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United States District Court, S.D. New York

May 27, 2004.

In re ENRON CORP., et al, Debtors ENRON NORTH AMERICA CORP., Plaintiff, -against- MEDIA GENERAL INC., Defendant

The opinion of the court was delivered by: SIDNEY STEIN, District Judge


Defendant Media General Inc. moves pursuant to 28 U.S.C. § 157(d) for an order withdrawing the reference of the above-captioned adversary proceeding from the Bankruptcy Court of the Southern District of New York. Plaintiff Enron North America Corp. opposes this motion. For the reasons set forth below, Media General's motion to withdraw the reference is denied without prejudice.


A. Facts Relating to This Action
  In July of 2000, Media General and Enron entered into a financial swap for newsprint. The parties executed a Master Agreement from the International Swap Dealers Association (the "ISDA Agreement"). That contract was designated to remain in effect until August 31, 2007.

  On November 28, 2001, Media General sent Enron a notice stating that it was terminating the swap agreement. According to that notice, Media General asserted two bases for its right of early termination: (1) Enron's announcement of accounting fraud on November 8, 2001 constituted an event of default under the ISDA Agreement and (2) a downgrade of Enron's debt by Standard & Poor also constituted an event of default under the ISDA Agreement. (November 28, 2001 Notice at 1-2, attached at Exhibit A to Media General's Reply Memorandum) That notice further stated that "in accordance with Section 6 of [the ISDA Agreement], Media General has determined that no payment is required to be made by the parties." (Id. at 1) Four days later, Enron petitioned for Chapter 11 bankruptcy protection.

  Enron subsequently sent Media General a notice that, by Enron's calculation, Media General owed Enron an early termination payment of more than $26 million. (Compl. at ¶ 25-26). Media General responded that it intended to reject that notice as "well beyond `late.'" (August 13, 2002 Letter, attached at Exhibit B to Media General's Reply Memorandum) Media General also took exception to Enron's calculation, affirmed its position that a termination payment was not owed by either party, and reiterated that Enron had made a misrepresentation in connection with the financial swaps. Separately, Media General filed a Notice of Claim against Enron in the bankruptcy court in this district, seeking $7 million due to losses resulting from its earlier sale of a company to Enron.

  In late December of 2003, Enron commenced this adversary proceeding, seeking an early termination payment from Media General under the terms of the ISDA Agreement as well as a declaratory judgment. Enron alleges, among other matters, 1) that Media General never prepared the required calculation of the early termination payment and 2) that it is entitled to a payment of more than $26 million from Media General for either a breach of contract or as an equitable remedy for Media General's unjust enrichment. (Compl. at ¶ 22-24, ¶ 32-36, ¶ 51-54) Enron also seeks declaratory relief that (1) Media General's claim of rescission for fraudulent inducement be deemed a "core" issue involving the property of the estate (Compl. at ¶ 37-40); (2) Media General is not entitled to rescission (Compl. at ¶ 41-44); and (3) the ISDA Agreement's arbitration provision is unenforceable. (Compl. at ¶ 45-50) Separately, Enron objects to Media General's proof of claim relating to the corporate sale referred to above. (Compl. at ¶ 31)

  Media General then moved in the bankruptcy court to dismiss this action on the basis of a mandatory arbitration provision in the ISDA Agreement or, in the alternative, to compel arbitration. See Memorandum of Law in Support of Defendant Media General's Motion to Dismiss (Attached at Exhibit B to Memorandum of Law in Support of Defendant Media General's Motion to Withdraw Reference).

  B. Proceedings in the Bankruptcy Court

  In March of 2003, Bankruptcy Judge Gonzalez issued an order referring all pending and future adversary proceedings between Enron and its counterparties in wholesale trading and retail agreements to mediation under the supervision of a Special Master, Bankruptcy Judge Alan Gropper (the "Mediation Order"). In that Mediation Order, Judge Gonzalez noted that certain common issues, including "the enforceability and applicability of setoff, recoupment, arbitration, and termination provisions, the calculation and payment of termination payments, alleged grounds for rescission," are present in numerous adversary proceedings between Enron and its trading partners. See First Amended Order Governing Mediation of Trading Cases dated March 20, 2003 at 1 (Attached at Exhibit H to Declaration of Theodore E. Tsekerides). The Mediation Order further provided that Judge Gropper "shall have the broadest discretion as mediator." Id. In conjunction with that mediation referral, the Mediation Order stayed all pending motions seeking to arbitrate or to modify the existing automatic stay in order to seek arbitration. Id. at 2. The Mediation Order permitted, however, the parties to file motions to compel arbitration and to seek withdrawal of reference. Id. at 2-4.

  At the time Judge Gonzalez issued that Mediation Order, there were 25 adversary proceedings, such as this action, relating to wholesale trading. Currently, there are more than 45 such adversary proceedings.


  A. Legal Standards

  28 U.S.C. § 157(d) provides that "[a] 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."*fn1 That statute does not provide a definition of what constitutes "for cause," In In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993), the Court of Appeals for the Second Circuit identified the analytical framework for evaluating a motion to withdraw the reference and enumerated a list of relevant factors to be considered. See id. at 1101. Those factors are: "(1) whether the proceeding is core or non-core; (2) judicial economy; (3) uniformity in bankruptcy administration; (4) economical use of debtors' and creditors' resources; (5) reduction of forum shopping and confusion; (6) expediting the bankruptcy process and (7) the presence of a jury demand." See In re Enron Corp., 295 B.R. 21, 25 (S.D.N.Y. 2003); see also In re Burger Boys, 94 F.3d 755, 762 (2d Cir. 1996). The decision to grant or deny a motion for withdrawal of the reference is within the discretion of the district court. See In re Chateaugay Corp., 193 B.R. 669, 673 (S.D.N.Y. 1996).

  Because a bankruptcy court lacks jurisdiction to conduct a jury trial over a non-core claim except by consent of the parties, see In re Orion Pictures, 4 F.3d at 1101; see also 28 U.S.C. § 157(e) (permitting trial before bankruptcy judge if there is designation by a district court and consent by the parties), the threshold core/non-core evaluation is of critical importance if the commencement of trial is approaching in an adversary proceeding. Interests of efficiency and uniformity also bear significantly on this Court's determination. See In re Ames Department Stores, Inc., 190 B.R. 157, 162-163 (S.D.N.Y. 1995) ("timing of the withdrawal of the reference . . . depends on particular circumstances of each case, including [its likelihood] to reach trial, whether it involves lengthy discovery or careful pretrial guidance by the court, or whether the jury demand is without merit"); In re Kenai Corp., 136 B.R. 59, 61 (S.D.N.Y. 1992) ("appropriateness of removal of the case to a district court for trial by jury, on asserted Seventh Amendment grounds, will become a question ripe for determination if and when the case becomes trial ready") (citations omitted).

  B. This Court Need Not Decide Whether Claims Are Core Because Withdrawal Is Not Mandated Even If the Claims Asserted Here Are Non-Core

  In re Orion Pictures Corp. instructs us that in "considering whether to withdraw the reference, [a district court] should first evaluate whether the claim is core or non-core" because this is the "most important" factor. See 4 F.3d at 1101; see also In re Enron Corp., 295 B.R. at 25. Two distinct rationales underlie this suggested procedure: constitutional considerations and the interests of efficiency and uniformity. First, because the Seventh Amendment to the United States Constitution proscribes a bankruptcy court from issuing final orders or presiding over jury trials in proceedings involving non-core claims, the core/non-core determination implicates constitutional considerations if a proceeding is close to trial. See In re Orion Pictures, 4 F.3d at 1101: In re Kenai Corp., 136 B.R. at 61. Moreover, as the Second Circuit also observed in Orion, the core/non-core determination is ordinarily also a good proxy for factors of efficiency and uniformity because "the fact that a bankruptcy court's determination on non-core matters is subject to de novo review by the district court could lead the latter to conclude that in a given case unnecessary costs could be avoided by a single proceeding in the district court" and "[c]onversely, hearing core matters in a district court could be an inefficient allocation of judicial resources given that the bankruptcy court generally will be more familiar with the facts and issues." Id.

  The cynosure of this adversary proceeding is Enron's claim for damages for Media General's alleged breach of their swap agreement, which had been terminated by Media General four days prior to the filing of Enron's bankruptcy petition. The classification of the claims asserted by Enron in this proceeding as core or non-core turns on three legal determinations: 1) whether Media General's likely claims of fraudulent inducement or of set-off rights can be deemed to "directly affect a core bankruptcy function'"; see In re United States Lines. Inc., 197 F.3d 631, 637 (2d Cir. 1999); 2) whether Enron's breach of contract claim should be deemed to have accrued prior to or after its petition for bankruptcy protection; and 3) whether the similarity of this adversary proceeding to numerous other proceedings relating to wholesale trading agreements, which collectively "have an impact on a significant portion of the estate's assets," render its resolution important to the Bankruptcy Court's ability to "administer all property in the [estate's] possession." See id. at 637.

  Judges of the bankruptcy courts have a wealth of experience in resolving questions of bankruptcy law and in adjudicating the interplay between bankruptcy and non-bankruptcy issues. Accordingly, it is generally preferable for the bankruptcy court to make the initial determination as to whether a claim should be classified as core or non-core. See 28 U.S.C. § 157(b)(3) ("[a] bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection . . .); see also In re Enron Corp., 03 Civ. 5078, 2003 WL 22171695 at *2 (S.D.N.Y. Sep. 22, 2003).

  As noted above, this adversary proceeding is still at a preliminary stage. Although Media General has moved to dismiss Enron's action pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6), that motion is based entirely upon Media General's assertion of a contractual right to arbitration and does not address the underlying merits of Enron's claims. In addition, an experienced, Court-appointed mediator, himself a bankruptcy judge, is attempting to have this entire complex of disputes resolved consensually by the parties. Accordingly, even assuming that the claims in this proceeding are, as Media General asserts, non-core and that Media General therefore has the right to a jury trial before a district court on those non-core claims, the constitutional considerations associated with this right do not, at this juncture, mandate the withdrawal of the reference in this proceeding. See In re Enron Power Marketing, Inc., 01 Civ. 7964, 2003 WL 68036 at *9 (S.D.N.Y. Jan. 8, 2003); In re Formica Corp., 305 B.R. 147, 150 (S.D.N.Y. 2004). Furthermore, for the reasons set forth more fully below, the interests of efficiency and uniformity in this proceeding weigh heavily in favor of retaining the reference to the bankruptcy court. As neither rationale underlying Orion's call for a core/non-core determination by the district court applies to the circumstances of this proceeding, there is no need for this Court to make such a determination at this juncture.

  B. Interests of Efficiency and Uniformity Do Not Support the Withdrawal of the Reference

  After examining the other factors identified by the Second Circuit in Orion, this Court finds that those factors, which fall under the broad umbrella of interests of efficiency and uniformity, weigh heavily in favor of preserving the reference of this adversary proceeding. As described above, Bankruptcy Judge Gonzalez has ordered that the parties to this and numerous other similar adversary proceedings involving Enron mediate their disputes before special master Bankruptcy Judge Gropper, who has been given "the broadest discretion" by Judge Gonzalez.

  The purpose of this mediation process is clearly, as this Court recently recognized in related proceedings, to promote efficient use of judicial resources, to ensure uniformity in the application of bankruptcy law, and to minimize wasteful expenditure of parties' time and financial resources. See In re Enron Corp., 2003 WL 22171695 at *2; In re Enron Power Marketing, Inc., 2003 WL 68036 at *10 (denying motion to withdraw reference in a similar proceeding involving an Enron affiliate because "evidence [of judicial efficiency and uniformity] weigh overwhelmingly in [Enron's] favor"). Interests of efficiency and uniformity accordingly lie with denying the instant motion and preserving the continuity of the mediation process.


  For the reasons set forth above, Media General's motion to withdraw the reference of this adversary proceeding from the bankruptcy court is hereby denied without prejudice.


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