In re Market XT Holdings Corp., Case No. 04-12078 (ALG) (Substantively Consolidated) (Bankr. S.D.N.Y. 7/20/2009), Case No. 04-12078 (ALG)
| Decision Date | 20 July 2009 |
| Docket Number | Case No. 04-12078 (ALG) |
| Parties | In re: MARKET XT HOLDINGS CORP., MKXT, LLC, MARKETXT, INC. AND EPOCH INVESTMENTS, LP f/k/a EMPYREAN INVESTMENTS, LP, Chapter 11, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
WINDELS MARX LANE, & MITTENDORF LLP, Counsel to the Responsible Officer, By: Howard L. Simon, Esq., Regina Griffin, Esq., New York, New York.
THE GORDON LAW FIRM LLP, Counsel to Chimera Capital LP, Fat Boy Partners, LLC, Gblatt, LLC & Gerstenblatt, By: Stephen F. Gordon, Esq., Boston, Massachusetts.
Before the Court is a motion filed by Alan Nisselson, the former Chapter 11 Trustee and the current Distribution Agent and Responsible Officer of the Debtor (the "Responsible Officer"), for retroactive annulment of the automatic stay in the above-captioned cases. This relief is sought (i) to validate an outstanding arbitration award of approximately $545,526 entered against Market XT Holdings Corp. (the "Debtor") after an involuntary bankruptcy petition was filed against it; and (ii) to reduce accordingly proofs of claim of approximately $37 million filed by Chimera Capital LP, Fat Boy Partners, LLC, Gblatt, LLC & Gerstenblatt (the "Claimants"). The Claimants oppose the motion.
For the reasons set forth below, the Responsible Officer's motion is granted, and the claims filed by the Claimants are reduced.
The relevant facts are undisputed. The Debtor, and its wholly-owned subsidiary, Momentum Securities, LLC ("Momentum"), provided electronic trading services to the Claimants' day-trading business through an Exclusive Trading Agreement (the "Agreement"), which required the Debtor and Momentum to offer the Claimants business terms that were at least as good as those offered to other customers. The Agreement also required the parties to arbitrate disputes through the National Association of Securities Dealers (the "NASD") in New York City.
In April 2002, the Claimants commenced an NASD arbitration against the Debtor (then sometimes known as Tradescape) and Momentum, contending that at least one other customer had received better terms and that the difference in terms amounted to approximately $3.4 million. The Claimants' NASD Statement of Claim included, among other things, a demand for the production of all documents revealing the business terms offered to Tanzman, Rock, and Kaban ("TRK"). (See ECF Doc. No. 1566, Exh. 2.) In June 2002, E*Trade Financial Corp. ("E*Trade") acquired Momentum, and the Claimants subsequently added E*Trade as a party to the arbitration. During the arbitration discovery process, the Claimants requested information and documents about business terms offered to other customers. Counsel for the Debtor (who was no longer counsel for Momentum) responded by letter, stating that his client had no documents responsive to the Claimants' discovery requests, and that "such documents, if they exist at all, are likely in the possession of Momentum Securities." (ECF Doc. No. 1655, Exh. 1.) The Claimants then filed a motion with the arbitrators to compel production of the documents, which was granted. As for the Debtor, counsel maintained its previous position and produced no documents.
Arbitration hearings began in early June 2003, with at least six witnesses testifying. A former employee of the Debtor, who was at the time an employee of Momentum, testified at length about the business terms offered to TRK. See, e.g., NASD Tr. 795:13-797:25, June 5, 2003, (ECF Doc. No. 1661, Exh. E.) During the arbitration, the Claimants also obtained documentary evidence concerning the business terms offered to TRK, as admitted by the Claimants' principal, Jared Gerstenblatt. See NASD Tr. 477:12-480:9; 488:19-489:2, June 2, 2003, (ECF Doc. No. 1661, Exh. D). NASD hearing remarks of E*Trade's counsel also referred to the documentary evidence produced at the time of the hearings:
COUNSEL: I can just illustrate this, Mr. Chairman, [TRK's] current deal. [TRK] runs a group. We produced the documents this morning, we produced some of them before . . . . All I am saying, Mr. Chairman, is that once we learned their focus, we produced the broker agreements that were the subject of their focus. There were lots of brokers . . . who have lots of agreements that are like, in some sense, [TRK's] . . . and we produced, when we knew the focus, [TRK's] and we produced Mr. Miller's. That's all. The other broker agreements, we have not produced them.
The NASD also authorized the Claimants to issue additional subpoenas to third-party customers, including the principal of TRK, to testify and to produce documents at the arbitration hearing, including among other things, copies of the agreements between TRK, the Debtor and/or Momentum.
In September 2003, during a hiatus in the arbitration proceedings, the Claimants settled their claims against E*Trade/Momentum, and the arbitration continued against the Debtor alone with two additional days of hearings in September and October. The Claimants did not call any representative of TRK to testify at the hearings. The matter was then taken under advisement by the arbitration panel on or about October 20, 2003.
On March 26, 2004, an involuntary Chapter 7 bankruptcy case was commenced against the Debtor.1 A month-and-a-half later, apparently without notice of the bankruptcy filing, the NASD rendered a decision in favor of the Claimants in the aggregate amount of $545,526, plus interest.2
In July 2005, the Claimants filed proofs of claim 95, 96, 97 and 98 against the Debtor, stating that the claims were based on the breach of the Agreement that had been the subject of the NASD arbitration. The Claimants also assert that during the course of the Debtor's bankruptcy, documents were discovered that show that TRK had been granted better business terms than those established in the arbitration proceedings. The Claimants argue that their damages were approximately $37 million, rather than $545,526, as the arbitrators found.
The Responsible Officer objected, arguing among other things, that the NASD award was preclusive as to the Claimants' claims. The Claimants replied that "since the issuance of the Arbitration Award was subsequent to the commencement of this bankruptcy case, it was issued in violation of the automatic stay and is null and void and has no force or effect and cannot be the basis of any issue preclusion doctrine." (Claimants' Mot. in Response to Claim Objection, ¶ 16, ECF Doc. No. 1526.) The Responsible Officer countered with the present motion for retroactive annulment of the automatic stay, which the Claimants oppose, arguing that retroactive annulment is not legally warranted, and, in the alternative, that the NASD award was procured by fraudulent conduct and should be vacated under § 10 of the Federal Arbitration Act, 9 U.S.C. § 10.
Section 362 of the Bankruptcy Code automatically stays the "commencement or continuation . . . of a judicial, administrative or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title . . . ." "Congress intended the stay to afford Debtor breathing room and to assure creditors of equitable distribution." In re Soares 107 F.3d 969, 977 (1st Cir. 1997), citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97. For this reason, "any proceedings or actions described in section 362(a)(1) are void and without vitality if they occur after the automatic stay takes effect." Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527 (2d Cir. 1994); Eastern Refractories Co. Inc. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir. 1998).3 This includes the issuance of an arbitration award. See Savers Fed. Savs. & Loan Ass'n v. McCarthy Constr. Co. (In re Knightsbridge Dev. Co.), 884 F.2d 145, 148-49 (4th Cir. 1989); Ellison v. Northwest Eng'g Co., 707 F.2d 1310, 1311 (11th Cir. 1983). Contrary to the Responsible Officer's contention, there is no exception that would permit the Court to treat the award as final because the dispute had been fully submitted for decision when the bankruptcy petition was filed, or to treat the issuance of the arbitrators' decision as a ministerial act. Compare Rexnord, 21 F. 3d at 527-28; with In re Best Payphones, 279 B.R. 92, 98 (Bankr.S.D.N.Y. 2002).
In this case it thus cannot be disputed that the automatic stay became effective upon the petition date and that the NASD award was null and void under Second Circuit law. Under these circumstances, the appropriate relief available to the Responsible Officer is the retroactive annulment of the automatic stay. See In re Albany Partners, Ltd., 749 F.2d 670, 675 (11th Cir. 1984). Section 362(d) of the Bankruptcy Code provides that "after notice and a hearing the court shall grant relief from the stay" by among other things, annulling the stay for cause. 11 U.S.C. § 362(d)(1). Retroactive annulment of the automatic stay "operates retroactively to the date of the filing of the petition . . . and thus validate[s] actions taken by the party at a time when he may have been unaware of the existence of the stay." Albany Partners, Ltd., 749 F.2d at 675; In re Best Payphones, 279 B.R. at 98. Courts use a case-by-case test to determine when retroactive annulment of the stay is appropriate. See In re WorldCom, 325 B.R. 511, 521 (Bankr.S.D.N.Y. 2005).
In In re Stockwell, 262 B.R. 275, 281 (Bankr.D.Vt. 2001), the Court provided a non-exclusive, disjunctive list of the reasons that courts have used for granting retroactive annulment of the automatic stay:
(1) if the creditor had actual or constructive knowledge of the bankruptcy filing and, therefore, of the stay, (2) if the debtor has acted in bad faith, (3) if there...
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