Neilson v. Monterey Cnty. Bank (In re Cedar Funding, Inc.)
| Decision Date | 13 August 2012 |
| Docket Number | No. C-12-00643 RMW,C-12-00643 RMW |
| Court | U.S. District Court — Northern District of California |
| Parties | In re CEDAR FUNDING, INC., Debtor. R. TODD NEILSON, CHAPTER 11 TRUSTEE, Plaintiff, v. MONTEREY COUNTY BANK, ACCUSTOM DEVELOPMENT, LLC, DAVID A. NILSEN AND ANGELA NILSEN, Defendants. |
Defendant Monterey County Bank ("MCB") moves for an order withdrawing the reference of an adversary proceeding currently pending before the bankruptcy court for this district. The trustee opposes the motion. Having considered the papers submitted by the parties, and for the reasons set forth below, the court denies the motion.
This is an adversary proceeding brought by the Chapter 11 trustee for Cedar Funding, Inc. ("CFI") against MCB and others concerning real property located in Pebble Beach, California (the "Property"). The trustee seeks quiet title and declaratory relief establishing that "the interests in the Property of MCB, Accustom, Nilsen and those persons claiming through any of them, are subordinate to the interests of Plaintiff." Dkt. No. 4, Exh. 2 at 5-6.1
The relevant factual allegations have been ably summarized by the bankruptcy court after its review of multiple filings by the parties. Dkt. No. 4, Exh. 7 ("December 19, 2011 Order") at 2-4.2 In short, the dispute concerns multiple loans that were secured by deeds of trust or liens against the Property. Initially, David A. Nilsen made a loan of $400,000 to Thomas P. Harrow secured by a deed of trust recorded in June 2001 ("First Deed of Trust"). Nilsen made an additional loan of $650,000 secured by a deed of trust recorded in December 2001 ("Second Deed of Trust"). In 2002, Nilsen sold fractionalized interests in the Second Deed of Trust to various third-parties, and the assignments were duly recorded. Thereafter, Harrow executed a grant deed conveying all his right, title, and interest in the Property to Accustom Development, LLC ("Accustom"). Between 2005 and 2007, CFI advanced an additional $2.6 million to Accustom allegedly secured by the Second Deed of Trust. CFI obtained most of these funds from investors, who purportedly were sold fractionalized interests in the loans. Then, in December 2007, Accustom sought to refinance the Property by borrowing $1.855 million from MCB. The MCB loan was secured by a new first deed of trust against the Property. MCB fully funded the escrow in January 2008, and the funds were made payable to or deposited in accounts controlled by Nilsen. The First Deed of Trust was reconveyed in May 2008, but the Second Deed of Trust was never reconveyed.
The trustee contends that MCB had actual or presumed notice of all the liens against the Property and therefore the Second Deed of Trust - and the bankruptcy estate's interest in that lien - is senior to MCB's deed of trust against the Property.
The trustee commenced this adversary proceeding against MCB on October 20, 2008. Discovery is complete, and trial was set to begin in November 2011. However, on June 23, 2011, the Supreme Court issued its decision in Stern v. Marshall, 131 S.Ct. 2594 (2011). MCB argued that Stern put the bankruptcy court's jurisdiction in question. The bankruptcy court rejected these arguments and declined to dismiss the adversary proceeding. See December 19, 2011 Order.
In denying MCB's motion to dismiss, the bankruptcy court construed the trustee's claims as "a request to determine what interest the bankruptcy estate has in the Property" and concluded that the claims are core matters under 28 U.S.C. § 157(b)(2)(O). Id. at 4-5. The court then discussed Stern v. Marshall, noting that its actual holding "is quite limited" but "[t]he majority opinion's broad language . . . gives this court serious pause." See id. at 6-9. Ultimately, the court concluded that Stern v. Marshall did not deprive it of constitutional authority to enter a final judgment in this adversary proceeding because the trustee's claims "are not counter-claims filed against a creditor who filed a claim in this bankruptcy case, but instead are claims seeking a determination of what is property of the bankruptcy estate." Id. at 7. The court reasoned that "a bankruptcy court's determination of what is property of the bankruptcy estate is at the heart of the Bankruptcy Code," and "the concept of property of the bankruptcy estate is a fundamental creation of the Bankruptcy Code." Id. If a bankruptcy court could not determine what is the property of a bankruptcy estate, "its authority would be so fractured as to almost render the reorganization process too unwieldy to pursue in an Article I court," and such a result would be inconsistent with the Supreme Court's statement that Stern v. Marshall would not meaningfully change the division of labor in the current bankruptcy statute. Id. at 8. In addition, the court found, determining what is property of the bankruptcy estate stems from the bankruptcy itself, and therefore satisfies the test articulated in Stern. Id.
In the alternative, the bankruptcy court concluded that Stern did not preclude it from trying the trustee's claims and submitting proposed findings of fact and conclusions of law to the district court. Id. at 9. It concluded: "Simply put, this court intends to try this adversary proceeding." Id. at 10. After the bankruptcy court issued its order, MCB filed the present motion for an order withdrawing the reference.
28 U.S.C. § 157(a) permits district courts to refer "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" to the bankruptcy judges for the district. See also General Order No. 24. When a case or proceeding is referred to the bankruptcy judges, the district court may withdraw the reference "on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d). "In determining whether cause exists, a district court should consider the efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors." Sec. Farms v. Int'l Brotherhood of Teamsters, 124 F.3d 999, 1008 (9th Cir. 1997).
28 U.S.C. § 157(b)(1) provides that "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments . . . ." § 157(b)(2) lists non-exclusive categories of matters that are considered "core proceedings," including "(A) matters concerning the administration of the estate," "(C) counterclaims by the estate against persons filing claims against the estate," "(H) proceedings to determine, avoid, or recover fraudulent conveyances," and "(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship."
Under § 157(c)(1), bankruptcy judges may also "hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11."
In such a proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall beentered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.
28 U.S.C. § 157(c)(1).
In its recent decision of Stern v. Marshall, 131 S.Ct. 2594 (2011), the Supreme Court held that, even when a proceeding falls within the statutory definition of "core," it may be unconstitutional under Article III for a bankruptcy judge to enter final judgment. The Court relied in part on its earlier decision in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which held that a noncreditor has a right to a jury trial when sued by a bankruptcy trustee for fraudulent conveyance. In Granfinanciera, the Court found that fraudulent conveyance actions "are quintessentially suits at common law that more nearly resemble state-law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res." 492 U.S. at 54-55. Similarly, the counterclaim at issue in Stern was "in no way derived from or dependent upon bankruptcy law; it is a state tort action that exists without regard to any bankruptcy proceeding." 131 S.Ct. at 2618. The Stern Court stated:
Granfinanciera's distinction between actions that seek "to augment the bankruptcy estate" and those that seek "a pro rata share of the bankruptcy res," , reaffirms that Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.
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