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

Filing 56

REPLY MEMORANDUM OF LAW in Support /REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF DEFENDANTS OPPOSITION TO TRUSTEES REQUEST FOR A JURY TRIAL. 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)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
IRVING H. PICARD,
:
:
Plaintiff,
:
:
11-CV-03605 (JSR)
- against :
:
SAUL B. KATZ, et al.,
:
:
Defendants.
:
:
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REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT
OF DEFENDANTS’ OPPOSITION TO TRUSTEE’S
REQUEST FOR A JURY TRIAL

TABLE OF CONTENTS
PAGE
ARGUMENT.......................................................................................................................1
THE TRUSTEE IS NOT ENTITLED TO A JURY TRIAL ...............................................1
CONCLUSION....................................................................................................................5
TABLE OF AUTHORITIES
CASES
Germain v. Conn. Nat’l Bank, 988 F. 2d 1323 (2d Cir. 1993) ........................................3, 4
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) ...................................................1, 2
Katchen v. Landy, 382 U.S. 323 (1966)...............................................................................2
N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) ...........................4
Stern v. Marshall, 131 S. Ct. 2594 (2011) .......................................................................2, 4
CONSTITUTIONAL PROVISIONS
U.S. Const. art. III................................................................................................................3
STATUTES & RULES
28 U.S.C. § 157(a) ...............................................................................................................4

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Defendants respectfully submit this memorandum of law in response to the
Trustee’s memorandum in support of his jury trial demand. The Trustee has failed to
address the fundamental question: Does the Seventh Amendment or the Bankruptcy
Code grant a jury trial right to a trustee for a claim, arising exclusively under the Code,
that is brought for the benefit of creditors? The answer is no. No authority supports the
existence of any such right in this case.
ARGUMENT
THE TRUSTEE IS NOT ENTITLED TO A JURY TRIAL
The Trustee proclaims the sanctity of jury trial rights, but, recognizing that neither
the Seventh Amendment nor the Bankruptcy Code grants him a jury trial right as to every
claim he may assert, he offers no support for his jury demand as to his equitable
subordination claim under 11 U.S.C. § 510(c). (Mem. of Law in Support of the Tr.’s
Right to a Jury Trial (“Trustee Br.”) at 2.) The question, then, is whether the Trustee has
a right to a jury with regard to his claim for intentional fraudulent conveyance under 11
U.S.C. § 548(a)(1)(A).
In their opening brief, Defendants explained why he does not.
In his opening brief, the Trustee first argues, based on Granfinanciera, S.A. v.
Nordberg, 492 U.S. 33 (1989), that a jury trial right automatically attaches to a fraudulent
conveyance action because it is an action at law. (Trustee Br. at 3.) But the
Granfinanciera Court found such a right, not for the debtor, but for a non-debtor, noncreditor defendant that had not submitted to bankruptcy jurisdiction by filing a claim,
based in part on the theory that the defendant could have been subjected to a fraudulent

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conveyance claim, at law, 200 years ago in England. See id. at 43. Of course, any such
claim could have been asserted only by a creditor, in a “private” litigation.
Here, in contrast, the Trustee has submitted to bankruptcy jurisdiction, and all of
the claims he asserts in this case arise from the Bankruptcy Code—not from any right
granted to BLMIS by common law. BLMIS, the transferor, did not have any right 200
years ago to assert a fraudulent conveyance claim, at law or in equity, as to its own
transfers. The Trustee’s claim under 11 U.S.C. § 548(a)(1)(A) is granted to the Trustee
for the benefit of creditors, not for BLMIS, and it is purely a creation of federal law. Cf.
Stern v. Marshall, 131 S. Ct. 2594, 2614 (2011) (state-law rights at issue were not
“completely dependent upon” a claim created by federal law). Granfinanciera therefore
provides no support for the Trustee’s jury demand with regard to his claims under 11
U.S.C. § 548(a)(1)(A), particularly as this case is one of hundreds of adversary
proceedings that collectively constitute an endeavor—undertaken by a Trustee who has
claimed to have “quasi-governmental” duties and obligations—quite distinct from a
“private” lawsuit.
The Trustee then turns to an entirely different argument, at odds with his posture
in opposition to withdrawal. The Trustee notes that thirty-nine of the many Defendants
in this case are not creditors, having filed no proofs of claim, so as to them the claims
administration process will never be invoked. (Trustee Br. at 8.) Based upon Katchen v.
Landy, 382 U.S. 323 (1966), the Trustee claims that he is entitled to a jury trial, even
though none of these Defendants has asked for a jury. (Trustee Br. at 4-6.)
His argument is unfounded.

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The Trustee cannot seriously argue that he has a jury trial right because, as to
some Defendants, he has no live claim at all—jury or non-jury. Defendants who did not
file claims have no claims subject to equitable subordination. Of the thirty-nine in that
category, the Trustee asserts that thirty-five are not targets under Section 548(a)(1)(A).
(Trustee Br. at 8.) The Trustee has no jury trial right as to every other Defendant because
he has no claim against some Defendants.
More importantly, Katchen does not give the Trustee a jury trial right just because
a defendant may have one—especially where the defendant asserts no such right. If
BLMIS possessed a claim under non-bankruptcy law as to which a jury trial right existed,
the filing of this case under the Securities Investor Protection Act might not deprive the
Trustee of that existing right. See Germain v. Conn. Nat’l Bank, 988 F. 2d 1323, 1328-29
(2d Cir. 1993). But no such claim is asserted in this case. Neither Katchen nor Germain
supports the finding of a jury trial right where one does not otherwise exist.
The Trustee then suggests that because this case is now pending in an Article III
court, a jury trial right arises in his favor. “Because the Trustee asserts fraudulent
transfer causes of action in an Article III court, he has an absolute right to a jury trial.”
(Trustee Br. at 4.) But withdrawal to this Court does not confer jury trial rights where
none previously existed. The Trustee confuses Article III with the Seventh Amendment.
They are not the same.
Article III creates the federal judiciary. See U.S. Const. art. III, § 1. Jurisdiction
over bankruptcy cases is granted to the District Court under Article III pursuant to
28 U.S.C. § 1334. See U.S. Const. art. III, § 2 (“The judicial power shall extend to all
cases, in law and equity, arising under . . . the laws of the United States . . . .”). The
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District Court may refer cases falling within that jurisdiction to the Bankruptcy Court.
See 28 U.S.C. § 157(a). However, the District Court’s ability to refer such cases is
limited by the constitutional rights of non-debtor parties to Article III courts. See Stern,
131 S. Ct. 2594; N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).
When a bankruptcy case is withdrawn to the District Court because a defendant
has a constitutional right to adjudication in an Article III court, the jurisdiction of the case
remains unchanged—the District Court simply exercises its bankruptcy jurisdiction.
Here, the jurisdictional bases for the Trustee’s lawsuit against Defendants are 11 U.S.C.
§ 1334(b) and 15 U.S.C. §§ 78eee(b)(2)(A), (b)(4), the latter of which grants jurisdiction
under SIPA and provides for referral to a Bankruptcy Court. (See Compl. ¶ 14.) The
Trustee alleges that this is a “core” bankruptcy matter. (Id. ¶ 16.) Withdrawal to this
Court did not change these essential jurisdictional characteristics and does not
spontaneously generate a jury trial right for the Trustee.
Finally, the Trustee ignores Germain’s direction that a matter cannot be tried to a
jury, and the verdict then used as a basis for equitable subordination of a creditor’s
claim—indeed, it is apparent that the Trustee intends exactly that result. Although courts
generally permit a jury trial in tandem with a non-jury trial, Germain suggests that, at
least where the Trustee contemplates leveraging a jury verdict, rendered in connection
with a claim against a non-debtor defendant, as the basis for subordination of the claims
of that defendant against the estate, no such process is appropriate. See Germain, 988
F.2d at 1332.

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CONCLUSION
For the reasons set forth above, and in their opening memorandum, Defendants
respectfully request that the Court find the Seventh Amendment inapplicable to the
Trustee’s two remaining claims in this action.
Dated: New York, New York
October 21, 2011
DAVIS POLK & WARDWELL LLP
By: /s/ Karen E. Wagner
Karen E. Wagner
Dana M. Seshens
Andrew Ditchfield
450 Lexington Avenue
New York, New York 10017
Telephone:
[phone]
Facsimile:
[phone]

Of Counsel:
Robert B. Fiske, Jr.
Robert F. Wise, Jr.

Attorneys for Defendants

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