JP Morgan Chase Funding Inc. et al v. Sher

Filing 6

MEMORANDUM. Signed by Judge James K. Bredar on 7/6/2015. (dass, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

In re:
TMST, INC. (f/k/a/ THORNBURG
MORTGAGE, INC.), et al.,

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Case No. 09-17787 (NVA)
Jointly Administered

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Debtors,
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Adversary Proceeding
Case No. 11-00340 (NVA)

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JOEL I. SHER in his capacity as Chapter
11 Trustee for TMST, INC., et al.,
Plaintiff,

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CIVIL NO. JKB-15-75

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JPMORGAN CHASE FUNDING INC.,
et al.,
Defendants.
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MEMORANDUM
The matter now pending before the Court is rooted in an ongoing Chapter 11 bankruptcy
action in the United States Bankruptcy Court for the District of Maryland (“the bankruptcy
proceeding”). The bankruptcy proceeding was initiated in 2009 by TMST, Inc. f/k/a Thornburg
Mortgage, Inc. (“TMST”), TMST Acquisition Subsidiary, Inc. f/k/a Thornburg Acquisition
Subsidiary, Inc. (“TAS”), TMST Home Loans, Inc. f/k/a Thornburg Mortgage Home Loans, Inc.
(“TMHL”), and TMST Hedging Strategies, Inc. f/k/a Thornburg Mortgage Hedging Strategies,
Inc. (“TMHS,” and collectively the “Debtors”). See Chapter 11 Voluntary Petition, In re TMST,
Inc., Case No. 09-17787-DK (Bankr. D. Md. May 1, 2009), ECF No. 1. Joel I. Sher is the courtappointed Chapter 11 Trustee (the “Trustee”) for the Debtors’ jointly administered estates. In
2011, the Trustee commenced this proceeding (“the adversarial proceeding”), asserting thirty-

one claims against JPMorgan Chase Funding Inc., Citigroup Global Markets Limited, Citigroup
Global Markets Inc., Credit Suisse Securities (USA) LLC, Credit Suisse International, RBS
Securities Inc., Greenwich Capital Derivatives, Inc., Royal Bank of Scotland plc, and UBS AG
(collectively, the “Defendants”). See Original Complaint, In re TMST, Inc., Case No. 11-00340DK (Bankr. D. Md. Apr. 30, 2011), ECF No. 1. The adversarial proceeding was automatically
referred to the bankruptcy court, pursuant to Local Rule 402. Now pending before the Court is
Defendants’ motion to withdraw the reference to the Bankruptcy Court. (ECF No. 1.) The
issues have been briefed (ECF Nos. 1, 2 and 3) and no hearing is required, Local Rule 105.6.
For the reasons explained below, Defendants’ motion to withdraw the reference will be
DENIED.
I. Background1
The Debtors had been involved in the once profitable business of investing in mortgagebacked securities (“MBS”). See Amended Complaint ¶¶ 19-34, In re TMST, Inc., Case No. 1100340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15. They “financed the acquisition of MBS
primarily through financing agreements with investment banking and securities firms such as the
Defendants,” and pledged MBS to the Defendants as collateral. Id. ¶ 20. In February 2008, the
market value of MBS began to fall quickly, which lead the Defendants to make a series of
“aggressive” margin calls. Id. ¶¶ 44-54. “Facing a deluge of margin calls and recognizing that
current market conditions made it untenable for [the Debtors] to contest every margin call, [the
Debtors] spent the second week of March 2008 engaging the Defendants in a strained attempt to
restructure its debts with them.”

Id. ¶ 55.

Through these negotiations, the Debtors and

1

In synthesizing the facts of this complex matter, the Court relies on the parties’ briefing related to the Defendants’
motion to withdraw the reference (ECF Nos. 1, 2, and 3), as well as the Trustee’s amended complaint, Amended
Complaint, In re TMST, Inc., Case No. 11-00340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15, and the
bankruptcy court’s memorandum and order granting in part and denying in part the Defendants’ motion to dismiss,
Sept. 25, 2014 Memorandum and Order, TMST, Case No. 11-00340-DK (Bankr. D. Md. Sept. 25, 2014), ECF Nos.
76 and 77.

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Defendants reached an agreement “to override and extend” the terms of the original financing
agreements (the “Override Agreement”). Id. ¶¶ 55-56. In the ensuing year, the market for MBS
continued to erode. The Debtors and Defendants amended the Override Agreement (the “AOA”)
“[t]o clarify their respective rights” (ECF No. 1-1 at 11-12), and later executed forbearance
agreements (the “Forbearance Agreements”) to give the Debtors “additional breathing room” (Id.
at 12). Both the AOA and the Forbearance Agreements included provisions releasing the
Defendants from specified potential claims by the Debtors (the “First Release” and “Second
Release”). (Id. at 12.)
On May 1, 2009, fourteen months after the Override Agreement was executed, the
Debtors filed for Chapter 11 bankruptcy. Chapter 11 Voluntary Petition, In re TMST, Inc., Case
No. 09-17787-DK (Bankr. D. Md. May 1, 2009), ECF No. 1. Shortly thereafter, the bankruptcy
court appointed Joel I. Sher as the Trustee to jointly administer the Debtors’ estates. TMST, Case
No. 09-17787-DK (Bankr. D. Md. Oct. 28, 2009), ECF No. 506. The Defendants filed proofs of
claim in the underlying bankruptcy proceeding “in the aggregate amount of” approximately $2.6
billion. (ECF No. 2 ¶ 3.) Significantly, at the time the Debtors and Defendants signed the
Override Agreement, the Defendants “represented that their aggregate . . . claims against the
Debtors totaled” approximately $5.8 billion. (Id. ¶ 2.) “It is the manner in which the Defendants
reduced their alleged claims [from $5.8 billion to $2.6 billion] between the execution of the
Override Agreement and the filing of their Proofs of Claim that is at the heart of this Adversary
Proceeding.” (Id. ¶ 3.)
The Trustee commenced this adversarial proceeding on April 30, 2011 and the case was
automatically referred to the bankruptcy court for this district. Original Complaint, TMST, Case
No. 11-00340-DK (Bankr. D. Md. Apr. 30, 2011), ECF No. 1. The Trustee then amended his
complaint on June 8, 2011. Amended Complaint, TMST, Case No. 11-00340-DK (Bankr. D.
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Md. June 8, 2011), ECF No. 15. This amended complaint included thirty-one separate counts,
and generally sought “redress for the Defendants’ conduct after the execution of the Override
Agreement and the manner in which they systematically seized or obtained all of the Debtors’
liquidity, MBS and other assets and applied the proceeds thereof to their respective claims.”
(ECF No. 2 ¶ 4.)
Before filing an answer to the amended complaint, the Defendants filed two consecutive
motions: On September 12, 2011, the Defendants filed a joint motion to dismiss the amended
complaint, Motion to Dismiss, TMST, Case No. 11-00340-DK (Bankr. D. Md. Sept. 12, 2011),
ECF No. 32; and on October 26, 2011, the Defendants filed their first motion to withdraw the
reference, First Motion to Withdraw the Reference, TMST, Case No. 11-00340-DK (Bankr. D.
Md. Oct. 26, 2011), ECF No. 33.
On July 23, 2012, this Court denied the Defendants’ first motion to withdraw the
reference. Order, Joel I. Sher v. JP Morgan Chase Funding, Civ. No. L-12-157 (D. Md. July 23,
2012), ECF No. 8. The Court—presided over by Judge Legg—noted that “[a]t least 28 of the 31
counts in the Amended Complaint are properly within the core jurisdiction of the Bankruptcy
Court.” Id. On the remaining three counts,2 the Court held that “[a]ssuming arguendo that the
Bankruptcy Court lacks final adjudicatory authority under Stern, it may still submit proposed
findings of fact and conclusions of law pursuant to the procedure set forth in 28 U.S.C.
§ 157(c)(1).”

Id.

Defendants’ motion was denied, and the matter was returned to the

Bankruptcy Court for further proceedings.
On September 25, 2014, the Bankruptcy Court entered an order granting in part and
denying in part Defendants’ motion to dismiss. See Sept. 25, 2014 Memorandum and Order,
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In this first motion to withdraw the reference, the Defendants apparently only argued that the Bankruptcy Court
lacked final adjudicatory authority over Counts 7, 27, and 28 of the amended complaint. See First Motion to
Withdraw the Reference, TMST, Case No. 11-00340-DK (Bankr. D. Md. Oct. 26, 2011), ECF No. 33-2.

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TMST, Case No. 11-00340-DK (Bankr. D. Md. Sept. 25, 2014), ECF Nos. 76 and 77. The Court
dismissed twenty-two of the Trustee’s thirty-one original counts. Id. The following nine counts
are what remain of the Trustee’s amended complaint: Counts 3, 7, 10, 16, 20, 27, 28 29, and 31.3
Id. On October 15, 2014, both the bankruptcy proceeding and the adversarial proceeding were
reassigned from Judge Keir to Judge Alquist. See TMST, Case No. 09-17787-NVA (Bankr. D.
Md. Oct. 15, 2014); TMST, Case No. 11-00340-NVA (Bankr. D. Md. Oct. 15, 2014).
The Defendants have now filed their second motion to withdraw the reference, on the
theory that while “bankruptcy law claims and issues predominated in the case” when the first
motion to withdraw was denied, the Trustee’s complaint is now better suited for resolution in the
district court in light of the Bankruptcy Court’s order dismissing most of the Trustee’s claims.
(ECF No. 1-1 at 8.) Defendants’ motion (ECF No. 1), the Trustee’s response in opposition (ECF
No. 2), and Defendants’ reply (ECF No. 3) were all referred to this Court on January 9, 2015.
II. Analysis
In general, “district courts shall have original and exclusive jurisdiction of all cases under
title 11,” the Bankruptcy Code. 28 U.S.C. § 1334(a). District courts may, however, refer “any
or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related
to a case under title 11 . . . to the bankruptcy judges for the district.” Id. § 157(a). In the District
of Maryland, all qualifying cases—including the instant action—are “deemed to be referred to
the bankruptcy judges of this District.” Local Rule 402. “The district court may withdraw, in
whole or in part, any case or proceeding referred under this section, on its own motion or on

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The Bankruptcy Court’s order also dismissed Count 27 as to Defendant Citi Global LTD. Sept. 25, 2014 Order,
TMST, Case No. 11-00340-DK (Bankr. D. Md. Sept. 25, 2014), ECF No. 77. The Bankruptcy Court subsequently
vacated in part those portions of the order that had dismissed the Trustee’s “assertion of a right against Citi Global
LTD for breach of the forbearance agreement” as well as the Trustee’s asserted “right to turnover and disallowance
of claim based upon the asserted facts and application of Sections 559 and 562 . . . .” Nov. 14, 2014 Memorandum
and Order, TMST, Case No. 11-00340-DK (Bankr. D. Md. Nov. 14. 2014), ECF Nos. 91 and 92.

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timely motion of any party, for cause shown.” 28 U.S.C. § 157(d). The Defendants now move
this Court to withdraw the reference to the bankruptcy court pursuant to § 157(d).
“The district court has broad discretion in deciding whether reference should be
withdrawn for cause shown,” and “[i]t is the movant’s burden to show cause . . . .” In re
Millennium Studios, Inc., 286 B.R. 300, 303 (D. Md. 2002) (internal quotation marks omitted).
In assessing a motion to withdraw the reference, courts consider the following six factors: “(1)
whether the matter at issue between the parties is ‘core’ within the meaning of Section 157(b)(2)
of the Bankruptcy Code; (2) uniformity of bankruptcy administration; (3) forum shopping; (4)
conservation of creditor and debtor resources; (5) expediency of the bankruptcy proceeding; (6)
the likelihood of a jury trial.” Albert v. Site Mgmt., Inc., 506 B.R. 453, 455 (D. Md. 2014). “The
most important factor is whether the case presents a core or non-core proceeding,” and so the
Court begins its analysis accordingly. Allen v. Nat’l City Mortg. Co., No. 2:04 CV 188, 2:05 MC
144, 2006 WL 3899997, at *2 (S.D. W. Va. July 13, 2006).
A. Core vs. Non-core Claims
By statute, bankruptcy judges are authorized to “hear and determine all cases under title
11 and all core proceedings arising under title 11, or arising in a case under title 11 . . . .” 28
U.S.C. § 157(b)(1) (emphasis added). The statute provides a non-exhaustive list of sixteen types
of core claims. Id. § 157(b)(2). For statutorily non-core claims that are “otherwise related to a
case under title 11,” a bankruptcy judge may still retain authority to hear the case, but “cannot
finally resolve [the claims] and must instead submit proposed findings of fact and conclusions of
law to the district court.” Moses v. CashCall, Inc., 781 F.3d 63, 70 (4th Cir. 2015) (citing 28
U.S.C. § 157(c)(1)). Alternatively, “with the consent of all the parties to the proceeding,” a
district court “may refer a proceeding related to a case under title 11 to a bankruptcy judge to
hear and determine and to enter appropriate orders and judgments . . . .” Id. § 157(c)(2).
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In 2011, the Supreme Court identified a constitutional limit on a bankruptcy court’s
authority to issue final judgments. Stern v. Marshall, 131 S. Ct. 2594 (2011). Now, “even where
the bankruptcy court possesses statutory power to enter a final judgment under Section 157
because the issue is ‘core,’ Article III presents an independent bar to the bankruptcy court’s
adjudication of at least some cases.” Albert, 506 B.R. at 457. Stated differently, claims must be
both statutorily and constitutionally core for a bankruptcy court to possess final adjudicatory
authority. A claim is not constitutionally core unless it “stems from the bankruptcy itself or
would necessarily be resolved in the claims allowance process.” Stern, 131. S. Ct. at 2618.
“[W]hen a bankruptcy court is faced with a claim that is statutorily core but constitutionally noncore—a so-called ‘Stern claim’—it must treat the claim as if it were statutorily non-core,
submitting proposed findings of fact and conclusions of law to the district court for de novo
review.”4 Moses, 781 F.3d at 70 (citing Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165,
2173 (2014)).
In this case, the Trustee asserts nine claims that may be grouped into three categories:
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The Avoidance Claims (Counts 3, 10, 16, and 20)

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The Objections to Defendants’ Proofs of Claim (Counts 27, 29 and 31)

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The Common Law Claims (Count 7 and 28)

The Court assesses each set of claims in turn, concluding whether any set is categorically beyond
the authoritative reach of a bankruptcy court. At the outset, the Court finds that all claims
against creditors5 are statutorily core pursuant to, inter alia, § 157(b)(2)(C), which extends to all
“counterclaims by the estate against persons filing claims against the estate.” And claims against

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Similar to a statutorily non-core claim, the parties may still consent to a bankruptcy court’s adjudication of a
constitutionally non-core claim where it relates to a case under title 11. See generally Wellness Int’l Network, Ltd. v.
Sharif, 135 S. Ct. 1932 (2015).
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Creditor refers to those Defendants who have filed proofs of claim in the underlying Chapter 11 bankruptcy
proceeding.

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non-creditors are probably not constitutionally core, and thus may not be finally adjudicated by
the Bankruptcy Court (absent consent) as discussed in Section II.C. infra. Thus, the Court
primarily considers whether the Trustee’s claims against creditors are constitutionally core.
The Court hastens to note that it makes these determinations at this point only for the
purpose of deciding the motion before it. Notwithstanding the Court’s analysis below, the Court
is fully confident that these determinations are more properly suited for initial consideration by
bankruptcy judges, who possess familiarity with the underlying legal issues and who are
consistently fair and capable arbiters in resolving similar issues.6 For that reason, the Court does
not decide as a matter of law whether any particular claims in this case are properly deemed core
proceedings. Rather, the Court merely considers here whether Defendants, the movants, have
satisfied their burden to show that the Court should exercise its broad discretion to withdraw the
reference to the Bankruptcy Court.
1. The Avoidance Claims
In the Avoidance Claims7—Counts 3, 10, 16, and 20—the Trustee alleges that the debtors
made fraudulent transfers to the Defendants under the direction and/or control of the Defendants.
(ECF No. 2 ¶ 19.) “The purpose of the Bankruptcy Code’s avoidance provisions is to prevent a
debtor from making transfers that diminish the bankruptcy estate to the detriment of creditors.”
In re Derivium Capital LLC, 716 F.3d 355, 361 (4th Cir. 2013). Section 548(a)(1)(A) enables a
trustee to avoid any transfer made “with actual intent to hinder, delay, or defraud” a creditor. 11
U.S.C. § 548(a)(1)(A). Section 550 is the accompanying liability provision, which states that “to

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A bankruptcy court’s initial determination is subject to appeal to the district court, though. See 28 U.S.C. § 158.
And even if the bankruptcy court enters an invalid final judgment, the district court may cure this error through “de
novo review and entry of its own valid final judgment.” Exec. Benefits Ins. Agency, 134 S. Ct. at 2174-75.
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The Defendants label these same four counts differently—as “Actual Fraud Claims”—but the Defendants agree
that these claims “seek[] to avoid transfers under the Override Agreement (Count 3) and the AOA (Count 10), as
well as avoidance of the Forbearance Agreements (Count 16) and the Second Releases contained therein (Count
20).” (ECF No. 1 at 15-16.)

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the extent that a transfer is avoided under section . . . 548 . . . , the trustee may recover, for the
benefit of the estate, the property transferred . . . .” Id. § 550(a). And § 502(d) of the bankruptcy
code is a related provision, stating that a “court shall disallow any claim of any . . . transferee of
a transfer avoidable under section . . . 548 . . . , unless such . . . transferee has paid the amount, or
turned over any such property, for which such entity or transferee is liable under section . . . 550
. . . .” Id. § 502(d).
The Trustee seeks to avoid transfers pursuant to § 548(a)(1)(A), seeks to recover the
value of these transfers pursuant to § 550(a), and seeks to disallow Defendants’ claims in the
bankruptcy proceeding pursuant to § 502(d). The Court first holds that fraudulent transfer claims
may be constitutionally core, if the claims would necessarily be resolved as part of the claims
allowance process.

Further, as to claims against the Defendants who are creditors in the

bankruptcy proceeding, it appears that these fraudulent transfer claims are constitutionally core,
as explained below.
A fraudulent transfer claim may be constitutionally core where the defendant is a creditor
in the underlying bankruptcy proceeding. In Granfinanciera, S.A. v. Nordberg, 492 U.S. 33
(1989), the Supreme Court considered “whether a person who has not submitted a claim against
a bankruptcy estate has a right to a jury trial8 when sued by the trustee in bankruptcy to recover
an allegedly fraudulent monetary transfer.” Id. at 36. The Court held that a non-creditor does
have a right to a jury trial because, where a party has “not filed claims against the estate, [the
trustee’s] fraudulent conveyance action does not arise as part of the process of allowance and
disallowance of claims.

Nor is that action integral to the restructuring of debtor-creditor

relations.” Id. at 59 (internal quotation marks omitted). Significantly, though, Granfinanciera
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While Granfinanciera involved the Seventh Amendment right to a jury trial, courts have consistently applied its
reasoning and holding in cases similar to the instant action, where the question is whether Article III authorizes or
prohibits a bankruptcy court to adjudicate claims. See, e.g., Stern, 131 S. Ct. at 2614-15; id. at 2628 (Breyer, J.
dissenting) (“As we have recognized, the jury trial question and the Article III question are highly analogous.”).

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does not categorically strip bankruptcy courts’ authority to finally adjudicate any and all
fraudulent transfer claims. Instead, it holds that the resolution of fraudulent transfer claims may
be within the core powers of a bankruptcy judge if the defendants are also creditors in the
underlying bankruptcy proceeding.
Of course, a party’s decision to file a proof of claim in a bankruptcy proceeding does not
empower a bankruptcy court to resolve every claim by a debtor or trustee against that creditor.
In Stern v. Marshall, a creditor filed a defamation complaint—and subsequently a proof of claim
for the defamation action—against the debtor in a bankruptcy proceeding. 131 S. Ct. at 2601.
The debtor filed a counterclaim, alleging that this same creditor had tortiously interfered with the
debtor’s deceased husband’s estate. Id. The Court held that the debtor’s tortious interference
counterclaim “involve[d] the most prototypical exercise of judicial power: the entry of a final,
binding judgment by a court with broad substantive jurisdiction, on a common law cause of
action, when the action neither derives from nor depends upon any agency regulatory regime.”
Id. at 2615. The fact that this defendant was a creditor in the underlying bankruptcy proceeding
did not give the bankruptcy court authority to adjudicate this common law counterclaim. Id. at
2615-18.

While “[t]here was some overlap between [the debtor’s] counterclaim and [the

creditor’s] defamation claim . . . . there was never any reason to believe that the process of
adjudicating [the creditor’s] proof of claim would necessarily resolve [the debtor’s]
counterclaim.” Id. at 2617 (emphasis added.) Regardless of whether a party is a creditor in the
underlying bankruptcy proceeding, to determine whether a claim is constitutionally core, the
ultimate consideration is whether the challenged claim “stems from the bankruptcy itself or
would necessarily be resolved in the claims allowance process.” Id. at 2618.
Unlike the fraudulent transfer claim in Granfinanciera, most of the Defendants in this
case are creditors in the underlying bankruptcy proceeding. And more importantly, unlike the
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tortious interference claim in Stern, the Bankruptcy Court in this case will necessarily resolve
these fraudulent transfer claims as part of its claims allowance process. In Count 31 of the
Amended Complaint, the Trustee seeks to disallow proofs of claim filed by Defendants who
have allegedly received avoidable transfers—pursuant to § 502(d). Amended Complaint ¶¶ 469473, In re TMST, Inc., Case No. 11-00340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15.
Section 502(d) “makes clear that [a] [d]efendants’ proofs of claim cannot be allowed until a
determination of the fraudulent transfer claims has been made.” Mason v. Ivey, 498 B.R. 540,
548-49 (M.D.N.C. 2013) (concluding “that when a proof of claim has been filed in a bankruptcy
case to which, as here, the trustee objects, a trustee’s fraudulent transfer claims necessarily must
be resolved in the claims allowance process”); see also Sec. Inv’r Prot. Corp. v. Bernard L.
Madoff Inv. Sec. LLC, 490 B.R. 46, 54-55 (S.D.N.Y. 2013) (“[W]henever [a] [b]ankruptcy
[c]ourt must resolve a § 502(d) claim brought by [a] [t]rustee, it may also finally decide
avoidance actions to the extent that those actions raise the same issues as the § 502(d) claim and
thus would ‘necessarily’ be resolved by it.”). As a result, the Court expects that the Avoidance
Claims will necessarily be resolved in the course of the Bankruptcy Court’s claims allowance
process.
Defendants would have the Court read Stern and Granfinanciera quite differently,
arguing that all fraudulent transfer claims are constitutionally non-core, and that “[c]ourts have
recognized this, without distinguishing between claims asserted against creditors and noncreditors.” (ECF No. 3 at 11.) In particular, Defendants rely on one decision by a court in this
district. In In re Erickson Ret. Cmtys., LLC, Civ. No. WDQ-11-3736, 2012 WL 1999493 (D.
Md. June 1, 2012), the court interpreted Stern and Granfinanciera to hold “that fraudulent
conveyance claims must be finally decided by Article III courts, not Bankruptcy Courts.” Id. at
*3. More recently, a different court in this district took up the same question and reached the
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opposite conclusion. See Albert, 506 B.R. 453. In Albert, the district court recognized “a split of
authority as to how broadly Stern should be read,” citing Erickson as an example where courts
have applied Stern broadly. Id. at 458. The Albert court ultimately concluded that the holding in
Stern should be applied narrowly, id., and this Court agrees. The Court rejects the Defendants’
broad interpretation of Granfinanciera and Stern, adopts the reasoning in Albert, and now holds,
for the purpose of deciding this motion, that even after Stern, a bankruptcy court has the
authority to finally adjudicate fraudulent transfer claims if they are necessarily resolvable as part
of the claims allowance process.
2. The Objections to Defendants’ Proofs of Claim
In the Objections to Defendants’ Proofs of Claim—Counts 27, 29, and 31—the Trustee
seeks to disallow and/or reduce Defendants’ claims in the underlying bankruptcy proceeding.
Thus, it appears that it is within the Bankruptcy Court’s core power to finally adjudicate these
claims because they will necessarily be resolved in the course of the claims allowance process.
The Defendants do not contend that Counts 29 and 31 are non-core claims, and for good
reason. Count 29 is a claim for equitable subordination of Defendants’ proofs of claim, pursuant
to § 502(b) and § 510(c), and Count 31 is a claim for disallowance of claims pursuant to §
502(d). Both counts go to the heart of the claims allowance process.
Defendants do, however, contend that Count 27 is non-core. In Count 27, the Trustee
alleges breach of repurchase agreements, seeks the transfer of property now held by Defendants
that is deemed part of the Debtors’ estates—pursuant to 11 U.S.C. § 559—as well as the
disallowance and reduction of Defendants’ proofs of claim—pursuant to id. § 562. In granting in
part a motion to reconsider an order dismissing Count 27 as to Citi Global LTD, the Bankruptcy
Court previously noted “that dismissal of Count 27 would prejudice [the Trustee’s] rights to
challenge [a defendant’s] proof of claim under Section 559 of the Bankruptcy Code and a finding
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that the claim should be disallowed or reduced based upon a subsequent finding that Section 562
of the Bankruptcy Code necessitates a valuation of the liquidated securities other than that which
is asserted by [the defendant].” Nov. 14, 2014 Order, TMST, Case No. 11-00340-DK (Bankr. D.
Md. Nov. 14, 2014), ECF No. 91. The Bankruptcy Court’s reasoning suggests that Count 27 is
necessarily resolvable as part of the claims allowance process.
For these reasons, it appears that Counts 27, 29, and 31 raise constitutionally core claims.
3. The Common Law Claims
The Trustee’s remaining two claims—Counts 7 and 28—are traditional common law
claims.
In Count 7, the Trustee alleges that Defendants breached the Override Agreement by
failing to remit owed interest payments. Amended Complaint ¶¶ 244-255, TMST, Case No. 1100340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15. The Trustee seeks “all interest payments
to which TMST was entitled for the months of August 2008 through November 2008 in the
aggregate amount of not less than $121.8 Million . . . .” Amended Complaint ¶ 255, TMST, Case
No. 11-00340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15. Count 7 is the prototypical
“common law [claim] that simply attempts to augment the bankruptcy estate—the very type of
claim that [the Supreme Court] held in Northern Pipeline and Granfinanciera must be decided
by an Article III court.” Stern, 131 S. Ct. at 2616. The Trustee did not cite, and the Court could
not find, any provision in the Override Agreement or other legal authority to support the
proposition that this pure breach of contract claim must necessarily be resolved as part of the
claims allowance process.

The Court suspects that this plain breach of contract claim, if

successful on the merits, may result in a remedy of money damages but would not render the
contract unenforceable. Thus, it appears that the claim is not constitutionally core as to any of
the Defendants, and must be finally adjudicated by an Article III judge.
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In contrast, in Count 28 the Trustee alleges that “the Override Agreement, AOA, First
Release, March Forbearance Agreements, Second Releases, and the obligations and transfers
related thereto, are otherwise invalid and unenforceable because they are the product of coercion
and/or duress, and the Debtors are entitled to rescission of [the] Override Agreement, AOA and
March Forbearance Agreements.” Amended Complaint ¶ 456, TMST, Case No. 11-00340-DK
(Bankr. D. Md. June 8, 2011), ECF No. 15 (emphasis added). The Fourth Circuit recently held
that a debtor’s counterclaim seeking to declare a loan agreement as unenforceable was
“constitutionally core, because the validity of the Loan Agreement would ‘necessarily be
resolved’ in adjudicating [the creditor’s] proof of claim and [the debtor’s] objections thereto.”
Moses, 781 F.3d at 70 (quoting Stern, 131 S. Ct. at 2618). Likewise, Count 28 appears to be a
constitutionally core claim because it alleges that the contested agreements are unenforceable,
and the validity of these agreements must be assessed as part of the claims allowance process.
B. Other Considerations
In sum, in order to decide the motion before it and for that purpose only, the Court finds
that all claims against creditors are statutorily core, and are probably constitutionally core, with
the exception of Count 7. In addition to the core/non-core assessment, a court must also
consider: “(2) uniformity of bankruptcy administration; (3) forum shopping; (4) conservation of
creditor and debtor resources; (5) expediency of the bankruptcy proceeding; (6) the likelihood of
a jury trial.” Albert, 506 B.R. at 455.
Defendants primarily argue that the Court should withdraw the reference for two
additional reasons: (1) to conserve resources; and (2) to promote the uniformity of bankruptcy
administration. Neither rationale is persuasive.

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1. Conservation of Resources
Defendants are concerned that the creditors and debtors will waste countless resources relitigating claims over which the Bankruptcy Court lacks final adjudicatory authority. (ECF No. 1
at 27-32.)
The Defendants first argue that it would be “unworkable” to split this lawsuit (i.e., to
withdraw the reference as to only some claims). (Id. at 27.) The Court agrees, and will not split
these proceedings. Fears of issue preclusion are unwarranted. Defendants also argue that, if the
bankruptcy court submits proposed findings to this Court for de novo review pursuant to
§ 157(c)(1), this Court will have to re-take countless hours of testimony because “[a] cold record
would plainly be inadequate for . . . review of issues so dependent on live testimony and
credibility determinations.” (Id. at 31.) De novo review does not necessarily imply merely a
“cold record” review, and it does not require the Court to take additional evidence. Rather, the
Federal Rules of Bankruptcy Procedure enable a district court to take a hybrid approach: “The
district judge shall make a de novo review upon the record, or after additional evidence, of any
portion of the bankruptcy judge’s findings of fact or conclusions of law . . . .” Fed. R. Bank. P.
9033(d). Concern about avoiding work duplication is not dispositive here.
Moreover, there is “significant value in having the bankruptcy court preside over
preliminary legal and discovery issues in a proceeding that is related to a bankruptcy case given
its greater familiarity with the issues involved.” Albert, 506 B.R. at 459 n.3. While the
adversarial proceeding was recently reassigned to a new judge, the Bankruptcy Court possesses
expertise and familiarity with all matters related to bankruptcy proceedings. Resources are
especially preserved where the same bankruptcy court is adjudicating both the adversarial and
bankruptcy proceedings, as is true here. C.f. Erickson, 2012 WL 1999493, at *3-4 (granting a
motion to withdraw the reference where, inter alia, the Chapter 11 proceeding was in Texas and
15

the adversarial proceeding was in Maryland, but noting that “[w]hen the Bankruptcy Court
handling the adversary proceeding is also handling the bankruptcy proceeding . . . there is still
significant value in having the bankruptcy court preside over preliminary legal and discovery
issues in a proceeding that is related to the bankruptcy action”).
Thus, this factor does not justify withdrawing the reference to the bankruptcy court.
2. Uniformity of Bankruptcy Administration
Defendants also contend that the motion to withdraw should be granted because it would
promote the uniformity of bankruptcy administration, especially where six related adversarial
proceedings are, or were, adjudicated in the district court. (ECF No. 1 at 32-33.)

The Court

notes, and Defendants concede, that only one of these six related proceedings is still pending; the
other five have been resolved and are closed. (See id. at 33.) And while the Trustee may have
brought similar causes of action in the related proceedings (id. at 32-33), the Court finds no
evidence to suggest that these claims implicate the same or similar debts. Thus, allowing this
matter to remain with the Bankruptcy Court poses no risk of producing conflicting outcomes,
and this factor does not justify withdrawing the reference.
C. The Court’s Discretion—Balancing the Factors
Defendants’ motion was indeed timely, and the Court does not suspect Defendants of
forum shopping. But all other factors weigh in favor of denying the motion to withdraw.
With the sole exception of Count 7, every remaining claim against a creditor seems to be
statutorily and constitutionally core, and thus a bankruptcy court has final adjudicatory authority
pursuant to 28 U.S.C. § 157(b). Claims against non-creditors may be statutorily core, but are
probably not constitutionally core because they are not necessarily resolvable as part of the

16

claims allowance process.9

In addition to retaining a large number of core claims, the

bankruptcy court is in a better position to conserve litigant resources, promote the uniformity of
bankruptcy administration, and ensure the expediency of the bankruptcy proceedings.
The Supreme Court recently acknowledged that “without the distinguished service of
[bankruptcy judges], the work of the federal court system would grind nearly to a halt.”
Wellness Int’l. Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1938-39 (2015). This Court agrees
completely. After considering all of the factors, and in accordance with its “broad discretion” to
decide such motions, see Millennium Studios, 286 B.R. at 303, the Court finds that Defendants
have not satisfied their burden to show that withdrawing the reference is appropriate. As stated
supra, the Court does not go beyond what is necessary to decide the instant motion, and it does
not finally decide which claims are core proceedings, but leaves that initial determination in the
skilled hands of the Bankruptcy Judge, subject to review on appeal.
III. Conclusion
Accordingly, an order will issue DENYING the Defendants’ motion to withdraw the
reference (ECF No. 1).
DATED this _6th _ day of July, 2015.

BY THE COURT:

/s/
James K. Bredar
United States District Judge

9

This set of constitutionally non-core claims appears to include all claims against RBS Securities. In addition, it
appears to include claims by TMHS and TMHL against JPMorgan, UBS, and Citi, as well as claims by TMHL
against RBS PLC and GCD. (See ECF No. 3 at 13-14.)

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