Irving H. Picard v. Saul B. Katz et al

Filing 16

REPLY MEMORANDUM OF LAW in Support re: 1 MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).MOTION TO WITHDRAW THE BANKRUPTCY REFERENCE. Bankruptcy Court Case Numbers: 10-5287A, 08-1789 (BRL).. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Wagner, Karen)

Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]
Attorneys for the Sterling Defendants
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------- x
IRVING H. PICARD,
:
:
Plaintiff,
:
:
- against –
: 11-CV-03605 (JSR) (HBP)
:
SAUL B. KATZ, et al.
:
:
Defendants.
:
:
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REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF THE
STERLING DEFENDANTS’ MOTION TO WITHDRAW THE REFERENCE

TABLE OF CONTENTS
PRELIMINARY STATEMENT .........................................................................................1
ARGUMENT.......................................................................................................................2
WITHDRAWAL OF THE REFERENCE IS MANDATORY ...........................................2
1. The Trustee and SIPC Fail to Meaningfully Address Why
Withdrawal Is Not Mandatory ...........................................................................3
2. The “Net Equity” Litigation Does Not Govern This Case ................................6
3. The Motion to Withdraw the Reference Is Not a Collateral Attack ..................7
4. The Conflict between SIPA and Section 546(e) ................................................8
5. No Court Has Considered a Brokerage Customer’s Diligence Obligation........9
6. This Motion Is Timely .......................................................................................9
CONCLUSION..................................................................................................................10

i

TABLE OF AUTHORITIES
PAGE
Cases
Bear, Stearns Sec. Corp. v. Gredd, No. 01 Civ. 4379, 2001 WL 840187
(S.D.N.Y. July 25, 2001) ...............................................................................................4
Devilla v. Schriver, 245 F.3d 192 (2d Cir. 2001) ................................................................8
In re Adelphia Commc’ns Corp., No. 03 MDL 1529, 2006 WL 337667
(S.D.N.Y. Feb. 10, 2006) ...............................................................................................5
In re Boston Generating, LLC, 10 Civ. 6528, 2010 WL 4288171
(S.D.N.Y. Nov. 1, 2010) ................................................................................................4
In re Chateaugay Corp., 86 B.R. 33 (S.D.N.Y. 1987) ..................................................4, 10
In re Chateaugay Corp., 108 B.R. 27 (S.D.N.Y. 1989) ......................................................4
In re Dana Corp., 379 B.R. 449 (S.D.N.Y. 2007))..........................................................4, 5
In re Enron Corp., 04 Civ. 8177, 2004 WL 2711101 (S.D.N.Y. Nov. 23, 2004) ...............5
In re Kenval Mktg. Corp., 69 B.R. 922 (Bankr. E.D. Pa. 1987) ..........................................8
In re Fairfield Communities, Inc., No. LR-M-91-160, 1992 WL 158642
(E.D. Ark. Apr. 14, 1992) ..............................................................................................5
In re Porges, 44 F.3d 159 (2d Cir. 1995).............................................................................7
In re Schultz, 250 B.R. 22 (Bankr. E.D.N.Y. 2000) ............................................................8
In re Staff Mortgage & Inv. Corp., 625 F.2d 281 (9th Cir. 1980) .......................................8
Mishkin v. Ageloff, 220 B.R. 784 (S.D.N.Y. 1998) .............................................................5
Picard v. HSBC Bank PLC, 11 Civ. 763, 2011 WL 1544494
(S.D.N.Y. Apr. 25, 2011)...........................................................................................4, 6
Picard v. JPMorgan Chase & Co., 11 Civ. 0913, 2011 WL 2119720
(S.D.N.Y. May 23, 2011)...............................................................................................5
Picard v. Merkin, 440 B.R. 243 (Bankr. S.D.N.Y. 2010)............................................2, 7, 8
Picard v. Merkin, No. 09-1182, doc. no. 63 (Bankr. S.D.N.Y. Feb. 24, 2010) ...................9
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Stern v. Marshall, __ U.S. __, No. 10-179, 2011 WL 2472792 (June 23, 2011) ............3, 4
Statutes and Rules
11 U.S.C. § 546(e) .......................................................................................................1, 8, 9
15 U.S.C. § 78lll(11)............................................................................................................6
28 U.S.C. § 157................................................................................................................2, 3
28 U.S.C. § 157(b) ...............................................................................................................3
28 U.S.C. § 157(d) .................................................................................................1, 3, 4, 10
NYUCC Art. 8 .................................................................................................................6, 9
SEC Rule 10b-5 ...............................................................................................................6, 9
Sec. Exch. Act § 10(b) ....................................................................................................6, 9
Other Authorities
10 Collier on Bankruptcy § 7001.01 (16th ed. 2011) ..........................................................7

iii

Sterling Defendants respectfully submit this reply memorandum of law in further
support of their motion, pursuant to 28 U.S.C. § 157(d), to withdraw from the Bankruptcy
Court the reference of this adversary proceeding brought by the Trustee. 1
PRELIMINARY STATEMENT
This case requires substantial and material consideration of the critical interplay
between and among SIPA, other securities laws and regulations, and the Bankruptcy
Code. Among the key matters of first impression mandating withdrawal are the
following:
•

Does SIPA override otherwise applicable securities laws and render
brokerage customer statements—not just the last statement, but also
the many that come before it—no longer proof of a registered broker’s
legal obligations?

•

Does SIPA eliminate the otherwise applicable limits upon the
Bankruptcy Code avoidance provisions, permitting avoidance of
transfers made by a registered broker well outside the preference
period to discharge the broker’s obligations to its customers under the
federal and state securities laws?

•

Is the safe harbor of Section 546(e) of the Bankruptcy Code
inconsistent with SIPA in a SIPA liquidation triggered by a Ponzi
scheme? Is a registered broker that engaged in a Ponzi scheme and
that is liquidated under SIPA not a broker for purposes of Section
546(e)?

•

Does SIPA impose upon customers of a registered broker a retroactive
legal duty—and, if so, to whom—to investigate their broker to ensure
that payments on account of their statements are not the product of a
Ponzi scheme?
In opposing withdrawal, the Trustee and SIPC effectively ignore the relevant

question of whether withdrawal is mandated because of substantive statutory
1

Defined terms used herein have the same meaning as they did in the Sterling
Defendants’ moving memorandum.
1

considerations raised by their positions. Instead, relying principally on cases analyzing
permissive rather than mandatory withdrawal, they contend that, because this proceeding
is within the “core” bankruptcy jurisdiction and the Sterling Defendants have submitted
to that jurisdiction, this case should be adjudicated by the Bankruptcy Court. The Trustee
further argues that the “net equity” decision in the Second Circuit will determine the
outcome here and complains that the Sterling Defendants are engaged in a “collateral
attack” of the Bankruptcy Court’s decision in Picard v. Merkin.
These arguments are disingenuous at best. Where withdrawal is mandatory, a
case must be withdrawn regardless of whether it falls within the “core proceedings”
definition of 28 U.S.C. § 157 or whether defendants have filed proofs of claim. The “net
equity” litigation is directed toward an entirely distinct legal issue, resolution of which
will not decide any issue in this case, let alone all of them. The Sterling Defendants were
not parties, “technical” or otherwise, to the Merkin litigation. The Sterling Defendants
have moved with expedition, both in moving for dismissal of this case and in seeking
withdrawal.
ARGUMENT
WITHDRAWAL OF THE REFERENCE IS MANDATORY
The Trustee’s and SIPC’s arguments require substantial and material
consideration of SIPA, which alone mandates withdrawal, and of other securities laws.
Withdrawal is also mandatory because the Trustee’s and SIPC’s interpretations cause
SIPA to conflict with the other securities laws and with the Bankruptcy Code.

2

1.

The Trustee and SIPC Fail to Meaningfully
Address Why Withdrawal Is Not Mandatory

In their respective oppositions to the Sterling Defendants’ motion, neither SIPC
nor the Trustee confronts the issue presented—namely, that withdrawal of the reference
of this adversary proceeding is mandatory under 28 U.S.C. § 157(d) because it raises
significant issues of non-bankruptcy federal law, including SIPA and other securities
laws. SIPC addresses various aspects of SIPA’s history and the merits of the Sterling
Motion, while the Trustee addresses arguments not made by the Sterling Defendants. To
the extent they address withdrawal at all, they rely almost exclusively on cases addressing
permissive withdrawal, including Judge Preska’s Madoff-related Fairfield Sentry
decision and Judge Chin’s Enron decision. (Trustee Withdrawal Opp. at 13, 16.) 2 They
argue that the Trustee’s claims are matters within the “core” competence of the
Bankruptcy Court, pursuant to 28 U.S.C. § 157, and that, because the Sterling Defendants
have submitted to bankruptcy jurisdiction, withdrawal is not appropriate. (See, e.g., SIPC
Withdrawal Opp. at 14-15; Trustee Withdrawal Opp. at 14-15.)
Indeed, under Section 157 the Trustee’s claims are “core,” and the Sterling
Defendants have submitted to bankruptcy jurisdiction, but neither point is relevant. 3

2

Citations to “Trustee Withdrawal Opp.” and “SIPC Withdrawal Opp.” refer to
the Trustee’s and SIPC’s respective memoranda of law in opposition to the Sterling
Defendants’ motion to withdraw the reference.
3

Section 157(b) is not a grant of subject matter jurisdiction for “core” matters.
See Stern v. Marshall, ___ U.S. ___, No. 10-179, 2011 WL 2472792, at *11-12 (June 23,
2011). The Supreme Court has ruled that Section 157(b) is unconstitutional to the extent
that it grants authority to a non-Article III judge to “enter a final judgment on a state law
counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.”
Id. at *27. In Stern, a creditor filed a proof of claim for defamation, thereby submitting
to bankruptcy jurisdiction. He then filed a complaint against the debtor, alleging
defamation and seeking to prevent the debtor’s discharge. The debtor filed a
3

Where withdrawal of the reference is mandatory, a court does not have discretion to deny
a petition for withdrawal. See 28 U.S.C. § 157(d) (providing that the district court “shall”
withdraw a proceeding if the mandatory withdrawal standards are met); see also In re
Chateaugay Corp., 108 B.R. 27, 28 (S.D.N.Y. 1989) (“Congress intended that
[mandatory] withdrawal be required when [the] standard is met, and that it not be a
matter within the district court’s discretion.”); In re Chateaugay, 86 B.R. 33, 36-37
(S.D.N.Y. 1987) (when requirements for mandatory withdrawal are met, “a district court
does not have discretion to deny a petition for withdrawal”); accord Picard v. HSBC
Bank PLC, 11 Civ. 763, 2011 WL 1544494, at *2 (S.D.N.Y. Apr. 25, 2011) (withdrawal
“mandate[d]” when necessary requirements satisfied).
Consequently, courts frequently have withdrawn the reference of proceedings that
involve core matters because “[w]hether or not [the matter being withdrawn] is a core
proceeding is irrelevant” to mandatory withdrawal. In re Boston Generating, LLC, 10
Civ. 6528, 2010 WL 4288171, at *5 (S.D.N.Y. Nov. 1, 2010) (rejecting argument that
mandatory withdrawal was not proper for “core” claims); see also In re Dana Corp., 379
B.R. 449, 459 (S.D.N.Y. 2007) (granting motion for mandatory withdrawal of “core”
matter concerning resolution of bankruptcy claim objections); Bear, Stearns Sec. Corp. v.
Gredd, 01 Civ. 4379, 2001 WL 840187, at *3-4 (S.D.N.Y. July 25, 2001) (withdrawing
counterclaim for tortious interference with contract. The bankruptcy court issued
judgment on the debtor’s counterclaim. On appeal, the Supreme Court ruled that only an
Article III judge could issue a final judgment on the debtor’s state law counterclaim—
even though the litigation was part of a “core” proceeding and even though the plaintiff
had submitted to jurisdiction. See id. at *9-10, 27. Here, the Sterling Defendants have
asserted critical rights under non-bankruptcy federal and state law in opposition to the
Trustee’s avoidance claims. These defenses will not be resolved in the process of ruling
on the Sterling Defendants’ proofs of claim. It is respectfully submitted that the analysis
in Stern provides another basis for withdrawal of the reference to an Article III court.
4

core avoidance claims because resolution involved substantial and material consideration
of SEC rule that potentially barred avoidance).
That a party has submitted to bankruptcy jurisdiction is also irrelevant where the
conditions for mandatory withdrawal exist because submission to bankruptcy jurisdiction
does not waive the constitutional rights preserved by mandatory withdrawal.
Accordingly, courts regularly withdraw the reference where parties have filed proofs of
claim. See, e.g., In re Dana Corp., 379 B.R. at 450, 459 (finding withdrawal of reference
mandatory even though movant submitted to bankruptcy court’s jurisdiction by filing
proof of claim); In re Adelphia Commc’ns Corp., No. 03 MDL 1529, 2006 WL 337667,
at *1, 3, 5 (S.D.N.Y. Feb. 10, 2006) (withdrawing reference on mandatory and
permissive grounds even though defendants submitted proofs of claim); In re Enron
Corp., 04 Civ. 8177, 2004 WL 2711101, at *1, 4 (S.D.N.Y. Nov. 23, 2004) (granting
mandatory withdrawal even though defendants filed proofs of claim); see also, e.g., In re
Fairfield Communities, Inc., No. LR-M-91-160, 1992 WL 158642, at *2 (E.D. Ark. Apr.
14, 1992) (withdrawing the reference specifically to resolve proof of claim and rejecting
argument that submission to bankruptcy jurisdiction precluded mandatory withdrawal).
Finally, withdrawal is not inefficient here because the Bankruptcy Court has not
expended resources on the Sterling Motion and consideration of the Motion will not
require any deep familiarity with the Madoff fraud. In any event, where withdrawal is
mandatory, considerations such as judicial efficiency also are irrelevant. See Picard v.
JPMorgan Chase & Co., 11 Civ. 0913, 2011 WL 2119720, at *7 (S.D.N.Y. May 23,
2011) (requiring withdrawal notwithstanding the “bankruptcy court’s familiarity with a
statute outside of Title 11”); Mishkin v. Ageloff, 220 B.R. 784, 798-99 (S.D.N.Y. 1998)
5

(withdrawing the reference on mandatory grounds irrespective of uniformity arguments
raised by non-movants); cf. HSBC, 2011 WL 1544494, at *2 n.3, 5 (identifying
permissive withdrawal considerations and deeming resolution of permissive withdrawal
request unnecessary where withdrawal was mandatory).
2.

The “Net Equity” Litigation Does Not Govern This Case

The Trustee’s argument that the “net equity” litigation pending before the Second
Circuit precludes withdrawal of the reference of this adversary proceeding is incorrect.
(Trustee Withdrawal Opp. at 9-11, 21-22; see also SIPC Withdrawal Opp. at 22-23.) The
issues in the two matters are quite different.
The issue before the Second Circuit is the proper interpretation of “net equity,”
which defines a “customer” claim against a bankrupt broker’s estate and the SIPC Fund
under SIPA. “Net equity” is “the sum which would have been owed by the debtor to
such customer if the debtor had liquidated, by sale or purchase on the filing date, all
securities positions of such customer[.]” 15 U.S.C. § 78lll(11) (emphasis added). The
“net equity” definition is relevant only after a SIPA case commences. Before
commencement of a SIPA liquidation, SIPA does not apply, and no customer has a “net
equity” claim.
The Complaint, in contrast, asserts claims against customers, not claims by
customers, and challenges transactions that occurred long before SIPA was applicable,
during a period of time when the broker’s obligations were governed by Article 8 of the
UCC and an array of federal securities laws, including Section 10(b) and Rule 10b-5 of
the Securities Exchange Act of 1934 (“Exchange Act”). Under those laws, BLMIS was
obligated to its customers for the securities on their brokerage statements, and the
6

customers were legally entitled to make withdrawals from those accounts. No provision
of SIPA, or any other law, alters these obligations or legal entitlements simply because a
SIPA liquidation is commenced. The Trustee’s contention that SIPA permits him to
reach back decades before the SIPA filing to recover, as fraudulent, transfers that were
legal at the time they were made has nothing to do with “net equity” and is not before the
Second Circuit.
3.

The Motion to Withdraw the Reference Is Not a Collateral Attack

Equally spurious is the contention that this motion to withdraw the reference is a
collateral attack upon the Bankruptcy Court’s decision in Picard v. Merkin, 440 B.R. 243
(Bankr. S.D.N.Y. 2010). (Trustee Withdrawal Opp. at 10-11, 22-23.)
First, in his brief in opposition to the Sterling Motion, the Trustee did not contend
that the Sterling Defendants were bound by the Merkin decision—a case in which no
Sterling Defendant was a party and which was decided before any Sterling Defendant
was sued. Any such position would have been contrary to the most basic of legal
principles. See In re Porges, 44 F.3d 159, 163 n.2 (2d Cir. 1995) (“[A]n adversary
proceeding and the companion bankruptcy case constitute two distinct proceedings.”);
10 Collier on Bankruptcy § 7001.01 (16th ed. 2011) (“Adversary proceedings are
separate lawsuits within the context of a particular bankruptcy case . . . .”). Although it is
likely that the same legal issue presented in two different adversary proceedings arising
in a particular bankruptcy case will be decided in the same way by the same judge, that
practical reality is no basis to preclude mandatory withdrawal in an entirely separate case.
Second, and even more extreme, is the claim that Merkin should be considered the
law of the case. That doctrine applies to matters “decided during the course of a single
7

continuing lawsuit.” Devilla v. Schriver, 245 F.3d 192, 197 (2d Cir. 2001) (emphasis
added) (internal quotation marks omitted). “The underlying bankruptcy case and an
adversary proceeding are distinct legal actions, with very different relief sought,” In re
Kenval Mktg. Corp., 69 B.R. 922, 926-27 (Bankr. E.D. Pa. 1987), as are separate
adversary proceedings arising from the same bankruptcy case, see In re Staff Mortgage &
Inv. Corp., 625 F.2d 281, 283 (9th Cir. 1980) (law of the case doctrine inapplicable in
separate adversary proceedings arising out of same bankruptcy); In re Schultz, 250 B.R.
22, 35 (Bankr. E.D.N.Y. 2000) (law of the case inapplicable to subsequent adversary
proceeding involving same bankrupt because it was a different litigation involving
different parties). The Sterling Motion, made in a lawsuit separate from the Merkin case,
raises different legal and factual issues and requires an independent adjudication.
4.

The Conflict between SIPA and Section 546(e)

The Trustee also argues that the Merkin decision precludes consideration of the
issue of whether Section 546(e) applies to any BLMIS transfer. (Trustee Withdrawal
Opp. at 11, 23-24.)
First, as noted, the Merkin decision applies as a juridical matter only to the parties
to that case, not to any Sterling Defendant.
Second, the Trustee disingenuously argues that Judge Lifland’s decision in
Merkin “certainly did not find that any [conflict between SIPA and the Bankruptcy Code]
exists” concerning application of Section 546(e). (Trustee Withdrawal Opp. at 24.) In
fact, Judge Lifland concluded that Section 546(e) was “incompatible with SIPA” and,
thus, did not apply, Merkin, 440 B.R. at 267-68 (emphasis added), agreeing with the
Trustee’s argument in that case, see Mem. of Law in Opp’n to Mot. by Defs. Ariel Fund
8

& Gabriel Capital to Dismiss the 2d Am. Compl., Picard v. Merkin, No. 09-1182, doc.
no. 63, at 36 (Bankr. S.D.N.Y. Feb. 24, 2010) (arguing that Section 546(e) “would be
inconsistent with SIPA and inapplicable”). The Merkin case itself exemplifies the basis
for withdrawal as to the application of Section 546(e) in a SIPA case.
5.

No Court Has Considered a Brokerage
Customer’s Diligence Obligation

A key issue of first impression presented by this case is the relevant law by which
to evaluate the duty, or lack thereof, owed by brokerage customers targeted by avoidance
claims—that applicable at the time of the transfers or a different rule imposed by SIPA.
In this case, the Complaint seeks to avoid transfers of what the Trustee calls
“principal”—transfers equal to the sum of net cash deposited with BLMIS—on the
ground that the Sterling Defendants breached a duty, retroactively imposed by SIPA, to
perform due diligence on BLMIS. But at the time of the targeted transactions, the
transactions between the Sterling Defendants and BLMIS were governed by the UCC and
the federal securities laws, including Section 10(b) and Rule 10b-5 of the Exchange Act.
Those laws impose no diligence obligation on any brokerage customer and certainly no
duty to any third party. No other law imposes any such duty either. This fundamental
issue is a matter of first impression requiring substantial interpretation of SIPA and,
therefore, mandating withdrawal.
6.

This Motion Is Timely

The suggestion that the instant motion is not timely is particularly disingenuous.
(Trustee Withdrawal Opp. at 12-13.) First, as noted, the legal issues presented by the
“net equity” omnibus briefing are different than those presented here. Second, it is not
the Sterling Defendants’ position that any of the applicable bodies of law is in conflict
9

with another—it is the arguments put forward by SIPC and the Trustee that create the
conditions for mandatory withdrawal. Therefore, any motion prior to the filing by SIPC
and the Trustee of their briefs in opposition to the Sterling Motion would have been
premature. This motion was made within days after those papers, making plain that the
non-Bankruptcy Code issues to be considered were “non-speculative and necessary to the
resolution of the proceeding,” Chateaugay, 86 B.R. at 40, were filed. Briefing on the
underlying motion was also expeditious and is now complete. (See Reply Mem. of Law
in Further Support of Sterling Motion, dated June 20, 2011, attached as Exhibit G to the
Supplemental Declaration of Karen E. Wagner in Further Support of Sterling Defendants’
Motion to Withdraw the Reference.)

CONCLUSION
For the reasons set forth above and in the Sterling Defendants’ moving
memorandum, the reference of this adversary proceeding is subject to mandatory
withdrawal to this Court pursuant to 28 U.S.C. § 157(d).
Dated: New York, New York
June 24, 2011
DAVIS POLK & WARDWELL LLP
By: /s/ Karen E. Wagner
Karen E. Wagner
Dana M. Seshens
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]
Attorneys for the Sterling Defendants

10