UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

To: The United States District Court

Introduction

On November 4, 1994, the United States filed a motion to withdraw the reference of this Chapter 11 case to the United States District Court for the District of Alaska, pursuant to 28 U.S.C. § 157(d). Having reviewed the United States' motion, the oppositions thereto, and the United States' reply, the Bankruptcy Court submits the following report to the United States District Court, and recommends that the motion be denied.

Case Background

This Chapter 11 case has been pending since December 19, 1993. At the time of filing, the debtor was engaged in over 70 "bonded contracts" for construction with various federal agencies throughout the United States. In February 1994, the debtor rejected most of these contracts, and the United States received relief from stay in order to complete the affected projects.

The United States filed an amended proof of claim in this case on April 25, 1994. Its claim is a contingent, general unsecured claim for $11 million. The United States indicated on its claim that the "amount is estimated due to the fact that the government is unable at this time to quantify the amount of costs required for completion of the various contracts."⁽¹⁾

The sureties who issued payment and performance bonds on the government projects, as required by the Miller Act, 40 U.S.C. § 270a, moved for conversion of the case to one under Chapter 7. That motion was granted by order entered May 16, 1994. However, the bankruptcy court subsequently granted a motion for reconsideration and vacated the conversion order on May 24, 1994. Reconsideration was granted because it appeared the debtor and its largest secured creditor, National Bank of Alaska ("NBA"), had negotiated a plan which could satisfy the confirmation requirements of 11 U.S.C. § 1129.

The debtor and NBA filed a joint plan and disclosure statement on June 9, 1994. They proposed a liquidating plan which provided for the compromise and full release of claims between NBA and the debtor. An amended plan and disclosure statement were filed June 17, 1994. The United States filed its objection to the amended disclosure statement on July 6, 1994. It objected to the disclosure statement because it failed to provide adequate information as required under 11 U.S.C. § 1125(a)(1) and did not address the government's equitable right of setoff under 11 U.S.C. § 553. No nonbankruptcy federal law issues were raised in the objection.

The bankruptcy court held hearings on approval of the first amended disclosure statement on July 7 and 8, 1994. A further disclosure statement hearing was held July 18, 1994. The United States attended all three hearings. At the July 18 hearing, the bankruptcy court directed the debtor and NBA to file an amended disclosure statement and continued the hearing to August 22, 1994. The hearing was further continued to September 1, 1994, and then to September 7, 1994, because the plan proponents requested additional time to revise the disclosure statement and plan.

On September 6, 1994, a second amended disclosure statement and second amended plan were filed. The second amended disclosure statement more thoroughly described the plan's treatment of general unsecured claims, and indicated that the claim of the United States would probably not be allowed. Exhibits were added to the second amended disclosure statement, including a new Exhibit K which listed the individual unsecured creditors and summarized their proposed treatment under the plan. Exhibit K indicated that the United States' $11 million       4 ABR 53  claim would likely be disallowed in full because the projects were all bonded by the sureties.

The second amended disclosure statement mentioned setoff rights in the context of its discussion of a pending adversary proceeding between the sureties and the debtor. This proceeding, initiated by the sureties, involves alleged breaches of a post-petition debtor-surety agreement pertaining the application of contract receivables from the bonded government projects. The sureties' rights of setoff are at issue in the proceeding. The government is not a party to the action. The debtor's position regarding setoff rights was described as follows:

Martech's position is that each Surety must establish its individual claim on a project-by-project basis, and that such claims may be allowed only to the extent each Surety actually has paid the underlying third-party claims. . . . Martech also asserts that even the government's right of setoff in this case (which the Sureties claim to inherit) would be limited on the grounds that: the funds in the Bonded Receivables Account have been paid and are no longer in the governments' hands; because of this bankruptcy estate, there are competing claimants to the funds in that account; and even in the hands of the government, setoff is a remedy limited to satisfying the amount of the government's claim, so that amounts due on each contract (including amounts due on change orders) must be accounted for before any claim for setoff could rise.

On September 7, 1994, the bankruptcy court held a hearing to consider approval of the second amended disclosure statement. This hearing was continued to September 15, 1994. The United States attended the September 15th hearing. The bankruptcy court directed the debtor and NBA to file a revised disclosure statement by September 22, 1994.

A third amended disclosure statement was filed September 23, 1994. The proposed treatment of the United States' claim and the debtor's discussion of setoff rights remained substantially unchanged in this third revision. A hearing on the third amended disclosure statement was held September 26, 1994. The matter was continued to September 30, 1994. At the hearing on September 30, a revised third amended disclosure       4 ABR 54  was filed. The bankruptcy court approved the revised third amended disclosure statement and scheduled the confirmation hearing for November 7, 1994. October 31, 1994, was fixed as the last day to file objections to confirmation.

The confirmation hearing was duly noticed to all creditors and parties in interest. On October 31, 1994, the United States filed its objection to confirmation of the third amended plan. The grounds for objection raised by the United States are purely bankruptcy issues: the plan's noncompliance with 11 U.S.C. § 1129 and the plan's failure to deal with the government's setoff rights under 11 U.S.C. § 553. No nonbankruptcy federal law issues were asserted by the United States.

Four days after filing its objection to confirmation, on the eve of the confirmation hearing, the United States filed its motion to withdraw the reference of this case. The motion was filed late on Friday, November 4, 1994, and served, by mail, only on the United States Trustee and counsel for the debtor, NBA, the unsecured creditor's committee, the sureties, and the sub-debt holders.

The confirmation hearing commenced on November 7, 1994, and lasted three days. At the conclusion of the hearing, the bankruptcy court ordered closing briefs on confirmation issues to be filed by November 30, 1994. A supplemental objection to confirmation filed by the United States raised purely bankruptcy issues, based on 11 U.S.C. §§ 1129, 1123. Again, no nonbankruptcy federal law issues were raised. The United States also joined in a renewed motion to convert the case filed by the sureties.

On the eve of the confirmation hearing, the United States also filed a motion for stay of all proceedings pending resolution of the motion to withdraw the reference. That motion has been denied by the bankruptcy court. Also, by order entered concurrently with the filing of this report and recommendation, the bankruptcy court has denied confirmation of the revised third amended plan and converted the case to one under Chapter 7.

The motion to withdraw the reference was not served on the official service list in this case. Of the parties served, responses were filed by the debtor, NBA and the sureties. The debtor and NBA oppose the motion. The sureties do not oppose withdrawal of the       4 ABR 55  reference as to certain issues, but oppose withdrawal of the entire case.

Analysis

The United States' motion is procedurally deficient in that it was not noticed in compliance with AK LBR 70(d). The motion should also be denied because it is untimely and the issues ripe for determination in this case are bankruptcy issues which should be considered by the bankruptcy court.

The United States bases its motion on 28 U.S.C. § 157(d), which provides:

(d) 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.

A threshold issue in evaluating a motion to withdraw the reference is timeliness. Vista Metals Corp. v. Metal Brokers Intern., Inc., 161 B.R. 454, 457 (E.D. Wis. 1993); In re Mahlmann, 149 B.R. 866, 869 (N.D. Ill. 1993). Untimeliness, by itself, is an adequate ground to deny a motion to withdraw the reference. In re Baldwin-United Corp., 57 B.R. 751, 755 (S.D. Ohio 1985); see also Mahlmann at 149 B.R. 869.

The statute provides little guidance as to what constitutes "timely." Courts, however, have generally defined timely as "as soon as possible after the moving party is aware of grounds for withdrawal of reference" or as "at the first reasonable opportunity after the moving party is aware of grounds for withdrawal of reference." The two statements of the standard are considered identical, any difference being purely a matter of semantics. The reason for the timeliness requirement is to prevent parties from forum shopping, stalling, or otherwise engaging in obstructionist tactics.

Timeliness must be evaluated in light of the specific circumstances of a given case.

A motion in a bankruptcy proceeding must . . . be evaluated in light of the status of those proceedings. In a Chapter 11 reorganization, for example, the determination of whether a motion is timely would turn somewhat on whether a reorganization plan and disclosure statement had already been prepared or approved. If a motion could have been filed earlier and it is filed at a time when it could delay and consequently jeopardize the reorganization, it would not be timely.

The United States' motion fails to satisfy the threshold requirement of timeliness. The United States claims it could not have filed its motion sooner because it was unable to determine how the debtor and NBA proposed to treat its claim and setoff rights. However, the United States asserted its setoff rights as early as July 6, 1994, when it filed its objection to the first amended disclosure statement. Its motion to withdraw the reference was filed November 4, 1994, on the eve of the confirmation hearing and after several disclosure statement hearings had been conducted by the bankruptcy court. Under the circumstances of this case, the motion is untimely.

Even assuming the motion were timely, the issues now pending in this case do not require "consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce," as provided under § 157(d). The United States asserts that resolution of this bankruptcy proceeding requires consideration of federal non-bankruptcy law, including the law of federal government contracts, litigation between the debtor, NBA and the sureties under the Miller Act, federal tax law, and the federal law of marine and aircraft mortgages. This assertion is contradicted by the issues the United States has raised in opposing confirmation. As noted above, no nonbankruptcy federal law issues were addressed in its opposition to confirmation. Further, the bankruptcy court's resolution of the confirmation and conversion issues in this case involved issues soley under title 11. Withdrawal of the entire case is not mandated under § 157(d). The sureties contend the reference should be withdrawn with       4 ABR 57  respect to the United States' motion for relief from stay to permit setoff.⁽²⁾ However, the issues raised in this motion are bankruptcy issues arising under 11 U.S.C. §§ 362(d), 553. Further, these issues are not yet ripe, as the motion has not been properly noticed in accordance with AK LBR 41(c).

Finally, withdrawal of the reference for a determination of the United States' claim would be premature at this time. The United States says resolution of its claim will require a determination of federal procurement laws and environmental laws, rather than bankruptcy laws. While this may be true, an objection to the United States' claim has not yet been filed. Until allowance of the claim is placed in issue, withdrawal of the reference as to the allowance of the United States' claim is premature. In re Chateaugay Corp., 104 B.R. 622, 625-626 (S.D.N.Y. 1989).

Recommendation and Conclusion

The United States' motion to withdraw the reference is procedurally deficient because it has not been properly noticed. Further, under the circumstances of this case, the motion is untimely. Even assuming the motion were timely, the issues presently pending before the bankruptcy court do not require consideration of nonbankruptcy federal laws affecting interstate commerce. Therefore, the bankruptcy court respectfully recommends that the United States' motion to withdraw the reference be denied.

DATED: December 21, 1994.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge

1.       4 ABR 51  The U.S. has more recently indicated, in its motion for relief from stay to permit setoff filed November 4, 1994, that the liquidated amount of its prepetition claim is $4,178,612.

2.       4 ABR 57  In their non-opposition, filed November 25, 1994, the sureties infer that the bankruptcy court has restricted the government's right of setoff on contracts. The bankruptcy court disagrees with the sureties' characterization of its ruling. The bankruptcy court ruled, on cross-motions for partial summary judgment in the debtor/surety adversary proceeding, that the sureties' setoff rights were determined by interpreting the terms of the post-petition Debtor/Surety Agreement for Use of Bonded Receivables and Other Relief. Both the sureties and the debtor concur that this agreement is binding and enforceable. The government's setoff rights are not affected by this ruling. Further, interpretation of the ageement does not involve application of the Miller Act.