Levine v. M & a Custom Home Builder & Developer

• Decision Date: 25 November 2008
• Docket Number: No. H-08-2946.,H-08-2946.
• Citation: 400 B.R. 200
• Parties: Jonathan LEVINE, et al., Plaintiffs, v. M & A CUSTOM HOME BUILDER & DEVELOPER, LLC, et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

Page 200

400 B.R. 200

Jonathan LEVINE, et al., Plaintiffs, v. M & A CUSTOM HOME BUILDER & DEVELOPER, LLC, et al., Defendants.

Civil Action No. H-08-2946.

United States District Court, S.D. Texas, Houston Division.

November 25, 2008.

COPYRIGHT MATERIAL OMITTED

Michael J. Durrschmidt, Hirsch & Westheimer PC, Houston, TX, for Plaintiffs.

Margaret Maxwell McClure, M&A Custom Home Builder & Developer, LLC, Houston, TX, Jeffrey P. Norman, Gipson & Norman, Webster, TX, for Defendants.

MEMORANDUM AND ORDER

LEE H. ROSENTHAL, District Judge.

In response to the motion to withdraw the reference filed by defendant Sergio Medina, the bankruptcy court has issued a report recommending that the district court withdraw the reference for the adversary proceeding filed as Adversary No. 07-3469, but defer the withdrawal until the bankruptcy court has ruled on the parties' dispositive motions. The standard for when a district court may withdraw the reference from a bankruptcy court is outlined in 28 U.S.C. § 157(d). Section 157 provides for both mandatory and permissive withdrawal:

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 any 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).

Courts generally interpret the mandatory withdrawal provision restrictively, granting withdrawal of the reference when the claim and defense entail material and substantial consideration of non-Bankruptcy Code federal law. See, e.g., Lifemark Hosps. of La., Inc. v. Liljeberg Enters., Inc., 161 B.R. 21, 24 (E.D.La. 1993) (withdrawing reference when case necessarily involved a determination of antitrust claims); U.S. Gypsum Co. v. Nat'l Gypsum Co., 145 B.R. 539, 541 (N.D.Tex. 1992) (withdrawing reference when case necessarily involved a determination of patent claims); In re Johns-Manville Corp., 63 B.R. 600, 603 (S.D.N.Y.1986) (withdrawing reference when case necessarily involved a determination of CERCLA issues); In re White. Motor Corp., 42 B.R. 693, 704 (N.D.Ohio 1984) (no withdrawal of reference based on speculation about issues under ERISA and Internal Revenue Code which may or may not be germane to the core proceeding). Permissive withdrawal for cause shown requires a court to examine the following factors: is the matter core or noncore? Do the proceedings involve a jury demand? Would withdrawal further uniformity in bankruptcy administration? Would withdrawal reduce forum-shopping and confusion? Would withdrawal foster economical use of resources? Would withdrawal expedite the bankruptcy process? Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir.1985); In re OCA, Inc. 2007 WL 1728914, *3 (E.D.La.2007).

In the present case, the bankruptcy court carefully analyzed the relevant factors and concluded that because defendant Medina had demanded a jury trial, had not waived his right to a jury trial, and had not consented to a jury trial held in the bankruptcy court, withdrawal was appropriate. The bankruptcy court recognized that the withdrawal should be deferred until that court has ruled on all dispositive motions, to further judicial economy and expedite the bankruptcy process.

This court adopts the report and recommendation and withdraws the reference effective when the bankruptcy court rules on the dispositive motions and subject to the bankruptcy court's rulings on those motions.

REPORT AND RECOMMENDATION TO WITHDRAW REFERENCE IN PART

MARVIN ISGUR, Bankruptcy Judge.

Pursuant to 28 U.S.C. § 157(d), the District Court may withdraw, in whole or in part, any case or proceeding referred under § 157, on its own motion or on timely motion of any party, for cause shown. This Court recommends that the District Court partially withdraw the reference to the Bankruptcy Court of adversary proceeding No. 07-03469. The Court recommends that the District Court refrain from withdrawing the reference until this Court has resolved all parties' dispositive motions.

Background

Plaintiffs Jonathan and Samantha Levine ("the Levines") hired defendant M & A Custom Home Builder & Developer, LLC ("M & A") to construct their home. M & A is wholly owned by defendant Mark Anthony Blake ("Blake"). M & A in turn, hired defendant S & S Construction Group ("S & S") to carry out construction of the Levines' home. S & S is owned by defendant Sergio Medina ("Medina"). Medina also owns defendant Sergio L. Medina, Inc, a company Medina formed shortly after Blake filed his bankruptcy petition. The Levines transferred approximately $925,000 to Blake to be held as construction funds.

The Levines' home was never built. The Levines contend that Blake misrepresented his construction expertise. The Levines contend that Blake stated that he had extensive experience building homes and displayed a portfolio book of homes and a showroom of model homes as examples of his prior works. The Levines contend that, in fact, Blake had never built a home and the portfolio and showroom were actually owned by S & S. According to the Levines, S & S allowed Blake to use their materials in return for the construction contract.

The Levines contend that Blake spent over $250,000 of the construction funds on personal expenses. The Levines contend that the remainder was transferred to S & S. S & S did some preliminary work on the home, including clearing the lot, utility work, and pouring a foundation. The Levines value the work at approximately $150,000. $75,000 was deposited with a homeowners association as compensation for unapproved removal of trees. Neither S & S nor Medina have accounted for the unused funds. The Levines allege that Medina transferred the construction funds to his personal account and Sergio L. Medina, Inc.

On March 30, 2007, Blake filed a chapter 7 bankruptcy petition. On October 30, 2007, the Levines filed this adversary proceeding. Subsequently, the trustee of Blake's bankruptcy estate ("Trustee Cage") intervened to assert the claims of Blake's bankruptcy estate against Medina and S & S. On March 30, 2008, the Levines and Trustee Cage filed a joint First Amended Complaint. The complaint was subsequently amended by a Second Amended Complaint filed on September 4, 2008.

Trustee Cage asserts that M & A is the alter ego of Blake and that S & S and Sergio Medina, Inc. are alter egos of Medina. Trustee Cage also seeks to collect from defendants all transfers of the Levines' construction funds under §§ 541, 542, 548, 550. Under the Fifth Circuit's Schimmelpenninck Opinion, Trustee Cage owns these claims. In re Schimmelpenninck, 183 F.3d 347 (5th Cir.1999). The Levines do not dispute Trustee Cage's senior status with respect to these claims. Trustee Cage also seeks an accounting from defendants with respect to all Levine funds.

The Levines seek a finding that their claims for fraud, misrepresentation, defalcation, embezzlement, willful injury, and misapplication of fiduciary property against Blake for the construction funds is nondischargeable under §§ 523(a)(2), 523(a) (4), and 523(a)(6). The Levines also seek to hold M & A, Medina, S & S Construction Group, and Sergio L. Medina, Inc. liable as co-conspirators and joint venture participants with Blake.

Jury Demand

On November 30, 2007, Medina timely filed a Motion to Dismiss and Abstain. In the Motion, Medina stated that he would be making a jury demand. On December 10, 2007, Medina timely filed an Answer to the Levines' complaint. The Answer contained a jury demand. On January 17, 2008, the Court ordered briefing on how Medina's jury demand should impact the adversary proceeding. On February 28, 2008, the Court considered Medina's Motion and the jury demand. The Court denied Medina's Motion to Dismiss. The Court declined to consider the jury demand. The Court found that consideration of the jury demand issue would be improvident until Medina filed an answer to the Trustee Complaint in Intervention and the case had further developed. The Court also issued a Scheduling Order requiring any party who wished to obtain a ruling on whether the case should be tried by a jury to file a motion by July 31,2008.

On March 20, 2008, pursuant to the Court's order, the Levine's and Trustee Cage filed their First Amended Complaint. On April 7, 2008, Medina timely filed an answer to the Amended Complaint. The answer contained a jury demand. On July 17, 2008, pursuant to the Court's February 28 Scheduling Order, Medina filed a motion demanding a jury trial and requesting this Court to withdraw the reference.

Medina has timely requested that this Court recommend that the reference be withdrawn. Medina has demanded a jury trial and does not consent to a jury trial held by the bankruptcy court.

Analysis

The Fifth Circuit holds that without consent of the parties, a bankruptcy judge lacks the authority to conduct a jury trial. In re Clay, 35 F.3d 190, 196-97 (5th Cir. 1994). Medina has requested a jury trial. Accordingly, if Medina is entitled to a jury trial, the reference must be withdrawn.

The Seventh Amendment provides the right to a jury trial in cases in which the value in controversy exceeds twenty dollars and the cause of action is to enforce statutory rights that are at least analogous to one which was tried at law in the late 18th century English courts. See City of Monterey v. Del Monte Dunes, 526 U.S. 687, 708, 119 S.Ct. 1624, 143 L.Ed.2d 882 (1999); Lorillard v. Pons, 434 U.S. 575, 98 S.Ct. 866, 55 L.Ed.2d 40 (1978). Suits "at law" refers to "suits in which legal rights were to be ascertained and determined" as opposed to "those where equitable rights alone were recognized and equitable remedies were administered."...