JustMed, Inc. v. Byce, No. 1:11-CV-00378-BLW
United States District Court for the District of Idaho
December 14, 2011
B. Lynn Winmill, Chief Judge, United States District Court
Under Stern v. Marshall, must the District Court withdraw from the Bankruptcy Court an adversary proceeding that was initiated to resolve the nondischargeability of a creditor’s state law claim?
Summary of Ruling:
JustMed, Inc. initiated this adversary proceeding in the bankruptcy case of the Byces to determine if its claim against Mr. Byce was nondischargeable. JustMed’s proof of claim was based on a prior district court judgment that it had obtained against Mr. Byce on various state law claims arising out of Mr. Byce’s alleged misappropriation of computer source code from JustMed. On appeal, prior to the bankruptcy, the Ninth Circuit reversed the judgment with respect to one of the state law claims and remanded to the district court the issue of whether JustMed was entitled to damages under the remaining state law claims of breach of fiduciary duty and conversion. The Byces filed bankruptcy soon thereafter, and JustMed filed a proof of claim in the bankruptcy case, presuming that the Bankruptcy Court would resolve the remanded issues.
After initiating the adversary proceeding to determine whether its claim was nondischargeable, JustMed petitioned the District Court to withdraw the adversary proceeding from the Bankruptcy Court. JustMed argued that, under Stern v. Marshall, 131 S. Ct. 2594 (2011), the Bankruptcy Court lacked the constitutional authority to enter a final judgment in the proceeding because doing so would require it to determine matters of state law.
Ruling on JustMed’s motion, the Court held both that mandatory withdrawal was not required, reasoning that in Stern the Supreme Court held only that a Bankruptcy Court lacks constitutional authority to determine a state law counterclaim asserted by a debtor if the counterclaim would not “be resolved in the process of allowing or disallowing the creditor’s proof of claim.”
The Court then cited several factors that distinguish the counterclaim in Stern from the claim asserted by JustMed. First, the claim in the instant case was asserted by a creditor who had filed a proof of claim, not a claim asserted by the debtor, or the estate, against a creditor. This was significant because, by filing a proof of claim, JustMed had subjected itself to the Bankruptcy Court’s power to determine the legal issues that arose in the course of determining whether to allow its claim.
Second, the state law issues that comprised JustMed’s claim would be determined in the course of allowing or disallowing the claim, unlike in Stern. The Court noted that the Supreme Court has consistently held that the Bankruptcy Court has the constitutional authority to determine state law issues that arise in the course of resolving the allowance or disallowance of claims.
Third, JustMed had instituted an adversary proceeding to resolve a legal issue that arose only under the Bankruptcy Code—namely, nondischargability. This distinguished it from the tort counterclaim at issue in Stern that arose solely under state law and had no material connection to the Bankruptcy Case.
For these reasons, the District Court concluded that Stern did not require it to withdraw this adversary proceeding from the Bankruptcy Court. The Court also declined to exercise its power to “permissively” withdraw the proceeding under § 157(d) of the Bankruptcy Code because JustMed had not argued that such permissive withdrawal should be exercised.
Link to Opinion:
Link to Court:
Attorneys of Record:
For the Plaintiff (JustMed Inc.):
Jed W. Manwaring & Judy L. Geier
Evans Keane, LLP
For the Defendant (Byce):
John Richard Hammond
Batt Fisher Pusch & Alderman LLP
Shelly C. Shannahan
Perkins Coie LLP