In re Ltd.

Decision Date19 September 2011
Docket Number11 MC 230 (LAP),11 MC 237 (LAP).,11 MC 231 (LAP),Nos. 11 MC 224 (LAP),11 MC 236 (LAP),11 MC 235 (LAP),s. 11 MC 224 (LAP)
Citation458 B.R. 665
PartiesIn re FAIRFIELD SENTRY LTD., et al. Litigation.This Document Applies To All Actions.
CourtU.S. District Court — Southern District of New York

OPINION TEXT STARTS HERE

Opinion & Order

LORETTA A. PRESKA, Chief Judge.

Defendants in adversary proceedings before the Bankruptcy Court moved this Court for leave to appeal from an order of the Bankruptcy Court denying Defendants' motions to remand these cases to state court or abstain from asserting jurisdiction. In re Fairfield Sentry Ltd. ( Fairfield III ), 452 B.R. 64, 69 (Bankr.S.D.N.Y.2011). For the reasons set forth below, the motion for leave to appeal [dkt. no. 1] is granted.

Following a hearing on the motion for leave to appeal, the parties agreed to use their submissions to the Bankruptcy Court on the substantive issues as their briefs on the merits of the issues in this Court if leave to appeal were granted. In re Fairfield Sentry, Ltd., No. 11 MC 224 (S.D.N.Y. Aug. 22, 2011). This opinion and order also addresses Defendants' appeal of the Bankruptcy Court's order denying Defendants' motions to remand or abstain. After careful consideration of all of the parties' submissions in the Bankruptcy Court and in this Court as well as the arguments made in the hearing before this Court, the order of the Bankruptcy Court is reversed.

I. BACKGROUND

The facts involved in this appeal are laid out in prior orders of the Bankruptcy Court and this Court, and the Court assumes familiarity with those facts. In re Fairfield Sentry Ltd. (Fairfield I), 440 B.R. 60, 64–66 (Bankr.S.D.N.Y.2010); In re Fairfield Sentry, Ltd. ( Fairfield II ), No. 10 Civ. 7340, 2010 WL 4910119, at *1 (S.D.N.Y. Nov. 22, 2011); Fairfield III, 452 B.R. at 68–73. The Court rehearses only the facts germane to this appeal.

Plaintiffs, Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited (the “Funds”), are three Funds organized under the laws of the British Virgin Islands (“BVI”). The Funds sold shares to foreign investors and “invested” the proceeds with Bernard L. Madoff Investment Securities LLC (“BLMIS”). The Funds' shareholders could redeem their shares at will. After Madoff's fraud was exposed, the Funds' “investments” were eviscerated. As a result, each of the Funds entered liquidation proceedings in either February or April of 2009 in the BVI.

The BVI courts appointed liquidators and foreign representatives of the Plaintiffs. Beginning in April 2010, the foreign representatives began filing numerous lawsuits for Plaintiffs in the New York state courts against these and other Defendants. These Defendants are, generally, banks and the unknown beneficial holders of the interests in the Funds. Many banks purchased shares in the Funds (and were the registered owners) then resold them to individual clients, who were the beneficial owners of the shares. Plaintiffs originally made only state-law claims for money had and received, unjust enrichment, mistaken payment, and constructive trust. The theory of all of these claims, however titled, is the same: because of Madoff's fraud, the Funds miscalculated the net asset value (“NAV”) of shares, which resulted in inflated share prices upon redemption. Plaintiffs challenge the transfers made to redeem shares because the amounts paid on redemption were allegedly too high.

On June 14, 2010, the foreign representatives commenced an ancillary proceeding in the Bankruptcy Court under Chapter 15 of title 11, United States Code, seeking recognition of the BVI liquidation proceedings as “foreign main proceedings.” 11 U.S.C. §§ 1502(4), 1515. That petition was granted on July 22, 2010. Fairfield I, 440 B.R. at 66.

After this, the foreign representatives began filing substantially identical claims in the Bankruptcy Court rather than in state court. To date, over 200 substantially similar lawsuits have been filed in the state and federal courts. After recognition, the foreign representatives, under 28 U.S.C. § 1452(a), removed the actions that had been filed in state court to this Court, which referred them automatically to the Bankruptcy Court. Not all of the actions were removed simultaneously. Now, all of these lawsuits have been consolidated in the Bankruptcy Court.

Before recognition, the foreign representatives commenced in the New York state courts the 41 lawsuits against the present Defendants, claiming over $3 billion. These Defendants filed the motions to remand or abstain in the Bankruptcy Court on October 4, 2010, arguing that the Bankruptcy Court lacked subject matter jurisdiction and that it should abstain from hearing these cases. In addition, certain defendants claimed that the removal of the actions against them was untimely.

After the remand motions were filed, the foreign representatives amended 34 of the instant actions in January 2011 to include statutory claims under BVI law for “unfair preferences” and “undervalue transactions.” These claims target transfers made within the vulnerability period under BVI law. Nevertheless, the essential facts to be determined are identical to the state-law claims for mistaken payment.

On May 23, 2011, the bankruptcy court denied the remand motion. Fairfield III, 452 B.R. at 69. The bankruptcy court ruled that it had “core” bankruptcy jurisdiction under 28 U.S.C. § 1334(a) “over the BVI Avoidance Claims in particular, and the Actions as a whole” because they “directly affect[ ] this Court's core bankruptcy functions under chapter 15.” Id. at 74; see id. at 74–82. In the alternative, the court ruled that it had “related to” jurisdiction because the actions are related to the Plaintiffs' Chapter 15 case. Id. at 82. The court also ruled that it would not abstain under either the mandatory or permissive standards. Id. at 83–86. It also sua sponte enlarged the time period for removal of the allegedly untimely removed actions. Id. at 87–91. This Court granted Defendants' motion for a stay pending leave to appeal on July 14, 2011, and extended that stay at oral argument until a decision on the motion for leave to appeal was rendered.

II. LEAVE TO APPEAL

This Court has discretion to grant an interlocutory appeal of an order of the Bankruptcy Court. 28 U.S.C. § 158(a)(3). In exercising that discretion, courts have looked for guidance to 28 U.S.C. § 1292(b) and have granted such leave where (a) the order involves a controlling question of law; (b) there is a substantial ground for difference of opinion; and (c) an immediate appeal may materially advance the ultimate termination of the litigation. In re Adelphia Commc'ns Corp., 333 B.R. 649, 658 (S.D.N.Y.2005). [T]he ‘question of law’ must refer to a ‘pure’ question of law that the reviewing court could decide quickly and cleanly without having to study the record. The question must also be ‘controlling’ in the sense that reversal of the bankruptcy court would terminate the action, or at a minimum that determination of the issue on appeal would materially affect the litigation's outcome.” Id. A ‘substantial ground for a difference of opinion’ must arise out of a genuine doubt as to the correct applicable legal standard relied on in the order. Substantial ground would exist if the issue is difficult and of first impression.” Id. at 658–59. Normally, leave to appeal is granted where “exceptional circumstances” are present. Id. at 658.

This case presents issues of first impression regarding federal subject matter jurisdiction of the bankruptcy courts in a Chapter 15 case. The issues, as the discussion below shows, are nuanced and difficult, involve a new statutory scheme, and reach questions about the limits of the bankruptcy court's jurisdiction. There are substantial grounds for differences of opinion not only with respect to the Bankruptcy Court's determinations as to jurisdiction but also with respect to its determination as to abstention. Moreover, the issues are pure issues of law. The litigation has barely progressed, and little, if any, discovery has even been conducted. Fairfield II, 2010 WL 4910119, at *1. The substantive issues can be decided on the basis of the amended complaints. Finally, the determination of subject matter jurisdiction is not only of utmost importance in federal court but also would materially affect the litigation's outcome. Wynn v. AC Rochester, 273 F.3d 153, 157 (2d Cir.2001). In short, leave to appeal is granted because this case presents the sort of exceptional circumstances other courts have found when granting such a motion. See In re DPH Holdings Corp., 437 B.R. 88, 93–94 (S.D.N.Y.2010). The Court grants Defendants' motions for leave to appeal.

III. MERITS OF THE APPEAL

On appeal, Defendants' primary argument is that the Bankruptcy Court erred in determining that it had subject matter jurisdiction. First, Defendants argue that there is no “core” bankruptcy jurisdiction because these actions have no connection to the United States and are not cases arising “in” or “under” title 11. See 28 U.S.C. § 1334(b). They say that Plaintiffs' claims are independent of the United States Bankruptcy Code (and bankruptcy generally) and involve foreign plaintiffs seeking foreign transfers from foreign entities. Second, Defendants argue that the Bankruptcy Court erred in determining that it has “related to” or “non-core” jurisdiction over these actions. Defendants also argue that the Bankruptcy Court erred in failing to abstain from exercising jurisdiction under either the mandatory or permissive standards governing the decision to abstain. Certain Defendants finally argue that the Bankruptcy Court erred in sua sponte enlarging the time period for filing a notice of removal.

After outlining the standard of review and principles of federal subject matter jurisdiction in the bankruptcy context, the Court addresses Defendants' arguments in turn, beginning with “core” jurisdiction.

A. Standard of Review

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