(BK) Taggart v. Roberts ( 2021 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 YU FANG TAGGART and MELISSA No. 2:19-cv-2470-KJM-JDP BOLTON, 12 Bankr. Case No. 19-22029-B-7 Plaintiffs, 13 Adversary Proceeding No. 19-02099-B v. 14 ORDER RICHARD LEON ROBERTS and 15 PAMELA JEAN HALL, 16 Defendants. 17 18 This motion arises from adversarial proceedings that began prior to the Chapter 7 19 bankruptcy of Richard Leon Roberts and Pamela Jean Hall (collectively “defendants”). Plaintiffs 20 were students in defendants’ Ultrasound Technology training program and filed claims against 21 defendants for nondischargeability under 11 U.S.C. § 523(a)(6) (“willful and malicious injury by 22 debtor”) and denial of discharge under 11 U.S.C. § 727 (“false oath”). Plaintiffs assert all claims, 23 including personal injury tort claims, sexual harassment and a “false oaths” claim, previously 24 filed in state court, are “core causes” over which the bankruptcy court has jurisdiction. 25 Defendants move to withdraw the reference so that all claims may be addressed before this court. 26 This matter was submitted without a hearing. For the following reasons, the court GRANTS the 27 motion to withdraw the reference. 28 1 I. BACKGROUND 2 A. Factual Background 3 On September 21, 2018, prior to the commencement of defendants’ bankruptcy 4 case, plaintiff Taggart filed a complaint in the Superior Court of the State of California for the 5 County of Sacramento. See Compl. at 37, ECF No. 1.1 On February 21, 2019, plaintiff Bolton 6 filed a demand for arbitration through Alternative Dispute Resolution (ADR) Services, Inc. in the 7 Superior Court. See generally Demand for Arbitration at 64, ECF No. 1. 8 In addition to plaintiffs Taggart and Bolton, two other claimants, Amy Pedrioli and 9 Ariel Cook, filed arbitration claims in the Superior Court against defendants based on the same 10 alleged conduct. Mot. at 9, ECF No. 1. The bankruptcy filing stayed all ADR proceedings. See 11 Status Report, ECF No. 10. The demand for arbitration is the operative document in bankruptcy 12 court and contains eight causes of action: (1) sexual harassment; (2) sexual battery; (3) gender 13 violence; (4) violation of the Ralph Act; (5) assault; (6) battery; (7) negligent retention of unfit 14 employee; and (8) intentional infliction of emotional distress. See generally Demand for 15 Arbitration. 16 On April 1, 2019, defendants filed a petition under Chapter 7 of the Bankruptcy 17 Code, staying the arbitrations. See Petition, ECF No. 1 (Bankruptcy Docket). On August 19, 18 2019, plaintiffs filed their two additional claims against defendants in the bankruptcy action: 19 (1) nondischargeability under 11 U.S.C. § 523(a)(6) (“willful and malicious injury by debtor”) 20 and (2) denial of discharge under 11 U.S.C. § 727 (“false oath”). See generally Bankruptcy 21 Compl., ECF No. 38. Defendants move this court to withdraw the reference from the bankruptcy 22 court with respect to all of plaintiffs’ claims for pre-trial proceedings and trial to be held before 23 this court. Mot. at 16. 24 25 26 27 1 The court cites to the page numbers assigned by the court’s ECF system. 28 1 B. Proceedings in Bankruptcy Court 2 On October 10, 2019, the bankruptcy court issued an Order to Show Cause (OSC) 3 Why All Proceedings Should Not be Suspended under 11 U.S.C. § 305(a), which provides the 4 statutory authority for the bankruptcy court to suspend all proceedings in “the parent [C]hapter 7 5 case, . . . until such time as the pending civil arbitrations initiated by creditors [Melissa Bolton 6 and Yu Fang Taggart] . . . are concluded.” OSC, ECF No. 11 (Bankruptcy Docket). Defendants 7 opposed bankruptcy court allowing state court arbitrations to proceed. ECF No. 16 (Bankruptcy 8 Docket). Plaintiffs filed a statement of non-opposition to the bankruptcy court’s OSC. ECF No. 9 14 (Bankruptcy Docket). The bankruptcy court employed a totality of the circumstances test to 10 evaluate suspension under § 305(a) and determined, “Defendant shall file a motion to withdraw 11 the reference on or before December 19, 2019.” Bankruptcy Court OSC Order, ECF No. 22. On 12 December 12, 2019, defendants filed with this court a motion to withdraw the reference. See 13 Mot. Plaintiffs oppose, Opp’n, ECF No. 4, and defendants replied, Reply, ECF No. 5. On April 14 8, 2021, this court directed the parties to file a focused joint status report addressing two issues: 15 (1) the current status of arbitration proceedings, and (2) whether the parties stipulate to 16 withdrawal of the reference as to plaintiffs’ claim for nondischargeability under 11 U.S.C. 17 § 523(a)(6) in light of the bankruptcy court’s January 4, 2021 Order bifurcating plaintiffs’ § 727 18 cause of action to allow plaintiffs’ § 727 case to move forward while defendants’ motion to 19 withdraw the reference is pending before this court. See Minute Order, ECF No. 9. On April 14, 20 2021, the parties filed their joint status report. See Status Report. The parties clarified arbitration 21 proceedings remain stayed by the bankruptcy filing and plaintiffs do not stipulate to withdrawal 22 of the reference as to plaintiffs’ claim under 11 U.S.C. § 523(a)(6). Id. The court thus resolves 23 the motion to withdraw the reference here. 24 II. LEGAL STANDARD 25 Under 28 U.S.C. § 1334 (a)–(b), district courts have original jurisdiction but not 26 exclusive jurisdiction over “all civil proceedings arising under title 11” as well as over cases 27 “arising in or related to cases under title 11.” Each district court may, however, “provide that any 28 or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related 1 to a case under title 11 shall be referred to the bankruptcy judges for the district.” 28 U.S.C. 2 § 157(a). Relying on this authority, this court has issued orders automatically referring all 3 bankruptcy cases filed in the district to the bankruptcy court. See E.D. Cal. Gen. Order Nos. 182, 4 223. 5 There are two circumstances in which the automatic reference to the bankruptcy 6 court is withdrawn for the case to proceed in district court. First, withdrawal is mandatory where 7 “cases require[] substantial and material consideration of federal law.” Sec. Farms v. Int’l Bhd. of 8 Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1007 (9th Cir. 1997). Second, 9 withdrawal is permissive as provided by 28 U.S.C. § 157(d): “The district court may withdraw, in 10 whole or in part, any case or proceeding . . . on timely motion of any party, for cause shown.” 11 When seeking permissive withdrawal, “[t]he party moving for withdrawal of the reference has the 12 burden of persuasion.” Hawaiian Airlines, Inc. v. Mesa Air Grp., Inc., 355 B.R. 214, 218 (D. 13 Haw. 2006). 14 As also provided by 28 U.S.C. § 157(d), matters in bankruptcy can be classified as 15 either “core proceedings,” in which the bankruptcy court “may enter appropriate orders and 16 judgments,” or “non-core proceedings,” in which the bankruptcy court may only submit findings 17 of fact and conclusions of law to the district court for de novo review. Id. In general, a core 18 proceeding in bankruptcy is one that “invokes a substantive right provided by [T]itle 11 or . . . a 19 proceeding that, by its nature, could arise only in the context of a bankruptcy case . . . Non-core 20 proceedings are those not integral to the restructuring of debtor-creditor relations and not 21 involving a cause of action arising under [T]itle 11.” In re Gruntz, 202 F.3d 1074, 1081 (9th Cir. 22 2000). “The separation of ‘core’ and ‘non-core’ proceedings in the [Bankruptcy Amendments 23 and Federal Judgeship Act of] 1984 [] creates a distinction between those judicial acts deriving 24 from the plenary Article I bankruptcy power and those subject to general Article III federal court 25 jurisdiction.” Id. “A district court considering whether to withdraw the reference should first 26 evaluate whether the claim is core or non-core, since it is upon this issue that questions of 27 efficiency and uniformity will turn.” Hjelmeset v. Cheng Hung, No. 17-CV-05697-BLF, 2018 28 WL 558917, at *3 (N.D. Cal. Jan. 25, 2018) (quoting In re Orion Pictures Corp., 4 F.3d 1095, 1 1101 (2d Cir. 1993)). “In determining whether cause [for permissive withdrawal] exists, a district 2 court should consider the efficient use of judicial resources, delay and costs to the parties, 3 uniformity of bankruptcy administration, the prevention of forum shopping, and other related 4 factors.” Sec. Farms, 124 F.3d 999 at 1008. 5 III. DISCUSSION 6 The court considers defendants’ arguments for permissive withdrawal of the 7 reference and evaluates whether plaintiffs’ claims against defendants are “core” or “non-core,” 8 which impacts the bankruptcy court’s ability to enter appropriate orders and judgments in this 9 case. Defendants argue the “gravamen of [plaintiffs’] complaint is that . . . any debt owed in 10 connection with [defendants’] conduct toward plaintiffs . . . is not dischargeable [under 11 U.S.C. 11 § 523(a)(6)] and survives any discharge received by the defendants because the debt is ‘for willful 12 and malicious injury by the debtor’ to [p]laintiffs.” Mot. at 9. In reply, defendants argue the 13 substance of defendants’ claims are primarily personal injury tort claims, each of which has 14 multiple elements, “which means they must be tried in district court.” Reply at 2 (quoting 15 bankruptcy court’s OSC 3:4–3:6). 16 Plaintiffs do not contest that their tort claims against defendants are non-core and 17 in fact concede that a determination of nondischargeability of debt will “require an inquiry into 18 defendant Richard Roberts’ tortious conduct.” Opp’n at 2. Based on the record before the court, 19 the claims at issue appear to be non-core, as they do not invoke “a substantive right provided by 20 Title 11” or constitute “a proceeding that, by its nature, could arise only in the context of a 21 bankruptcy case.” In re Gruntz, 202 F.3d at 1081. Accordingly, this factor does not weigh in 22 favor of the bankruptcy court’s retaining the referral of the proceeding. Of course, bankruptcy 23 judges may still propose findings of fact and conclusions of law to federal district courts with 24 respect to non-core proceedings related to a case proceeding under Title 11. Id. The court 25 considers whether the bankruptcy judge in this case should perform this role by conducting the 26 analysis set forth below. 27 In resolving the pending motion, the court considers the factors relevant to 28 permissive withdrawal. Sec. Farms, 124 F.3d 999 at 1008. First, the court considers the efficient 1 use of judicial resources. The division of labor between the bankruptcy court and the district court 2 “promotes judicial economy and efficiency by making use of the bankruptcy court’s unique 3 knowledge of Title 11 and familiarity with the actions before them.” In re Heller Ehrman LLP, 4 464 B.R. 348, 358 (N.D. Cal. 2011). In support of withdrawal of the reference to achieve judicial 5 efficiency, defendants argue the “Bankruptcy Court cannot try personal injury tort claims. Only 6 district court can try personal injury tort claims and enter a final judgment on all claims in the 7 [a]dversary [p]roceeding.” Mot. at 13; 28 U.S.C. § 157(b)(5) (“The district court shall order that 8 personal injury tort and wrongful death claims shall be tried in the district court in which the 9 bankruptcy case is pending . . .”). Plaintiffs argue defendants’ “invocation of 28 U.S.C. 10 157(b)(5) is misplaced because [p]laintiffs did not actually bring their personal injury complaints 11 to the bankruptcy court.” Opp’n at 2. 12 The bankruptcy court reasoned withdrawal of the reference to let the District Court 13 decide the personal injury tort claims was likely the correct approach to prevent “potential [] 14 conflicting rulings and conflicting findings.” Bankruptcy Hr’g Tr. 24:15–19 (Nov. 5, 2019), ECF 15 No. 1. This court agrees with the bankruptcy court’s assessment that plaintiffs’ claims against 16 defendants are predominantly tort claims under California law. See In re Jercich, 238 F.3d 1202, 17 1206 (9th Cir. 2001); In re Bailey, 197 F.3d 997, 1000 (9th Cir. 1999) (“While bankruptcy law 18 governs whether a claim is nondischargeable under § 523(a)(6), this court looks to state law to 19 determine whether an act falls within the tort of conversion.”). 20 The court is not persuaded by plaintiffs’ characterization of the bankruptcy court’s 21 direction for the “already-pending civil arbitrations [to] determine those messy factual issues” 22 related to defendant’s tortious conduct. Opp’n at 2. A review of the record shows the 23 Bankruptcy Judge’s primary concern during the OSC hearing was with “personal tort claims that 24 have been alleged” being scheduled for arbitration before multiple decision makers because that 25 could lead to “the potential for conflicting rulings . . . run[ning] the risk of having different 26 conclusions [and] different findings of fact.” Bankruptcy Hr’g Tr. 24:15–19 (Nov. 5, 2019), ECF 27 No. 1. The bankruptcy court found Mr. Roberts “does have an interest in having the matter 28 resolved in one forum, by one decision maker, rather than different decision makers.” Id. at 1 29:9–14; see also Reply at 3. Accordingly, an efficient use of judicial resources weighs in favor 2 of this court retaining the proceeding. 3 The court notes plaintiff’s argument that “the civil caseload crisis pending in the 4 Eastern District of California . . . will certainly end up delaying the administration of justice and 5 unduly burden judicial resources.” Opp’n at 3. While plaintiffs’ argument has some weight on 6 the one hand, as the time to resolve the pending motion itself illustrates, delays due to the court’s 7 dearth of judgeships cannot be given dispositive weight; even if the parties proceeded in 8 bankruptcy court for some time yet, the proceeding ultimately could and likely would be 9 withdrawn for trial here eventually. In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 10 1990) (“bankruptcy courts cannot conduct jury trials on noncore matters, where the parties have 11 not consented,” because to do so would create a conflict between the Seventh Amendment and 28 12 U.S.C. § 157(c)(1)). On balance, the court finds withdrawing the reference will avoid delay and 13 unnecessary costs to the extent plaintiffs’ claims “can be litigated in a single court capable of . . . 14 trying the non-core, personal injury tort claims and entering final judgment on them.” Mot. at 8. 15 The prevention of forum shopping is not a concern here as only this court has the 16 power to enter final judgment on the claims for which the bankruptcy court cannot enter final 17 judgment, given that the elements of “willfulness” under § 523(a)(6) are not grounded in the 18 Bankruptcy Code. See Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (“The word ‘willful’in 19 [§ 523](a)(6)] modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or 20 intentional injury, not merely a deliberate or intentional act that leads to injury.”) (alterations and 21 emphasis in original). Even if the bankruptcy court were to adjudicate these non-core claims in 22 the first instance, the court would have to conduct a de novo review to the extent that the losing 23 party had any objections. See generally 28 U.S.C.A. § 157. 24 Lastly, the court concludes that any disruption to the uniform administration of 25 the bankruptcy estate is outweighed by the efficiencies that will result in withdrawing plaintiffs’ 26 non-core claims to this court. In re Rosales, No. 13-CV-01316-LHK, 2013 WL 5962007, at *3 27 (N.D. Cal. Nov. 7, 2013) (“If the Bankruptcy Court cannot enter final judgment with respect to 28 most of the claims, then efficiency favors withdrawing the reference”). 1 IV. CONCLUSION 2 This order resolves ECF No. 1. The motion is GRANTED as follows: 3 (1) The reference is withdrawn with respect to claims 1 through 8 of the complaint 4 in adversarial proceedings: sexual harassment; sexual battery; gender violence; violation of the 5 Ralph Act; assault; battery; negligent retention of unfit employee; and intentional infliction of 6 emotional distress. 7 (2) Withdrawal of the reference with respect to claims for nondischargeability 8 under 11 U.S.C. § 523(a)(6) (“willful and malicious injury by debtor”) and denial of discharge 9 under 11 U.S.C. § 727 (“false oath”). 10 (3) All further proceedings with respect to plaintiffs’ claims in the adversary action 11 shall be held before this court. 12 (4) A Status Conference to discuss scheduling is set for August 19, 2021 at 2:30 13 p.m. A joint case management conference statement is to be filed no later than August 5, 2021. 14 IT IS SO ORDERED. 15 DATED: May 7, 2021. 16 17 18 19 20 21 22 23 24 25 26 27 28