Kirschner v. Agoglia (In re Refco Inc.)

• Decision Date: 30 November 2011
• Docket Number: Adversary No. 07–3060 (RDD).,Bankruptcy No. 05–60006 (RDD).
• Citation: 55 Bankr.Ct.Dec. 226,461 B.R. 181
• Parties: In re REFCO INC., et al., Debtors.Marc S. Kirschner, As Trustee of the Refco Litigation Trust, Plaintiff, v. John D. Agoglia, Phillip R. Bennett, The Trustee(s) of the Phillip R. Bennett Three Year Annuity Trust, Edwin L. Cox, Sukhmeet “Mickey” Dhillon, The Trustee(s) of the Jasdeep Dhillon Trustee MSD Family Trust, Thomas H. Dittmer, The Trustee(s) of the Dittmer Trust, Stephen Grady, Tone N. Grant, Eric Lipoff, Santo Maggio, Peter McCarthy, Joseph Murphy, Frank Mutterer, William Sexton, Willard Sparks, Robert Trosten, Memphis Holdings LLC, MLC First Cayman Ltd., Refco Group Holdings Inc., and John Does 1 Through 10, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

461 B.R. 181

55 Bankr.Ct.Dec. 226

In re REFCO INC., et al., Debtors.Marc S. Kirschner, As Trustee of the Refco Litigation Trust, Plaintiff,

v.John D. Agoglia, Phillip R. Bennett, The Trustee(s) of the Phillip R. Bennett Three Year Annuity Trust, Edwin L. Cox, Sukhmeet “Mickey” Dhillon, The Trustee(s) of the Jasdeep Dhillon Trustee MSD Family Trust, Thomas H. Dittmer, The Trustee(s) of the Dittmer Trust, Stephen Grady, Tone N. Grant, Eric Lipoff, Santo Maggio, Peter McCarthy, Joseph Murphy, Frank Mutterer, William Sexton, Willard Sparks, Robert Trosten, Memphis Holdings LLC, MLC First Cayman Ltd., Refco Group Holdings Inc., and John Does 1 Through 10, Defendants.

Bankruptcy No. 05–60006 (RDD).

Adversary No. 07–3060 (RDD).

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

Nov. 30, 2011.

West Codenotes

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Milbank, Tweed, Hadley & McCloy LLP, by Andrew M. Leblanc, for Mark S. Kirschner, as Trustee of the Refco Litigation Trust.

Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., by Sam Blair, and Dechert LLP, by Gary J. Mennitt, for Memphis Holdings, LLC.

MEMORANDUM OF DECISION ON MEMPHIS HOLDINGS LLC'S MOTION TO DISMISS

ROBERT D. DRAIN, Bankruptcy Judge.

In this adversary proceeding, the plaintiff, as trustee of the Refco Litigation Trust (the “Trustee”) under the confirmed chapter 11 plan of Refco Inc. and its affiliated debtors, including the alleged transferor under the Trustee's complaint, Refco Group Ltd., LLC (“RGL”), has sought to avoid and recover various alleged fraudulent transfers, as well as related relief on unjust enrichment and, against certain defendants, equitable subordination grounds. The Trustee has prevailed against, settled with or dismissed his claims against most of the defendants. This Memorandum of Decision addresses the motion of one of the three remaining defendants, Memphis Holdings LLC (“MH”) to dismiss the Trustee's claims against it under Fed.R.Civ.P. 12(b)(6) as incorporated by Fed. R. Bankr.P. 7012.

The Trustee has confirmed that his claims against MH are now limited to claims for constructive fraudulent transfer and unjust enrichment; he has also confirmed that the amount at issue has been reduced to $4 million. At the same status conference, MH has confirmed that it will rest on its original motion to dismiss and the pleadings filed to date. For the reasons set forth below, MH's motion to dismiss is granted.

Jurisdiction

Jurisdiction over this proceeding derives from 28 U.S.C. § 1334(b) because the Trustee's avoidance claims under 11 U.S.C. § 544(b) specifically arise under the Bankruptcy Code and the Trustee's unjust enrichment claim (to the extent that it does not also arise under section 544 of the Bankruptcy Code) is related to these chapter 11 cases for purposes of 28 U.S.C. § 1334(b) in that it would augment the estate if successful. Such jurisdiction has continued after the confirmation of the Refco debtors' chapter 11 plan: the liquidating chapter 11 plan specifically reserved jurisdiction over litigation claims such as those asserted in this adversary proceeding, having provided for the creation of the Refco Litigation Trust to pursue such claims; and the adversary proceeding has a close nexus to the plan and the chapter 11 cases because it affects the implementation and execution of the chapter 11 plan and the litigation trust agreement incorporated in it. Rahl v. Bande, 316 B.R. 127, 133–34 (S.D.N.Y.2004); Penthouse Media Group v. Guccione (In re Gen. Media, Inc.), 335 B.R. 66, 73–74 (Bankr.S.D.N.Y.2005). See also Newby v. Enron Corp. (In re Enron Corp. Sec.), 535 F.3d 325, 335–36 (5th Cir.2008). If the Trustee is successful, the claims asserted in his complaint constitute significant assets for distribution to creditors.

This Court's jurisdiction over the adversary proceeding derives from 28 U.S.C. § 157(a), which states that each district court, having been conferred with jurisdiction under 28 U.S.C. § 1334(b), may provide that “all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district,” and the Order of Acting Chief Judge Robert J. Ward, dated July 10, 1984 (the “Standing Order of Reference”), which so provides.¹

This is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and (O). Accordingly, under 28 U.S.C. § 157(b)(1), this Court has the power to hear and determine this proceeding by final order and judgment.

The Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), however, which held that a different subsection of the Judicial Code, 28 U.S.C. § 157(b)(2)(C), unconstitutionally conferred on the bankruptcy courts, as courts established under Article I not Article III of the Constitution, the power to issue final judgments, id. at 2601, raises two issues with respect to the Court's power to decide this proceeding. The first is whether this proceeding to determine, avoid and recover a fraudulent transfer and a related unjust enrichment claim, covered by 28 U.S.C. § 157(b)(2)(H) and (O), respectively, so resembles the state law tortious interference counterclaim covered by 28 U.S.C. § 157(b)(2)(C) at issue in Stern, 131 S.Ct. at 2601, 2608, as to preclude this Court's ability to issue a final judgment. Note that this is not a question about the Court's subject matter jurisdiction; litigants and at least one court ² contending to the contrary misread Stern and ignore the expansive nature of the bankruptcy courts' subject matter jurisdiction.³

The second question, however, does raise an issue of subject matter jurisdiction: if the Court lacks the constitutional power to issue a final judgment in this proceeding, does it have statutory or other authority to submit proposed findings of fact and conclusions of law to the district court under the Judicial Code, Fed. R. Bankr.P. 9033 or the Standing Order of Reference? This question arises because 28 U.S.C. § 157(b)(2) states that “bankruptcy judges may hear and determine ... all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title,” and 28 U.S.C. § 157(c)(1) states that “[a] bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11, [in which case] the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected,” but Stern can be said to have created a new type of proceeding: a core proceeding in which the bankruptcy judge is constitutionally precluded from entering a final order or judgment. This, in turn, raises the issue whether there is a gap in the statutory scheme preventing the Court's submission of proposed conclusions of law to the district court if a matter falls into the new “core but precluded” category. See also Fed. R. Bankr.P. 9033(a), which—understandably, because Congress did not anticipate Stern's new category of unconstitutional core proceedings—provides only for the bankruptcy judge's filing of proposed findings of fact and conclusions of law “[i]n non-core proceedings heard pursuant to 28 U.S.C. § 157(c)(1).”

Given the procedural stage of this proceeding, the answer to the first question is not particularly meaningful. First, the denial of MH's motion to dismiss in whole or in part, would be only an interlocutory order, and thus could not in any event be subject to Stern's prohibition of this Court's entry of final judgments (subject, though, to rights under Fed. R. Bankr.P. 7054(a), incorporating Fed.R.Civ.P. 54(b)). Moreover, an order and judgment granting MH's motion to dismiss, like an order granting summary judgment, would contain no factual findings and would be subject to the same de novo standard of review on appeal as proposed conclusions of law and a recommendation to the district court. See Retired Partners of Coudert Brothers Trust v. Baker & McKenzie LLP, (In re Coudert Bros. LLP), 2011 WL 5593147, at *13, 2011 U.S. Dist. LEXIS 110425, at *36–37 (S.D.N.Y. Sept. 22, 2011). The second question, however, bears on the Court's jurisdiction to enter any order on MH's motion, as well as potentially on the future conduct of this proceeding, including possible motions to withdraw the reference.⁴ Therefore, the Court sets forth below its reasons for concluding that Stern does not preclude the Court's issuance of a final judgment on the Trustee's complaint and that, in any event, the Court has the power to submit proposed conclusions of law and a recommendation to the district court on MH's motion to dismiss, if the district court so wishes to treat the Court's ruling.

Reasonable people may differ over whether Stern's prohibition on the bankruptcy court's issuance of a final judgment extends to fraudulent transfer claims, at least where, as here, the defendant has not filed a proof of claim in the case and, therefore, the holdings of Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), which Stern found to comport with its holding, 131 S.Ct. at 2616–2617, would not apply. Compare Paloian v. American Express Co. (In re Canopy Fin. Inc.), 2011 WL 3911082, at *3–4, 2011 U.S. Dist. LEXIS 99804, at *7–8 (N.D.Ill. Sept. 1, 2011), and Hagan v. Freedom Fid. Mgmt. (In re Fife), 2011 Bankr.Lexis 3544, at *1 (Bankr.W.D.Mich. Aug. 22, 2011), adopted by, judgment entered by, 2011 U.S. Dist. LEXIS 106446 (D. W.D. Mich. Sept 20, 2011), and Samson v. Blixseth (In re...