NASDAQ OMX GROUP, INC v. ORDER EXECUTION SERVICES HOLDINGS, INC. et al

Filing 46

OPINION filed. Signed by Judge Anne E. Thompson on 6/14/2013. (mmh)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
NASDAQ OMX GROUP, INC.,
Plaintiff,
Civ. No. 12-6854
v.
OPINION
ORDER EXECUTION SERVICES
HOLDINGS, INC.; PRINCETON
FINANCIAL TECHNOLOGY GROUP, LLC;
RICHARD ROE COMPANIES 1-10; David
SCHECKEL; David MITCHELL; Brian
CAPUANO; Raymond RHONE; George
LAWLOR; Richard PAOLILLO; John DOES
1-20,
Defendants.

THOMPSON, U.S.D.J.
This matter comes before the Court upon five motions. Defendant Richard Paolillo
(“Paolillo”) has moved to dismiss the Amended Complaint and Jury Demand pursuant to Federal
Rules of Civil Procedure 12(b)(6), 8(a) and 9(b). (Doc. No. 7). Defendant David Mitchell
(“Mitchell”) has also moved to dismiss based upon lack of standing and Federal Rules of Civil
Procedure 8(a) and 9(b). (Doc. No. 10). Defendants Raymond Rohne (“Rohne”) 1 and George
Lawlor (“Lawlor”) have filed motions to dismiss, in which they join the arguments of Paolillo
and Mitchell. (Doc. Nos. 14, 24). Plaintiff NASDAQ OMX Group, Inc. (“NASDAQ”) has
moved to remand/abstain. (Doc. No. 12). The Court has reached its decision after consideration
of the written submissions of the parties in accordance with Federal Rule of Civil Procedure

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Rohne is referred to incorrectly in the Amended Complaint and in the case caption as “Rhone.”
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78(b) and Local Rule 78.1(b). For the reasons included herein, the Court grants NASDAQ’s
motion to remand/abstain, and denies the four motions to dismiss as moot.
BACKGROUND
I.

Initial State Court Action, the Amended Complaint, and the Bankruptcy Proceeding
This action arises from the October 5, 2011 filing of suit by NASDAQ against

Defendants Order Execution Services Holdings, Inc. (“Holdings”) and Princeton Financial
Technology Group, LLC (“Princeton”) in the Superior Court of New Jersey, Mercer County.
(Doc. No. 1, Att. 1, “Amd. Compl.,” at ¶ 37). NASDAQ then amended its Complaint, adding
Defendants Richard Roe Companies 1-10, David Scheckel (“Mr. Scheckel”), Brian Capuano
(“Mr. Capuano”), Mitchell, Rohne, Lawlor, Paolillo, and John Doe(s) 1-20. (Amd. Compl.). 2
The allegations of the Amended Complaint are as follows: from July 27, 2006, the date
that NASDAQ executed a Membership Services Agreement with a company called OES
Brokerage LLC (“Brokerage”), to at least October 2011, NASDAQ licensed services under

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NASDAQ is a Delaware corporation with a principal place of business in New York City.
(Amd. Compl. at ¶ 1). Holdings is a Delaware corporation with a former principal place of
business in Newark, NJ. (Amd. Compl. at ¶ 2). Princeton is a New Jersey limited liability
company with a former principal place of business in Newark, NJ. (Amd. Compl. at ¶ 3). The
Richard Roe Companies 1-20 are the fictitious names for yet to be identified limited liability
companies, limited liability partnerships, limited partnerships, corporations and other corporate
entities. (Amd. Compl. at ¶ 4). Mitchell and Paolillo are adult individuals residing in New
Jersey. (Amd. Compl. at ¶¶ 6, 10). Capuano is an adult individual residing in Pennsylvania.
(Amd. Compl. at ¶ 7). Lawlor is an adult individual in New York. (Amd. Compl. at ¶ 9).
Rohne is listed in the Amended Complaint as also residing in New York, (Amd. Compl. at ¶ 8),
although Rohne denies this in his pro se joint answer, (Doc. No. 6, Answer, at ¶ 8). Scheckel is
an adult individual who, in the Amended Complaint is listed as residing in New Jersey, (Amd.
Compl. at ¶ 5), but in the ensuing papers and conversations with the Court, is identified as living
abroad. Defendants John Doe(s) 1-20 are the fictitious names for yet to be identified adult
individuals. (Amd. Compl. at 11). Scheckel, Mitchell, Capuano, Rohne, Lawlor, Paolillo, and
John Doe(s) 1-20 are at times referred to in this Opinion as the “individual defendants.”
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separate service contracts to a group of affiliated entities organized under the umbrella of
Holdings. (Amd. Compl. at ¶¶ 14-17, 24). This group of affiliated entities included, inter alia,
Princeton, Brokerage, and Qubit Technologies. LLC (“Qubit”). (Amd. Compl. at ¶ 14).
Under the initial agreement with Brokerage, Brokerage received access to NASDAQ’s
membership services in exchange for monthly membership and trading fees. (Amd. Compl. at ¶
25). In the beginning of 2009, however, Brokerage started to delay payment of those fees.
(Amd. Compl. at ¶ 26). By June 2010, all payment ceased. (Amd. Compl. at ¶ 28). Brokerage’s
broker-dealer operations similarly declined, halting in September 2010. (Amd. Compl. at ¶ 27).
The cessation of payment left Brokerage in breach of the Membership Services Agreement and
in debt to NASDAQ in the amount of $2,002,505.84. (Amd. Compl. at ¶¶ 28-29).
NASDAQ alleges that concurrent with the above breach, the defendants named in this
action concocted an elaborate ruse to strip assets away from Brokerage for their own benefit and
to the detriment of NASDAQ and other creditors. (Amd. Compl. at ¶¶ 13, 19). These assets
were transferred from Brokerage to an ever-changing group of shell companies (including
Princeton and Qubit), whose assets were also stripped. (Amd. Compl. at ¶¶ 13, 19). NASDAQ
had separate service agreements with these entities apart from the initial agreement with
Brokerage. (See, e.g., Amd. Compl. at ¶¶ 15-17). Whenever one entity would default on its
contract with NASDAQ, another affiliated entity would spring into existence to execute a
separate contract. (Amd. Compl. at ¶ 17). As an example, as Brokerage’s activities with
NASDAQ declined, Princeton’s activities with NASDAQ increased. (Amd. Compl. at ¶ 27).
On December 28, 2010, NASDAQ was served with notice that Brokerage had filed a
voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the U.S. Bankruptcy
Court for the District of Delaware, In re OES Brokerage Services LLC a/k/a/ ABS Brokerage

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Services, LLC, Case No. 10-13249 (D. Del.) (the “Delaware Bankruptcy Case”). (Amd. Compl.
at ¶ 34). The Bankruptcy Court subsequently issued an automatic stay with regards to actions
against Brokerage or actions against or to recover property of the Brokerage Estate (referred to
herein as “the debtor estate” or “the estate”) while the Chapter 7 Trustee marshaled estate assets.
(Amd. Compl. at n. 2).
During the pursuit of its claims in the Delaware Bankruptcy Case, NASDAQ obtained
documents indicating that Princeton and Holdings are alter egos of Brokerage. (Amd. Compl at
¶ 36). The documents purportedly show that Princeton absorbed Brokerage’s business and left
the debt behind. (Amd. Compl at ¶ 36). It was this discovery that prompted the filing of the
2011 Complaint and subsequent Amended Complaint.
In the Amended Complaint, NASDAQ delineates twelve counts seeking four types of
relief: (1) to pierce the corporate veil with respect to both the corporate and individual
defendants, (Amd. Compl., Counts I & VI, at ¶¶ 90-95, 137-42); (2) to assert successor liability
against the corporate defendants, (Amd. Compl., Count II at ¶¶ 97-106); (3) to bring claims of
three fraudulent transfers pursuant to N.J.S.A. § 25:20, et seq., against all Defendants, (Amd.
Coml., Counts III-V, X-XII, at ¶¶ 108-134, 158-85); and (4) to assert a breach of fiduciary duty
on the part of the individual defendants with regards to those transfers, (Amd. Compl., Counts
VII-IX, at ¶¶ 143-56). The three alleged fraudulent transfers concern, in turn, the transfer of
assets between (1) Brokerage (the debtor) and Princeton; (2) Princeton and Qubit; and (3)
Holdings and a company called New Qubit. (See generally Amd. Compl.).
II.

Removal and Subsequent Motions to Dismiss and Abstain/Remand
On November 5, 2012, Paolillo filed a timely notice of removal pursuant to 28 U.S.C. §

1452, arguing for District Court jurisdiction under 28 U.S.C. § 1334 given the Amended

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Complaint’s purported relation to the Delaware Bankruptcy Case. 3 (Doc. No. 1, “Not. of
Removal,” at ¶ 6). In support of removal, Paolillo asserted (1) that Holdings and its affiliates are
the Debtor, and NASDAQ, a Creditor, in the Delaware Bankruptcy Case, (Not. of Removal at ¶
6); (2) that based upon information and belief, the allegations contained in the New Jersey State
Court action arise from the same facts and transactions as those in the Delaware Bankruptcy
Case, (Not. of Removal at ¶ 6); and (3) that Paolillo had been advised that he will be subject to a
Bankruptcy Rule 2004 Examination based upon his position as Controller of Holdings from June
2007 through May 2010. (Not. of Removal at ¶ 7). Subsequent to the removal action Paolillo
and Mitchell filed their motions to dismiss. (Doc. Nos. 7, 10). On December 5, 2012, NASDAQ
filed its motion to remand/abstain. (Doc. No. 12). In the weeks following, Lawlor and Rohne
also filed motions to dismiss in which they joined the arguments of Paolillo and Mitchell. (Doc.
Nos. 14, 214).
Given the factual overlap between this matter and the Delaware Bankruptcy Case, and the
lack of any definitive action on the part of the Chapter 7 Trustee or the defendants in the
Delaware Bankruptcy Court to stay the matter pending resolution of the proceedings there,
presiding Bankruptcy Judge Brendan L. Shannon held a status conference (the “Delaware Status
Conference”) on May 23, 2013. (Doc. Nos. 32, 34, Att. 1, Ex. A, “Del. B.R. Transcript”).

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28 U.S.C. § 1452(a): “A party may remove any claim or cause of action in a civil action . . . to
the district court for the district where such civil action is pending, if such district court has
jurisdiction of such claim or cause of action under section 1334 of this title.”
28 U.S.C. § 1334(a): “Except as provided in subsection (b) of this section, the district courts
shall have original and exclusive jurisdiction of all cases under title 11.”
28 U.S.C. § 1334(b): “. . .the district courts shall have original but not exclusive jurisdiction of
all civil proceedings arising under title 11, or arising in or related to cases under title 11.”

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At the Delaware Status Conference, the Chapter 7 Trustee indicated that those portions of
NASDAQ’s complaint alleging fraudulent transfers through or from Princeton are not in the
estate’s field of interest, as those particular assets were not and never would be part of the estate.
(Doc. No. 34, Att. 1, Ex. A, Del. B.R. Transcript, 4:8-21). The Trustee did indicate, however,
that claims concerning the assets of Brokerage are, in the first instance, claims of the estate, but
whether the estate would pursue them was an open question pending a possible cost-benefit
analysis. (Doc. No. 34, Att. 1, Ex. A, Del. B.R. Transcript, 4:6-25; 5:1-4). The Trustee also
indicated a desire to discuss with NASDAQ which claims in the complaint may belong to the
estate, and where applicable, whether the estate would consent to their pursuit by NASDAQ.
(Doc. No. 34, Att. 1, Ex. A, Del. B.R. Transcript, 5:18-24).
NASDAQ agreed with the Trustee’s recitation of the facts and the need for a discussion
on sorting claims. (Doc. No. 34, Att. 1, Ex. A, Del. B.R. Transcript, 6:16-18). NASDAQ further
emphasized the presence of claims in the Amended Complaint unquestionably separate from the
debtor estate, such as those against individual defendants for tort wrongs or wrongs committed
directly against NASDAQ. (Doc. No. 34, Att. 1, Ex. A, Del. B.R. Transcript, 6:19-24). Counsel
for Paolillo also spoke, summarizing some of the procedural history in the present matter and
contending that, while defense counsel did not seek relief from the Bankruptcy Court, the
Delaware Status Conference appeared to indicate a changing “landscape” with respect to the
pending motions. (Doc. No. 34, Att. 1, Ex. A, Del. B.R. Transcript, 9-11).
On June 7, 2013, this Court held an in-person status conference for NASDAQ and the
moving defendants. After a further review of the papers in light of the conference, the Court has
determined it appropriate to abstain with regards to this matter and remand to State Court. As
such, the following discussion engages only in the question of abstention.

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DISCUSSION
NASDAQ’s motion to abstain and/or remand proposes three grounds on which the Court
might decline jurisdiction and permit this case to proceed in State Court: (1) mandatory
abstention; (2) permissive abstention; and (3) equitable remand. Beginning with mandatory
abstention, the applicable statute provides that:
Upon timely motion of a party in a proceeding based upon a State law claim or State law
cause of action, related to a case under title 11 but not arising under title 11 or arising in a
case under title 11, with respect to which an action could not have been commenced in a
court of the United States absent jurisdiction under this section, the district court shall
abstain from hearing such proceeding if an action is commenced, and can be timely
adjudicated, in a State forum of appropriate jurisdiction.
28 U.S.C. § 1334(c)(2). Given NASDAQ’s timely motion to abstain and the fact that only
nondebtors and state law claims are involved, this Court would ordinarily abstain without further
consideration.
Given the briefing and the information gleaned at the status conferences, however, it
appears there is some question as to whether or not the pending matter touches upon the property
of the estate, which is currently the subject of an automatic stay and under the control of the
Chapter 7 Trustee. Linked to this concern is the issue of whether the suspect claims are properly
considered “core” under 28 U.S.C. § 157, the statute which establishes the procedures by which
a bankruptcy court may hear certain matters and the district court may make referrals. Matters
involving core proceedings under 28 U.S.C. § 157 fall outside of the purview of mandatory
abstention. See, e.g., Balcor/Morristown Ltd. Partnership v. Vector Whippany Assocs., 181 B.R.
781, 789 (D.N.J. 1995) (finding that Congress has incorporated the core/non-core distinction
enshrined in 28 U.S.C. § 157 into whether or not mandatory abstention applies).

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“Although § 157(b) does not precisely define ‘core’ proceedings, it nonetheless provides
an illustrative list of proceedings that may be considered ‘core.’” Halper v. Halper, 164 F.3d
830, 836 (3d Cir. 1999). After reviewing this list, the Court must then apply the test enumerated
by the Third Circuit whereby a proceeding is core if it (1) “invokes a substantive right provided
by title 11” or (2) “is a proceeding that, by its nature, could arise only in the context of a
bankruptcy case.” In re Integrated Health Servs., Inc., 291 B.R. 615, 618 (Bankr. D. Del. 2003)
(citing Halper, 164 F.3d at 836; Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir.1990)).
The Court finds that, while the claims in the Amended Complaint do not appear to invoke
a substantive right provided by title 11 or arise only in the context of a bankruptcy case,
fraudulent transfers of property within the debtor’s estate are included in the illustrative list of
§157(b). 28 U.S.C. § 157(a)(2) (“Core proceedings include . . . proceedings to determine, avoid,
or recover fraudulent conveyances.”). Although NASDAQ has argued vociferously in its
briefing that the Amended Complaint concerns only those assets belonging to NASDAQ that
were licensed by Brokerage, the Delaware Status Conference revealed that the Chapter 7
Trustee, at least, considers some of NASDAQ’s claims as likely touching upon property of the
estate. Thus, despite the fact that the Trustee has taken no formal action to stay or interfere with
these proceedings for the better part of two years, the Court will decline to exercise mandatory
abstention in the event that further meetings between NASDAQ and the Trustee reveal
definitively that estate property is in issue.
Turning, then, to the question of permissive abstention, the Court notes that, unlike in the
case of mandatory abstention, the issue of whether a claim is “core” does not preclude the Court
from permissively abstaining under 1334(c)(1). See, e.g., Bricker v. Martin, 348 B.R. 28, 34
(W.D. Pa. 2006), aff'd, 265 F. App'x 141 (3d Cir. 2008) (“Another critical distinction between

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mandatory and permissive abstention for purposes of this case is that, unlike section 1334(c)(2),
section 1334(c)(1) indicates that permissive abstention applies to both core and non-core
proceedings.”). Neither does the presence of a “core” issue in a complaint require the Court to
refer the matter to the Bankruptcy Court. See 28 U.S.C. § 157 (“Each district court may provide
that any or all cases under … arising in or related to a case under title 11 shall be referred to the
bankruptcy judges for the district.” (emphasis added)).
The relevant provision governing permissive abstention dictates that:
Except with respect to a case under Chapter 15 of title 11, nothing in this section prevents
a district court in the interest of justice, or in the interest of comity with State courts or
respect for State law, from abstaining from hearing a particular proceeding arising under
title 11 or arising in or related to a case under title 11.
28 U.S.C. § 1334(c)(1). In addition to these considerations, courts in this Circuit have further
consulted a somewhat flexible list of between 7 and 12 factors. The shorter, seven-factor list
principally expounded upon by the parties in briefing counsels the Court to consider:
(1) the effect on the efficient administration of the bankruptcy estate; (2) the extent to
which issues of state law predominate; (3) the difficulty or unsettled nature of the
applicable state law; (4) comity; (5) the degree of relatedness or remoteness of the
proceeding to the main bankruptcy case; (6) the existence of the right to a jury trial; and
(7) prejudice to the involuntarily removed defendants.
See, e.g., Shalom Torah Ctrs. v. Phila. Indem. Ins. Cos., Civil No. 10-6766, 2011 U.S. Dist.
LEXIS 35726, at *12 (D.N.J. Mar. 31, 2011). Other factors from the more comprehensive, 12factor list include (1) the jurisdictional basis of the case, if any, other than § 1334; (2) the
substance rather than form of an asserted core proceeding; (3) the feasibility of severing state law
claims from core bankruptcy matters to allow judgments to be entered in state court with
enforcement left to the bankruptcy court; (4) the burden of the bankruptcy court’s docket; (5) the
likelihood commencement of the proceedings in bankruptcy court involves forum shopping by
one of the parties; and (6) the presence in the proceeding of nondebtor parties. See Lemonis v.
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Doerge Cap. Collaterized Bridge Fund, L.P. (In re Holiday RV Superstores), 362 B.R. 126, 130
(D. Del. 2007).
In considering these many and varied factors, the Court must remember to apply them
flexibly, prioritizing more relevant factors like “the effect on the estate’s administration, whether
the state law issues predominate, and whether the proceeding is core or non-core.” In re Kessler,
430 B.R. 155, 166 (M.D. Pa. 2010) (maintaining further that the application of the relevant
factors is not a “mere mathematical exercise”).
Upon consideration of the law and the arguments, the Court has decided to abstain in this
matter and permit the litigation to continue in State Court, even in lieu of referral to the
Bankruptcy Court in Delaware. As a baseline matter, the Court considers the Superior Court of
New Jersey an appropriate court of jurisdiction. All of the claims asserted involve matters of
state law. While there may be a question as to whether some of the claims involve estate assets
that fall within the purview of the Chapter 7 Trustee and the Bankruptcy Court, a review of the
Amended Complaint reveals multiple claims that appear decidedly apart from matters of the
estate, even without acceptance of NASDAQ’s contention that the only assets it seeks are its
own. The State Court or the Trustee may decide differently and act accordingly upon further
review and discovery, but, at this moment, the Court does not believe the Amended Complaint
should be barred from State Court consideration.
Similarly, the Court is unconvinced that the pursuit of this litigation in State Court, as
opposed to in this Court or in the Delaware Bankruptcy Court, will have an adverse effect on the
administration of the bankruptcy estate. The present matter involves nondebtors, is rife with
nondebtor claims, and even the Trustee, while asserting the possibility that some of the claims as
currently expressed may involve property of the estate, indicated uncertainty as to whether the

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estate would ever pursue those claims. The fact that state law issues predominate only bolsters
the argument for abstention, even where the claims themselves are not particularly complex. In
re Integrated Health Servs., 291 B.R. at 620-21 (finding that “even if a matter does not involve
unsettled issues of state law, where the state law issues so predominate . . .” state court
jurisdiction is favored). Given the thin independent jurisdictional justification for maintaining
the action in this Court, the Court would prefer, in the interests of judicial economy, not to
burden the District Court’s docket with questions better resolved swiftly and effectively by our
State Court kin. A bankruptcy judge in Delaware should likewise not, where possible, be tasked
with non-bankruptcy state law claims. See, e.g., Shalom, 2011 U.S. Dist. LEXIS 35726, at *1516 (“[T]he federal court should not rush to usurp the traditional precincts of the state court.”).
Admittedly, a jury trial could be provided in both this Court and in State Court; on the
other hand, a jury trial is not guaranteed in the Delaware Bankruptcy Court. In considering
possible prejudice to the parties, the Court notes that the transfer between this Court and State
Court would be geographically equivalent, and, given that the litigation has barely advanced in
either forum, would have little detrimental effect on parties and counsel. Transfer to Delaware,
however, would involve moving this case farther away from the four individual defendants living
in the Tri-State area, and would be neutral for those living outside of either region.
Finally, the Court notes that this matter’s initial removal to federal court from state court
could arguably be seen as a means by which to delay the litigation of NASDAQ’s legitimate
claims against the individual defendants. Whether or not such effect was intended by removal,
the Court does not wish to further delay the pursuit of meritorious claims by either pausing this
litigation until completion of the Delaware Bankruptcy Case (a case which will likely never

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seriously overlap with the Amended Complaint in issue) or by adding it to the crowded dockets
of either this Court or the Delaware Bankruptcy Court.
In reaching this conclusion, the Court is sensible to concerns that concurrent and
conflicting actions in State Court and Bankruptcy Court may produce inconsistent results.
However, the Court believes that here these concerns are minimal where the Chapter 7 Trustee,
with full knowledge of this litigation, has failed to indicate that the automatic stay definitively
applies to the current Amended Complaint or that debtor property is implicated, and where
Defendants have failed to follow procedures by which the Delaware Bankruptcy Court might
extend the stay. Certainly, abstention in favor of State Court jurisdiction does not mean that
relevant claims may not be severed from the Amended Complaint as needed; in the meantime,
the litigation may advance in the forum most suited for its disposal.
CONCLUSION
For the foregoing reasons, the Court grants NASDAQ’s motion to abstain, (Doc. No. 12),
and denies the four pending motions to dismiss as moot, (Doc. Nos. 7, 10, 14, 24). An
appropriate Order accompanies this Opinion.

/s/ Anne E. Thompson
ANNE E. THOMPSON, U.S.D.J.
Dated:

June 14, 2013

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