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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 1 of 10









UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF CALIFORNIA

No. CIV. S-13-1363 LKK

ORDER

In Re:

SK FOODS, L.P., a California
Limited Partnership,
Debtor,


BRADLEY D. SHARP, Chapter 11
Trustee,

Plaintiff,

v.

SEGAL & KIRBY, LLP,

Defendant.



The adversary proceeding at issue here is brought by the
bankruptcy Trustee, who seeks to recover $450,000 from Segal &
Kirby LLP (“Segal”). The adversary complaint asserts that debtor
SK Foods, while insolvent, paid that money to Segal “on account
of legal services performed by Segal for the personal benefit of
Scott Salyer, including, but not limited to, Scott Salyer’s
criminal defense.” First Amended Complaint (ECF No. 8-1) ¶ 7.
Segal asserts that Salyer was the CEO of the debtor, SK Foods,


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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 2 of 10

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and that SK Foods properly authorized the alleged payments,
having concluded that it would be in its own best interests.
Segal moves to withdraw the reference of the case to the

Bankruptcy Court, asserting that it has demanded a jury trial, it
has a right to a jury trial, the Bankruptcy Court cannot conduct
a jury trial without the consent of all parties, and Segal does
not consent to proceed in the Bankruptcy Court.

For the reasons set forth below, the court will withdraw the

reference.1

I. BANKRUPTCY CASES AND PROCEEDINGS: DIVISION OF LABOR BETWEEN

THE DISTRICT COURT AND THE BANKRUPCTY COURT

Except as otherwise provided by Congress, the district court
has “original and exclusive jurisdiction of all cases under Title
11 … [and] original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related to
cases under title 11.” 28 U.S.C. § 1334(a) & (b); Stern v.
Marshall, 564 U.S. ___, 131 S. Ct. 2594, 2603 (2011).2

1 This matter was scheduled for the court’s regular Law and
Motion Calendar. However, the court has concluded that it may be
decided on the papers already filed, and without the benefit of
oral argument.

2 “Cases under Title 11” are bankruptcy cases, that is, the
proceedings that are initiated by the filing of a petition in
bankruptcy. See 11 U.S.C. § 101(42) (bankruptcy petition
“commenc[es] a case under this title”). Civil proceedings that
“aris[e] under title 11, or aris[e] in … cases under title 11”
are “core proceedings.” Stern v. Marshall, 1431 S. Ct. at 2605
(“core proceedings are those that arise in a bankruptcy case or
under Title 11”); Montana v. Goldin (In re Pegasus Gold Corp.),
394 F.3d 1189, 1193 (9th Cir. 2005) (“[p]roceedings ‘arising in’
bankruptcy cases are generally referred to as ‘core’ proceedings,
and essentially are proceedings that would not exist outside of
bankruptcy”) (citing 28 U.S.C. § 157(b)(2)).



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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 3 of 10

Congress has empowered the district court to refer any such

cases and proceedings to bankruptcy judges. See 28 U.S.C.
§ 157(a). Congress has empowered the Bankruptcy Court to “hear
and determine all cases under title 11 and all core proceedings
arising under title 11, or arising in a case under title 11,” and
to “enter appropriate orders and judgments,” subject to appellate
review in the district court. 28 U.S.C. § 157(b)(1); 158(c)(2)
(appeals). “Core proceedings” expressly include “proceedings to
determine, avoid, or recover fraudulent conveyances.” Id.,
§ 157(b)(2)(H). Notwithstanding Congress’s grant of authority to
the Bankruptcy Courts however, constitutional and statutory
impediments must be overcome before the Bankruptcy Court can
adjudicate a given claim.

First, notwithstanding the Congressional grant of authority,

as a constitutional matter, the Bankruptcy Court cannot
adjudicate a fraudulent conveyance claim against a non-claimant
to the bankruptcy estate:

[C]an a non-Article III bankruptcy judge
enter a final judgment in a fraudulent
conveyance action against a nonclaimant to
the bankruptcy estate? Federal law empowers
bankruptcy judges to do so, but we hold that
the Constitution forbids it.

Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins.
Agency, Inc.), 702 F.3d 553, 556 (9th Cir. 2012), cert. granted,
570 U.S. ___, 133 S. Ct. 2880 (2013). That is because such a
claim does not involve “public rights,”3 which are the only

3 The Supreme Court and Ninth Circuit have written at length
about what are “public rights,” and why a Section 548 claim
against a non-claimant to the bankruptcy estate does not involve
public rights. See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33


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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 4 of 10

claims the Bankruptcy Court can adjudicate.

Bankruptcy judges, because they do not have
the tenure and salary protections of Article
III [of the U.S. Constitution], may not
exercise the judicial power of the United
States, except in cases involving public
rights.

Carpenters Pension Trust Fund v. Moxley, ___ F.3d ___, 2013 WL
4417594 at *3 (9th Cir. 2013) (citing Stern v. Marshall, 131 S.
Ct. at 2613). Second, as a statutory matter, the Bankruptcy
Court cannot hear the claim if defendant has demanded a jury
trial, is entitled to a jury trial, and has not consented to have
the case adjudicated by the Bankruptcy Court. See 28 U.S.C.
§ 157(e) (authority of Bankruptcy Court to conduct jury trial
with the parties’ consent); Knupfer v. Linblad (In re Dyer), 322
F.3d 1178, 1194 (9th Cir. 2003) (“the bankruptcy court is unable
to preside over a jury trial absent explicit consent from the
parties and the district court”).

II. STANDARD FOR SECTION 157 WITHDRAWAL OF THE REFERENCE

The district court may withdraw, in whole or
in part, any case or proceeding referred
under this section, on its own motion or on
timely motion of any party, for cause shown.

28 U.S.C. § 157(d). A motion to withdraw the reference “shall be
heard by a district judge.” Fed. R. Bankr. P. 5011(a); Sigma
Micro Corp. v. Healthcentral.com (In re Healthcentral.com), 504
F.3d 775, 784-85 (9th Cir. 2007) (“‘[t]he withdrawal decision is
committed exclusively to the district court’”). Among the proper
considerations on whether to withdraw the reference, are the

(1989), and Bellingham.



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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 5 of 10

efficient use of judicial resources, delay and costs to the
parties, uniformity of bankruptcy administration, the prevention
of forum shopping, and other similar issues. Security Farms v.
Int’l Brotherhood of Teamsters, 124 F.3d 999, 1008 (9th
Cir. 1997).4

III. ANALYSIS

Under the authority granted by 28 U.S.C. § 157(a), the U.S.

District Court for the Eastern District of California has
referred all bankruptcy cases and proceedings to the Bankruptcy
Judges of this district. See General Order Nos. 182 (May 14,
1985) & 223 (October 22, 1987). Accordingly, the bankruptcy
case, In re SK Foods,5 and the adversary proceeding arising in
that case, Sharp v. Segal,6 were properly referred to the
Bankruptcy Court.

The adversary proceeding at issue here is brought by the
Trustee, pursuant to 11 U.S.C. §§ 548(a)(1)(B) (avoidance of
fraudulent transfers) and 550 (recovery of fraudulent transfers),
to recover money he asserts SK Foods transferred to Segal to pay
for Salyer’s legal bills. The Trustee asserts that SK Foods did
not receive “reasonably equivalent value” for the transfers, and
that SK Foods was insolvent at the time it made the transfers.
Complaint ¶¶ 8& 9. Accordingly, the Trustee has brought a “core”


4 Citing Orion Pictures Corp. v. Showtime Networks, Inc. (In re
Orion Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir. 1993), cert.
dismissed, 511 U.S. 1026 (1994).

5 Case No. 9-29162-D-11 (Bankr. E.D. Cal.).

6 Adv. Proc. No. 13-2181 (Bankr. E.D. Cal.).



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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 6 of 10

However, it is undisputed that Segal is a non-claimant to

proceeding as defined by the bankruptcy statute which, according
to the statute, may be adjudicated by the Bankruptcy Court. See
11 U.S.C. §§ 157(b)(1) (bankruptcy judges may “hear and determine
… all core proceedings arising under title 11”); 157(b)(2)(H)
(proceedings to recover fraudulent conveyances are “core”
proceedings); Bellingham, 702 F.3d at 558 (“[t]he bankruptcy
judge hearing the Trustee's claim” under Section 548 was
“empowered by statute to enter a final judgment,” although the
court later found that “the Constitution forbids it”).

the SK Foods bankruptcy estate. Accordingly, the Trustee’s
fraudulent conveyance claims do not involve “public rights,” and
thus they may not be adjudicated in the Bankruptcy Court,
notwithstanding their statutory designation as “core
proceedings,” and notwithstanding the express Congressional
authorization empowering the Bankruptcy Court to adjudicate such
a case. Bellingham, 702 F.3d at 561 (“fraudulent conveyance
claims, because they do not fall within the public rights
exception, cannot be adjudicated by non-Article III judges”)
(citing Granfinanciera and Stern v. Marshall). Indeed, both
parties agree that the trial of this matter can only be conducted
by an Article III court, and the final entry can only be entered
by an Article III court, not the Bankruptcy Court.

Thus, the only disputes on this motion are (1) whether this
court has the authority to permit the Bankruptcy Court to conduct
pretrial proceedings, and (2) if so, whether this court should do
so.








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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 7 of 10


A. The Bankruptcy Court May Conduct Pretrial

Proceedings.

In Bellingham, the Ninth Circuit, faced with the same

situation confronting this court – a fraudulent transfer (or
“conveyance”) case brought by the Trustee under Section 548
against a non-claimant of the bankruptcy estate – held that the
Bankruptcy Court lacked “[o]nly the power to enter final
judgment.” Bellingham, 702 F.3d at 566. Accordingly, in
Bellingham, the Ninth Circuit found that the Bankruptcy Court was
permitted to “hear” the claim, and to then submit proposed
findings and recommendations to the district court for its de
novo review. Bellingham, 702 F.3d at 565. It would appear then,
that the Bankruptcy Court may conduct pretrial proceedings, even
though it may not conduct the trial itself.7


B. Conservation of Judicial Resources Warrants


Withdrawal of the Reference.

The parties each make creditable arguments about whether
judicial resources are best preserved by having the Bankruptcy
Court or the District Court conduct pretrial proceedings.8

7 The court here relies on Bellingham’s determination that
“[o]nly the power to enter final judgment was abrogated.”
Bellingham, 702 F.3d at 566. The Trustee asks the court to rely
upon Healthcentral.com. However, in that case, the Ninth Circuit
addressed only whether the Bankruptcy Court could conduct
pretrial proceedings in light of defendant’s demand for a jury
trial. The question in Healthcentral.com thus arose in the
context of a statutory prohibition against the Bankruptcy Court’s
entering final judgment in the absence of the parties’ consent.
It did not consider whether the Bankruptcy Court could conduct
pretrial proceedings where the Constitution withdrew the
Bankruptcy Court’s jurisdiction to “hear and determine” the case.

8 In Sharp v. SKPM (In re SK Foods), 2:11-cv-2369 (E.D. Cal.
April 3, 2013) (ECF No. 24), this court remanded the adversary


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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 8 of 10

Segal notes that no proceedings have yet occurred in the
underlying adversary proceeding, and that that proceeding is
stayed pending resolution of this motion. Segal argues that
leaving this proceeding in the Bankruptcy Court would create the
need for the parties to prepare the case for two courts, force
two courts to learn the case, and allow for inevitable
interruptions as orders are appealed from the Bankruptcy Court to
the District Court. Also, Segal argues that Salyer’s attorney-
client privilege and assertion of Fifth Amendment rights are
implicated here, and that this court is already familiar with
both as they pertain to Salyer. Segal denies that it is forum
shopping.

The Trustee argues that the fraudulent conveyance claim is
still a “core proceeding” (even though it may not be adjudicated
to final judgment by the Bankruptcy Court), so the Bankruptcy
Court is best suited to deal with it as far as it is permitted
to, that is, though pretrial proceedings. Further, the
Bankruptcy Court is intimately familiar with the overall
bankruptcy case, even if this is a brand-new adversary
proceeding. Moreover, the Trustee argues, there is nothing
special about Salyer’s assertion of the attorney-client privilege
requiring that this court, rather than the Bankruptcy Court, hear
it. The Trustee asserts that the Fifth Amendment privilege no


proceeding for Findings and Recommendations, as authorized by
Bellingham. In that case, no party had demanded a jury (SKPM,
ECF No. 24 at 5 n.5), so the Bankruptcy Court could conduct all
proceedings, all the way to Findings and Recommendations made to
this court.



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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 9 of 10

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longer exists, because Salyer has been sentenced.9 The Trustee
argues further that since the claim here is made under bankruptcy
law, uniform administration of those laws counsels for leaving
the proceeding in the Bankruptcy Court for pretrial matters.
Finally, the Trustee asserts that Segal is forum shopping.
The court concludes that Segal has the better of these

arguments. No appreciable judicial resources have been expended
in the Bankruptcy Court on this brand-new, stayed, adversary
proceeding. A duplication of judicial resources would likely
occur if the Bankruptcy Court must first learn the case
sufficiently to make it ready for trial, and then this court also
must learn the case so that it can adjudicate the matter de
novo.10 Also, this court will be assisted in pretrial matters by
a Magistrate Judge who can be assigned to the case to address any
discovery disputes. The court is not convinced by the Trustee’s
appeal to the uniform administration of bankruptcy laws. The
Supreme Court and the Ninth Circuit have determined that these
cases must be decided by the district court. Any consequent
effect on the administration of the bankruptcy laws is an
unavoidable consequence of that mandate. The court does not
believe that delegating pretrial matters to the Bankruptcy Court
will mitigate whatever harm the Trustee fears in this area.

IV. CONCLUSION

9 Segal demurs, asserting that the restitution part of the
criminal trial is on-going, and so sentencing is not complete.

10 The duplication in effort is likely to be exacerbated by the
known tendency of the adversary proceedings in the underlying
bankruptcy case to generate district court motions and
interlocutory appeals to this court.


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Case 2:13-cv-01363-LKK-KJN Document 15 Filed 10/01/13 Page 10 of 10

For the reasons set forth above, the court hereby WITHDRAWS

reference of this adversary proceeding. The matter is now set
for a Status Conference in this court on October 28, 2013 at
11:00 a.m.

IT IS SO ORDERED.
DATED: September 30, 2013.











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