District Court Denies Motion To Withdraw the Reference In Nortel, May Consider Renewed Motion At A Later Time

SNMP Research Int’l, Inc. v. Nortel Networks, Inc. (In re Nortel Networks, Inc.), No. 15-449 (LPS), 2015 WL 5275966 (D. Del. Sept. 9, 2015)

Chief Judge Stark of the District Court of Delaware recently denied a motion to withdraw the reference of an adversary proceeding in the cross-border bankruptcy case of In re Nortel Networks, Inc.  The Court held that due to the infancy of the proceeding and the Bankruptcy Court’s familiarity with the issues, the Bankruptcy Court would be better suited to preside over the proceeding until, if ever, a jury trial becomes necessary.

SNMP Research Int’l Inc. (“SNMP”), a creditor of one of Nortel Networks, Inc.’s United States subsidiaries (the “Debtors”), filed an adversary complaint in the Delaware Bankruptcy Court against Debtors and Avaya, Inc. (“Avaya”), alleging core claims against the Debtors and non-core claims against Avaya related to alleged unauthorized use of SNMP’s intellectual property.  SNMP then filed a motion to withdraw the reference in the District Court of Delaware, which forms the basis of this Memorandum.

The Delaware District Court has non-exclusive original jurisdiction of civil proceedings arising under title 11 of the United States Code in Delaware, but the Court refers those cases to Bankruptcy Court.  Nonetheless, the District Court may (and must) withdraw that reference in certain situations.  See 28 U.S.C. § 157(d).  Withdrawal of the reference is mandatory where “substantial and material” consideration of federal non-bankruptcy law is necessary to resolve the case or proceeding.  Op. at 5.  “[S]ubstantial and material” consideration is “meaningful consideration” rather than “simple application” of well-settled law.  Id.  In contrast, withdrawal of the reference is permissive where the party seeking withdrawal demonstrates cause to overcome the presumption that “Congress intended to have bankruptcy proceedings adjudicated in the bankruptcy court….”  Id. at 4 (citing Hatzel & Buehler, Inc. v. Cen. Hudson Gas & Elec. Corp., 106 B.R. 367, 371 (D. Del. 1989)).  When determining if cause exists, courts in the Third Circuit consider the following factors: promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, fostering economical use of the debtors’ and creditors’ resources, and expediting the bankruptcy process.  Id. at 8 (citing In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990)).

The Court concluded that mandatory withdrawal was unwarranted in this case.  SNMP’s claims required simple application of the Copyright Act to the facts rather than “deciphering or interpreting the [non-bankruptcy] law.”  Id. at 6.  Additionally, the Court found the potential questions of first impression raised by the Debtors (seeking to add international affiliates as third parties) too uncertain and speculative to mandate withdrawal.  See Fed. R. Civ. P. 14; Op. at 6-7.  Simply put, SNMP failed to show that “substantial and material” consideration of federal non-bankruptcy law would be required.

The Court also declined to use its discretion to withdraw the case, primarily finding that judicial efficiency would be best served by the Bankruptcy Court presiding over the proceeding due to its familiarity with the issues and parties.  The Court also reasoned that, to the extent the Bankruptcy Court enters final judgment only on the core issues, judicial uniformity would not be greatly impaired.  Finally, the Court held that, while SNMP may have a right to a jury trial for its non-core claims against Avaya, only when and if the parties or the Bankruptcy Judge determines that there are “genuine issues of material fact which should be tried to a jury” would the District Court consider granting a renewed motion for withdrawal.  Op. at 13.