United States District Court, E.D. Michigan, Southern Division
In re Lifestyle Lift Holding, Inc., et al. Debtors,
Kenneth M. Zorn, Defendant. Basil T. Simon, Trustee Plaintiff,
K. Majzoub U.S. Magistrate Judge.
ORDER DENYING DEFENDANT'S MOTION TO WITHDRAW THE
REFERENCE TO BANKRUPTCY COURT
J. Tarnow Senior United States District Judge.
a bankruptcy case. Before the Court is Defendant Kenneth
Zorn's Motion to Withdraw the Reference to Bankruptcy
Court , filed on August 23, 2016. Plaintiff Basil Simon
filed a Response  on September 8, 2016. Defendant filed a
brief Reply  on September 19, 2016. Pursuant to Local Rule
7.1(f)(2), the Court will decide this motion without oral
reasons discussed herein, Defendant's Motion to Withdraw
the Reference to Bankruptcy Court is DENIED.
David Kent founded Lifestyle Lift (“Lifestyle”),
a cosmetic surgery practice, in 2001. He was the
company's sole shareholder, president, and director.
Defendant Kenneth Zorn served as one of Lifestyle's
attorneys. See generally Pl.'s Compl., Simon
v. Zorn (In re: Lifestyle Lift Holding, Inc.),
No. 16-04298 (hereinafter “Zorn adversary
alleges that both Kent and Zorn breached their duties to the
company and recklessly caused a number of severe financial
losses. For example, Kent and Zorn failed to ensure that
Lifestyle met its ERISA obligations, subjecting the
corporation to penalties and sanctions for ERISA violations.
Id. at ¶¶ 21(e), 40(c)(6). Plaintiff also
claims that Zorn knew that Kent simultaneously reduced
employment compensation by 10% and increased his own
compensation, then lied to employees about this decision.
Id. at ¶ 20. Additionally, Kent promised Stock
Appreciation Rights to Lifestyle's physicians, but never
funded them. Id. at ¶ 19. Zorn made no effort
to communicate this information to the physicians.
entered into a number of forbearance agreements with J.P.
Morgan Chase Bank, its primary lender, in 2013. The company
also retained Conway MacKenzie, Inc., a consulting and
financial advisory firm, for assistance with restructuring,
and appointed Steve Wybo as Chief Restructuring Officer.
Id. at ¶ 25. Plaintiff asserts that in March
2014, Wybo warned Kent and Zorn that Lifestyle was unable to
meet its obligations, due to the deterioration of the
business. Wybo noted that, among other things, rent payments
to landlords were delayed, and Lifestyle owed approximately
$2.8 million to two different companies. Id. at
¶ 25(1), (2).
subsequently retained Pegasus, another consulting firm,
seeking additional guidance, and designated its
representative the acting CEO of Lifestyle. Id. at
¶ 18(e), (f). Plaintiff claims that Zorn knew of
Kent's search for so-called payday loans at exorbitant
interest rates, and that Zorn failed to prevent Kent's
misconduct as to an undocumented agreement with an outside
investor. The investment, according to Plaintiff, resulted in
litigation and fraud allegations against the corporate
entities. The agreement eventually collapsed, resulting in a
$5 million judgment against some of the Debtors.
and its subsidiaries voluntarily filed for Chapter 11
Bankruptcy on March 27, 2015. In re Lifestyle Lift
Holding, Inc., No. 15-44839 (hereinafter
“Bankruptcy proceeding”). The Bankruptcy Court
appointed Plaintiff Basil Simon as Trustee in April 2015. The
case was later converted to Chapter 7 in October 2015.
Plaintiff then filed an adversary proceeding against Kent,
alleging that Kent breached his statutory and common law
duties to Lifestyle by “[r]ecklessly failing to
properly manage the finances . . . in the face of available
information, data and opinions” and “[r]ecklessly
disregarding available information, data and opinions
concerning [Lifestyle's debt] . . . ” Pl.'s
Compl. ¶ 12(a)-(b), Simon v. Kent (In re:
Lifestyle Lift Holding, Inc.), No. 15-05045 (hereinafter
“Kent adversary proceeding”).
filed the instant action against Defendant Zorn on March 22,
2016, alleging legal malpractice and breach of fiduciary
duty. Plaintiff contends that Defendant Zorn failed to
represent his clients' best interests and that he
committed a myriad of acts and omissions that resulted in
Lifestyle's downfall. Zorn adversary proceeding,
¶ 40(a)-(m). For instance, Plaintiff argues that Zorn
did not advise Kent on numerous matters, including hiring and
firing consultants, entering into failed business deals (e.g.
the payday loans, letters of intent, undocumented investment,
etc.), and the zone of insolvency. Plaintiff further asserts
that Defendant Zorn had a conflict of interest because he was
Kent's personal attorney. Finally, Plaintiff claims that
Zorn should have petitioned a court to appoint a receiver
based on Kent's “instability and irrational
conduct.” Id. at ¶ 40(k).
district courts are vested with original but non-exclusive
jurisdiction over “all civil proceedings arising under
title 11, or arising in or related to cases under title
11.” 28 U.S.C. § 1334(b). Bankruptcy proceedings
are divided into “core” and
“non-core” proceedings. See, e.g.,
Lowenbraun v. Canary, et al. (In re
Lowenbraun), 453 F.3d 314, 320-21 (6th Cir. 2006). 28
U.S.C. § 157(a) permits district courts to refer cases
and related proceedings, both core and non-core, arising
under Title 11 to the bankruptcy court. All such cases in the
Eastern District of Michigan are automatically referred to
the bankruptcy court pursuant to Local Rule 83.50(a)(1).
“The significance of whether a proceeding is core or
non-core is that the bankruptcy judge may hear non-core
proceedings related to bankruptcy cases, but cannot enter
judgments and orders without consent of all parties to the
proceedings.” Eglinton v. Loyer, et al.
(In re G.A.D., Inc.), 340 F.3d 331, 336 (6th Cir.
district court may withdraw a case from the bankruptcy court
“for cause shown.” 28 U.S.C. § 157(d).
“The requirement that cause be shown creates a
presumption that Congress intended to have bankruptcy
proceedings adjudicated in bankruptcy court, unless rebutted
by a contravening policy.” Venture Holdings Co.,
LLC, v. Winget, No. 05-73639, 2006 WL 800790, at *1
(E.D. Mich. Mar. 6, 2006) (internal citations omitted);
see also Hunderup v. Fesmire (In re Southern
Industrial Mechanical Corp.), 266 B.R. 827, 831 (W.D.
Tenn. 2001) (“[T]he courts have ...