United States District Court, S.D. Illinois
MEMORANDUM AND ORDER
STACI M. YANDLE, District Judge.
This matter comes before the Court on Defendant Global Traffic Technologies' ("GTT") Motion to Withdraw the Reference (Doc. 1) in which GTT seeks to move Plaintiff STC's Bankruptcy Adversary Proceeding 14-4039 ("14-4039") from the United States Bankruptcy Court to the United States District Court for the Southern District of Illinois. Defendants Rodney Kris Morgan ("Morgan") and KM Enterprises ("KME") filed a Response (Doc. 2) and stated they do not oppose the Motion. Plaintiff and Debtor STC, Inc. filed an Objection and Memorandum in Response (Doc. 3). Defendant Community First Bank of the Heartland did not respond to the Motion. For the following reasons, the Court DENIES the Motion to Withdraw the Reference.
According to documents filed with the Bankruptcy Court, GTT was awarded a judgment for $5, 052, 118 following a jury verdict against STC, KME and Morgan for patent infringement which, when consolidated with subsequent enhanced damages and interest, amounts to more than $8.5 million. See Southern District of Illinois Bankruptcy Court Proceeding No. 14-41014, Order at Doc. 37, p. 2. STC and Morgan have appealed the judgment in the Federal Circuit Court of Appeals, but a request to stay enforcement of the judgment was denied. Id.
In the meantime, GTT initiated actions to enforce the judgment and asserted liens against STC and KME assets. 14-4039, Complaint at Doc. 1, p. 4-5. Of particular relevance to the current Motion, STC has initiated adversarial action 14-4039 in the Bankruptcy Court to recover alleged proceeds for the sale of STC's goods under an agreement with Defendant KME. STC alleges the proceeds are property of STC, payable to STC and only held by Defendant KME in an account with Defendant First Community Bank. See 14-4039, Complaint at Doc. 1, p. 5. GTT presumes the proceeds are actually property of KME and has asserted a citation lien on the proceeds. 14-4039, KME Response to Motion to Reconsider at Doc. 24, p. 2-4. The Circuit Court for the Second Judicial Circuit in Jefferson County, Illinois ordered a stay of those citations after holding an emergency hearing. Id.
KME claims no ownership of the proceeds and attempted to stipulate as to STC's ownership by way of an agreed motion for entry of a consent judgment in favor of STC. 14-4039, Agreed Motion for Order Approving Stipulation at Doc. 13. The Bankruptcy Court entered judgment by consent in favor of STC and ordered the recovery of the proceeds held at Community First Bank. 14-4039, Order and Judgment by Consent at Doc. 15. GTT filed a Motion to Reconsider asking the Bankruptcy Court to vacate the Order and Judgment on the basis that GTT did not receive proper notice and that the Order and Judgment adjudicates a property right without a hearing. 14-4039, Motion to Reconsider at Doc. 19. In replying to KME's Response, GTT explained that the determination of ownership affects GTT's rights in that a judgment in favor of STC will shield the funds and disallow garnishment under GTT's lien. 14-4039, Reply of GTT at Doc. 27, p.4.
The Bankruptcy Court granted GTT's Motion to Reconsider, vacated its Judgment Order and set the matter for hearing. 14-4039, Minutes of Court at Doc. 29. Only GTT insists the proceeds are property of KME, and understandably so. If GTT prevails and a court determines that the proceeds are property of KME, GTT may collect on its lien.
As an initial matter, GTT denies STC's claim that 14-4039 is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (K) and (O). See 14-4039, Answer and Affirmative Defenses at Doc. 8, p. 2, Response to Paragraph 4. STC asserts that "it is indisputable-and GTT does not attempt to dispute-that STC's claims are core claims." Objection and Response to Motion to Withdraw the Reference, Doc. 3, p. 7. However, STC has misinterpreted GTT's position. GTT does not address a "core" versus "non-core" issue. It argues instead that the claims are rooted in law that is wholly independent of federal bankruptcy law and therefore beyond the jurisdiction of the bankruptcy court. In particular, GTT argues only an Article III court can determine whether the property held by a third party is estate property-a question that involves private property rights which fall under state law.
Both GTT and STC rely on the Supreme Court's decision in Stern v. Marshall, which held that a bankruptcy judge lacks constitutional authority to enter a final judgment on a state-law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim (specifically in that case, for tortious interference of an inter vivos gift). 131 S.Ct. 2594 (2011). GTT argues that Stern establishes a claim having "some bearing" on a bankruptcy case is insufficient to establish a bankruptcy court's authority and that the hurdle to be crossed is "whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." 131 S.Ct. at 2618. STC argues that GTT's reliance on Stern is misplaced. Rather than a general lack of authority to enter final judgment on state law claims, STC cites Stern as limiting a bankruptcy court's jurisdiction only where the state law claims are wholly unrelated to bankruptcy matters. Because the claims of 14-4039 arise under federal bankruptcy law, STC argues the case should proceed with the Bankruptcy Court.
Both parties also cite to the Seventh Circuit Court's opinion in Wellness International Network v. Sharif, which building on Stern, held that a bankruptcy court lacked the authority to enter a final judgment on an "alter-ego" claim for which state law provides the rule of decision. 727 F.3d 751, 773-777 (7th Cir. 2013). GTT argues the claim in Wellness International is analogous because it is a determination of property ownership. STC distinguishes Wellness International because the claim in that case was based entirely on state law and was "wholly independent of federal bankruptcy law." Objection and Response to Motion to Withdraw the Reference, Doc. 3, p. 6, quoting Wellness International, 727 F.3d at 775. STC points instead to Section 541 of the Bankruptcy Code, 11 U.S.C. § 541, which defines and creates the property of a bankruptcy estate, and Section 542, which empowers a debtor-in-possession to compel parties in possession of property of debtor's estate to turn over the property.
The jurisdiction of Article I bankruptcy courts is more limited than that of Article III district courts. Bankruptcy courts have statutory authority to issue final orders and judgments only in " core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157(b)(1) (emphasis added). The statute contains a non-exhaustive list of "core proceedings" in which the bankruptcy court may enter a final order or judgment. 28 U.S.C. § 157(b)(2). By contrast, when the bankruptcy court determines, under Section 157(b)(3), that a claim is only "related to" the bankruptcy proceedings, the court may not enter final judgment but "shall submit proposed findings of fact and conclusions of law to the district court" for de novo review and final entry of final judgment. 28 U.S.C. § 157(c)(1). The proceedings in this latter category are known as "noncore" proceedings.
The United States Supreme Court summarized the approach to "core" versus "non-core" claims as follows:
Put simply, if a matter is core, the statute empowers the bankruptcy judge to enter final judgment on the claim, subject to appellate review by the district court. If a matter is non-core, and the parties have not consented to final adjudication by the bankruptcy court, the bankruptcy judge must propose findings of fact and conclusions of law. Then, the district court must review the proceeding de novo and enter final judgment.
Executive Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165, 2172 (2014).
GTT does not attempt to distinguish the claims as "non-core." Rather, it relies on Stern and Wellness International in arguing that, because the claims represent private rights and property ownership, they are rooted in state property law rather than any provision of the Bankruptcy Code ...