Ecurities Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

• Decision Date: 06 February 2013
• Docket Number: Adversary Nos. 08–1789 (BRL), 12–02047 (BRL).,No. 12 Civ. 9408 (VM).,12 Civ. 9408 (VM).
• Citation: 486 B.R. 579
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re Bernard L. Madoff, Debtor. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff, v. Fairfield Greenwich Limited, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

486 B.R. 579

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v.BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.

In re Bernard L. Madoff, Debtor.

Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC, Plaintiff,

v.Fairfield Greenwich Limited, et al., Defendants.

Adversary Nos. 08–1789 (BRL), 12–02047 (BRL).

No. 12 Civ. 9408 (VM).

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

Feb. 6, 2013.

David J. Sheehan, Deborah Hilarie Renner, Marc E. Hirschfield, Nicholas J. Cremona, Thomas Leslie Long, Tracy Lynn Cole, Baker & Hostetler LLP, Keith R. Murphy, United States Attorney's Office, Southern District of New York, Mark Allen Kornfeld, Hogan & Hartson L.L.P., New York City, NY, for Plaintiff.

Peter Eric Kazanoff, Jeffrey Edward Baldwin, Jeffrey Lawrence Roether, Mark Geoffrey Cunha, Simpson Thacher & Bartlett LLP, David A. Barrett, Howard L. Vickery, II, Boies, Schiller & Flexner, LLP, New York, NY, for Defendants.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

Irving Picard (the “Trustee”), trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”), instituted adversary proceeding No. 12–02047 requesting an Application for Enforcement of Automatic Stay and Related Stay Orders and Issuance of a Preliminary Injunction (the “Stay Application”) to enjoin the preliminary class action settlement reached in Anwar v. Fairfield Greenwich Ltd., No. 09 Civ. 118 (S.D.N.Y.) (“ Anwar ”). Plaintiffs Pacific West Health Medical Center Inc. Employees Retirement Trust, Harel Insurance Company Ltd., Martin and Shirley Bach Family Trust, Natalia Hatgis, Securities & Investment Company (SICO) Bahrain, Dawson Bypass Trust and St. Stephen's School (collectively the “Anwar Plaintiffs”) filed a motion to withdraw the bankruptcy reference with respect to the Trustee's Stay Application pursuant to 28 U.S.C. § 157(d) (the “Motion”). The Trustee has filed opposition to the Motion. Defendants Fairfield Greenwich Ltd., Fairfield Greenwich (Bermuda) Limited, and certain of the defendant individuals associated with those entities (collectively, the “Fairfield Defendants”) filed a declaration in support of the Anwar Plaintiffs' Motion, while reserving certain rights in connection with the matter.

For the reasons sets forth below, the Court GRANTS the Anwar Plaintiffs' Motion.

I. LEGAL STANDARD

District courts have original jurisdiction over bankruptcy cases and all civil proceedings “arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334. Pursuant to 28 U.S.C. § 157(a), the district court may refer actions within its bankruptcy jurisdiction to the bankruptcy judges of the district. The Southern District of New York has a standing order that provides for automatic reference. Notwithstanding the automatic reference, a district court has broad authorityto withdraw the reference under appropriate circumstances. See28 U.S.C. § 157(d). Section 157(d) provides for both (1) mandatory withdrawal when a court must consider federal laws other than the Bankruptcy Code and (2) permissive withdrawal for cause. See id.

A. MANDATORY WITHDRAWAL

Mandatory withdrawal of the reference is required “where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for resolution of the proceedings.” In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir.1990). “Substantial and material consideration” means “significant interpretation, as opposed to simply application, of federal laws apart from the bankruptcy statutes.” City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir.1991); Picard v. HSBC Bank PLC, 450 B.R. 406, 409 (S.D.N.Y.2011). Mandatory withdrawal does not depend on whether a matter falls within the bankruptcy court's “core” or “non-core” jurisdiction. See Exxon, 932 F.2d at 1026. Furthermore, the Court “need not evaluate the merits of the parties' positions” to determine whether withdrawal is mandatory. Bear, Stearns Sec. Corp. v. Gredd, No. 01 Civ. 4379, 2001 WL 840187, at *4 (S.D.N.Y. July 25, 2001). Rather, it is sufficient that “resolution of this matter will require substantial and material consideration of federal law outside the Bankruptcy Code.” Id. at *3. Although mandatory withdrawal does not require matters of first impression be involved, where they are, “the burden of establishing a right to mandatory withdrawal is more easily met.” Picard v. JPMorgan Chase & Co., et al., 454 B.R. 307, 312 (S.D.N.Y.2011) (quotation marks omitted); Gredd, 2001 WL 840187, at *2 (same).

B. PERMISSIVE WITHDRAWAL

Absent mandatory withdrawal, the Court has broad discretionary authority to withdraw the bankruptcy reference for cause shown. In re Enron Corp., 295 B.R. 21, 25 (S.D.N.Y.2003). In exercising its broad discretion to withdraw the bankruptcy reference, the Court should consider the following factors: (1) whether the bankruptcy court has constitutional authority to enter a final decision; ¹ (2) judicial economy; (3) uniformity in bankruptcy administration; (4) economical use of debtors' and creditors' resources; (5) reduction of forum shopping and confusion; (6) expediting the bankruptcy process and (7) the presence of a jury demand. See In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir.1993).

II. ANALYSIS

A. MANDATORY WITHDRAWAL

The Anwar Plaintiffs claim that withdrawal of the bankruptcy reference here is mandatory because the Trustee's Stay Application will require significant interpretation of the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. (“SIPA”). Specifically, the Anwar Plaintiffs assert that resolution of the Trustee's Stay Application requires (1) significant interpretation of SIPA to determine whether the relevant funds are “customer property” under SIPA, “whether this classification requires application of the automatic stay to bar lawsuits seeking to recover such funds,” and whether the Anwar causes of action are property of the BLMIS estate or “wholly separate and distinct legal rights”; (2) “substantial and material consideration of the preliminary injunction standard and the viability of the Trustee's avoidance action under SIPA”; and (3) significant interpretation of federal law on various equitable defenses. Pls.' Mot. 5–12. The Trustee disagrees, claiming that withdrawal of the reference is not necessary because, among other reasons, the Stay Application does not require the substantial and material consideration of non-bankruptcy federal law. Tr.'s Opp'n 11–19.

The Court finds that withdrawal of the bankruptcy references is mandatory because a determination of whether the Anwar Plaintiffs' independent claims against the Fairfield Defendants can become property of the BLMIS estate necessarily involves a significant interpretation of federal law outside the Bankruptcy Code.²

As a preliminary matter, the Court notes that much of the Trustee's argument goes to the merits of the dispute between the Anwar Plaintiffs and the Trustee rather than the appropriate forum in which the dispute should be adjudicated. This Court has repeatedly noted that it “need not evaluate the merits of the parties' positions” in order to determine whether withdrawal is warranted, Gredd, 2001 WL 840187, at *4. Accordingly, the Court declines to address the substantive merits of the dispute between the Trustee and the Anwar Plaintiffs regarding, among other things, whether the relevant funds and/or claims are property of the BLMIS estate.

The Court finds that the withdrawal of the reference is mandatory because the resolution of the Trustee's Stay Application will require substantial and material consideration of federal law outside of the Bankruptcy Code, including SIPA. The very nature of the Trustee's argument requires not only an interpretation of the Bankruptcy Code, but also a fundamental analysis of the nature of the Anwar Plaintiffs' legal claims themselves. The Trustee is not merely arguing that some pool of funds in possession of the Fairfield Defendants constitutes estate property—a conclusion which the Anwar Plaintiffs claim is contrary to the controlling law and which in theory could be determined by the bankruptcy court ³—but also that the Anwar Plaintiffs' claims themselves are “causes of action that belong to the Trustee, which are property of the [BLMIS] estate.” Tr.'s Opp'n 27. However, the Anwar Plaintiffs' claims, which they assert as direct investors against the Fairfield Defendants, are rooted in federal securities law and New York law.

The Trustee claims that a resolution of the Stay Application merely involves the application of federal law because actions seeking the same funds as those sought by the Trustee on behalf of the estate clearly violate the automatic stay. Tr.'s Opp'n 16–17. However, unlike the Anwar action, the authorities cited by the Trustee as violating the automatic stay involve derivative claims, not direct claims. See, e.g., Securities Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 429 B.R. 423, 431–32 (Bankr.S.D.N.Y.2010) (plaintiffs “[n]owhere ... contend that [defendants] owed a separate duty, or caused a separate harm”); Securities Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 443 B.R. 295, 312 (Bankr.S.D.N.Y.2011). The extensive analysis of the Anwar Plaintiffs' claims already undertaken by this Court in multiple opinions—including the conclusion that the Anwar Plaintiffs' surviving claims are direct rather than derivative—therefore directly implicates the substantive issues raised by the Trustee's Stay Application. See, e.g., Anwar v. Fairfield Greenwich Ltd., 728 F.Supp.2d 372, 400–02 (S.D.N.Y.2010) (finding plaintiffs properly alleged direct claims independent of the fund involving duties directly owed by the defendants to the individual investors). Because any determination of whether the Anwar Plaintiffs' direct and independent claims can become property of the BLMIS estate, either as a result of SIPA or...