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Eric R. Perkins, In His Capacity As Chapter 7 Trustee For the Estate of Jesal v. Susheela Verma

October 27, 2011

ERIC R. PERKINS, IN HIS CAPACITY AS CHAPTER 7 TRUSTEE FOR THE ESTATE OF JESAL
PATWARI; AND CATHERINE YOUNGMAN, IN HER CAPACITY AS CHAPTER 7 TRUSTEE FOR SHAPAT, INC., PATWARI, LLC, AND SHAPAT 3, LLC, PLAINTIFFS,
v.
SUSHEELA VERMA,
DEFENDANT.



The opinion of the court was delivered by: Wigenton, District Judge.

OPINION

This matter comes before the Court on Defendant Susheela Verma‟s ("Defendant" or "Verma") Motion for an Order Withdrawing the Reference pursuant to 28 U.S.C. § 157(d), of the Adversary Proceeding captioned Eric R. Perkins, Chapter 7 Trustee for the Estate of Jesal Patwari, and Catherine E. Youngman, Esq., Chapter 7 Trustee for Shapat, Inc., Patwari, LLC, Shapat 2, LLC and Shapat 3, LLC v. Susheela Verma (the "Motion"). This Court has jurisdiction pursuant to 28 U.S.C. § 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408, 1409. This Motion is decided without oral argument pursuant to Fed. R. Civ. P. 78. For the reasons below, Defendant‟s Motion is DENIED without prejudice.

I. STATEMENT OF FACTS AND PROCEDURAL HISTORY

A.Relevant Background

On August 27, 2008, Jesal Patwari, f/k/a Jesal Desai ("Patwari") and Shapat, Inc. (collectively "Patwari") filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code ("Bankruptcy Code"). (Def.‟s Ex. C, Adversary Compl. ¶ 8.) On the same day, Patwari also filed voluntary Chapter 11 petitions on behalf of four corporations: Patwari, LLC, Shapat, Inc., Shapat II, LLC, and Shapat III, LLC (collectively "Corporate Debtors"), through which she owned and operated four Subway sandwich shops.*fn1 (Id. ¶ 9.) Verma, was the Corporate Debtors‟ former legal counsel. She represented the Debtors in various pre-petition legal matters against Doctors Associates, Inc. ("DAI"), which was the franchisor of Patwari‟s Subway sandwich shops. (Id. ¶¶ 12-14.) On February 17, 2009, the Corporate Debtors‟ cases were jointly administered under the lead case Shapat, Inc., Bankr. Case No. 08-26181. (Id. ¶ 9.) On July 20, 2009, the Debtors‟ Chapter 11 proceedings were converted to Chapter 7 proceedings. (Id. ¶ 10.) Eric R. Perkins was appointed Chapter 7 Trustee for the Debtors on July 21, 2009 ("Patwari Trustee"). (Id. ¶ 5.) Thereafter, Catherine Youngman was appointed the Chapter 7 Trustee for the bankruptcy estates of the Corporate Debtors ("Corporate Debtors Trustee").*fn2 (Id. ¶ 6.) Plaintiff Trustees filed a motion for turnover of documents relating to Defendant‟s pre-petition representation of Patwari and the Corporate Debtors and Defendant filed a cross-motion to be relieved as counsel. By Order dated February 2, 2010, the Bankruptcy Court granted Plaintiff Trustees‟ Motion and Defendant‟s Cross-Motion ("Turnover Order"). (Pl. Trustees‟ Br. ¶ 12.)

On August 26, 2010, Plaintiff Trustees, on behalf of their respective bankruptcy estates, filed adversary proceedings. (Id. ¶ 2.) The Bankruptcy Court by Order dated March 1, 2011, consolidated the separate adversary proceedings. (Id. ¶ 3.) In the underlying complaints, Plaintiff Trustees seek to avoid and recover certain transfers the Debtors made to, or for the benefit of Verma pursuant to 11 U.S.C. §§ 544, 547-550 of the Bankruptcy Code, to disallow claims pursuant to 11 U.S.C. § 502(d) and N.J. Stat. Ann. §§ 25:2-25 and 27, and to recover payments received and injury caused by Verma with respect to her pre-petition legal representation of the Debtors. (Def.‟s Reply Br. Ex. C, Adversary Compl. ¶¶ 32-58.) On November 30, 2010, Defendant, pro se, filed a motion to dismiss. On February 8, 2011, the Bankruptcy Court denied Defendant‟s motion to dismiss and granted Plaintiff Trustees‟ leave to amend within ten (10) days. (Pl. Trustees‟ Br. ¶ 3.) Plaintiff Trustees filed a timely Second Amended Complaint on February 18, 2011. The Second Amended Complaint contains nine counts: (I) Avoidance of Preferential Transfers; (II) Avoidance of Fraudulent Transfers under § 548; (III) Avoidance of Fraudulent Transfers under N.J. Stat. Ann. §§ 25:2-25 and 27; (IV) Avoidance of Post-Petition Transfers under § 549; (V) Recovery of Property under § 550; (VI) Disallowance of Claim under § 502(d); (VII) Failure to Deliver Files and Comply with the Bankruptcy Court‟s Turnover Order; (VIII) Legal Malpractice; and (IX) Accounting and Repayment of Funds. (Def.‟s Reply Br. Ex. C, Adversary Compl. ¶¶ 32-82.)

On April 7, 2011, Defendant filed a motion to stay the adversary proceedings and to extend her time to answer, which the Bankruptcy Court denied on May 13, 2011. On April 21 and May 19, 2011, Defendant filed an answer to the underlying adversary complaint and a jury demand. (Def.‟s Reply Br. Exs. A, B.)

B.Defendant's Motion to Withdraw the Reference*fn3

On April 7, 2011, Defendant filed the instant Motion. Defendant submits that Count III for fraudulent conveyance, and Count VIII for legal malpractice are state law claims and should be tried either in state court or before this Court. (Docket No. 1.)Defendant also contends that she: (1) never filed a proof of claim in the underlying bankruptcy proceeding; (2) refuses to submit to the jurisdiction of the bankruptcy court; (3) is guaranteed a jury trial; and (3) does not consent to the bankruptcy court conducting a jury trial. (Def.‟s Reply Br. Ex. A ¶¶ 3-4.*fn4 ) Based on the above and her desire to have her matter adjudicated by an Article III or state court judge, Defendant asserts that mandatory withdrawal is applicable. (Docket No. 1, ¶ 7.) Defendant further maintains that because she is neither a debtor nor has she filed a proof of claim in the underlying bankruptcy proceeding, she has an inviolable Constitutional right under the Seventh Amendment to a jury trial as to the fraudulent conveyance claims under New Jersey State law and the legal malpractice claim. (Id. ¶¶ 14,*fn5 16.)

On the other hand, Plaintiff Trustees argue that most of the claims are core proceedings under the Bankruptcy Code. (Pl. Trustees‟ Br. ¶ 6.) They also allege that Verma has represented the Debtors pre and post-petition and "availed herself of the assistance of the Bankruptcy Court."

(Id. ¶ 7.) Plaintiff Trustees further maintain that Defendant waived her right to a jury trial through an arbitration provision in the retainer agreement she had with the Debtors. (Id. ¶ 8.)

II.CONCLUSIONS OF LAW

A.Statutory Basis

The District Court confers jurisdiction to the Bankruptcy Court in this District under a standing order of reference dated July 23, 1984. 28 U.S.C. § 157(a). After a Title 11 proceeding is referred to the bankruptcy court, § 157(d) governs the district court‟s authority to withdraw ...


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