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IN RE APPONLINE.COM

January 15, 2004.

In re: APPONLINE.COM, INC., ISLAND MORTGAGE NETWORK, INC., et al, Debtors PRUDENTIAL SECURITIES CREDIT CORP., LLC, Plaintiff, -against- PACIFIC POINTE ESCROW, INC., FRANCISCO TRUJILLO and PATRICIA TRUJILLO Defendants


The opinion of the court was delivered by: ARTHUR SPATT, District Judge Page 2

MEMORANDUM OF DECISION AND ORDER

On October 15, 2001, the plaintiff Prudential Securities Credit Corp., LLC ("Prudential" or the "plaintiff") commenced this adversary proceeding against the defendant Pacific Pointe Escrow, Inc. ("Pacific Pointe" or the "defendant"). Pacific Pointe now moves pursuant to Rule 5011-1 of the Local Rules of the Bankruptcy Court of the Eastern District of New York and 28 U.S.C. § 157(d), to withdraw the automatic reference of this adversary proceeding to the Bankruptcy Court.

I. BACKGROUND

  1. Factual Background

  Before filing for bankruptcy protection in July 2000, Island Mortgage Network, Inc. ("Island Mortgage"), a wholly owned subsidiary of the co-debtor AppOnline.com, Inc., was a mortgage banker and broker that originated and sold mortgages. In particular, Island Mortgage originated mortgages and promissory notes which were sold in the secondary mortgage market pursuant to standard purchase and sale contracts. Among other things, Prudential purchased notes and mortgages from Island Mortgage in its ordinary course of business.

  Sometime in April, 2000, Franscico Trujillo and Patricia Trujillo (collectively, the Page 3 "Trujillos") entered into a loan transaction with Island Mortgage (the "Trujillo Loan"). Allegedly, Pacific Pointe was the escrowee and/or settlement agent designated by Island Mortgage and the buyer and sellers of the relevant property. On or about April 24, 2000, the Trujillos made and executed a note in the amount of $213,550 (the "Note") and a mortgage in favor of Island Mortgage to secure payment of the Note (the "Mortgage").

  On April 27, 2000, it is alleged that Pacific Pointe released the original executed Note and a certified copy of the Mortgage to Island Mortgage with a request that Island Mortgage provide loan funds as soon as possible. Pacific Pointe's actions were allegedly contrary to the escrow instructions that it received from Island Mortgage and contrary to California law, the law governing the situs of the property encumbered by the Mortgage.

  Upon information and belief, Prudential claims that on or about May 4, 2000, the Trujillo Loan transaction was cancelled by the Trujillos and the seller of the property. However, Pacific Pointe failed to void the original executed Note and Mortgage, despite being instructed by the Trujillos and the seller to "void all documents." Compl. ¶ 25. On May 4, 2000 Prudential purchased the Note and Mortgage from Island Mortgage allegedly "in the ordinary course of business for value and in good faith." Compl. ¶ 32. However, because the Trujillo Loan is unfunded, Prudential alleges that it has suffered monetary damages.

  2. Procedural Background Page 4

  On October 15, 2001, Prudential commenced this adversary proceeding seeking a declaratory judgment against Pacific Pointe and the Trujillos declaring that Prudential is the valid owner of the Note and Mortgage and that it owns the Note and Mortgage free and clear of any claim by any defendant. Prudential also included a cause of action against Pacific Pointe on the basis of negligence in releasing the original executed Note and Mortgage without first confirming that Island Mortgage had provided "good funds" for the Loan. Compl. ¶ 33. On March 20, 2002, Pacific Pointe filed its answer to the complaint. The answer did not demand a jury trial.

  On or about March 21, 2003, new counsel were substituted for Pacific Pointe who did not oppose Prudential's motion for leave to amend its complaint. Prudential served its Amended Complaint on April 14, 2003, which, in addition to re-wording and providing more detail with respect to the allegations, included a claim for negligent misrepresentation against Pacific Pointe. In response, Pacific Pointe served and filed its answer to the amended complaint which demanded a jury for the first time.

  On May 13, 2003, Pacific Pointe filed this motion to withdraw the reference on the basis that Pacific Pointe demanded a jury trial in its answer to the amended complaint. Pacific Pointe simultaneously filed a motion with the Bankruptcy Court to dismiss the amended complaint for lack of subject matter jurisdiction. However, the motion to dismiss has been stayed by the Bankruptcy Court pending this Court's determination of the instant Page 5 motion.

  II. DISCUSSION

  Under the authority of § 157(a), all Chapter 11 cases in this District are automatically referred to the District's bankruptcy judges. As stated above, the defendants move to withdraw the reference of this adversary proceeding from the Bankruptcy Court pursuant to 28 U.S.C. § 157(d). This section states:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce
28 U.S.C. § 157. Thus, withdrawal of a reference may be either mandatory or permissive pursuant to 28 U.S.C. § 157(d). Because the resolution of this case will not require "`significant interpretation'" of non-bankruptcy federal laws, this action is not subject to mandatory withdrawal. In re Enron Corp., 295 B.R. 21.25 (S.D.N.Y. 2003) (quoting City of New York v. Exxon Corp., 932 F.2d 1020, 1026 ...

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