“It’s too early….” – me, every day, when my daughter wakes me up

Not all decisions need to be complicated. A recent decision from the Eastern District of Michigan is instructive as to one principal consideration taken into account in facing a motion to withdraw the reference at an early stage in an adversary proceeding in bankruptcy.

The district court’s decision in Simon v. Zorn (In re Lifestyle Lift Holding, Inc.) arose out of an action by a bankruptcy trustee against one of the debtors’ former attorneys.  The trustee initially sued the debtors’ founder and later brought suit against the debtors’ prior counsel as well, alleging that both the founder and his chosen counsel had breached their fiduciary duties to the company and recklessly caused severe losses, including a number of questionable business decisions and a failure by the company to comply with the Employee Retirement Income Security Act (ERISA) obligations.

The trustee commenced the first action (against the founder) in October 2015.  In August 2016, the trustee commenced the second action (against counsel).  Shortly after the trustee commenced the second action, the defendant (i.e., debtors’ former attorney) moved the district court to withdraw the reference to the bankruptcy court in order to allow further proceedings to continue before the district court.

In reviewing the motion, the district court acknowledged that the Sixth Circuit Court of Appeals has not yet weighed in on what constitutes sufficient “cause shown” for withdrawal of the reference pursuant to 28 U.S.C. § 157(d).  The district court noted that courts in the Eastern District of Michigan have generally looked to the standards set forth by the Second Circuit Court of Appeals in its Orion and Burger Boys decisions, in which the Second Circuit held that:

In deciding whether cause exists to withdraw an issue from the bankruptcy court, the district court should weigh several factors, of which the first is the most important: (1) whether the claim is core or non-core, (2) what is the most efficient use of judicial resources, (3) what is the delay and what are the costs to the parties, (4) what will promote uniformity of bankruptcy administration, (5) what will prevent forum shopping, and (6) other related factors.

The district court then further observed that other judges in the district have adopted a number of approaches to such motions, including the seemingly disparate positions that, on the one hand, it is “standard practice” for bankruptcy judges to handle all pretrial matters and, on the other hand, that bankruptcy courts should refuse to adopt any “standard policy” that motions to withdraw the reference should be denied until the matter is ready for trial.

The district court, expressing agreement with courts that have adopted a “flexible” approach and ostensibly looking to the Second Circuit’s Burger Boys decision, concluded that it was premature to withdraw the reference at this early stage in the proceeding because it would not promote judicial efficiency.  Interestingly, the district court was principally persuaded by the fact that the matter was at an early stage and that it might, therefore, be resolved through dispositive motions – or, presumably, through settlement – while pending before the bankruptcy court, with no need for any proceedings before the district court.  Indeed, courts in the Second Circuit have similarly held that withdrawing the reference at the pre-trial stage is an unnecessary waste of judicial resources.

On the other hand, some have argued that this very factor could, in certain circumstances, point to the opposite conclusion, insofar as there is little reason to keep the matter before the bankruptcy court if that court is not yet immersed in the issues and the matter may ultimately be put before the district court in any case.  However, at least in this case, the district court speculated that the bankruptcy court was not entirely unfamiliar with the issues, particularly because the bankruptcy case had been pending for over a year and the somewhat related litigation against the debtor’s founder – in which much of the same alleged misconduct was at issue – had been pending for nearly a year.

Of course, all motions to withdraw the reference are assessed on a case-by-case basis.  But the decision in Lifestyle Lift reflects one instance in which the very fact that a motion to withdraw the reference was filed early in the adversary proceeding itself constituted a critical basis for denial of that request.