Virginia District Court Denies Defendants’ Motion to Withdraw Reference, Finds Defendants Had Already Submitted to the Bankruptcy Court’s Equitable Jurisdiction
May 28, 2021, District of New Jersey – The case arose from the underlying adversary proceedings involving Debtor LeClairRyan, which is a national law firm headquartered in Virginia. Defendant UnitedLex provided personnel to assist the wind-down operations and received compensation for those individuals’ services from the bankruptcy estate. The joint venture between the Debtor and UnitedLex resulted in the creation of a company ULXP, also a Defendant in this case. UnitedLex owned 99% of ULXP and LeClairRyan owned 1%.
Trustee Lynn L. Tavenner alleges that Defendants took control over LeClairRyan to improperly divert funds away from the firm and its creditors and to Defendants. The Trustee also argues that LeClairRyan transferred about $19,357,282.51 to ULXP prior to the filing of the bankruptcy petition. For each of the fourteen counts that the Trustee asserts against both Defendants, she asserts liability against UnitedLex “as an alter ego of ULXP.”
Defendants sought to withdraw the reference, arguing that many of the Trustee’s claims are non-core. Defendants also sought to preserve their right to a jury trial on the Trustee’s damages claims. The Bankruptcy Court found the claims to be “core” and denied the Defendants’ motion. In reaching its decision, the Bankruptcy Court found that ULXP had subjected itself to the “bankruptcy court’s equitable power” by filing two proofs of claim against the bankruptcy estate. With respect to UnitedLex, the Bankruptcy Court found that it also participated in the administration of the bankruptcy case and was paid administrative fees. Defendants objected to the Bankruptcy Court’s decision on the arguments that: (1) that the Bankruptcy Court erred in its application of several of the factors that guide the review of a motion to withdraw; and (2) that the Bankruptcy Court erred in referring to the “Defendants” collectively when Defendants argue that the Trustee’s allegations only implicate actions by ULXP.
The District Court analyzed the facts of the case and found that although the Trustee’s claims arise under state law, rather than bankruptcy law, they directly concern the dealings between LeClairRyan and Defendants that underpin the joint venture. The Court stated that those precise dealings will play a key role in the bankruptcy case, including with respect to resolving ULXP’s claims. Secondly, the Defendants’ arguments that none of the claims against UnitedLex are “core” since only ULXP filed proofs of claim fails because it ignores the Trustee’s claims that UnitedLex acted as an alter ego of ULXP. The Court has previously held that a Virginia state law alters ego claim is a “core” matter. Thirdly, with respect to the Defendants’ right to jury trial arguments, the court found that ULXP has filed two proofs of claim against the estate, thereby submitting to the equity jurisdiction of the Bankruptcy Court. Likewise, UnitedLex participated extensively in the administration of the bankruptcy cases and was paid administrative expenses under Section 503 of the Bankruptcy Code. Additionally, the record before the Court revealed that UnitedLex employees assisted in the wind-down of the estate, and UnitedLex managers communicated with the Trustee regarding those services and payment for those services. Thus, the Court agrees with the Bankruptcy Court that ULXP and UnitedLex have submitted to the Bankruptcy Court’s equitable jurisdiction by substantially participating in the Bankruptcy case, thereby limiting their right to a jury trial.
In conclusion, the District Court found that withdrawing the reference and waiting for the District Court to conduct a trial on the adversary proceedings would disrupt the streamlined procedures created by the bankruptcy court, delay the bankruptcy process, and undermine the judicial economy. The Defendants’ motion to withdraw the reference was accordingly denied. Virginia District Court Denies Defendant’s Motion to Withdraw Reference, Finds Defendants Had Already Submitted to the Bankruptcy Court’s Jurisdiction