James S. Feltman v. Tri-State Employment Service, Inc.

Background

TS Employment, Inc. filed for Chapter 11 bankruptcy on February 2, 2015. The Bankruptcy Court appointed James S. Feltman as trustee for the bankruptcy estate. Feltman later brought a fraudulent-conveyance action against, among others, Tri-State Employment Service, Inc. The Bankruptcy Court entered a default judgment against Tri-State on June 13, 2019. The opinion states that Tri-State owes the trustee more than $98 million.

The trustee then filed a turnover action seeking money that Jofaz Transportation, Inc., Y&M Transit Corp., and Third Avenue Transit, Inc. allegedly owed Tri-State. The trustee claimed that the respondents owed Tri-State $1,964,961.22. The action relied on New York Civil Practice Law and Rules section 5227 through Federal Rule of Civil Procedure 69. The Bankruptcy Court had overseen the case, including status hearings, discovery disputes, document production, and depositions.

Motions and Legal Standard

The respondents moved under 28 U.S.C. § 157(d) to withdraw the district court’s reference of the turnover action to the Bankruptcy Court. They also moved to dismiss under Rule 12(b) of the Federal Rules of Civil Procedure. A court may withdraw a bankruptcy reference for good cause, considering factors identified by the Second Circuit in Orion Pictures Corp. and modified by the Supreme Court’s decision in Stern v. Marshall.

The court considered whether the Bankruptcy Court had authority to finally decide the claim, whether the respondents had a right to a jury trial, and other factors such as efficient use of judicial resources, delay and cost, consistent bankruptcy administration, and possible forum shopping.

Analysis

The trustee agreed that the Bankruptcy Court lacked final authority to adjudicate the claim. The court nevertheless explained that this factor alone did not require withdrawal of the reference.

The respondents had demanded a jury trial, and the trustee did not dispute that they were entitled to one. But the court found that a jury trial was only a distant possibility because the case was not close to trial-ready and dispositive motions remained unresolved. The respondents could seek withdrawal again if the case later proceeded to trial.

The efficiency factors favored leaving the case with the Bankruptcy Court. That court had already managed discovery, held hearings, resolved discovery disputes, and handled related adversary proceedings. It was also familiar with TS Employment’s bankruptcy, the underlying fraudulent-conveyance proceeding, and the books of Tri-State. The court concluded that the legal and factual issues could appropriately be addressed by the Bankruptcy Court in the first instance. Delay and cost weighed slightly against withdrawal; uniformity of bankruptcy administration and forum shopping were neutral.

Disposition

The court declined to withdraw the bankruptcy reference. Judge John P. Cronan denied without prejudice the respondents’ motion to withdraw the reference. He also denied without prejudice the respondents’ motion to dismiss, leaving the issues raised in that motion for assessment by the Bankruptcy Court. The conclusion states that both motions were denied without prejudice to any future motions, and the Clerk of Court was directed to close the district-court case.