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The Delaware Bankruptcy Insider is a premier blog designed to bring its readers a comprehensive analysis of the latest Delaware corporate bankruptcy news and rulings. Brought to you by Ashby & Geddes, P.A.
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- Delaware District Court Finds Section 506(b) Does Not Limit Allowability of Unsecured Claims for Contractual Postpetition Attorneys’ Fees
- Post-Confirmation Purchasers of Shares Be Aware: Third Circuit Holds Shares are Subject to the Plan, Including Its Releases
- Delaware District Court Agrees That Plans Need Not Reflect Bargained For Priority Provisions in Subordination Agreements
A Simple Example: Withdrawal Of The Reference Denied By Delaware District Court Despite Federal RICO Claim
Barry v. Santander Bank, N.A. (In re Liberty State Benefits of Delaware Inc.), Civ. No. 14-677-LPS (D. Del. Mar. 12, 2015)
On March 12, 2015, Chief Judge Stark of Delaware’s District Court denied the request of defendant Santander Bank, N.A. (the “Defendant”) to withdraw the reference, rejecting Defendant’s arguments for mandatory and permissive withdrawal. Richard Barry, the chapter 11 trustee of the debtor (the “Plaintiff”), alleged in the complaint almost entirely non-bankruptcy causes of action, including violations of the federal Racketeering Influenced and Corrupt Organization Act (“RICO”)—the sole basis for the Defendant’s mandatory withdrawal request. Ultimately, the Court found, under Delaware precedent, that consideration of the federal RICO claim was not “substantial and material” to resolving the proceeding and thus, the claim alone did not warrant mandatory withdrawal. Likewise, the Court held that the Defendant was unable to carry its burden for permissive withdrawal “for cause shown.”
District courts “have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 11 U.S.C. § 1334. Under this grant of authority, district courts “refer” these proceedings to bankruptcy courts, typically under a standing order of reference. Section 157(d) determines when a district court must withdraw the reference from the bankruptcy court (and adjudicate the matter), and when a district court may withdraw the reference. For mandatory withdrawal, a district court must withdraw the 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). For permissive withdrawal, a district court may withdraw the proceeding “for cause shown.” Id.
The Delaware District Court has adopted a two-pronged approach for mandatory withdrawal: (1) consideration of the non-bankruptcy law is necessary for the resolution of the proceeding; and (2) consideration of the federal non-bankruptcy law necessary to resolve the proceeding is “substantial and material.” In re Cont’l Airlines, 138 B.R. 442, 444-45 (D. Del. 1992). “Substantial and material” has been interpreted to exclude cases in which only a simple application of well-settled federal non-bankruptcy law is required in order to avoid the use of section 157(d) as an “escape hatch” from bankruptcy court. In re CM Holdings, Inc., 221 B.R. 715, 721 (D. Del. 1998).
In Santander, the Court held that Plaintiff’s federal RICO claim does not involve an issue of first impression, and is only a minor aspect of the Plaintiff’s overall complaint. The Court further ruled that even if the federal RICO claim was the primary allegation, Defendant did not carry its burden for the “substantial and material” prong. Defendant presented no analysis of how the adjudication of the RICO claim would be anything other than straightforward and the Court refused to allow an alleged violation of federal law to upend the policy favoring adjudication of routine non-bankruptcy law by bankruptcy courts.
When considering a permissive withdrawal request, courts within the Third Circuit consider four factors “for cause shown”: (1) promoting uniformity in bankruptcy administration; (2) reducing forum shopping and confusion; (3) fostering the economically use of the debtors’ and creditors’ resources; and (4) expediting the bankruptcy process. In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990). The “cause shown” requirement “creates a presumption that Congress intended to have bankruptcy proceedings adjudicated in bankruptcy court unless rebutted by a contravening policy.” Hatzel & Buehler, Inc. v. Cent. Hudson Gas & Elec. Corp., 106 B.R. 367, 371 (D. Del. 1989) (citation and internal quotations omitted).
Here, the Court quickly concluded that it is more economical and efficient, and promotes judicial uniformity, for the Bankruptcy Court to retain the reference. Chief Judge Stark observed that the Bankruptcy Court is more informed about the underlying facts of the case, having presided over at least thirteen similar adversary proceedings brought by the Plaintiff. Moreover, although a majority of the asserted claims are non-core, judicial uniformity was found not to be undermined, especially given that it is the practice of the Delaware District Court to permit withdrawn proceedings to continue in Bankruptcy Court through their pre-trial stages. And finally, the Court disregarded the Defendant’s accusations of forum shopping. The Plaintiff filed the subject adversary proceeding in the jurisdiction where the main bankruptcy case was pending. Accordingly, the choice was proper and logical.