In re Contemporary Lithographers, Inc.
| Decision Date | 01 March 1991 |
| Docket Number | Adv. No. A-90-1125,2:91CV00129.,2:91CV00128,M-90-49,No. B-89-12022C-11,Adv. No. A-90-2129,B-89-12022C-11 |
| Citation | 127 BR 122 |
| Court | U.S. District Court — Middle District of North Carolina |
| Parties | In re: CONTEMPORARY LITHOGRAPHERS, INC., Debtor. CONTEMPORARY LITHOGRAPHERS, INC., Marshall M. Boon, Edith N. Boon, Daniel Laughhunn and Amy Laughhunn, Marjorie Boyd Boon, Dean Marion, James E. Marion and Effie A. Marion, Plaintiffs, v. Carl W. HIBBERT, Louis Kelly, and Foye Lee K. Beck, as personal representatives of the Estate of Angus Wilton Kelly, Deceased, Defendants. The ESTATE OF A. Wilton KELLY, By and Through Louis T. KELLY, Foye Lee K. Beck, and Carl W. Hibbert, Co-Executors, Plaintiff, v. Marshall M. BOON, Edith Read Boon, Dan L. Laughhunn, and Amy T. Laughhunn, Defendants. |
Lacy M. Presnell, III, Marjorie K. Lynch, Raleigh, N.C., for defendants in Adv. No. A-90-2115 and for plaintiffs in Adv. No. A-90-2129.
Edward L. Embree, III, Alesia Rae Alphin, Durham, N.C., for plaintiffs in Adv. No. A-90-2115 and for defendants in Adv. No. A-90-2129.
The issue before the court involves the circumstances under which the district court should, upon motion by a party, withdraw a case or proceeding from the bankruptcy court. The two proceedings involved are an action by the estate of the deceased seller of a now bankrupt business, Contemporary Lithographers, Inc. ("Contemporary"), to collect part of the purchase price from the purchasers, and a second suit by the purchasers against the seller's estate alleging that the seller misrepresented the financial position of that business in violation of federal securities law.
The representatives of the estate of Angus Wilton Kelly ("Kelly") argue that withdrawal of the suit against Kelly's estate, Adversary Proceeding No. A-90-2115, by Contemporary Lithographers, Inc., Marshall and Edith Boon, Daniel and Amy Laughhunn, Marjorie Boon, Dean Marion, James and Effie Marion (collectively, with Contemporary, the "Plaintiff-Purchasers"), is mandatory under 28 U.S.C. § 157(d), because of the presence of federal securities law issues. The federal statutes relevant to the Plaintiff-Purchasers' suit include: Section 10(b) of the 1934 Securities Exchange Act, and Securities and Exchange Commission Rule 10b-5 (governing securities fraud); Section 29(b) of the Securities Exchange Act (); and Section 12(2) of the 1933 Securities Act (). Kelly's representatives also request that their suit to collect the promissory note, Adversary Proceeding No. A-90-2129,1 which relates to the same transaction as the Plaintiff-Purchasers' suit, be withdrawn for cause under the discretionary withdrawal portion of 28 U.S.C. § 157(d).2 The court will grant both motions.
Mandatory withdrawal is governed by the second sentence of 28 U.S.C. § 157(d), which states: "The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." The court will consider the legislative history of this provision to determine its precise scope. Seemingly all of the references in the Congressional Record leading to the passage of this law were found and discussed in In re White Motor Corp., 42 B.R. 693 (N.D.Ohio 1984). As Judge Aldrich pointed out in White Motor Corp., the text of the section was read into the Record on more than one occasion, id. at 699, but there was little discussion of the effect of the rule.
Congress, before enacting the bankruptcy amendments of 1984, of which Section 157(d) was a part, deliberated for two years over an appropriate response to a variety of judicial holdings and other considerations. Among the rulings considered were Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), NLRB v. Bildisco & Bildisco, 465 U.S. 513, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984), and the problems Congress sought to address included peculiar aspects of grain elevator bankruptcies, shopping center bankruptcies, and the discharge of debts incurred by drunken drivers. A review of the Record does not reveal the particular concerns motivating Congress to enact Section 157(d), but suggests that the provision was created with some conceptually independent purpose of its own. It apparently was added to Section 157 on March 20, 1984; no such provision appeared in the proposed amendments to the Bankruptcy Code on February 27, 1984, when the text of Section 157 was previously considered. One commentator has argued that Congress may have "had in mind that district judges, which consider such matters on a daily basis, are better equipped to" decide cases involving application of non-bankruptcy federal laws. 1 Collier on Bankruptcy ¶ 3.01, at 3-65 (15th ed. 1990).
Whatever Congress's motivation in enacting Section 157(d), two discussions concerning the application of the law indicate Congress's intent regarding its impact. Senator DeConcini submitted the following explanation in the Senate:
This provision concerns mandatory withdrawal of proceedings from the bankruptcy judge where the district court determines that the resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce. The district court should withdraw such proceedings only if the court determines that the assertion that other laws regulating organizations or activities affecting interstate commerce are in fact likely to be considered, and should not allow a party to use this provision to require withdrawal where such laws are not material to the resolution of the proceeding. The district court should refuse withdrawal if withdrawal would unduly delay administration of the case, considering the status of the case, the importance of the proceeding to the case, and the relative caseloads of the district court and the bankruptcy judge.
130 Cong.Rec. 17155-17156 (1984) (emphasis added). The Senator's explanation illuminates what Congress meant when it said that withdrawal is required when these statutes have to be considered. If a party to a case is federally regulated, such as a bank or securities brokerage, but no federal regulation applies to the dispute at hand, the court need not withdraw the proceeding because no federal regulation will have to be considered. See American Biomaterials Corp. v. Univ. of Florida, 1989 WL 144931 (D.N.J.) (CIV. No. 89-4148 CFS) . But if federal regulations determine the outcome of a dispute, as would standards for liability set by the Securities and Exchange Commission for acts of insider trading in a securities fraud suit, then the mandatory withdrawal provision would apply.3
Statements made in the House of Representatives about this particular provision also provide an understanding of how Section 157(d) must be applied. On March 21, 1984, Representative Kramer observed that proposed amendments "create a new section 157 in the bankruptcy code." Representative Kramer then asked Representative Kastenmeier which laws constituted the kinds of laws which would trigger the mandatory withdrawal provision, observing that the statute's reference to laws of the United States, regulating organizations or "`activities affecting interstate commerce' is very broad language." Kastenmeier responded that the language was to be construed narrowly, applying to cases in which "both title 11 issues and other Federal laws including cases involving the National Labor Relations Act, civil rights laws, Securities and Exchange Act of 1934, and similar laws" were involved, but not asbestosis cases filed against manufacturers, since "those are essentially State issues." (Emphasis added). That concluded the House discussion on Section 157 for the day.
White Motor Corp., supra, added an additional twist to its analysis of when withdrawal is required. It said that to avoid abuse or over-use of the withdrawal provision, even when federal statutes are to be considered, a district court should not withdraw the case from bankruptcy court unless "such consideration is necessary for the resolution of a case or proceeding." In re White Motor Corp., 42 B.R. at 703. Thus, where the existence of liens created by federal law must be considered according to the Bankruptcy Code, but where no such liens in fact apply to the assets of the estate, withdrawal would be inappropriate, even though the court must, technically speaking, consider the federal law. Id.
Applying Section 157(d) to bankruptcy proceedings in which federal securities laws have been implicated, district courts have generally granted timely withdrawal motions. In the case In re American Solar King Corp., 92 B.R. 207, 208 (W.D.Tex. 1988), investors filed a securities fraud suit against a bankrupt corporation, alleging that false financial statements were issued by the company, and the court considered a mandatory withdrawal motion. The court explained that various factors supported mandatory withdrawal in securities fraud cases: the legislative history of Section 157(d) specifically mentions withdrawal in securities cases; the familiarity with non-bankruptcy federal law possessed by district courts and lacking in bankruptcy courts; and the holding of at least one other court in a similar case, Price v. Craddock, 85 B.R. 570 (D.Colo.1988), favoring...
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