Kossoff PLLC v. Bruce Barasky

Background

Kossoff PLLC was the subject of an involuntary Chapter 7 bankruptcy case after its principal, Mitchell L. Kossoff, apparently misappropriated client funds. Albert Togut, acting only as the Chapter 7 trustee for Kossoff PLLC’s estate, filed an adversary proceeding against Bruce Barasky to recover assets for the benefit of creditors.

The dispute concerns a $210,000 wire transfer from a Kossoff PLLC interest-on-lawyer-accounts account to Barasky on February 16, 2021. Barasky contended that he received the payment as an advance for the sale of real property. Togut’s complaint asserts four causes of action: avoiding the transfer as a preferential transfer under Bankruptcy Code Section 547(b); alternatively avoiding it as a fraudulent transfer under Section 548; recovering the transfer under Section 550; and disallowing any claim Barasky filed in the bankruptcy case under Section 502(d).

Barasky moved to withdraw the bankruptcy court’s authority over the adversary proceeding, meaning he asked the district court to take the proceeding from the Bankruptcy Court. He also moved to dismiss the case. The district-court motion addressed withdrawal of the reference; the Bankruptcy Court was to consider the dismissal motion after the district court resolved the withdrawal request.

Mandatory Withdrawal

The court denied Barasky’s request to the extent it relied on mandatory withdrawal. Mandatory withdrawal applies when resolving a proceeding requires substantial and material consideration of federal law outside the Bankruptcy Code. The court found that Barasky had identified no such non-bankruptcy federal statute. His reference to being a New Jersey resident did not establish a basis for mandatory withdrawal.

The court noted that the claims involved preference and fraudulent-transfer issues that bankruptcy courts routinely consider and that are identified as core proceedings under the Bankruptcy Code.

Permissive Withdrawal and Final Authority

The court also considered permissive withdrawal, which allows a district court to withdraw a bankruptcy reference for cause. The relevant considerations included whether the Bankruptcy Court had authority to finally decide the claims, the legal or equitable nature of the claims, efficiency, prevention of forum shopping, and consistent administration of bankruptcy law.

The court agreed with Barasky that the Bankruptcy Court lacked constitutional authority to enter a final judgment on Counts One and Two—the preference claim under Section 547 and the fraudulent-transfer claim under Section 548. The court treated those claims as private-right claims and found that the exceptions allowing a bankruptcy court to enter final judgment did not apply: the opinion states that Barasky had not filed a proof of claim, that Togut did not assert Barasky had consented to final judgment by the Bankruptcy Court, and that the claims involved private rather than public rights.

The court did not decide whether the Bankruptcy Court lacked authority to enter a final judgment on the other two causes of action because Barasky had not made an argument about them. If the Bankruptcy Court considers Counts One and Two, it must submit proposed findings of fact and conclusions of law rather than a final judgment on those claims.

Other Factors

Despite the Bankruptcy Court’s lack of final adjudicative authority over Counts One and Two, the court found that the other factors weighed against withdrawing the reference at this stage. The Bankruptcy Court was familiar with the underlying Chapter 7 case and related adversary proceedings, making it an efficient forum. Keeping the proceeding there also promoted consistent administration of the bankruptcy case.

The court found that the forum-shopping factor also weighed against withdrawal, although less strongly. The court acknowledged that Barasky had raised concerns about having the claims decided in a constitutionally appropriate forum and had moved to withdraw the reference along with his responsive pleading rather than after an unfavorable bankruptcy ruling. But the court also emphasized that withdrawal should not become a litigation tactic for leaving the Bankruptcy Court.

The court further found that any need for a jury trial was still theoretical. Barasky had not filed a jury demand, the case was in its early stages, and a motion to dismiss was pending. The court held that withdrawal could be renewed later if Barasky timely and properly asserted a right to a jury trial and the proceeding became ready for trial.

Disposition

The court denied the motion to withdraw the reference without prejudice. The Bankruptcy Court therefore was to hear Barasky’s motion to dismiss. If the Bankruptcy Court found the dismissal motion meritorious, a district judge would review the Bankruptcy Court’s proposed findings of fact and conclusions of law de novo, at least as to Counts One and Two. The district court directed the clerk to close the motion and the district-court case.