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Court Declines to Withdraw Bankruptcy Court Reference Due to ESI Concerns

Posted on July 22nd, 2015

The U.S. District Court for the Eastern District of Michigan recently considered whether to “withdraw the reference” to bankruptcy court (e.g., remove the matter from the bankruptcy court’s consideration) in an adversary proceeding where discovery was still ongoing.

In Vulpina, LLC v. Dzierzawski (In re Dzierzawski), Bankruptcy Case No. 13-47986, Adversary Proceeding No. 14-05199; District Court Case Nos. 14-14615 and 14-14734 (June 22, 2015), Plaintiff sued Defendant in District Court for allegations that Defendant had transferred 99% of his shares in a company for less than adequate consideration in an attempt to avoid a monetary judgment entered against him in favor of Plaintiff. Shortly thereafter, Defendant filed for bankruptcy. Plaintiff filed an adversary proceeding against Defendant in the bankruptcy for the same alleged fraudulent transfer as alleged in the district court. Defendant (now also Debtor) filed a Motion to Withdraw the Reference to have the adversary proceeding occur in the district court instead of the bankruptcy court.

Plaintiff objected to the withdrawal primarily because the parties had not yet conducted any discovery of electronically stored information (ESI). Plaintiff expected that ESI discovery would shed light upon the allegedly fraudulent transfers at issue and also potentially lead to the need for depositions. Plaintiff also expressed concern that if the reference were withdrawn and the matter heard in the district court, ESI discovery would then proceed along two different tracks in the district court and the bankruptcy court, potentially wasting resources and causing confusion.

The court agreed with Plaintiff, stating that withdrawing the reference would unnecessarily create two different discovery tracks. The court reasoned that the bankruptcy judge was in a better position to monitor the discovery segment of the litigation. The court held that Debtor and Defendant could file a new Motion at a later date, after the conclusion of discovery, to have the case heard by the District Court.

ILS – Plaintiff eDiscovery Experts

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