Edward S. Weisfelner v. Leonard Blavatnik et al
Filing
35
OPINION & ORDER: The November 15 and November 21 motions to withdraw the reference in the above-captioned cases are denied without prejudice to any renewed motions to withdraw when the case is ready for trial. (Signed by Judge Denise L. Cote on 3/29/2012) (ft)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
:
In re: LYONDELL CHEMICAL COMPANY, et
:
al.,
:
Debtors,
:
----------------------------------------:
:
EDWARD S. WEISFELNER,
:
Plaintiff,
:
:
-v:
:
LEONARD BLAVATNIK, et al.,
:
Defendants.
:
:
----------------------------------------X
EDWARD S. WEISFELNER,
:
Plaintiff,
:
:
-v:
:
NAC INVESTMENTS LLC,
:
Defendant.
:
:
----------------------------------------X
11 Civ. 8251 (DLC)
11 Civ. 8445
OPINION & ORDER
APPEARANCES:
For plaintiff:
May Orenstein
Sigmund Samuel Wissner-Gross
Brown Rudnick LLP (NYC)
Seven Times Square
New York, NY 10036
For defendants Leonard Blavatnik, Access Industries Holdings
LLC, Access Industries, Inc., AI International, S.à.r.l., Nell
Limited, Lincoln Benet, Peter Thoren, Alex Blavatnik, Philip
Kassin, and BI S.à.r.l.:
Susheel Kirpalani
Alex J.B. Rossmiller
Rex Lee
Richard Irving Werder, Jr.
Quinn Emanuel Urquhart & Sullivan, LLP (NYC)
51 Madison Avenue
New York, NY 10010
For defendants the Legal Representative of the Estate of Richard
Floor (deceased) and Estate of Richard E. Floor:
James S. Dittmar
John Owen Farley
Michael Jones
Goodwin Procter, LLP (Boston)
53 State Street, Exchange Place
Boston, MA 02109
For defendants Lynn Coleman and John Fisher Gray:
John Owen Farley
Goodwin Procter, LLP (Boston)
53 State Street, Exchange Place
Boston, MA 02109
For defendant Deutsche Bank Securities, Inc.:
Jason L. Watkins
Bingham McCutchen LLP (Boston)
One Federal Street
Boston, MA 02110
For defendant Alan S. Bigman:
Adam James van Alstyne
James D. Wareham
DLA Piper US LLP (DC)
500 8th Street, N.W.,
Washington, DC 20004
Kurt Ernest Kates Ramlo
Skadden, Arps, Slate, Meagher & Flom, LLP (Los Angeles)
300 South Grand Avenue
34th Floor
Los Angeles, CA 90071
For defendant Stephen I. Chazen:
Joseph P. Moodhe
Erich O. Grosz
Debevoise & Plimpton, LLP (NYC)
919 Third Avenue, 31st Floor
New York, NY 10022
For defendant Perella Weinberg Partners LP:
Alex J.B. Rossmiller
Quinn Emanuel Urquhart & Sullivan, LLP (NYC)
2
51 Madison Avenue
New York, NY 10010
For defendants Dan F. Smith, Carol A. Anderson, Susan K. Carter,
Engen Engen, Paul S. Halata, Danny W. Huff, David J. Lesar,
David J.P. Meachin, William R. Spivey, T. Kevin DeNicola, Kerry
A. Galvin, John A. Hollinshead, James W. Bayer, W. Norman
Phillips, Kevin R. Cadenhead, Charles L. Hall, Rick Fontenot,
and Morris Gelb:
Eric D. Wade
John F. Higgins
Thomas III Woolley
Whitney V. Ables
Porter Hedges, L.L.P.
Reliant Energy Plaza
1000 Main Street
36th Floor
Houston, TX 77002
For defendant Daniel J. Murphy:
Eric D. Wade
John F. Higgins
Thomas III Woolley
Porter Hedges, L.L.P.
Reliant Energy Plaza
1000 Main Street
36th Floor
Houston, TX 77002
For defendant Edward J. Dineen:
Andrea Jacquelyn Gildea
Covington & Burling LLP
The New York Times Building
620 Eighth Avenue
New York, NY 10018
For defendant Lyondell D&O Defendants:
John F. Higgins
Porter Hedges, L.L.P.
Reliant Energy Plaza
1000 Main Street
36th Floor
Houston, TX 77002
For defendant NAG Investments, LLC:
Susheel Kirpalani
Alexander Johannes Bittner Rossmiller
3
Rex Lee
Richard Irving Werder, Jr.
Quinn Emanuel Urquhart & Sullivan, LLP (NYC)
51 Madison Avenue
New York, NY 10010
DENISE COTE, District Judge:
Defendants in the above-captioned cases move for withdrawal
of the reference to the Bankruptcy Court pursuant to 28 U.S.C. §
157(d), Bankruptcy Rule 5011, and Stern v. Marshall, 131 S. Ct.
2594 (2011) (“Stern”).1
For the reasons discussed below, the
motions to withdraw the reference are denied.
BACKGROUND
Lyondell Chemical Company (“Lyondell”) was North America’s
third largest independent, publicly-traded chemical company.
Basell AF S.C.A. (“Basell”) was a Luxembourg entity.
On
December 20, 2007, Lyondell was acquired by and merged with
Basell to create LyondellBasell Industries AF S.C.A. (“LBI”),
the third largest chemical company in the world.
On January 6,
2009, Lyondell and certain affiliates filed for relief under
1
The movants are Carol A. Anderson, James Bayer, Kevin R.
Cadenhead, Susan Carter, Stephen I. Chazen, C. Bart de Jong, T.
Kevin DeNicola, Edward Dineen, Travis Engen, Rick Fontenot,
Kerry A. Galvin, Morris Gelb, Paul S. Halata, Charles L. Hall,
John A. Hollinshead, Danny W. Huff, David Lesar, David J.P.
Meachin, Daniel Murphy, W. Norman Phillips, Jr., Dan F. Smith,
William Spivey, Access Industries, Inc., Access Industries
Holdings LLC, AI International, S.à.r.l., Nell Limited, BI
S.à.r.l., Leonard Blavatnik, Lincoln Benet, Philip Kassin, Peter
Thorén, Alex Blavatnik, NAG Investments LLC, Alan S. Bigman, and
Diane Currier (Executor of the Estate of Richard Floor).
4
Chapter 11 of the Bankruptcy Code.
LBI filed for bankruptcy on
April 24.
The Bankruptcy Court granted the Official Committee of
Unsecured Creditors (the “Committee”) standing to pursue claims
arising out of the merger of Lyondell and Basell (the “Merger”)
on July 21, 2009.
This adversary proceeding commenced the
following day, with a complaint filed on behalf of the Debtors’
estates.
In light of the complexity of the litigation, the
Bankruptcy Court divided the case into phases.
The first phase
(“Phase 1”) consisted of certain claims against financing party
defendants (“FPDs”) that needed to be tried prior to LBI’s
emergence from bankruptcy.
Trial in Phase 1 was to take place
in early December 2009.
On December 4, 2009, shortly before the scheduled start of
the trial, the Debtors advised the Bankruptcy Court of a
proposed settlement by the Debtors and the FPDs.
Following a
February 16, 2010 agreement among the parties on modifications
to the settlement, the Bankruptcy Court approved a revised
settlement on March 11, 2010 and confirmed a plan of
reorganization (the “Plan”) on April 23, 2010.
The Plan became
effective on April 30, 2010, resulting in LBI’s emergence from
bankruptcy.
5
Pursuant to the Plan, the LB Litigation Trust was
established in order to pursue estate claims that had not been
settled or otherwise disposed of pursuant to the revised
settlement of March 11, 2010 and the Plan.
Edward Weisfelner
was appointed as Trustee of the Litigation Trust (the “Trustee”)
and was substituted as the plaintiff in the first of these
actions.
The Trustee filed an amended complaint on July 23, 2010
against individuals and corporate entities involved in the
merger of Lyondell and Basell and the subsequent collapse of
LBI.
The amended complaint included twenty-one counts under the
Bankruptcy Code, state law, Delaware law, and Luxembourg law
containing the following claims:
Count 1: A constructive fraudulent transfer claim under the
bankruptcy code and state law against Nell Limited, AI
Chemical, and Leonard Blavatnik;
Count 2: An intentional fraudulent transfer claim under the
bankruptcy code and state law against Nell Limited, AI
Chemical, and Leonard Blavatnik;
Count 3: A constructive fraudulent transfer claim under the
bankruptcy code and state law against the Lyondell
Directors2 and the Lyondell Officers;3
2
The eleven Lyondell Directors are Carol A. Anderson, Susan
Carter, Stephen I. Chazen, Travis Engen, Paul S. Halata, Danny
W. Huff, David Lesar, David J.P. Meachin, Daniel Murphy, Dan F.
Smith, and William R. Spivey.
3
The eight Lyondell Officers are James Bayer, Kevin DeNicola,
Bart de Jong, Edward Dineen, Kerry Galvin, Morris Gelb, John
Hollinshead, and Norm Phillips.
6
Count 4: An intentional fraudulent transfer claim under the
bankruptcy code and state law against the Lyondell
Directors and the Lyondell Officers;
Count 5: A breach of fiduciary duty claim under Delaware
law against the Lyondell Directors;
Count 6: A mismanagement claim under Luxembourg law against
Leonard Blavatnik;
Count 7: A tort claim under Luxembourg law against Len
Blavatnik, Phil Kassin, the Estate of Richard Floor, and
Alan Bigman;
Count 8: A breach of fiduciary duty claim under Delaware
law against the Lyondell Subsidiary Directors;4
Count 9: An avoidable preference claim under the bankruptcy
code and state law against Access Industries;
Count 10: An equitable subordination claim under the
bankruptcy code against AI International;
Count 11: A fraudulent transfer claim under the bankruptcy
code and state law against Nell Limited and Perella
Weinberg;
Count 12: A breach of contract claim under state law
against Access Industries;
Count 13: An illegal dividends and redemption claim under
Delaware law against the Lyondell Directors;
Count 14: An unlawful distribution and extra-contractual
tort claim under Luxembourg law against Leonard Blavatnik,
BI S.à.r.l., Alan Bigman, Alex Blavatnik, Peter Thoren, and
the Estate of Richard Floor;
Count 15: A claim for declaratory judgment for
recharacterization of a revolving credit facility provided
for the benefit of LBI under applicable federal or state
4
The three Lyondell Subsidiary Directors are Kevin Cadenhead,
Rick Fontenot, and Charles Hall.
7
law against Access Industries, Alan Bigman, Edward Dineen,
and Morris Gelb;
Count 16: An illegal dividends and redemption claim under
Delaware law against Alan Bigman, Edward Dineen, and Morris
Gelb;
Count 17: A constructive fraudulent transfer claim under
the bankruptcy code and state law against Access
Industries;
Count 18: An aiding and abetting breach of fiduciary duty
claim under Luxembourg law against Nell Limited, Access
Industries, Inc., AI International, and AI Chemical;
Count 19: A fraudulent transfer claim under the bankruptcy
code against BI S.à.r.l.;
Count 20: A breach of fiduciary duty claim under Delaware
law against Dan Smith, Kevin DeNicola, Edward Dineen, Kerry
A. Galvin, and Norm Phillips; and
Count 21: An aiding and abetting breach of fiduciary duty
claim under Delaware law against Kevin DeNicola, Edward
Dineen, Kerry A. Galvin, and Norm Phillips.
The gravamen of the amended complaint is that senior executives
at Lyondell, Basell and other companies involved in the Merger
exaggerated the earnings potential of the two companies for
personal gain; as a result, LBI was severely under-capitalized
after the Merger and was destined to fail in the face of a
foreseeable industry downturn.
The Trustee brought a related action against NAG
Investments LLW (“NAG”) on June 16, 2011 to recover €100 million
transferred by Basell less than two weeks before the Merger.
The amended complaint in this related action (the “NAG Action”)
8
brings a claim of fraudulent transfer pursuant to the Bankruptcy
Code against NAG, and is based on the same facts that gave rise
to certain claims in the initial action brought on July 23, 2010
(the “Main Action”).
On September 24, 2010, the defendants filed thirteen
motions to dismiss under Fed. R. Civ. P. 12(b)(6) and forum non
conveniens grounds.
parties.
Five of these motions were resolved by the
On March 10, 2011, the Bankruptcy Court conducted
approximately eight hours of oral argument on the remaining
eight motions.
In August, the Honorable Robert E. Gerber stated
that “quite a bit of work has proceeded” in the course of
preparing to rule on the motions.
At the close of discovery in September, the parties filed
six motions for summary judgment involving issues that were not
dependent on the outcome of the pending motions to dismiss.
Briefing on the summary judgment motions closed in November.
On
November 15, defendants in the Main Action filed their motion to
withdraw the reference.
The motion to withdraw the reference in
the NAG Action followed shortly thereafter, on November 21.
Both motions became fully submitted on December 27.
DISCUSSION
Pursuant to the factors in Orion Pictures Corp. v. Showtime
Networks, Inc., 4 F.3d 1095, 1101 (2d Cir. 1993), as amended by
9
Stern, the motions to withdraw the reference are denied in order
to allow the bankruptcy court to issue opinions on the pending
motions.
This denial is without prejudice to any motions to
withdraw once the cases are ready for trial.
I.
Public Versus Private Rights
A brief history of the relevant case law, as well as the
relevant constitutional and statutory provisions, is necessary
to explain the denial of these motions.
Article III, Section I
of the United States Constitution provides as follows:
The judicial power of the United States shall be
vested in one Supreme Court, and in such inferior
courts as the Congress may from time to time ordain
and establish. The judges, both of the supreme and
inferior courts, shall hold their offices during good
behaviour, and shall, at stated times, receive for
their services, a compensation, which shall not be
diminished during their continuance in office.
U.S. Const. art. III § 1.
Pursuant to this Article, Congress
may not “withdraw from judicial cognizance any matter which,
from its nature, is the subject of a suit at the common law, or
in equity, or admiralty.”
Murray's Lessee v. Hoboken Land &
Improvement Co., 59 U.S. 272, 284 (1856).
There are also
matters involving public rights, however, “which may be
presented in such form that the judicial power is capable of
acting on them, and which are susceptible of judicial
determination, but which congress may or may not bring within
10
the cognizance of the courts of the United States, as it may
deem proper.”
Id.
In Northern Pipeline Construction Co. v. Marathon Pipe Line
Co., 458 U.S. 50 (1982) (“Marathon”), the Court clarified the
scope of this “public rights exception” in the context of
adjudication by Article I bankruptcy courts.
A full majority of
the Court did not reach consensus on the precise contours of the
exception, but a majority concluded that it did not encompass
the particular claim at issue -- a state law contract claim
against an entity that was not otherwise part of the bankruptcy
proceedings.
See id. at 89-91 (Rehnquist, J., concurring).
Congress could not assign final adjudicative authority of such a
claim to a bankruptcy judge “whose tenure and salary protection
do not conform to the requirements of Art. III.”
To do so would
improperly permit a bankruptcy court to exercise “‘[t]he
judicial power of the United States’ described by Art. III of
the Constitution.”
Id. at 89.
In response to the Marathon opinion, Congress enacted the
Bankruptcy Amendments and Federal Judgeship Act of 1984 (the
“1984 Act”).
The 1984 Act permits district courts to refer all
cases under title 11, all proceedings arising under title 11,
and all cases arising in or related to a case under title 11 to
bankruptcy judges.
28 U.S.C. § 157(a).
11
In this district, all
Chapter 11 cases are automatically referred to bankruptcy judges
via a standing order.
The 1984 Act divides bankruptcy-related matters into “core”
and “non-core” proceedings.
28 U.S.C. § 157(b)(1), (c)(1).
Bankruptcy courts can hear both core proceedings and non-core
proceedings that are “otherwise related” to a case under title
11.
They can enter final judgments only in core proceedings,
however, unless the parties consent.
Id.
In non-core cases
otherwise related to a case under title 11, bankruptcy courts
are authorized to “submit proposed findings of fact and
conclusions of law to the district court.”
Id. at § 157(c)(1).
The district court can enter final judgments in such cases only
after reviewing de novo any matters to which a party timely and
specifically objects.
Id.
The 1984 Act does not define “core proceedings.”
Instead,
it offers a non-exhaustive list of examples, including, inter
alia, “counterclaims by the estate against persons filing claims
against the estate,” and “proceedings to determine, avoid, or
recover fraudulent conveyances.”
Id. at § 157(b)(2); see also
Stern, 131 S.Ct. at 2605.
In Stern, the Supreme Court held that an Article I
bankruptcy court lacked constitutional authority to enter final
judgment on a state law counterclaim that is not resolved in the
process of ruling on a creditor’s proof of claim, even though
12
the claim was properly designated as “core” under the 1984 Act.
See Stern, 131 S. Ct. at 2608, 2611.
In other words, the 1984
Act had granted bankruptcy courts final adjudicative authority
over a type of claim that fell outside the public rights
exception.
See id. at 2620.
At least in this “one isolated
respect,” then, Congress had exceeded the limitations of Article
III.
Id.
The Court noted that the issue presented in the case
was “narrow,” and that it would not “meaningfully change[] the
division of labor” between bankruptcy courts and district
courts.
II.
Id.
Withdrawal of the Reference
A party can move to withdraw the reference to the
Bankruptcy Court pursuant to 28 U.S.C. § 157(d) (“§ 157(d)”),
which states:
The district court may withdraw, in whole or in part,
any case or proceeding referred under this section, on
its own motion or on timely motion of any party, for
cause shown. The district court shall, on timely
motion of a party, so withdraw a proceeding if the
court determines that resolution of the proceeding
requires consideration of both title 11 and other laws
of the United States regulating organizations or
activities affecting interstate commerce.
28 U.S.C. § 157(d).
The defendants do not argue that
withdrawal is mandatory in this case, but rather that the
reference should be withdrawn “for cause” under the
permissive standard of § 157(d).
13
Section 157(d) does not define “cause.”
Prior to
Stern, however, the Second Circuit had identified a number
of factors relevant to a determination of “cause” (the
“Orion factors”), including “whether the claim or
proceeding is core or non-core, whether it is legal or
equitable, and considerations of efficiency, prevention of
forum shopping, and uniformity in the administration of
bankruptcy law.”
Orion, 4 F.3d at 1101; see also In re
Burger Boys, Inc., 94 F.3d 755, 762 (2d Cir. 1996).
The
parties disagree on how much of this standard survives
Stern.
Under the pre-Stern standard, the “threshold” inquiry in
evaluating a request for permissive withdrawal was whether the
claim was core or non-core, because that issue determined both
“questions of efficiency and uniformity,” and “the relevance of
parties’ jury trial rights.”
In re Orion, 4 F.3d at 1101.
Consistent with the intent of Congress, core jurisdiction was to
be construed “as broadly as possible subject to the
constitutional limits established in Marathon.”
In re S.G.
Phillips Constructors, Inc., 45 F.3d 702, 705 (2d Cir. 1995).
The court further noted that “unnecessary costs could be avoided
by a single proceeding in the district court” in non-core
matters because a bankruptcy court’s rulings on such matters are
subject to de novo review.
In re Orion, 4 F.3d at 1101.
14
Conversely, it could be more efficient to hear core matters in
the bankruptcy court due to the bankruptcy court’s familiarity
with the issues.
Id.
After Stern, the core/non-core distinction may or may not
remain relevant to a district court’s withdrawal of the
reference “for cause.”
Compare Adelphia Recovery Trust v. FLP
Group, Inc., et al., No. 11 Civ. 6847 (PAC), 2012 WL 264180, at
*3
(S.D.N.Y. Jan. 30, 2012) (holding that after Stern, “a
court’s consideration of a motion to withdraw the reference to
bankruptcy court should -- in addition to the Orion factors -include consideration of” the bankruptcy court’s final
adjudicative authority) (emphasis supplied); In re Extended
Stay, Inc., Nos. 11 Civ. 5394, 11 Civ. 5395, 11 Civ. 5396, 11
Civ. 5397, 11 Civ. 5864 (JMP), 2011 WL 5532258, at *8 (S.D.N.Y.
Nov. 10, 2011) (“[T]he core/non-core distinction is still a
relevant consideration in permissive withdrawal analysis, except
to the extent Stern holds that Congress’s classification of a
claim as ‘core’ exceeds the boundaries of Article III.”) with
Dev. Specialists, Inc. v. Akin Gump v. Akin Strauss Hauer & Feld
LLP, 462 B.R. 457, 467 (S.D.N.Y. 2011) (“[A]fter Stern, one can
still apply the Orion factors but not looking at whether the
matter can be classified as ‘core’ under 28 U.S.C. § 157, but
rather at whether, under Stern, the Bankruptcy Court has the
final power to adjudicate it.” (emphasis supplied)).
15
Under
Stern, it is not the core/non-core distinction but Article III
that determines the bankruptcy court’s adjudicative authority.
Thus, a district court evaluating a motion to withdraw must
first determine whether or not the bankruptcy court has
constitutional authority to enter final judgment on the claim,
since it is on this issue that “questions of efficiency and
uniformity” certainly turn, and “the relevance of parties’ jury
trial rights” may also turn.
Cf. In re Orion, 4 F.3d at 1101.
To the extent the core/non-core distinction held a privileged
position among the Orion factors before Stern, this is no longer
the case.
III.
The Bankruptcy Court’s Adjudicative Authority
The Bankruptcy Court lacks final adjudicative authority
over all but a few of the claims in these actions.5
Stern held
that the bankruptcy court lacked constitutional authority to
enter final judgment on a state law counterclaim for at least
three reasons:
1. The claim at issue did not fall within the public rights
exception, Stern, 131 S.Ct. at 2614;
5
The parties agree that counts 1-4, 9-11, 17, and 19 contain
core claims and that the claims in counts 5-8, 13-14, 16, 18,
and 20-21 are non-core. The Trustee claims that the claims in
count 15 are core, while the defendants claim they are non-core.
In addition, the Access Parties concede that the bankruptcy
court has final adjudicative authority over the equitable
subordination claim against AI International in count 10,
because this claim would necessarily be resolved in the claims
allowance process.
16
2. The claim would not necessarily be resolved in ruling on a
creditor’s proof of claim, id. at 2608; and
3. The parties did not unanimously consent to final
adjudication by a non-Article III tribunal, id. at 2618.6
Stern thus stands for the proposition that a bankruptcy court
lacks final adjudicative authority over a core claim when each
of these three conditions is met.
See Adelphia, 2012 WL 264180,
at *3; In re Extended Stay, Inc., 2011 WL 5532258, at *5; Dev.
Specialists, 462 B.R. at 467.
Each of these three conditions is met for most of the core
claims in these actions.
The defendants are therefore correct
that Article III claims “predominate” in these proceedings.
First, many of the core claims are for fraudulent conveyance and
such claims do not fall within the public rights exception.
Fraudulent conveyance actions by a bankruptcy trustee against a
person who has not submitted a claim against a bankruptcy estate
are quintessentially suits at common law that more
nearly resemble state-law contract claims brought by a
bankrupt corporation to augment the bankruptcy estate
than they do creditors’ hierarchically ordered claims
to a pro rata share of the bankruptcy res.
Granfinanciera, S.A., et al. v. Nordberg, 492 U.S. 33, 56
(1989).
The Supreme Court determined in Granfinanciera that
6
Under Rule 7012(b), “[i]n non-core proceedings final orders and
judgments shall not be entered on the bankruptcy judge’s order
except with the express consent of the parties.” Fed. R. Bankr.
P. 7012(b). Stern suggests that consent may also provide a
sufficient basis for final adjudication over core matters that
do not fall within the public rights exception. See Stern, 131
S.Ct. at 2614.
17
such actions therefore “appear matters of private rather than
public right.”
Id.
In Stern, the Supreme Court used this determination from
Granfinanciera to support its holding on the scope of Article
III.
It concluded that, “like the fraudulent conveyance claim
at issue in Granfinanciera,” a counterclaim for tortious
interference that simply attempts to augment the bankruptcy
estate “does not fall within any of the varied formulations of
the public rights exception.”
Stern, 131 S.Ct. at 2616.
Under
both Stern and Granfinanciera, then, it is axiomatic that a
fraudulent conveyance claim against a person who has not
submitted a claim against a bankruptcy estate, brought solely to
augment the bankruptcy estate, is a matter of private right.
The Trustee brings such claims in counts 1-4, 11, 17, and 19 of
the Main Action and in the NAG Action; these claims are
therefore matters of private right.
Second, all or almost all of the Trustee’s fraudulent
conveyance claims will not necessarily be resolved in ruling on
any defendant’s proof of claim.
This is because only two
defendants, Nell Limited and AI International, filed proofs of
claim in the bankruptcy cases.
At most, then, only claims
against these two defendants will be addressed in the claims
resolution process.
18
Third, the defendants have not consented to adjudication of
these proceedings by the bankruptcy court.
Pursuant to the
bankruptcy code, as amended in August 1987, “express consent of
the parties” is required for a bankruptcy court to enter final
orders and judgments in non-core matters.
7012(b).
Fed. R. Bankr. P.
In a chart submitted to the bankruptcy judge on
September 26, 2011, the defendants expressly stated that they
did not consent to the entry of final orders by the bankruptcy
court.
The Trustee offers no alternative instance when the
defendants offered their express consent.
The Trustee contests each of these determinations.
He
contends that a bankruptcy court can, in fact, enter final
judgment on all the core fraudulent conveyance claims in light
of the multiple bases on which Stern was decided, the Stern
court’s insistence that its holding was “narrow,” the historical
practice of bankruptcy courts, and other Supreme Court
decisions.
The Trustee thus claims that these proceedings are
“dominated by claims arising under the Bankruptcy Code,” and
that withdrawal is therefore inappropriate.
The Trustee cites
to a number of decisions by bankruptcy courts in this district
and elsewhere that have reached similar conclusions.
See, e.g.,
In re Refco, Inc., 461 B.R. 181, 184-94 (Bankr. S.D.N.Y., 2011);
In re Safety Harbor Resort and Spa, 456 B.R. 703, 717-18 (Bankr.
19
M.D. Fla., Aug. 30, 2011); Miller v. Greenwish Cap. (In re Am.
Bus. Fin. Servs.), 457 B.R. 314, 319-20 (Bankr. D. Del., 2011).7
The basic rationale for these decisions is that
Granfinanciera addresses fraudulent conveyance claims in a
Seventh Amendment context, not an Article III context, and the
comments in Stern comparing the claims in that case to those in
Granfinanciera are dicta.
Furthermore, the other express
rationales for the opinion in Stern may weigh against applying
the holding in Granfinanciera to an Article III context.
re Refco, Inc., 461 B.R. at 186-94.
See In
Unlike the claim in Stern,
so the argument goes, fraudulent conveyance claims “flow from a
federal statutory scheme,” Thomas v. Union Carbide Agr. Products
Co., 473 U.S. 568, 584–585 (1985), and are “completely dependent
upon adjudication of a claim provided by federal law,” Commodity
Futures Trading Com'n v. Schor, 478 U.S. 833, 856 (1986), and
the asserted authority to decide them is limited to a
“particularized area of law.”
Marathon, 458 U.S. at 85; see
7
The Court is unaware of any district court decisions in the
Southern District of New York that have embraced the Trustee’s
reasoning on this issue. Rather, the consensus among district
courts in this district appears to be that, post-Stern,
bankruptcy courts lack authority to enter final judgments in
fraudulent conveyance actions that will not necessarily be
decided in ruling on a proof of claim, absent the parties’
consent. See, e.g., Adelphia Recovery Trust, 2012 WL 264180, at
*5; In re Coudert Bros. LLP, App. Case No. 11–2785, 2011 WL
5593147, at *8-*12 (S.D.N.Y. Sept. 23, 2011); Development
Specialists, Inc., 462 B.R. at 469.
20
also Stern, 131 S.Ct. at 2614-15 (Scalia, J., concurring); In re
Refco, Inc., 461 B.R. at 186-87.
This argument runs directly contrary to the clear language
of Stern.
Specifically, Stern provides that “[the debtor’s]
counterclaim -- like the fraudulent conveyance claim at issue in
Granfinanciera -- does not fall within any of the varied
formulations of the public rights exceptions in this Court's
cases.”
Stern, 131 S.Ct. at 2614 (emphasis supplied).
The
Court then lists each of these public rights exceptions and
explains why the counterclaim at issue in Stern -- and by
implication, the fraudulent conveyance claim in Granfinanciera - does not fit within any of them.
Id. at 2614-15.
The Stern Court compares the claim at issue in Stern to
that in Granfinanciera.
legal contexts.
It makes no mention of the differing
Stern thus leaves no room for a fraudulent
conveyance claim that is somehow a matter of private right in a
Seventh Amendment context, but a matter of public right in an
Article III context.
Simply put, fraudulent conveyance claims
in Stern and Granfinanciera are matters of either public or
private right; they cannot be both.
The Trustee argues that a number of his claims will
necessarily be resolved in ruling on a creditor’s proof of
claim.
Specifically, he contends that the fraudulent conveyance
claims against Nell Limited and the equitable subordination
21
claim against AI International are integrally related to these
parties’ proofs of claim, and are central to the actions as a
whole.
The defendants contest these assertions.
Even if the
Trustee is correct, however, a substantial majority of the
fraudulent conveyance claims have been brought against thirdparty defendants who, like the petitioners in Granfinanciera,
have not filed claims against the estate.
492 U.S. at 58.
See Granfinanciera,
It is therefore not necessary to decide this
issue in order to conclude, as the defendants claim, that
Article III claims “predominate” in these actions.
The Trustee contends that the defendants consented to final
adjudication by a bankruptcy court implicitly through, among
other things, participating in proceedings before the bankruptcy
court without objection since July 2010.
The Trustee also notes
that the bankruptcy court’s final, non-appealable order
confirming the Plan contains language specifically authorizing
the bankruptcy court to “hear and determine” the claims in these
proceedings.
He contends that this language forecloses the
defendants from contesting the bankruptcy court’s authority to
hear and determine these claims.
Under Fed. R. Bankr. P. 7012(b), which requires “express
consent of the parties” for a bankruptcy court to enter final
orders and judgments in non-core matters, mere implied consent
appears to be insufficient.
Fed R. Bankr. P. 7012(b).
22
Regardless, “a court should not lightly infer from a litigant’s
conduct consent to have private state-created rights adjudicated
by a non-Article III bankruptcy judge.”
Men’s Sportswear, Inc.
v. Sasson Jeans (In re Men’s Sportswear, Inc.), 834 F.2d 1134,
1138 (2d Cir. 1987).
There is no implied consent where, as
here, defendants seek withdrawal at the close of discovery
before any trial activities or judgment, and where new precedent
renders unclear the authority of the bankruptcy to enter final
judgment on certain claims.
indicating otherwise.
The Trustee cites to no authority
Cf. In re Coudert, 462 B.R. at 471-72
(finding a lack of consent to final adjudication before the
bankruptcy court because “a waiver of important rights should
only be found where it is fully knowing”).
The Trustee’s argument that the order confirming the Plan
contains language authorizing the bankruptcy court to “hear and
determine” these claims is similarly unavailing.
This order
confirmed the bankruptcy court’s subject matter jurisdiction; it
did not address the bankruptcy court’s authority to enter final
judgments under Article I.
Jurisdiction retention language from
a Plan, by itself, does not confer upon a bankruptcy court
authority to enter final orders.
Cf. Stern, 131 S.Ct. at 2607
(noting that the allocation of authority to enter final judgment
between the bankruptcy court and the district court “does not
implicate questions of subject matter jurisdiction”); In re 610
23
W. 142 Owners Corp., 219 B.R. 363, 373 (Bankr. S.D.N.Y. 1988)
(“A provision of the Plan by itself cannot confer core
jurisdiction over [a defendant].”).
For the above reasons, the bankruptcy court lacks final
adjudicative authority over the Trustee’s core fraudulent
conveyance claims against all parties except Nell Limited, at a
minimum.
It is left to the bankruptcy court to determine, in
the first instance, its adjudicative authority with respect to
the other claims.8
IV.
Additional Orion Factors
The bankruptcy court’s authority to enter final judgment on
claims is not determinative in deciding whether to withdraw the
reference, however.
Orion also requires an investigation into
whether this matter is legal or equitable and considerations of
“efficiency, prevention of forum shopping, and uniformity in the
administration of bankruptcy law.”
Orion, 4 F.3d at 1101.
In
this case, these other factors are decisive.
8
Section 157 directs bankruptcy judges to determine “whether a
proceeding is a core proceeding under this subsection or is a
proceeding that is otherwise related to a case under title 11.”
This provision permits the bankruptcy court to determine its own
adjudicative authority pursuant to the core/non-core distinction
in the bankruptcy code. Because Stern was not intended to
“meaningfully change[] the division of labor” between bankruptcy
courts and district courts, the bankruptcy court also has
authority to determine its adjudicative authority pursuant to
Stern and Article III, subject to review by this Court.
24
A. Efficiency
Withdrawal is not appropriate here because it would result
in significant inefficiencies.
This Court will benefit from
exposure to the bankruptcy court’s knowledge and expertise when
it rules on the outstanding motions.
The bankruptcy court has
performed the yeoman’s work of preparing these matters for
trial.
It has presided over the bankruptcy case underlying
these proceedings since January 2009.
It reviewed the evidence
developed in Phase 1 in order to approve the settlement
agreement in March 2010 and confirm the Plan in April 2010.
It
presided over pretrial proceedings in these matters from July
2010 until the defendants filed their motions to withdraw the
reference.
It oversaw discovery and motion practice, and began
work on six motions to dismiss.
This Court, on the other hand,
was only made aware of these proceedings in November 2011, and
has not performed any work on the outstanding motions, presided
over any pretrial proceedings, or overseen any discovery or
motion practice.
The bankruptcy court is well positioned to
issue proposed findings of fact and conclusions of law or final
orders or judgments on the outstanding motions, as appropriate.
The defendants make three primary arguments in support of
their contention that withdrawal will increase efficiency.
First, they claim that withdrawal is appropriate because the
bankruptcy court may not enter final judgment on fraudulent
25
conveyance claims and withdrawal would therefore eliminate
unnecessary layers of litigation.
Second, they contend that
withdrawal is appropriate because it is unclear whether, under
the bankruptcy code, the bankruptcy court can enter proposed
findings of fact and conclusions of law on core Article III
claims.
Third, they argue in the alternative that de novo
review of such claims is unnecessary and will create unnecessary
layers of litigation.
Each of these arguments is misguided.
For the reasons discussed above, the defendants are correct
that the bankruptcy court may not enter final judgment on most
of the fraudulent conveyance claims, on any non-core claims, and
possibly on other claims as well.
But they are mistaken that
the layers of litigation that this may create are unnecessary or
inefficient.
Given the extensive experience the bankruptcy
court has acquired in this matter, permitting it to rule on the
pending motions and to conduct pre-trial proceedings will be of
assistance to this Court and to the parties.
The defendants are wrong that there is uncertainty whether
the Bankruptcy Court can enter proposed findings of fact and
conclusions of law on fraudulent conveyance claims.
that Bankruptcy Court can enter such orders.
It is clear
The defendants
point out that 28 U.S.C. § 157(c)(1) and Bankruptcy Rule 9033
permit a bankruptcy court to make proposed findings of fact and
conclusions of law on claims that are designated “non-core,” but
26
there is no corresponding provision that authorizes a bankruptcy
court to enter proposed findings or conclusions in core
proceedings over which the bankruptcy court lacks authority to
enter final judgments.
The defendants claim that there is thus
a statutory “gap” with respect to claims implicated by the
holding in Stern, and the bankruptcy court may lack authority to
propose findings of fact and conclusions of law on such claims.
The defendants are mistaken.
The Supreme Court was
explicit that the question presented in Stern was “narrow,” and
that the case would not “meaningfully change[] the division of
labor” between bankruptcy courts and district courts.
131 S.Ct. at 2620.
Stern,
Disallowing bankruptcy courts from issuing
findings of fact and conclusions of law on core Article III
claims would significantly change the division of labor between
bankruptcy courts and district courts.
As evidence, one need
look no farther than the large number of motions to withdraw the
reference that have been brought before this court in the wake
of Stern, many of which advance statutory “gap” arguments
similar to those advanced here.
See, e.g., Adelphia, 2012 WL
264180, at *5-7; In re Coudert, 2011 WL 5593147, at *13; In re
Extended Stay, 2011 WL 5532258, at *8.
When Congress enacted the 1984 Act, it delegated bankruptcy
courts greater authority over core claims than non-core claims.
Post-Stern, this statutory structure should be upheld as much as
27
possible.
Cf. Alaska Airlines, Inc. v. Brock, 480 U.S. 678, 684
(1978) (“A court should refrain from invalidating more of the
statute than is necessary.” (citation omitted)).
Granting
bankruptcy courts less authority over core Article III claims
than non-core claims, as defendants urge, would not accomplish
this goal.
Moreover, Congress clearly did not anticipate the holding
in Stern when it enacted the 1984 Act.
Rather, as indicated in
the conference report to the 1984 Act, Congress intended for
core proceedings to consist of all those “matters over which the
bankruptcy court can exercise summary jurisdiction,” and to
exclude those “state-based causes of action” that bankruptcy
courts cannot finally adjudicate under Article III.
130 Cong.
Rec. S 8891 (daily ed. June 29, 1984), reprinted in 1984 U.S.
Code Cong. & Admin. News 601.
By granting bankruptcy courts
authority to issue recommended findings in all non-core matters
related to a bankruptcy proceeding, Congress intended such
authority to reach all bankruptcy-related claims that bankruptcy
courts cannot finally adjudicate under Article III.
The fact
that Congress failed in its constitutional line-drawing does not
require invalidation of this broader statutory purpose.
See
United States v. Booker, 543 U.S. 220, 246 (2005) (citation
omitted) (holding that when a portion of a statute is ruled
unconstitutional, courts should “seek to determine what Congress
28
would have intended in light of the Court’s constitutional
holding”).
Thus, pursuant to this district’s Amended Standing
Order of Reference, the bankruptcy judge shall submit proposed
findings of fact and conclusions of law to the district court in
all those core matters that it cannot finally determine.
See
Amended Standing Order of Reference, Case No. 12 Misc. 00032
(S.D.N.Y. Jan. 31, 2012).
The defendants are similarly mistaken that de novo review
is impractical and will create unnecessary layers of litigation
in this case.
The defendants argue that any findings of fact by
a trial court will be highly dependent on the credibility of
witnesses, and that it would be inappropriate for this Court to
conduct de novo review of a “cold record” when the issues in the
case are so dependent on live testimony.
This argument is
unpersuasive at this stage in the litigation, when there are
pending motions and the case is not yet trial ready.
This Court
has no intention of allowing these matters to proceed to trial,
over defendants’ objections, before a court that lacks authority
to enter final orders.
Defendants are free to raise their
witness credibility arguments again upon a renewed motion to
withdraw once the pending motions have been decided and the case
is ready for trial.
29
B.
Jury rights, forum shopping, and uniformity of
bankruptcy administration
None of the other Orion factors weigh in favor of
withdrawing the reference at this time.
The defendants have a
right to a jury trial, but they have not yet asserted this right
and the case is not yet trial-ready.
The Seventh Amendment
conveys a guarantee of a jury trial to a party litigating a
fraudulent conveyance action when the party has not filed a
claim against the bankruptcy estate and the action is not
integral to the restructuring of debtor-creditor relations.
Granfinanciera, 492 U.S. at 58-59.
If and when the defendants
assert their jury trial rights and/or the case proceeds to
trial, then, the defendants are free to move for withdrawal a
second time.
It is unclear whether the defendants are engaged in forum
shopping or simply believe that withdrawal of the reference will
reduce the time and expense of litigation.
The Trustee claims
that the bankruptcy court has issued discovery rulings adverse
to the defendants, and claims that these rulings provided the
defendants with a motive to engage in forum shopping; the
defendants note that the bankruptcy court has yet to rule on any
motions and argue that there is therefore no motive for forum
shopping.
30
Similarly, it is unclear the extent to which withdrawal
will have a negative impact on the uniformity of bankruptcy
administration.
The Trustee points to a number of allegedly
novel issues of bankruptcy law implicated by these matters and
argues that it would be useful to have the bankruptcy court’s
opinion on these issues in the first instance; the defendants
note that the matters of central importance in this dispute
revolve around non-core claims or core Article III claims, and
that the plan of reorganization was confirmed more than a year
and a half ago.
The defendants further note that because there
is no longer an estate to administer, any concerns of uniformity
of bankruptcy administration are de minimus.
It is not necessary to resolve the parties’ differences on
these issues at this time.
Regardless of the defendants’ true
motivations for moving to withdraw or the impact of withdrawal
on the uniformity of bankruptcy administration, withdrawal at
this stage would result in significant inefficiencies and is
inappropriate.
CONCLUSION
The November 15 and November 21 motions to withdraw
the reference in the above-captioned cases are denied
31
without prejudice to any renewed motions to withdraw when
the case is ready for trial.
SO ORDERED
Dated:
New York, New York
March 29, 2012
ENISE COTE
:
United Stk:l.tes District Judge
32
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