court enters a final order without authority to do so, that order is instead "treat[ed]. . . as proposed findings of fact and conclusions of law."Admin. Order of Dec. 5, 2012, In the Matter of the Referral of Matters to the Bankruptcy Judges(available at https://img.nyed.uscourts.gov/files/general-ordes/Order12052012.pdf).

The moving party bears the burden of demonstrating that permissive withdrawal of the reference is warranted.Nisselson, 2013 WL 1245548, at *3.

C.Abstention

Like withdrawal, abstention may be mandatory or permissive.Abstention is mandatory "upon timely motion of a party in a proceeding based upon a State law claim. . .related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a [federal]court. . . absent jurisdiction under [28 U.S.C. § 1334]."28 U.S.C. § 1334(c)(2).Additionally, the proceeding at issue must have been pending in state court prior to the bankruptcy filing.SeeIn re. Intl. TobaccoPartners, Ltd., 462 B.R. 378, 390(Bankr. E.D.N.Y.2011).In cases where abstention is not mandatory, the court may nonetheless decline to hear a case"in the interest of justice, or in the interest of comity with State courts or respect for state law."28 U.S.C. § 1334(c)(1).

Permissive abstention "is an exception to the court's general obligation to exercise conferred jurisdiction" and should be granted sparingly.In re. Strathmore Grp., LLC, 522 B.R. 447, 457-58(Bankr. E.D.N.Y.2014).The Court considers twelve factors when deciding whether to abstain, which pertain to judicial economy, the difficulty and/or novelty of the state law issues, and the nature and extent of the relationship between the state law and bankruptcy issues.SeeOsuji v. Fed. Nat'l Mortg. Ass'n, 571 B.R. 518, 521(E.D.N.Y.2017)(listing factors).The party seeking abstention must show that it is warranted.Strathmore, 522 B.R. at 458.

II.

There is no serious basis for mandatory withdrawal in this case.Although this case involves some Virginia state laws, the Cipollones have pointed to no "non-Bankruptcy Codefederalstatutes[which are] necessary for resolution of" the underlying adversary proceeding.Cf..Ionosphere Clubs, Inc., 922 F.2d at 995(emphasis added).See alsoECF No. 1, Ex. 2at 37-47(listing causes of action under Virginia law and the United States Bankruptcy Code).Thus, the only issue iswhether the Court should exercise its discretion to remove this case from the bankruptcy court.

The Cipollones argue that permissive withdrawal is warranted because (1)"they have demanded a jury trial;"(2)they do not consent to jury trial in the bankruptcy court; (3) their proofs of claim "expressly reserve their right" to challenge the bankruptcy judge's jurisdiction or seek trial in the district court.ECF No. 1, Ex. 2at 14-15.They further argue that the Orion factors favor withdrawal because the bankruptcy court cannot enter final judgment on Virginia True's state law claims, and it would be inefficient to adjudicate the complaint piecemeal.ECF No. 1, Ex. 2at 16.

A.The Cipollones' Jury Demand and Reservation of Rights Do Not Justify Withdrawal

Regardless of whether the Cipollones have a right to a jury trial or have requested one, the fact remains that this case is not "trial ready."SeeOrion, 4 F.3d at 1101-02.On the contrary, discovery has not even begun, and the motion to dismiss pending in the bankruptcy court has the potential to eliminate some or all of the state law claims on which the Cipollones are otherwise entitled to a jury trial.⁵SeeBankr.ECF No. 30(arguing that state law counts fail to state a claim).Thus, at this early stage in the adversarial litigation, the Court has no reason to believe a jury trial is likely.SeeOrion, 4 F.3d at 1101-02(noting that the Court may leave case in bankruptcy court if it is "unlikely to reach...