Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

The United States District of Delaware denied the motion of defendants Discovery Re and United States Fidelity & Guaranty Company to withdraw the reference in this adversary proceeding commenced by the OHC Liquidation Trust. Pursuant to an order of then District Court Chief Judge Sue L. Robinson, effective October 6, 2001, under 28 U.S.C. §  157(a), all cases in the District of Delaware under Chapter 11 of the Bankruptcy Code are automatically referred to the Bankruptcy Court. However, under 28 U.S.C. § 157 a party may seek mandatory or permissive withdrawal of the reference so that the case or proceeding may be heard in the District Court. The defendants in this matter sought withdrawal of the reference on mandatory withdrawal grounds, or, in the alternative, on permissive grounds. The District Court found that mandatory withdrawal was not applicable where, as here, only state law claims were in play, and further found that the factors favoring permissive withdrawal were not satisfied.

The OHC Liquidation Trust, as liquidating trust for the estate of Oakwood Homes Corporation, filed an adversary proceeding in the United States Bankruptcy Court for the District of Delaware against Discovery Re and United States Fidelity & Guaranty Company, asserting seven claims arising under the Bankruptcy Code and contract law. Thereafter, the defendants filed a motion to dismiss, which the Bankruptcy Court granted as to the claims based on the Bankruptcy Code. The surviving claims were for (i) breach of contract, (ii) breach of implied covenant of good and faith and fair dealing, and (iii) unjust enrichment. By a decision dated July 11, 2006, the Bankruptcy Court held that these remaining claims constituted a core proceeding. Thereafter, the defendants filed a motion seeking to withdraw the reference.

The basis for the motion was that the remaining claims were all state law claims, and that mandatory withdrawal under 28 U.S.C. § 157(d) was required. Alternatively, the defendants argued for permissive withdrawal because the adversary proceeding was commenced after confirmation of the Oakwood Homes plan, and for reasons of judicial economy.

The District Court rejected the defendants’ argument for mandatory withdrawal, finding that it is only required where the action requires a “substantial and material” consideration of a federal statute outside the Bankruptcy Code. Because the adversary proceeding concerned only state law claims, mandatory withdrawal was not warranted.

The District Court also rejected the defendants’ request based on permissive withdrawal, noting that there is a presumption that bankruptcy proceedings shall proceed in bankruptcy court. The Third Circuit, in In re Pruitt, 910 F.2d 1160, 1168 (3d Cir. 1990) articulated five factors for determining whether permissive withdrawal is warranted: (i) promoting uniformity of bankruptcy administration; (ii) reducing forum shopping and confusion; (iii) fostering economical use of debtor/creditor resources; (iv) expediting the bankruptcy process, and (v) timing of the request for withdrawal. Considering these factors, the District Court stated that the Bankruptcy Court had already ruled on the defendants’ motion to dismiss and had conducted discovery. Also, this was a core proceeding that would affect the structure of debtor-creditor rights in the Oakwood Homes bankruptcy case. Finally, the District Court found that letting the adversary proceeding remain in the Bankruptcy Court would diminish the risk of forum shopping and promote consistent administration of the estate.

Accordingly, the District Court denied the defendants’ motion to withdraw the reference.