A tort claim against an officer of a debtor corporation, although affecting the administration of a confirmed chapter 11 plan, is non-core and subject to permissive withdrawal of the reference, according to a district judge in San Jose, Calif.
A company confirmed a chapter 11 plan calling for payments to creditors over several years. The debtor company was sold after confirmation. When the company was unable to make payments to creditors under the plan, the case was converted to chapter 7.
The chapter 7 trustee filed a complaint in bankruptcy court alleging that the new owner diverted corporate opportunities to other companies that he owned, hastening the debtor’s inability to make payments under the plan. The complaint asserted claims against the new owner and his companies for breach of fiduciary duty and interference with prospective economic advantage.
The new owner and his companies filed a motion for withdrawal of the reference and won in an Aug. 15 opinion by District Judge Lucy H. Koh.
Under 28 U.S.C. Section 157(d), mandatory withdrawal of the reference did not apply because the case did not turn on unresolved issues of federal law “affecting interstate commerce.”
To show “cause” justifying permissive withdrawal, Judge Koh analyzed whether efficiency would be served by allowing the suit to remain in bankruptcy court. Efficiency, or lack of it, would turn on whether the claims were core, allowing the bankruptcy court to enter a final judgment.
Classification of the claims as core or non-core thus became the crux of the decision. Judge Koh was bound by Ninth Circuit authority holding that a claim is non-core if it could have been brought in the absence of bankruptcy, even though it “may have a ‘profound impact on the bankruptcy proceedings.’”
Because the claims could arise outside of bankruptcy and were not created by title 11, Judge Koh concluded that they were non-core.
Judge Koh acknowledged that some courts allow non-core suits to remain in bankruptcy court for pretrial proceedings, but because the non-core claims “completely overwhelm,” she decided that withdrawing the reference immediately would be more efficient.