In Re Sonoma West Medical Center

Background

Sonoma West Medical Center filed a voluntary Chapter 7 bankruptcy petition on September 26, 2018. Before the bankruptcy filing, it operated and managed a hospital under a Management and Staffing Services Agreement with Palm Drive Healthcare District. The District terminated that agreement in August 2018 after the Debtor said it could no longer perform its obligations. The District then entered into a Management Services Agreement with American Advanced Management Group, which assigned its rights to Sonoma Specialty Hospital. Sonoma Specialty Hospital took over management of the hospital on September 9, 2018.

The central dispute concerns accounts receivable generated by the Debtor’s operation of the hospital through September 8, 2018. The Trustee contends that these accounts receivable belong to the bankruptcy estate. Sonoma Specialty Hospital filed an administrative claim, arguing that the Debtor and Trustee had no right to the accounts receivable after the District terminated the earlier agreement.

The Trustee later filed an adversary proceeding against Sonoma Specialty Hospital, American Advanced Management Group, and Gurpreet Singh. The Trustee asserted claims for turnover of estate property under 11 U.S.C. § 542, an accounting, and conversion, and alleged that American and Singh were alter egos of Sonoma Specialty Hospital. American and Sonoma Specialty Hospital filed counterclaims. The opinion states that the Trustee stipulated to dismissal of the claims against American and Singh without prejudice, but that American and Sonoma Specialty Hospital had not dismissed their counterclaims.

Motion to Withdraw the Reference

The defendants asked the District Court to withdraw the reference, meaning to take the bankruptcy-related proceeding away from the Bankruptcy Court and have the District Court handle it. The Bankruptcy Court recommended that it be allowed to decide first whether the accounts receivable are property of the bankruptcy estate. It characterized that threshold issue as non-core because it involved contract interpretation that could exist even without a bankruptcy case. The Bankruptcy Court also recommended that the issue of withdrawing the reference be revisited later.

The parties agreed that the Trustee’s turnover claim is a core bankruptcy proceeding. The District Court assumed, for purposes of its analysis, that the remaining claims and counterclaims were non-core. It explained that the threshold issue was an issue to be resolved in the case, not a separate claim asserted by either party.

Court’s Analysis

The District Court applied the factors used to decide whether there is sufficient cause for permissive withdrawal of a bankruptcy reference. Those factors include efficient use of judicial resources, delay and costs, uniformity of bankruptcy administration, and prevention of forum shopping.

The court concluded that the factors weighed against withdrawing the proceeding at that time. The Bankruptcy Court had been handling the adversary proceeding since August 2019 and had greater familiarity with the underlying facts, including the settlement in the main bankruptcy case. The Bankruptcy Court was prepared to decide the threshold issue, and allowing it to do so would use judicial resources efficiently.

The court also agreed that withdrawing the matter at that stage could cause additional delay and costs. Because the dispute was connected to a settlement incorporated into a confirmed reorganization plan, allowing the Bankruptcy Court to address the threshold issue would also promote uniformity in bankruptcy administration. The District Court did not decide the forum-shopping factor because the other factors already supported allowing the Bankruptcy Court to proceed.

The court did not reach the jury-trial issue. It stated that the Bankruptcy Court must decide whether the parties have a right to a jury trial under the applicable bankruptcy rule. Because the Bankruptcy Court would still need to resolve the threshold issue even if the turnover claim were the only claim, the District Court adopted the recommendation that the Bankruptcy Court address that issue first.

Disposition

The District Court adopted the Bankruptcy Court’s recommendation in part and denied the motion for withdrawal of reference without prejudice to renewal. The Bankruptcy Court is to resolve the threshold question of whether the accounts receivable are property of the bankruptcy estate. The District Court did not decide the ownership dispute, the parties’ other claims, or the jury-trial question.