In re the Vwe Group, Inc.

• Decision Date: 05 January 2007
• Docket Number: Adversary No. 06 08297 ASH.,Bankruptcy No. 04 20308 ASH.
• Citation: 359 B.R. 441
• Parties: In re: THE VWE GROUP, INC., d/b/a V.W.Eimicke Associates, Inc., Debtor. The Official Committee of Unsecured Creditors of the VWE Group, Inc., d/b/a V.W. Eimicke Associates, Inc., on behalf of itself, The VWE Group, Inc., d/b/a V.W. Eimicke Associates, Inc., Debtor, The Estate of the VWE Group, Inc., d/b/a V.W. Eimicke Associates, Inc. And the creditors of The VWE Group, Inc., d/ba/ V.W. Eimicke Associates, Inc. Plaintiffs, v. Thomas R. Amlicke, Michael A. Meyers, Richard B. Rodman, Lawrence M. Hertz, Bruce R. Johnson, Daniel R. Goodman, Edmund S. Wartels, Douglas J. Wood, Peter D. Raymond, Donald M. Klein, John Doe 1-10 and Jane Doe 1-10. Defendants.
• Court: U.S. District Court — Southern District of New York

359 B.R. 441

In re: THE VWE GROUP, INC., d/b/a V.W.Eimicke Associates, Inc., Debtor The Official Committee of Unsecured Creditors of the VWE Group, Inc., d/b/a V.W. Eimicke Associates, Inc., on behalf of itself, The VWE Group, Inc., d/b/a V.W. Eimicke Associates, Inc., Debtor, The Estate of the VWE Group, Inc., d/b/a V.W. Eimicke Associates, Inc. And the creditors of The VWE Group, Inc., d/ba/ V.W. Eimicke Associates, Inc. Plaintiffs, v. Thomas R. Amlicke, Michael A. Meyers, Richard B. Rodman, Lawrence M. Hertz, Bruce R. Johnson, Daniel R. Goodman, Edmund S. Wartels, Douglas J. Wood, Peter D. Raymond, Donald M. Klein, John Doe 1-10 and Jane Doe 1-10. Defendants.

Bankruptcy No. 04 20308 ASH.

Adversary No. 06 08297 ASH.

United States District Court, S.D. New York.

January 5, 2007.

COPYRIGHT MATERIAL OMITTED

Joseph O'Neil, Jr., New York, NY, for Debtor.

MEMORANDUM DECISION AND ORDER GRANTING THE MOTION TO WITHDRAW THE REFERENCE

McMAHON, District Judge.

VWE Group, Inc., d/b/a/ V.W. Eimicke Associates, Inc's (the "Debtor") is a familyowned New York corporation headquartered in Yonkers, New York and run by the Eimicke family. Prior to filing a bankruptcy petition on June 2, 2004, the Debtor was in the business of selling human resources products including copyrighted personnel forms, labor law posters, and human resources software.

The plaintiff in the present Adversary Proceeding is the official committee of unsecured creditors (the "Committee")— appointed in the Debtor's Chapter 11 case and authorized to "investigate and bring" any and all actions on behalf of and belonging to the Debtor and its estate. Pursuant to its investigation, the Committee discovered and continues to assert that a majority of the Debtor's creditors are innocent note holders who were defrauded by the Debtor's former officers, directors, shareholders and perhaps others in a "purported $26 million ponzi scheme that spanned over a decade." (Pl. Opp. at 2.)

In or about September 2005, counsel for the Committee advised that the District Attorney for Westchester County would be investigating the principals of the Debtor to determine if promissory notes had been fraudulently issued, and the Committee suspended its investigation. No prosecutorial action by the District Attorney was taken. The Committee has, however, commenced lawsuits against the Debtor's principals, which are currently pending before the Bankruptcy Court. In addition, two of the Debtor's principals have filed Chapter 7 bankruptcy proceedings, which are pending before the Bankruptcy Court.

Attorneys at the law firm of Hall Dickler LLP ("Hall Dickler") worked on various corporate and trusts and estates matters for the Debtor and its principals from the early 1990s through 2003. The Committee initially asserted that Hall Dickler knew of, and assisted the principals in carrying out, the ponzi scheme. The instant Adversary Proceeding was initiated on or about June 1, 2006 by the Committee against several former Hall Dickler partners.¹ The firm itself dissolved as of January 1, 2004. In the complaint, the Committee asserts a malpractice claim against the individual Hall Dickler attorneys, based on their alleged failure to advise the Debtor to seek Chapter 11 protection in a timely manner. In particular, the Committee alleges that during the period July 1, 2002 through December 31, 2003, the defendants represented the Debtor in connection with the negotiation and consummation of certain transactions (the "Taylor Transactions") with Taylor Corporation and its subsidiaries and affiliates (the "Taylor Entities"). The first of these included granting a lien to the Taylor Entities on substantially all the assets of the Debtor on account of an antecedent debt, that, at the time the lien was granted, was approximately $3,000,000 (the "Taylor Lien"). The Committee contends that after granting the Taylor Lien, the Debtor sold all of its assets to the Taylor Entities and used 84,223, 753.69 of the sale proceeds to repay secured and unsecured debt owed to the Taylor Entities. At the conclusion of the Taylor Sale, the Debtor's assets and future revenue generation ability were severely diminished and in excess of one-half of the proceeds of the Taylor Sale, or $4,663,965.05 were either repaid to Taylor Entities or used to satisfy selected liabilities that the Taylor Entities directed the Debtor to repay.

The complaint alleges that the Taylor Transactions rendered the Debtor hopelessly insolvent, with no ability to make distribution to the holders of the Debtor's debt securities and instruments in an aggregate amount in excess of $20,443,657. The Committee claims that the individual Hall Dickler defendants had a duty to inform the Debtor of all its options—one of which was the filing of a Chapter 11 petition—sooner rather than later, but failed to do so. Had defendants provided competent legal advice, the complaint asserts, the Debtor and its estate would have preserved an additional amount of approximately $4,223,753.69. The Committee seeks damages in that amount from the individual Hall Dickler defendants.

When Hall Dickler went out of business, all of the individual defendants joined Reed Smith LLP, as partners, and all but two of the individual defendants (Daniel R. Goodman and Bruce C. Klein) are still partners at Reed Smith. Reed Smith was appointed to represent the Debtor in its Chapter 11 case.

The Adversary Proceeding is currently before the Bankruptcy Court on the same discovery and trial schedule as other lawsuits instigated by the Committee. On July 13, 2006, the Bankruptcy Court entered a scheduling order that requires all discovery to be concluded no later than November 30, 2006, that a pre-trial conference to be held on January 9, 2007, and that the parties be required to proceed with trial within one week thereof. (I have checked with Judge Hardin's chambers, and those dates have slipped somewhat; the pre-trial conference is presently calendared for January 30).

On August 15, 2006, the defendants moved to dismiss the adversary complaint. Plaintiff filed their opposition papers on October 27, 2006.

Defendants filed the present Motion to Withdraw the Reference on or about October 19, 2006, some four and one half months after the filing of the adversary proceeding. On that same date, defendants filed a jury demand. Because no answer had yet been filed, the demand was timely. See Fed.R.Civ.P. 38(b).

The Bankruptcy Court denied the motion to dismiss—along with plaintiff's cross motion for summary judgment—on November 21, 2006, after the filing of the motion to withdraw the reference and the jury demand.

In their motion, defendants argue that plaintiffs legal malpractice claim against the Debtor's pre-petition counsel is not a core proceeding under the Bankruptcy Code, and that defendants are entitled to a jury trial and all the rights afforded them by the Federal Rules of Civil Procedure in defending themselves against this claim. Thus, they argue, this court should withdraw the reference.

Analysis

In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Supreme Court ruled that Congress could not constitutionally empower a non-Article III bankruptcy court with the authority to adjudicate a state breach-of-contract action, based on a pre-petition contract, brought by a debtor against a defendant that had not filed a claim with the bankruptcy court. The court held that "our Constitution reserves for Art. III courts" traditional functions of the judicial power such as adjudicating state breach-of-contract claims like that by the debtor against the defendant. Id. at 84, 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598. Accordingly, the Court in Marathon found unconstitutional Congress's broad grant of jurisdiction to the bankruptcy courts to adjudicate such claims in the Bankruptcy Act of 1978.

In response to Marathon, Congress enacted 28 U.S.C. § 157. See In re Ben Cooper, Inc., 896 F.2d 1394, 1398 (2d Cir.) (Ben Cooper I), vacated and remanded, 498 U.S. 964, 111 S.Ct. 425, 112 L.Ed.2d 408 (1990), reinstated on remand, In re Ben Cooper, Inc. 924 F.2d 36, 38 (2d Cir.) (Ben Cooper II). Section 157 classifies matters as either "core proceedings," which the bankruptcy court may "hear and determine" and on which the "may enter appropriate orders and judgments," § 157(b)(1), or "non-core proceedings," which the bankruptcy court may hear, but for which—absent the parties' consent— the bankruptcy court is only empowered to submit proposed findings of fact and conclusions of law to the district court for its consideration and for de novo review of any matter to which any party has timely and specifically objected, § 157(c)(1).

The district courts have original jurisdiction over all civil proceedings "arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. 1334(b). In this district, the District Court automatically refers all such cases to the Bankruptcy Court in the first instance. However, under 28 U.S.C. § 157(d), a "district court may withdraw . . . any case or proceeding referred [to the bankruptcy court] on its own motion or on timely motion of any party, for cause shown." Section 157(d) does not define the term "cause." District courts in this circuit have considered a number of factors in evaluating "cause:" whether the claim or proceeding is core or non-core, whether it is legal or equitable, and considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law. See, e.g., In re Kenai Corp., 136 B.R. 59, 61 (S.D.N.Y.1992).

Moreover, "the core/non-core evaluation also determines the relevance of the parties' jury trial rights to deciding a motion to withdraw the reference." In re Orion Pictures Corporation, 4 F.3d 1095, 1101 (2nd Cir.1993). Because the Second Circuit has definitively held that the "Constitution prohibits bankruptcy...