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In Re Maui Industrial Loan & Finance Company v. the Trust Estate of Rose Kepoikai

December 29, 2011

IN RE MAUI INDUSTRIAL LOAN & FINANCE COMPANY, DEBTOR.
DANE S. FIELD, PLAINTIFF,
v.
THE TRUST ESTATE OF ROSE KEPOIKAI, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Leslie E. Kobayashi United States District Judge

ORDER DENYING WITHOUT PREJUDICE DEFENDANTS' MOTIONS TO WITHDRAW REFERENCE

Before the Court are two Motions to Withdraw Reference, filed September 12, 2011: (1) Defendants Robert E. Rowland, in his individual capacity and his capacity as Successor Trustee of The Trust Estate of Rose Kepoikai, and Robert E. Rowland Attorney at Law, a Law Corporation's (collectively "Rowland Defendants") Motion to Withdraw Reference to Bankruptcy Court ("Rowland Defendants' Motion"); and (2) Defendant Mancini, Welch & Geiger LLP's ("Mancini Law Firm") Motion to Withdraw the Reference of the Trustee's First Amended Complaint Filed June 30, 2011 ("Mancini Law Firm's Motion"). Trustee Dane S. Field ("Plaintiff" or "Trustee") filed his memoranda in opposition on November 7, 2011. The Rowland Defendants and the Mancini Law

Firm filed their replies on November 14, 2011. This matter came on for hearing on November 28, 2011. Appearing on behalf of the Trustee were Bradley Tamm, Esq., and Lissa Schultz, Esq., appearing on behalf of the Rowland Defendants were Theodore Young, Esq., and Jeffrey Portnoy, Esq., and appearing on behalf of the Mancini Law Firm was Calvin Young, Esq. After careful consideration of the motions, supporting and opposing memoranda, and the arguments of counsel, the Rowland Defendants' Motion and the Mancini Law Firm's Motion are HEREBY DENIED WITHOUT PREJUDICE for the reasons set forth below. The parties are HEREBY DIRECTED to file an appropriate motion renewing their request to withdraw the reference when the bankruptcy court has resolved the core claims and fraudulent transfer claims.

BACKGROUND

In the Chapter 7 bankruptcy matter of debtor Maui Industrial Loan & Finance Company, Inc. ("Maui Industrial"), the Trustee brought an adversary proceeding (No. 10-90126) against Defendants The Trust Estate of Rose Kepoikai ("Estate"), Robert E. Rowland individually, and Robert E. Rowland, Attorney at Law, a Law Corporation ("Roland ALC"), the Mancini Law Firm, individual beneficiaries of the Estate ("Beneficiary Defendants"), and Lloyd Kimura (collectively "Defendants"). The Trustee's First Amended Complaint alleges that the bankruptcy court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 1367, and 11 U.S.C. §§ 544, 548, and 550. He alleges that this is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (C), (E), (H), and (O). [First Amended Complaint at ¶¶ 9-10.*fn1 ]

The First Amended Complaint further alleges that Mr. Kimura operated Maui Industrial as a Ponzi scheme.

Mr. Kimura was appointed as the Successor Trustee of the Estate in 1987. The Trustee alleges that, in 1989, Mr. Kimura, as Successor Trustee, invested $500,000 of the Estate's assets in Maui Industrial, and subsequently, invested additional assets. Between 1989 and 2000, Maui Industrial paid the Estate $3,106,907.32 on its investment. The trust assets were distributed to the Beneficiary Defendants, until the last life estate income beneficiary died in 1994. Despite the death of the last life estate income beneficiary, Mr. Kimura did not distribute the Estate trust assets to the Beneficiary Defendants or terminate the trust. Mr. Kimura resigned as Successor Trustee in October 1999, at which point Mr. Rowland was appointed as Successor Trustee. Mr. Rowland, Rowland ALC, and the Mancini Law Firm acted as legal counsel for Mr. Rowland in his capacity as Successor Trustee until 2002, at which point Mr. Rowland and Rowland ALC acted as legal counsel for Mr. Rowland in his capacity as Successor Trustee and for the Estate. [First Amended Complaint at ¶¶ 14-29.]

In February 2002, Mr. Rowland filed a petition for approval of an annual account for the Estate in the Second Circuit Court, indicating that Mr. Kimura owed various sums to the Estate. The Rowland Defendants and the Mancini Law Firm secured the debt due to the Estate with assets belonging to Mr. Kimura and his spouse, recording a $756,500 mortgage against three parcels of property. Mr. Kimura also drew several checks on Maui Industrial's bank account payable to the Estate totaling $1,477,669.71. [Id. at ¶¶ 35-40.] Mr. Rowland, Rowland ALC, and the Mancini Law firm made four distributions to the Beneficiary Defendants with checks drawn on the Mancini Firm's trust account from 2000 through 2004. In 2005, the Second Circuit Court granted Mr. Rowland and Rowland ALC's motion requesting permission to deposit with the court all unclaimed funds from the Estate. [Id. at ¶¶ 41-49.]

The First Amended Complaint alleges the following seven direct claims, seeking to avoid the transfers from Maui Industrial to the Defendants: (1) fraudulent transfer (11 U.S.C. § 548); (2) transferee liability (11 U.S.C. § 550); (3) state law fraudulent transfer (Haw. Rev. Stat. § 651C-4 ("HUFTA")); (4) strong arm powers (11 U.S.C. § 544); (5) unjust enrichment/ constructive trust; (6) aiding and abetting/participation in breach of fiduciary duty; and (7) Uniform Fiduciaries Act (Haw. Rev. Stat. § 556-4). [Id. at ¶¶ 50-82.] The Trustee also alleges the following four causes of action, obtained by way of assignment ("assigned claims"): (1) negligent misrepresentation; (2) breach of fiduciary duty; (3) attorney malpractice; and (4) aiding and abetting/participation in breach of fiduciary duty. [Id. at ¶¶ 83-106.] Both the Rowland Defendants and the Mancini Law Firm demanded a jury trial in response to the First Amended Complaint.

I. Rowland Defendants' Motion

The Rowland Defendants state that they have demanded a jury trial, have not consented to trial in bankruptcy court, have not filed any claims against the bankruptcy estate, do not consent to the bankruptcy court's entry of final judgment on any claims, and, therefore, under the circumstances, the case cannot be efficiently handled in bankruptcy court and the reference should be withdrawn. [Mem. in Supp. of Rowland Defs.' Mot. at 2.]

The Rowland Defendants' Motion explains that the original Complaint in the adversary proceeding did not include the four assigned claims. On May 6, 2011, United States Bankruptcy Judge Robert Faris granted the Trustee's motion to approve a settlement between the Trustee and three individual Beneficiary Defendants, which contained an assignment of claims. The First Amended Complaint filed on June 30, 2011 includes the four assigned claims. [Id. at 4-5.]

The motion first argues that the Rowland Defendants are entitled to a jury trial, which may not be held in bankruptcy court. The Rowland Defendants argue that the matter involves legal, rather than equitable, rights which entitles them to a jury trial under the Seventh Amendment. They rely on Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which characterized fraudulent conveyance actions by bankruptcy trustees as "private rights," providing defendants with a right to a jury trial regardless of the fact that the action was a core proceeding. Because they have not consented to a jury trial before the bankruptcy court, that court lacks the authority to conduct a jury trial, and they argue the reference should be withdrawn. [Id. at 7-8.]

Next, the Rowland Defendants argue that the bankruptcy court may not enter final judgment against them on the non-core proceedings, pursuant to 11 U.S.C. § 157(c)(1). The Trustee's aiding and abetting breach of fiduciary duty claim, Haw. Rev. Stat. § 556-4 claim, and all of the assigned claims are state law claims that do not depend on the resolution of questions of bankruptcy law, and are non-core claims. Further, under Stern v. Marshall, 131 S. Ct. 2594 (2011), they argue that a bankruptcy judge lacks authority to enter a final judgment on a claim that is traditionally adjudicated by Article III courts and does not involve "public rights." In this adversary proceeding, they argue that the fraudulent transfer claims are essentially common law claims that do not involve "public rights," and the bankruptcy court lacks constitutional authority to enter final judgment on these claims. [Id. at 9-12.]

They maintain that, under the circumstances, the bankruptcy court has no authority to enter final judgment on any of the Trustee's claims against them, and can only enter proposed findings and conclusions subject to de novo review by this Court, which will result in duplication of judicial efforts and increased costs to the parties. The Rowland Defendants argue that judicial economy is best served by having these claims decided by this Court. [Id. at 12-14.]

Finally, the Rowland Defendants assert that the withdrawal of reference should not be delayed. They acknowledge that the bankruptcy court may be permitted to retain jurisdiction over the action for pretrial matters. They argue, however, that it is not clear that the bankruptcy court even has jurisdiction over the fraudulent conveyance claims. Further, the bankruptcy court cannot enter final orders on dispositive motions, and can only enter proposed findings and conclusions to the district court for de novo review, which is not in the interests of judicial economy or efficiency. The Rowland Defendants note that Judge Faris already dismissed portions of the Trustee's "core" 11 U.S.C. § 548 claim on statute of limitations grounds, thus, to the extent his bankruptcy expertise was needed, it is no longer needed. The bankruptcy court's unique knowledge of Title 11 is not necessary to decide the eight state law claims of the ten remaining total claims. [Id. at 15-17.]

A. Plaintiff's Memorandum in Opposition

The Trustee argues in his opposition to the Rowland Defendants' Motion that: the demand for jury trial is not a basis for withdrawal and has been waived; the Stern decision does not provide a basis for withdrawal, and even if withdrawal is appropriate, it need not be immediate.

First, the Trustee argues that the demand for jury trial made for the first time after a pleading has been amended is effective only as to any new issues of fact raised in the amended pleading. The Trustee believes that, although he asserts several new causes of action in the First Amended Complaint, there is no significant difference in the facts necessary to support his original claims and those supporting his new claims, and turn on the same matrix of facts. [Mem. in Opp. to Rowland Defs.' Mot. at 5-9.] The Trustee maintains that the Rowland Defendants are not entitled to a jury trial on any of the issues the Trustee asserted in the original Complaint. [Id. at 10.]

Second, the Trustee argues that the Stern case does not apply here and that, even if it did apply, consideration of all the factors articulated in Stern do not weigh in favor of withdrawal of the reference. [Id. at 11-15.]

Finally, he argues that, even if withdrawal were appropriate, immediate withdrawal is not. The bankruptcy court may retain jurisdiction for pre-trial matters, which does not ...


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