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In re Lifestyle Lift Holding, Inc.

United States District Court, E.D. Michigan, Southern Division

October 18, 2016

In re Lifestyle Lift Holding, Inc., et al. Debtors,
v.
Kenneth M. Zorn, Defendant. Basil T. Simon, Trustee Plaintiff,

          Mona K. Majzoub U.S. Magistrate Judge.

          ORDER DENYING DEFENDANT'S MOTION TO WITHDRAW THE REFERENCE TO BANKRUPTCY COURT

          Arthur J. Tarnow Senior United States District Judge.

         This is a bankruptcy case. Before the Court is Defendant Kenneth Zorn's Motion to Withdraw the Reference to Bankruptcy Court [1], filed on August 23, 2016. Plaintiff Basil Simon filed a Response [5] on September 8, 2016. Defendant filed a brief Reply [7] on September 19, 2016. Pursuant to Local Rule 7.1(f)(2), the Court will decide this motion without oral argument.

         For the reasons discussed herein, Defendant's Motion to Withdraw the Reference to Bankruptcy Court is DENIED.

         Factual Background

         Dr. 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 proceeding”).

         Plaintiff 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. Id.

         Lifestyle 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).

         Kent 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.

         Lifestyle 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”).

         Plaintiff 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).

         Analysis

         Federal 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. 2003).

         The 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 ...


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