Bernard L. Madoff Inv. Sec. LLC v. BAM L.P. (In re Bernard L. Madoff Inv. Sec. LLC)

• Decision Date: 26 February 2020
• Docket Number: 18-CV-9916 (VSB),19-CV-812 (VSB)
• Citation: 612 B.R. 257
• Parties: IN RE BERNARD L. MADOFF INVESTMENT SECURITIES LLC Bernard L. Madoff Investment Securities LLC, Debtor. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff-Appellee, v. BAM L.P., et al., Defendants-Appellants.
• Court: U.S. District Court — Southern District of New York

612 B.R. 257

IN RE BERNARD L. MADOFF INVESTMENT SECURITIES LLCBernard L. Madoff Investment Securities LLC, Debtor.Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff-Appellee,

v.BAM L.P., et al., Defendants-Appellants.

18-CV-9916 (VSB)

19-CV-812 (VSB)

United States District Court, S.D. New York.

Signed February 26, 2020

David J. Sheehan, Nicholas J. Cremona, Stacey Ann Bell, Baker & Hostetler LLP, New York, NY, Counsel for Plaintiff-Appellee

Carole Neville, Dentons US LLP, New York, NY, Counsel for Defendants-Appellants

OPINION & ORDER

Vernon S. Broderick, United States District Judge

Before me is Defendants' motion to withdraw the bankruptcy reference pursuant to 28 U.S.C. § 157(d), (Doc. 1), as well as Defendants' motion for leave to appeal pursuant to 28 U.S.C. § 158(a), (Doc. 25-2; see also In Re: Bernard L. Madoff Investment Securities LLC , 19-cv-812, Doc. 1).¹ Because Defendants filed customer claims against the bankruptcy estate, Defendants "trigger[ed] the process of ‘allowance and disallowance of claims,’ thereby subjecting [themselves] to the bankruptcy court's equitable power." Langenkamp v. Culp , 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (citing Granfinanciera, S.A. v. Nordberg , 492 U.S. 33, 58–59 n.14, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) ). Accordingly, Defendants' motions are DENIED.

I. Factual Background and Procedural History ²

The instant case stems from a Securities Investor Protection Act ("SIPA"), 15 U.S.C. §§ 78aaa et seq. , liquidation proceeding brought by the Securities Investor Protection Corporation against Bernard L. Madoff Investment Securities LLC ("BLMIS"). The liquidation proceeding was commenced on December 15, 2008 when Judge Louis L. Stanton referred the case to the Bankruptcy Court pursuant to SIPA § 78eee(b)(4). (See Sec. Inv'r Prot. Corp. v. BLMIS , Adv. Pro. No. 08-01789 (SMB) (Bankr. S.D.N.Y. Dec. 15, 2008), ECF No. 1.) On December 23, 2008, the Bankruptcy Court entered a claims procedure order, prescribing the procedure for BLMIS customers to file customer claims against the estate. (See Id. at ECF No. 12.) Pursuant to this order, on June 16, 2009, Defendants Michael Mann, Meryl Mann, and BAM L.P. served Trustee Irving H. Picard (the "Trustee") with statements of claims, seeking to recover purported outstanding balances in their BLMIS accounts. See Sec. Inv'r Prot. Corp. v. BLMIS , 597 B.R. 466, 472 (Bankr. S.D.N.Y. 2019). The Trustee denied the Defendants' claims, explaining that no securities were ever purchased for their BLMIS accounts, and that the Defendants withdrew more than they deposited into their accounts over the lives of the accounts. Id. In response, on September 25, 2009, Defendants filed objections to the Trustee's determinations. (See Sec. Inv'r Prot. Corp. , Adv. Pro. No. 08-01789 (SMB), ECF Nos. 461, 815.)

The Trustee filed his original complaint commencing the adversary proceeding against Defendants on November 30, 2010. See Sec. Inv'r Prot. Corp. , 597 B.R. at 472 ; (Picard v. Bam L.P., et al. , Adv. Pro. No. 10-04390 (SMB) (Bankr. S.D.N.Y. Nov. 30, 2010), ECF No. 1). The complaint asserted, in relevant part, claims pursuant to sections 548(a) and 550(a) of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq , seeking to avoid and recover the alleged excess transfers from Defendants' BLMIS accounts to Defendants. Id. After the adversary proceeding was commenced, the Bankruptcy Court overruled Defendants' objection to the Trustee's calculation of Defendants' net equity, see Sec. Inv'r Prot. Corp. v. BLMIS , 496 B.R. 744, 761 (Bankr. S.D.N.Y. 2013), which was appealed to and affirmed by the Second Circuit, see In re BLMIS , 779 F.3d 74 (2d Cir. 2015). The Supreme Court denied a petition for a writ of certiorari later that year. See Peshkin v. Picard , ––– U.S. ––––, 136 S. Ct. 218, 193 L.Ed.2d 130 (2015).

Discovery in the Trustee's adversary proceeding concluded in February of 2015, and on September 26, 2018, the Bankruptcy Court held a pre-trial conference in the proceeding and set a trial date for December 3, 2018. See Sec. Inv'r Prot. Corp. , 597 B.R. at 472 ; (Picard , Adv. Pro. No. 10-04390, ECF No. 110). At the conference, Defendants expressed their desire to withdraw their customer claims and file a motion to withdraw the bankruptcy reference for lack of jurisdiction. Sec. Inv'r Prot. Corp. , 597 B.R. at 472. Bankruptcy Judge Bernstein invited briefing on whether the withdrawal of Defendants' customer claims on the eve of trial would deprive the Bankruptcy Court of jurisdiction to decide the Trustee's §§ 548(a) and 550(a) claims, which the parties later submitted. (See Picard , Adv. Pro. No. 10-04390, ECF Nos. 131, 132, 137.)

On October 26, 2018, Defendants filed a motion to withdraw the bankruptcy reference pursuant to 28 U.S.C. § 157(d). (Doc. 1.)³ At a November 28, 2018 hearing, Bankruptcy Judge Bernstein granted a stay of the scheduled trial pending my ruling on the motion to withdraw. (See Picard , Adv. Pro. No. 10-04390, ECF No. 130.) Additionally, Bankruptcy Judge Bernstein heard Defendants' motion to withdraw the customer claims, and on December 20, 2018, entered an order granting a withdrawal of Defendants' claims with prejudice. (Id. at ECF Nos. 130, 138.) However, on January 18, 2019, Bankruptcy Judge Bernstein entered his Memorandum Decision and Order Upholding Court's Equitable Jurisdiction, rejecting Defendants' arguments that the voluntary withdrawal of their customer claims on the eve of trial deprived the Bankruptcy Court of jurisdiction over the Trustee's claims. Sec. Inv'r Prot. Corp. v. BLMIS , 597 B.R. at 472.

On January 28, 2019, Defendants filed their motion for leave to appeal the decision pursuant to 28 U.S.C. § 158(a). (Doc. 25-2; see also In Re: BLMIS , 19-cv-812, Doc. 1.) Finally, on January 10, 2020, the parties notified me that Bankruptcy Judge Bernstein has since granted in part and denied in part the Trustee's motion for summary judgment on its §§ 548(a) and 550(a) claims. (Docs. 26, 27.)

II. Legal Standards

A. Motion to Withdraw

District courts have "original but not exclusive jurisdiction" over all bankruptcy proceedings. See 28 U.S.C. § 1334(b).⁴ In this district, all proceedings arising under Title 11 of the United States Code are automatically referred to the United States Bankruptcy Court for the Southern District of New York. See Amended Standing Order of Reference, M10-468 (S.D.N.Y. Jan. 31, 2012) (Preska, C.J.) (referring all bankruptcy matters to the bankruptcy court pursuant to 28 U.S.C. § 157(a) ). Once a Title 11 proceeding has been referred to the bankruptcy court, the district court's authority to withdraw the reference is governed by 28 U.S.C. § 157, which sets forth the standards for mandatory and permissive withdrawal. 28 U.S.C. § 157(d) provides, "[t]he 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." Section 157 does not define the term "cause." See S. St. Seaport Ltd. P'ship v. Burger Boys, Inc. (In re Burger Boys, Inc.) , 94 F.3d 755, 762 (2d Cir. 1996).

In deciding whether there is "cause" to withdraw a bankruptcy reference, the Second Circuit has outlined several factors a district court should consider, 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." In re Orion Pictures Corp. , 4 F.3d 1095, 1101 (2d Cir. 1993). A claim qualifies as a "core" bankruptcy claim where it "invokes a substantive right under [T]itle 11, or could only arise in the context of a bankruptcy case." Joremi Enters., Inc. v. Hershkowitz (In re New 118th LLC) , 396 B.R. 885, 890 (Bankr. S.D.N.Y. 2008). " Section 157 ... contains a non-exhaustive list of ‘core proceedings,’ " In re CBI Holding Co. , 529 F.3d 432, 460 (2d Cir. 2008), which includes the "allowance or disallowance of claims against the estate" and "proceedings to determine, avoid, or recover fraudulent conveyances." 28 U.S.C. §§ 157(b)(2)(B), (H). Although withdrawal of a reference is less often appropriate where a claim falls within a bankruptcy court's core jurisdiction, "[a]fter the District Court ‘makes the core/non-core determination, it should weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administration, the prevention of forum shopping, and other related factors,’ such as the presence of a jury demand." In re Lehman Bros. Holdings Inc. , 18 F. Supp. 3d 553, 557 (S.D.N.Y. 2014) (quoting In re Orion Pictures Corp. , 4 F.3d at 1101 ). "The moving party bears the burden of demonstrating that permissive withdrawal of the reference is warranted," id. (citing Nisselson v. Salim (In re Big Apple Volkswagon, LLC) , No. 12 Civ. 92(PGG), 2013 WL 1245548, at *3 (S.D.N.Y. Mar. 25, 2013) ), and the Court has "broad discretion to withdraw the reference for cause," In re Haynes , Nos. 14 CV 4171(VB), 14 CV 6183(VB), 14 CV 7525 (VB), 2015 WL 862061, at *2 (S.D.N.Y. Mar. 2, 2015) (internal quotation marks omitted).

In Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the Supreme Court recognized that "statutory authority to enter judgment" on a "core" claim under § 157 does not automatically give a bankruptcy court "the constitutional authority to do so." 564 U.S. at 469, 131 S.Ct. 2594 ; see also Exec. Benefits Ins. Agency v. Arkison , 573 U.S. 25, 35, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014) (" Stern made clear that some claims labeled by Congress as ‘core’ may not be adjudicated by a bankruptcy court in the manner designated by § 157(b)."). "Thus, ‘post- Stern , district courts must further analyze whether the nature of the core proceeding allows the [b]ankruptcy [c]ourt to issue a final judgment.’ " Picard for...