In re Manhattan Investment Fund Ltd.

• Decision Date: 20 December 2002
• Docket Number: No. 01 Civ. 4379 NRB.,01 Civ. 4379 NRB.
• Citation: 288 B.R. 52
• Parties: In re MANHATTAN INVESTMENT FUND LTD., et al., Debtors. Helen Gredd, Chapter 11 Trustee for Manhattan Investment Fund Ltd., Plaintiff, v. Bear, Stearns Securities Corp., Defendant.
• Court: U.S. District Court — Southern District of New York

288 B.R. 52

In re MANHATTAN INVESTMENT FUND LTD., et al., Debtors.

Helen Gredd, Chapter 11 Trustee for Manhattan Investment Fund Ltd., Plaintiff, v. Bear, Stearns Securities Corp., Defendant.

No. 01 Civ. 4379 NRB.

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

December 20, 2002.

Harry S. Davis, Martin L. Perschetz, Michael L. Cook, New York City, for Bear, Stearns Securities Corp.

Helen Gredd, Daniel E. Reynolds, Carl G. Sussman, New York City, for Helen Gredd, Chapter 11 Trustee for Manhattan Investment Fund Ltd.

MEMORANDUM AND ORDER

BUCHWALD, District Judge.

Defendant Bear, Stearns Securities Corp. ("Bear Stearns" or "defendant") moves pursuant to 28 U.S.C. § 158(a)(3) and Fed. R. Bankr.P. 8001(b) and 8003, for leave to appeal from an order of the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") dated October 7, 2002 (the "Order") which denied Bear Stearns' motion to dismiss Counts I and IV of the Complaint.¹ For the following reasons, defendant's motion is denied.

BACKGROUND²

This case arises out of the bankruptcy of Manhattan Investment Fund, Ltd. (the "Fund"), an offshore hedge fund that operated from April 1996 to mid-January 2000. Michael Berger served as the investment manager and advisor for the Fund, through his wholly owned company Manhattan Capital Management, Inc. ("MCM").

The Fund's strategy was to short sell United States securities of technology companies on the theory that the companies were overvalued and their stock prices would decline.³ This strategy was a colossal failure, generating more than $394 million in net losses. As these losses accumulated, Mr. Berger began issuing false statements to investors that indicated that the Fund was profitable, and began paying off early investors with funds acquired from later investors.⁴ The scheme eventually unraveled, however, and the Securities Exchange Commission sued Mr. Berger and the Fund for securities fraud, obtaining an asset freeze and the appointment of a Receiver. In the months that followed, the Receiver, Helen Gredd, caused the Fund and its investment advisor, to file voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Ms. Gredd was appointed Chapter 11 Trustee of the Fund and MCM.

At about the same in time, in March, 2000 a class-action lawsuit against Mr. Berger, Bear Stearns, and others was brought before Judge Denise Cote of this District. See Cromer Fin. Ltd. v. Berger, 137 F.Supp.2d 452, 472 (S.D.N.Y.2001) (dismissing the claims against Bear Stearns pursuant to Federal Rule of Civil Procedure 12(b)(6)).⁵

On August 24, 2000, the United States Attorney for the Southern District of New York brought a criminal action against Mr. Berger, which charged that he committed securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934 by lying to his investors about the performance of the Fund. On November 27, 2000, Mr. Berger pled guilty to the charges against him. See United States v. Berger, 188 F.Supp.2d 307, 338 (S.D.N.Y.2002) (denying Berger's motion to withdraw his guilty plea).

The Trustee then commenced this proceeding against Bear Stearns in the Bankruptcy Court on April 24, 2001. In her complaint, the Trustee sought to avoid, pursuant to section 548(a)(1)(A) of the Bankruptcy Code, three categories of transfers that were made to Bear Stearns in connection with the Fund's short selling activities during the last ten months of its operations.⁶

In May 2001, Bear Stearns moved to withdraw the adversary proceeding from the Bankruptcy Court to the District Court, and on July 25, 2002 this Court granted Bear Stearns' motion to withdraw reference for the limited purpose of determining whether the Debtor had an interest in the alleged transfers subject to Counts II and III of the complaint. See Bear Stearns v. Gredd, 2001 WL 840187 (S.D.N.Y. July 25, 2001). Bear Stearns then moved before this Court to dismiss Counts II and III of the complaint on the grounds that the transfers sought to be avoided were not transfers of property in which the Fund had an interest. By Opinion and Order dated March 22, 2002 this Court granted Bear Stearns' motion, reinstated the reference, and remanded the remaining Counts⁷ to the Bankruptcy Court for further proceedings. See Bear, Stearns Securities Corp. v. Gredd, 275 B.R. 190, 198 (S.D.N.Y.2002).

On May 10, 2002 Bear Stearns moved before the Bankruptcy Court to dismiss both remaining counts pursuant to Bankruptcy Rules 7009(b) and 7012(a) arguing inter alia, that the Trustee had not adequately alleged that the transfers were made with "actual intent" to defraud the Fund's creditors as required under § 548(a)(1)(A) of the Bankruptcy Code. Specifically, Bear Stearns argued that the presumption of fraudulent intent that courts have applied to operators of Ponzi schemes should not be applied in this instance because the transfers at issue were made in connection with legitimate and fully disclosed trading, outside the realm of the Ponzi scheme.

By Decision and Order dated October 7, 2002, the Bankruptcy Court denied Bear Stearns' motion to dismiss Counts I and IV of the Trustee's Complaint. The Bankruptcy Court held that "by citing Berger's guilty plea and conviction coupled with the fact that margin payments were made in connection with a massive Ponzi scheme, the Trustee had sufficiently alleged facts pursuant to Bankruptcy Rules 7009(b) and 7012(a) to withstand Bear Stearns' motion to dismiss." Order at 14. In so holding, the Bankruptcy Court found that it was appropriate to apply a presumption of actual intent to defraud on the part of the Debtor "regardless of whether the payments were made to early investors or whether the debtor was engaged in a strictly classic Ponzi scheme." Order at 12.

Presently before the Court is Bear Stearns' motion pursuant to 28 U.S.C. § 158(a)(3) and Fed R. Bankr.P. 8001(b) for an order granting interlocutory leave to appeal from Judge Lifland's denial of Bear Stearns' motion to dismiss Counts I and IV of the Trustee's Complaint.

DISCUSSION

I. The Legal Standard for Interlocutory Appeal

A district court's jurisdiction to review appeals from bankruptcy court orders is governed by 28 U.S.C. § 158, which provides in relevant part:

The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders and decrees; ... and, with leave of the court from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title.

28 U.S.C. § 158(a)(emphasis supplied). In deciding whether to entertain an appeal from an interlocutory order of a bankruptcy judge, district courts generally have applied the standards of 28 U.S.C. § 1292(b). See e.g. Urban Retail Properties v. Loews Cineplex Entertainment, 2002 WL 535479 * 4 (S.D.N.Y. Apr. 9, 2002) ("The standard for determining whether leave to appeal from an interlocutory bankruptcy order should be granted ... is given by 28 U.S.C. § 1292(b), which governs interlocutory appeals from the district courts to the courts of appeal.") Under § 1292(b), a party seeking certification must demonstrate that the disputed ruling: (1) involves a controlling question of law; (2) as to which there are substantial grounds for difference of opinion; and (3) that an immediate appeal from the order may materially advance the ultimate termination of the litigation. See 28 U.S.C. § 1292(b)⁸; see also Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21, 23 (2d Cir.1990); German v. Federal Home Loan Mortgage Corp., 896 F.Supp. 1385, 1398 (S.D.N.Y.1995).

The Second Circuit has repeatedly "urged the district courts to exercise great care in making a § 1292(b) certification." Westwood Pharmaceuticals, Inc. v. National Fuel Gas Dist. Corp., 964 F.2d 85, 89 (2d Cir.1992). Certification of a permissive interlocutory appeal is limited to "extraordinary cases where appellate review might avoid protracted and expensive litigation", see German, 896 F.Supp. at 1398, and is not intended as a vehicle to provide early review of difficult rulings in hard cases. Id.; Abortion Rights Mobilization, Inc. v. Regan, 552 F.Supp. 364, 366 (S.D.N.Y.1982).

Specifically, the Second Circuit has held that challenges to the sufficiency of a pleading are not generally the appropriate subjects of interlocutory review, as "a reversal [on interlocutory appeal] at most could lead only to a remand for repleading, with possibilities of further interlocutory appeals thereafter." Gottesman v. General Motors Corp., 268 F.2d 194, 196 (2d Cir.1959) (explaining further that "[i]t would seem axiomatic that appeals challenging pre-trial rulings upholding pleadings against demurrer could not be effective in bringing nearer the termination of litigation; on the contrary, they only stimulate the parties to more and greater pre-trial sparring apart from the merits.") See also Degulis v. LXR Biotechnology, Inc., 1997 WL 20832 *3 (S.D.N.Y. Jan. 21, 1997)(citing Wright, Miller, & Cooper, Federal Practice and Procedure, Jurisdiction 2d § 3931 at 458-49 (1996) and noting that while "`decisions on the pleadings may be appropriate for interlocutory review when they present difficult questions of substantive law, rather than the technical sufficiency of the pleadings' ... [a]s a general matter, rulings on the sufficiency of the pleadings are not appropriate for interlocutory review").

II. The Order of the Bankruptcy Court Will Not Be Certified

Applying the standard for certification set forth in § 1292(b), Bear Stearns contends that the following question is the appropriate subject for interlocutory appeal:

Did the Bankruptcy Court err in applying a presumption that all transfers made by a debtor operating a Ponzi scheme, where the debtor has pled guilty or been convicted of a crime, are made with actual fraudulent intent within the meaning of 11 U.S.C. § 548(a)(1)(A), even where such transfers do...