In re NDEP Corp.

• Decision Date: 30 December 1996
• Docket Number: Adversary No. 96-24.,Bankruptcy No. 95-1257 (HSB),Civil Action No. 96-270-LON
• Parties: In re NDEP CORPORATION, f/k/a Prospect Industries Corp., Debtor. NDEP CORPORATION, Plaintiff, v. HANDL-IT, INC., an Ohio Corporation, Defendant.
• Court: U.S. District Court — District of Delaware

203 B.R. 905 (1996)

In re NDEP CORPORATION, f/k/a Prospect Industries Corp., Debtor.

NDEP CORPORATION, Plaintiff, v. HANDL-IT, INC., an Ohio Corporation, Defendant.

Bankruptcy No. 95-1257 (HSB), Civil Action No. 96-270-LON, Adversary No. 96-24.

United States District Court, D. Delaware.

December 30, 1996.

Stephen W. Spence and Steven K. Kortanek of Phillips, Goldman & Spence, Wilmington, DE, for Plaintiff, NDEP Corporation.

Laura Davis Jones and S. David Peress of Young, Conaway, Stargatt & Taylor, Wilmington, DE, for Defendant, Handl-It, Inc.

OPINION

LONGOBARDI, District Judge.

I. FACTUAL BACKGROUND

This case arises out of the bankruptcy of NDEP Corporation ("NDEP"). NDEP petitioned for bankruptcy on October 11, 1995. On February 2, 1996, NDEP initiated this adversary proceeding by filing a complaint against Handl-It, Inc. ("Handl-It") in the United States Bankruptcy Court for the District of Delaware. The complaint alleges that Handl-It breached a supply contract by refusing to pay an outstanding balance of $68,758.67 plus interest. The outstanding balances became due under the supply contract between October 18, 1994 and April 7, 1995. NDEP also seeks to recover money damages from Handl-It under a theory of quantum meruit, arguing that it is entitled to the value of the goods that it provided.

Handl-It answered the complaint, denied liability, asserted several affirmative defenses, and demanded a trial by jury. Handl-It also filed five counterclaims. Handl-It alleged in its counterclaims that the goods described in the invoices were defective; that NDEP breached the agreement by failing to provide sales and marketing support; that NDEP breached its repurchase obligation; that NDEP negligently misrepresented its ability to provide ongoing sales and marketing support; and that NDEP owes Handl-It $2,864.00 in commissions on direct sales by NDEP to Handl-It's customers. Handl-It has not filed a proof of claim in the bankruptcy court.

On April 23, 1996, Handl-It moved to withdraw the reference from the bankruptcy court to the district court in accordance with 28 U.S.C. 157(d). That motion has been fully briefed and is ripe for decision.

II. DISCUSSION

Federal district courts are permitted under the bankruptcy statutes to refer certain cases and proceedings involving or relating to bankruptcy matters to bankruptcy judges. 28 U.S.C. § 157(a). Pursuant to that authority, this district court has entered an omnibus order referring all bankruptcy cases to the Bankruptcy Court for the District of Delaware. The bankruptcy statutes provide a procedure whereby that reference can be withdrawn from the bankruptcy court by the district court:

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. 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.

28 U.S.C. § 157(d).

Handl-It has made a timely motion for withdrawal of the reference. Under 28 U.S.C. § 157(d), withdrawal is mandatory in some instances and permissive in others. If "resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce," then this court is required to grant the motion to withdraw the reference. 28 U.S.C. § 157(d). Handl-It does not contend that this case meets the requirements for mandatory withdrawal. Handl-It does argue, however, that permissive withdrawal is appropriate. Under the permissive withdrawal standard, this Court may withdraw the reference of the adversary proceeding "for cause shown."

The burden to establish "cause" is on Handl-It as the movant. Ponce Marine Farm, Inc. v. Browner (In re Ponce Marine Farm), 172 B.R. 722, 724 (D.Puerto Rico 1994). The statute does not explain what "cause" means. In re Pruitt, 910 F.2d 1160, 1168 (3d Cir.1990); Hatzel & Buehler, Inc. v. Central Hudson Gas & Elec. Corp., 106 B.R. 367, 370 (D.Del.1989). The Third Circuit has explained that one court of appeals listed the following considerations: "the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering the economical use of the debtors' and creditors' resources, and expediting the bankruptcy process." In re Pruitt, 910 F.2d at 1168. The Third Circuit held in Pruitt that "even under these minimal standards, cause was lacking" to grant the motion to withdraw the reference. Id. The factors listed in Pruitt were not designed to be exhaustive; they are only "minimal standards."

The Second Circuit has listed a number of other factors, stressing that the initial determination should be whether the claim is a core bankruptcy proceeding or whether it is non-core. In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir.1993), cert. dismissed, 511 U.S. 1026, 114 S.Ct. 1418, 128 L.Ed.2d 88 (1994); see also, Hatzel & Buehler, Inc. v. Orange & Rockland Utils., Inc., 107 B.R. 34, 39 (D.Del.1989) (relevant considerations include "the nature of the proceeding (i.e., core or non-core proceeding) and judicial economy"); Sullivan v. Maryland Cas. Co. (In re Ramex Int'l, Inc.), 91 B.R. 313, 315 (E.D.Pa. 1988) (first step in analysis is to classify adversary proceeding as core or non-core). The Second Circuit explained that it is upon the issue of coreness "that questions of efficiency and uniformity will turn." Id. In non-core matters, the bankruptcy court's determination of the merits of the proceeding is subject to de novo review by the district court. Id. Consequently, reasoned the Second Circuit, district courts might reasonably conclude "that in a given case unnecessary costs could be avoided by a single proceeding in the district court." Id. Indeed, the hypothetical advanced by the Second Circuit mirrors the reasoning of this Court in Hatzel & Buehler, Inc. v. Orange & Rockland Utils., 107 B.R. 34, 39-40 (D.Del.1989). In that case, this Court found that the adversary proceeding initiated by the debtor which alleged state contract and tort claims constituted a non-core proceeding. Id. at 39. Then, this Court found that judicial economy favored permissive withdrawal because if it were denied, the district court would still need to review the merits of the dispute when considering the bankruptcy court's proposed findings of fact and conclusions of law. Id. at 40. Consequently, this Court withdrew the reference. Id.

In an Order dated May 21, 1996, the bankruptcy court determined that the current adversary proceeding is non-core. No party has disputed or appealed that finding, and this court agrees with the bankruptcy court that this adversary proceeding is non-core. See Hatzel & Buehler, Inc. v. Orange & Rockland Utils., 107 B.R. 34, 39 (D.Del.1989) (state contract and tort claims that exist independent of bankruptcy law are non-core proceedings).¹

Another factor sometimes considered by courts analyzing whether withdrawal is appropriate is "whether the parties have requested a jury trial." Hatzel & Buehler, Inc. v. Central Hudson Gas & Elec. Corp., 106 B.R. 367, 371 (D.Del.1989). This factor is important, because absent the express consent of both parties and a special designation of jurisdiction by the district court, the bankruptcy court may not hold a jury trial in this non-core proceeding. 28 U.S.C. § 157(e).² In its answer, Handl-It requested a trial by jury. There is no real question that, by the nature of the claims against it, Handl-It has a constitutional right to a jury trial. The Seventh Amendment provides: "In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved. . . ." In Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41, 109 S.Ct. 2782, 2790, 106 L.Ed.2d 26 (1989), the Supreme Court explained that "Suits at common law" referred to those controversies in which legal rights were to be determined, as distinguished from those cases in which "`equitable rights alone were recognized, and equitable remedies were administered.'" Id. (quoting Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 447, 7 L.Ed. 732 (1830)). The Seventh Amendment requires a jury trial "only if a cause of action is legal in nature and it involves a matter of `private right.'" Id. at 42 n. 4, 109 S.Ct. at 2790 n. 4. The present case, as a contract and tort action for money damages, is clearly legal in nature and involves a matter of private right.

NDEP contends, however, that Handl-It has waived its right to a jury and has consented to bankruptcy court jurisdiction by filing counterclaims that are not compulsory under the standards enunciated in Fed.R.Bankr.P. 7013. Rule 7013 provides in relevant part:

Rule 13 F.R.Civ.P. applies in adversary proceedings, except that a party sued by a trustee or debtor in possession need not state as a counterclaim any claim that the party has against the debtor, the debtor\'s property, or the estate, unless the claim arose after the entry of an order for relief.

Thus, Rule 7013 makes Fed.R.Civ.P. 13 generally applicable in adversary proceedings, but carves out an exception. Fed.R.Civ.P. 13(a) relates to compulsory counterclaims:

A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party\'s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. . . .

The parties concur that if Fed.R.Civ.P. 13(a) were applicable to this dispute, then the counterclaims brought by Handl-It would be compulsory.

Under Bankruptcy Rule 7013, however,...