In re Neumann Homes, Inc.

• Decision Date: 27 April 2009
• Docket Number: No. 09 C 169.,09 C 169.
• Citation: 414 B.R. 383
• Court: U.S. District Court — Northern District of Illinois
• Parties: In re NEUMANN HOMES, INC., et al., Debtors. The Official Committee of Unsecured Creditors of Neumann Homes, Inc., Plaintiff, v. Kenneth P. Neumann and Jean L. Neumann, Defendants.

414 B.R. 383

In re NEUMANN HOMES, INC., et al., Debtors The Official Committee of Unsecured Creditors of Neumann Homes, Inc., Plaintiff, v. Kenneth P. Neumann and Jean L. Neumann, Defendants.

No. 09 C 169.

United States District Court, N.D. Illinois, Eastern Division.

April 27, 2009.

COPYRIGHT MATERIAL OMITTED

Emily Newhouse Dillingham, Gregory Steven Otsuka, Steven Thomas Catlett, Paul, Hastings, Jonofsky & Walker, Chicago, IL, for Plaintiff.

Edwin Earl Brooks, McGuirewoods, LLP, Chicago, IL, United States Trustee, Office of the United States Trustee, Kenneth S. Gardner, Chicago, IL, for Defendants.

MEMORANDUM OPINION

CHARLES P. KOCORAS, District Judge.

This matter comes before the court on the motion of Defendants Kenneth Neumann and Jean Neumann ("Neumanns") to withdraw the reference of an adversary proceeding to the bankruptcy court, pursuant to 28 U.S.C. § 157(c) and Fed. R. Bankr.P. 5011(a). For the following reasons, the motion is denied.

BACKGROUND

On November 1, 2007, Neumann Homes, Inc. ("NHI") and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Thereafter on December 10, 2008, the Official Committee of Unsecured Creditors of NHI ("Committee") filed an adversary complaint against the Neumanns primarily seeking to avoid preferential and fraudulent transfers; the complaint additionally asserts state law claims of unjust enrichment, breach of fiduciary duty, constructive trust, equitable relief, and an accounting.

According to the allegations contained in the adversary complaint, on January 1, 1991, NHI elected to become a Subchapter S corporation for federal income tax purposes. Defendant Ken Neumann was the chief executive officer and sole shareholder of NHI from 1994 until his resignation on September 19, 2007. As a Subchapter S corporation, NHI's income tax liability flowed through to Ken Neumann as the sole voting shareholder and was taxed as if he was a member of a partnership. By September 21, 2007, NHI revoked its status as a Subchapter S corporation and became a Subchapter C corporation. As a Subchapter C corporation, NHI was responsible for paying its own federal income taxes.

In 2006 and 2007, NHI experienced net operating losses ("NOLs"). The Committee asserts that the Neumanns elected to carry back their NOLs from 2006 and 2007 to 2004 and 2005. Moreover, they contend that based on these NOL carry-backs for 2006 and 2007, the Neumanns have applied to the Internal Revenue Service ("IRS") for tax refunds worth approximately $25 million for the tax years of 2004 and 2005. It is the Committee's position that refunds derived from the NOLs should be made available to them as part of NHI's bankruptcy estate. The Neumanns filed the instant motion to withdraw the reference of the adversary proceeding.

DISCUSSION

Federal district courts have original jurisdiction over all bankruptcy proceedings arising out of title 11 of the Bankruptcy Code. See 28 U.S.C. § 1334. However, a district court may refer the case to the bankruptcy courts pursuant to 28 U.S.C. § 157(a). As a matter of course, this court refers all title 11 cases to the bankruptcy court. N.D. Ill. L.R. 40.3.1. The court derives the power to withdraw part of a case from the bankruptcy court from 28 U.S.C. § 157(d), which states the following:

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).

The Seventh Circuit has interpreted the first sentence of Section 157(d) to be permissive withdrawal, while the second sentence requires mandatory withdrawal in certain situations. In re Vicars Ins. Agency, Inc., 96 F.3d 949, 952 (7th Cir.1996).

The Neumanns move to withdraw the reference and present the court with arguments in favor of both mandatory and permissive withdrawal. The thrust of the Neumanns' argument is that their Seventh Amendment right to a jury trial establishes the requisite cause under permissive withdrawal. They also contend that mandatory withdrawal is necessary because the adversary complaint will require a significant interpretation of the Internal Revenue Code to resolve the underlying dispute. The Committee opposes the motion; it requests that the case remain in the bankruptcy court.

I. Permissive Withdrawal

The Neumanns move to withdraw the reference on the basis that they have established conclusive cause under permissive withdrawal. Although Congress did not expressly define "for cause shown," the courts have consistently adhered to a wide range of factors in ascertaining whether a movant has satisfied the burden of showing cause: (1) whether the claim or proceeding is core or non core; (2) judicial economy; (3) promotion of uniformity and efficiency in bankruptcy administration; (4) delay and costs to the parties; (5) the court's familiarity with the case; (6) reduction of forum shopping; and (7) whether the parties requested a jury trial. In re Edgwater Med. Ctr., 2004 WL 2921957, *1, 2004 U.S. Dist. LEXIS 25346, *2 (N.D.Ill. Dec. 15, 2004). While the court evaluates each of the cited factors, it is axiomatic that the most important factor is whether the claim is core or non-core because it is on this issue that questions of efficiency and uniformity will turn. In re Conseco Fin. Corp., 324 B.R. 50, 53 (N.D.Ill.2005).

The Neumanns set forth two distinct arguments in support of permissive withdrawal. First, they request a jury trial on the basis that the Committee's claims involving avoidance of preferential and fraudulent transfers seek a legal remedy — money damages. Next, they contend that the majority of the counts contained in the complaint are non-core, therefore, it is more suitable for the district court determination rather than the bankruptcy court.

A. Seventh Amendment Jury Rights

The Neumanns contend that they are entitled to a jury trial on nearly all of the counts of the complaint. As the movant, they carry the burden of establishing that withdrawal is appropriate. In re HA 2003, Inc., 2004 WL 609799, at *1, 2004 U.S. Dist. LEXIS 4674, at *2 (N.D.Ill. 2004). The Neumanns assert that they have not consented to a jury trial in the bankruptcy court and that the adversary proceeding ultimately requires adjudication before this court. They argue that notions of judicial economy support withdrawal of the reference. According to the Neumanns, court resources will be wasted if the right to a jury trial is delayed and the reference is not withdrawn.

The Committee takes the opposite approach. It perceives that the interests of judicial economy favor declining to withdraw the reference because the bankruptcy court is familiar with the case and will efficiently administer the estate. Since the adversary proceeding is in the early stages of litigation and likely to expand via an amended complaint, the Committee argues against withdrawal. It also opposes the Neumanns' motion on the basis that the underlying claims may be resolved by dispositive motions.

Despite whether the Neumanns right to a jury trial exists, the issue is not of primary concern when considering whether to withdraw the reference. In re Conseco Fin. Corp., 324 B.R. at 55. The principal goal of the bankruptcy court is the efficient use of the debtors and creditors' resources to administer the debtors' estate and resolve any related litigation. See In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2nd Cir.1993). The bankruptcy court has presided over this case since November 2007. The right to a jury trial, as presently asserted by the Neumanns, runs counter to the established policy of judicial economy and efficiency. In re Conseco Fin. Corp., 324 B.R. at 55. While a district court retains broad discretion to withdraw a reference based on cause, it remains an exception to the rule. Gecker v. Marathon Fin. Ins. Co., Inc., RRG, 391 B.R. 613, 614-15 (N.D.Ill.2008). Application of the ordinary rule prevents withdrawal of the reference from becoming "an escape hatch from bankruptcy to district court." Id. at 615. In the interests of judicial economy and efficient administration of the bankruptcy estate, the bankruptcy court is better suited to manage all pretrial matters and related issues arising out of the estate. Should a jury trial become necessary to resolve the issues...