Kirschner v. Agoglia

• Decision Date: 09 May 2012
• Docket Number: No. 11 Civ. 8250 (JSR).,11 Civ. 8250 (JSR).
• Citation: 476 B.R. 75
• Parties: Mark S. KIRSCHNER, as Trustee of the Refco Litigation Trust, Plaintiff, v. John D. AGOGLIA, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

476 B.R. 75

Mark S. KIRSCHNER, as Trustee of the Refco Litigation Trust, Plaintiff,

v.John D. AGOGLIA, et al., Defendants.

No. 11 Civ. 8250 (JSR).

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

May 9, 2012.

Andrew Michael Leblanc, Milbank, Twwed, Hadley & McCloy, LLP, Washington, DC, Dennis C. O'Donnell, Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, CA, for Plaintiff.

Michael Lewis Cook, Schulte Roth & Zabel LLP, David Stanley Frankel, Kramer Levin Naftalis & Frankel, LLP, William B. Fleming, Gage, Spencer & Fleming, LLP, Brian E O'Connor, Willkie Farr & Gallagher LLP, Alan Eric Gamza, Moses & Singer LLP, John J. Jerome, Saul Ewing LLP, New York, NY, Neil A. Goteiner, Farella Braun & Martel, LLP, San Francisco, CA, Lawrence Joel Kotler, Duane Morris LLP, Philadelphia, PA, Aitan David Goelman, Zuckerman Spaeder LLP, Washington, DC, for Defendants.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

On November 15, 2011, defendants Sukhmeet “Micky” Dhillon, the MSD Family Trust, and Eric Lipoff (collectively, “Movants”) moved to withdraw the reference to the Bankruptcy Court of the underlying adversary proceeding brought against them by plaintiff Mark Kirschner, Trustee of the Refco Litigation Trust in the Refco bankruptcy proceeding (and in the related Refco Multi–District Litigation pending before this judge, see generally In re Refco Sec. Litig., 07 MDL 1902 (S.D.N.Y.)). In the adversary proceeding, the Trustee had brought fraudulent conveyance and unjust enrichment claims against the Movants, and the Movants had moved to dismiss those claims. After hearing oral argument on the motion to withdraw the reference, this Court issued an Order on December 16, 2011, withdrawing the reference for the limited purpose of addressing two of the questions presented in Movants' motion: (1) whether after the United States Supreme Court's decision in Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)—which held that only an Article III court can finally resolve a state law tortious interference claim that was asserted in a bankruptcy proceeding—the Bankruptcy Court can finally resolve the Trustee's claims; and (2) if the Bankruptcy Court cannot finally resolve those claims, whether the Bankruptcy Court can still be utilized to recommend findings of fact and conclusions of law for the District Court to consider.

Having now fully considered the parties' briefs, notices of supplemental authority, oral arguments, and the opinions of the various district and bankruptcy courts around the country likewise attempting to reconcile Stern v. Marshall with settled bankruptcy practice, the Court, for the reasons that follow, answers the questions thusly: (1) Under the doctrine of Stern v. Marshall, the Bankruptcy Court lacks the constitutional authority to enter final judgment on the Trustee's claims against the Movants, and therefore these claims must be adjudicated by an Article III court. (2) Nonetheless, the Bankruptcy Court does have lawful authority to conduct proceedings and issue a report and recommendation to the District Court on Movants' motion to dismiss, provided it is subject to de novo review.

By way of background, Refco, before it entered bankruptcy, was one of the largest commodities brokerage firms in the United States. On October 10, 2005, the company disclosed that certain Refco insiders were using money in customer brokerage accounts to fund the firm's operating expenses and hide Refco's insolvency, all the while enriching themselves. Refco and its associated entities filed for voluntary Chapter 11 Bankruptcy in the Southern District of New York on October 17, 2005. Thereafter, on December 15, 2006, the Bankruptcy Court confirmed a proposed reorganization plan that, inter alia, created the Refco Litigation Trust, on behalf of which the Trustee (the plaintiff here) filed numerous litigation claims against various parties. On October 15, 2007, the Trustee filed a complaint in the Bankruptcy Court against the Movants, asserting two kinds of state law tort claims: fraudulent conveyance claims under the New York Debtor Creditor Law, and unjust enrichment claims under New York common law. See Compl. ¶¶ 60–63, 75–76. The gist of the claims is that the Movants, former executives at Refco, were coconspirators in the Refco fraud and, pursuant to that fraud, received $80 million from RGL, a Refco-affiliated entity. Id. ¶¶ 145–55. The Trustee seeks to avoid as fraudulent, or to recover as unjust enrichment, the money transferred from RGL to the Movants. Id. ¶¶ 153–55.

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), a district court may refer actions within its bankruptcy jurisdiction to the bankruptcy court of that district. The Southern District of New York has a standing order in place that provides for automatic reference of bankruptcy cases to the bankruptcy court. See In re Standing Order of Reference Re: Title 11, 12 Misc. 32 (S.D.N.Y. Feb. 1, 2012).

There are two types of bankruptcy proceedings delineated in § 157; “ ‘core proceedings,’ which the bankruptcy court may ‘hear and determine’ and on which the court ‘may enter appropriate orders and judgments,’ § 157(b)(1), [and] ‘non-core proceedings,’ which the bankruptcy court may hear, but for which the bankruptcy court is only empowered to submit proposed findings of fact and conclusions of law to the district court for de novo review, § 157(c)(1).” In re Orion Pictures Corp., 4 F.3d 1095, 1100–01 (2d Cir.1993). In Stern v. Marshall, the Supreme Court held that the state law tortious interference counterclaim before it could be finally adjudicated only by an Article III court and not by the bankruptcy court, even though the counterclaim was a “core” proceeding under § 157. The primary question here is whether the reasoning of Stern also makes it unconstitutional for the bankruptcy court to resolve state law fraudulent conveyance claims.¹

In reaching its conclusion in Stern, the Court held that:

When a suit is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.

Id. at 2609 (internal quotation marks and citation omitted). Although bankruptcy courts still have the ability to finally decide so-called “public rights” claims that assert rights derived from a federal regulatory scheme and are therefore not the “stuff of traditional actions,” as well as claims that are necessarily resolved in ruling on a creditor's proof of claim ( e.g., a voidable preference claim), see Stern, 131 S.Ct. at 2611–18, those exceptions do not apply to the state law tortious interference counterclaim presented in Stern because it is a traditional “private rights” claim. Id. Because Supreme Court precedent, as discussed below, likewise indicates that the Trustee's claims here are “private rights” claims based on common law, this Court concludes that only an Article III court may render final judgment on the Trustee's claims.

At the threshold, however, the Trustee argues that because the underlying adversary proceeding is only at the motion to dismiss stage, the Bankruptcy Court is merely ruling on a “pre-trial” matter that does not intrude on the District Court's sole authority to enter “final judgment.” See Opposition to Motion of Sukhmeet “Micky” Dhillon, MSD Family Trust, and Eric Lipoff to Withdraw the Reference dated Nov. 28, 2011 (“Trustee Opp. Br.”) at 7–9, Indeed, in ruling on a separate motion to dismiss in the underlying adversary proceeding filed by other defendants who did not join the instant motion to withdraw the reference, the Bankruptcy Court argued that the constitutional question was “not particularly meaningful” on a motion to dismiss, as an order denying the motion would not enter “final judgment” and an order granting the motion would be subject to the same de novo standard of review on a bankruptcy appeal as a report and recommendation in a “non-core” proceeding. See In re Refco Inc. (Memphis Holdings), 461 B.R. 181, 185 (Bankr.S.D.N.Y.2011).²

This reasoning is flawed. It confuses the power to enter final judgment with the right to appeal. If there is no appeal, the grant of the motion to dismiss for failure to state a claim is a final judgment dismissing the claim and is given res judicata and collateral estoppel effect. See Teltronics Servs. v. L M Ericsson Telecomms., Inc., 642 F.2d 31, 34–35 (2d Cir.1981) (holding judgment under Fed.R.Civ.P. 12(b)(6) is entitled to res judicata effect); Corbett v. MacDonald Moving Servs., Inc., 124 F.3d 82, 88 (2d Cir.1997) (holding that collateral attacks on bankruptcy court's jurisdiction are barred by res judicata). But this cannot be proper unless the bankruptcy court had the power to render final judgment in the first place. See Kontrick v. Ryan, 540 U.S. 443, 455, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004) (noting court should raise subject-matter jurisdiction sua sponte ) (citing Mansfield, C. & L.M. Ry. Co. v. Swan, 111 U.S. 379, 384, 4 S.Ct. 510, 28 L.Ed. 462 (1884) (“[T]he first duty of this court is, sua sponte, if not moved to it by either party, to examine the sufficiency of that plea, and thus to take care that neither the circuit court nor this court shall use the judicial power of the United States in a case to which the constitution and laws of the United States have not extended that power.”)); see also In re Ortiz, 665 F.3d 906, 910–11 (7th Cir.2011) (noting that whether bankruptcy court has constitutional authority to enter final judgment also affects a court of appeals' direct appellate jurisdiction under 28 U.S.C. § 158(d)(2)). Thus, even at the motion to dismiss stage, the question of whether the Bankruptcy Court has...