In re First Magnus Financial Corp.

• Decision Date: 06 April 2009
• Docket Number: No. CIV 08-135-TUC-CKJ.,CIV 08-135-TUC-CKJ.
• Citation: 403 B.R. 659
• Parties: In the Matter of FIRST MAGNUS FINANCIAL CORPORATION, Debtor. Binford et al., Appellants, v. First Magnus Financial Corporation and First Magnus Capital, Inc., Appellees.
• Court: U.S. District Court — District of Arizona

403 B.R. 659

In the Matter of FIRST MAGNUS FINANCIAL CORPORATION, Debtor Binford et al., Appellants, v. First Magnus Financial Corporation and First Magnus Capital, Inc., Appellees.

No. CIV 08-135-TUC-CKJ.

United States District Court, D. Arizona.

April 6, 2009.

COPYRIGHT MATERIAL OMITTED

AMENDED ORDER

CINDY K. JORGENSON, District Judge.

Pending before this Court is Appellant's appeal from the Bankruptcy Court's Orders in Bankr.Case No. 04-bk-01578 (JMM), Adv. No. 07-ap-00060 (JMM) dismissing the adversary proceeding, denying class certification, denying administrative priority status of Appellants' WARN Act claims and dismissing the non-debtor First Magnus Capital, Inc. (FMCI) for lack of jurisdiction.¹

I. FACTUAL BACKGROUND

First Magnus was one of the largest privately held mortgage companies in the United States. Headquartered in Tucson, Arizona, First Magnus employed over 5,500 individuals and maintained 335 branches throughout the United States. Its business encompassed originating, purchasing and selling mortgage loans secured by one to four unit residences. As the mortgage industry began suffering the unprecedented liquidity crisis that continues today, First Magnus became unable to secure financing for its continued operations. On August 16, 2007, First Magnus terminated the majority of its 5,500 employees and closed many of its retail and wholesale offices. Subsequently, on August 21, 2007, First Magnus sought the protection of the Bankruptcy Court and filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code.

Appellants in this cause of action were among the approximately 1,000 similarly situated employees who were terminated by First Magnus on August 16, 2007. None of First Magnus's employees received sixty (60) days advance written notice of their terminations. As a result, on August 29, 2007, Appellants filed a complaint for damages pursuant to the Worker Adjustment and Retraining Notification Act ("WARN Act"), 29 U.S.C. § 2101 et seq. in the Bankruptcy Court. Appellants amended this complaint the following day, August 30, 2007.

On October 31, 2007, First Magnus filed a motion to dismiss Appellants' complaint in the Bankruptcy Court. The following month, on November 30, 2007, Appellants filed a motion in the Bankruptcy Court seeking class certification of their complaint. This motion was denied by the Bankruptcy Court on January 10, 2008, Appellants timely filed a Notice of Appeal and filed their Motion for Leave to Appeal with this Court on January 22, 2008, seeking an interlocutory appeal of the order denying class certification.

On February 6, 2008, the Bankruptcy Court entered a final order granting First Magnus's Motion to Dismiss Appellants' Adversary Proceeding Complaint and FMCI's Motion to Dismiss for Lack of Subject Matter Jurisdiction. Appellants filed a Notice of Appeal seeking relief from the final order of the Bankruptcy Court. On March 31, 2008, Appellants filed their Motion on Behalf of Certain Former Employees of Debtor for Allowance and Immediate Payment of Administrative Expense Portion of WARN Act Wages and Benefits Pursuant to 11 U.S.C. § 503(b)(1)(A)(ii). Objections to this motion were filed in the Bankruptcy Court by various interested parties including the debtor, First Magnus. On June 20, 2008, the Bankruptcy Court denied Appellants' administrative expense status motion.

Additionally, FMCI filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on February 19, 2008. On May 29, 2008, FMCI filed its Plan of Reorganization and a Disclosure Statement in support of the plan. FMCI's Disclosure Statement was subsequently amended, and approved by the Bankruptcy Court on July 28, 2008. On September 12, 2008, FMCI submitted its "First Amended Plan of Reorganization Dated September 12, 2008." The Bankruptcy Court entered its order confirming the Amended Plan on September 25, 2008.

On September 26, 2008, this Court entered its Order denying Appellants' Motion for Leave to Appeal regarding the class action certification and granting Appellees' Motion to Dismiss on the grounds that Appellants' arguments were moot as a result of the dismissal of their adversary proceeding in the Bankruptcy Court. Appellants now appeal the Bankruptcy Court's Orders dismissing the adversary proceeding, denying class certification, denying administrative priority status of Appellants' WARN Act claims and dismissing the non-debtor FMCI for lack of jurisdiction.

II. STANDARD OF REVIEW

This Court has jurisdiction pursuant to 28 U.S.C. § 158(a), and reviews the bankruptcy court's findings under the same standard that the court of appeals would review a district court's findings in a civil matter. 28 U.S.C. § 158(c)(2). Therefore, this Court reviews the bankruptcy court's factual findings under a clearly erroneous standard, and conclusions of law de novo. In re Jastrem, 253 F.3d 438 (9th Cir.2001); See also Fed. R. Bankr.P. 8013.

III. ANALYSIS

A. Dismissal of Adversary Proceeding

Appellants argue that the Bankruptcy Court erred in its dismissal of the Adversary Proceeding pursuant to Rule 41(b), Federal Rules of Civil Procedure. Appellants further assert that the dismissal should be reversed because "a claimant under the WARN Act has the right to file a class action adversary proceeding seeking relief for a class of similarly situated former employees independent of the individual claims process." [Appellants' Opening Br. at 8-9.] This Court "will not reverse unless we have the definite and firm conviction that the [bankruptcy] court committed a clear error of judgment." Lewis v. Telephone Employees Credit Union, 87 F.3d 1537, 1557 (9th Cir.1996) (internal quotations and citations omitted).

"Courts are invested with inherent powers that are governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases." Id. (internal quotations and citations omitted). This principle is well established, and allows judges to exercise substantial discretion in controlling their dockets and to manage their cases and courtrooms effectively. U.S. v. W.R. Grace, 526 F.3d 499, 509 (9th Cir.2008). Furthermore, bankruptcy courts have "an inherent duty and the power to dismiss a case sua sponte to preserve its integrity, to ensure that the legislation administered by the court will accomplish its legislative purpose, or to control its docket." In re Wells, 71 B.R. 554, 557 (Bankr.N.D.Ohio 1987) (citations omitted). This "power is based upon the court's inherent duty to ensure the orderly administration of the debtors' estates." Id. As the Bankruptcy Code unequivocally provides:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules or to prevent an abuse of process.

11 U.S.C. § 105(a). As such, "[t]he bankruptcy court may dismiss cases sua sponte where to do so perpetuates the proper use of the bankruptcy mechanism." In re Ray, 46 B.R. 424, 426 (S.D.Ga.1984).

Moreover, "a trial court `has broad discretion in deciding whether to allow maintenance of a class action.'" In re First Alliance Mortgage Co., 269 B.R. 428, 441 (C.D.Cal.2001) (quoting 7B Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1785, at 119 (2d ed.1986)). The cases relied on by Appellants universally recognize that an adversary proceeding is duplicative of the normal bankruptcy claims process. Based on the particular facts of those cases, the adversarial process was allowed to proceed. See In re Protected Vehicles, Inc., 392 B.R. 633 (Bankr.D.S.C.2008) (finding "under the present circumstances, this adversary proceeding should not be dismissed at least at this early stage." Id. at 641.); In re First NLC Financial Services, LLC, 2008 WL 3471673 (Bkrtcy.S.D.Fla.2008) (noting "in this matter the Court finds that resolution of the WARN Act claims will be expedited and handled more efficiently in a class adversary proceeding . . . ." Id. at *3.); In re Quantegy, Inc., 343 B.R. 689 (Bankr. M.D.Ala.2006) (noting "the court is of the opinion that this adversary proceeding should not be dismissed on that ground [duplication of the claims process]." Id. at 693). Further, "the analysis necessarily focuses on the individual circumstances of the case." In re First Alliance Mortgage Co., 269 B.R. at 445 (emphasis added).

In the instant case, the Bankruptcy Court additionally relied upon its inherent powers pursuant to 11 U.S.C. § 105 in dismissing the adversary proceeding. Mem. Decision at 3, Feb. 6, 2008. Moreover, based on the circumstances presented below, the Bankruptcy Court found that the adversarial process was duplicative of the normal bankruptcy claims procedure. Order at 1, Jan. 10, 2008. At the time of dismissal of the class action certification, approximately 5300 of the 5500 potential claims had already been filed. See Hr'g Tr. on Mot. to Approve Class Cert. at 17:9-18, Jan. 9, 2008. The Bankruptcy Court concluded that the normal bankruptcy claims procedure was adequate to handle the claims of the WARN Act Claimants. The Bankruptcy Court was in the best position to assess the propriety of the normal claims process versus an adversarial proceeding. The high number of claims filed indicates that any concerns regarding persons holding small claims not seeking to prosecute them absent class procedures are unfounded. See In re Charter Co., 876 F.2d 866, 871 (11th Cir.1989). Moreover, there is no legal prohibition to the Bankruptcy Court's decision. As such, this Court finds that the Bankruptcy Court's decision was not clearly...