Sec. Investor Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC

• Decision Date: 04 January 2013
• Docket Number: No. 12 MC 115 (JSR).,12 MC 115 (JSR).
• Citation: 490 B.R. 46
• Parties: SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff, v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant. In re Madoff Securities.
• Court: U.S. District Court — Southern District of New York

490 B.R. 46

SECURITIES INVESTOR PROTECTION CORPORATION, Plaintiff,

v. BERNARD L. MADOFF INVESTMENT SECURITIES LLC, Defendant.In re Madoff Securities.

No. 12 MC 115 (JSR).

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

Jan. 4, 2013.

Held Unconstitutional

28 U.S.C.A. § 157(b)(2)(F, H)

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

OPINION & ORDER

JED S. RAKOFF, District Judge.

Irving Picard (the “Trustee”), the trustee appointed under the Securities Investor Protection Act (“SIPA”), 15 U.S.C. § 78aaa et seq., to administer the estate of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”), has filed hundreds of actions that seek to avoid transfers made by Madoff Securities on the ground that the transfers were fraudulent or preferential. Defendants in more than three hundred actions have moved based on Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), to withdraw the reference of their cases to the Bankruptcy Court. They argue that the Bankruptcy Court lacks both constitutional and statutory authority to adjudicate the Trustee's claims. On April 13, 2012, the Court consolidated the motions to withdraw that relied on Stern for the purpose of resolving three issues: (1) whether the Bankruptcy Court may exercise the judicial power necessary to finally decide the Trustee's avoidance actions; (2) whether, even if the Bankruptcy Court may not enter final judgment, it has authority to recommend proposed findings of fact and conclusions of law; and (3) whether the Court, in light of Stern, should withdraw the reference “for cause shown.” See Order dated April 13, 2012, No. 12 Misc. 115.

The parties extensively briefed these issues, and the Court heard oral argument on June 18, 2012. While these proceedings occurred, a number of judges in this District, including the undersigned, published opinions that considered the same issues in the context of other bankruptcy proceedings. See, e.g., In re Arbco Capital Mgmt., LLP, 479 B.R. 254 (S.D.N.Y.2012); Kirschner v. Agoglia, 476 B.R. 75 (S.D.N.Y.2012); In re Lyondell Chem. Co., 467 B.R. 712 (S.D.N.Y.2012). These opinions display an emerging consensus. Each concludes that, although the Bankruptcy Court may not ordinarily enter final judgment on avoidance claims, it may nonetheless hear the case in the first instance and recommend proposed findings of fact and conclusions of law. E.g., Arbco, 479 B.R. at 263–67;Kirschner, 476 B.R. at 82–83;Lyondell, 467 B.R. at 724–25. Each case further holds that, because the Bankruptcy Court may issue proposed findings of fact and conclusions of law, the district court need not withdraw “for cause shown” a case referred to the Bankruptcy Court before the Bankruptcy Court has made its report and recommendation. E.g., Arbco, 479 B.R. at 263–68;Kirschner, 476 B.R. at 83;Lyondell, 467 B.R. at 725. Consistent with that conclusion, the Board of Judges of this District has also amended its standing order of referral of cases to the Bankruptcy Court to provide that “[i]f a bankruptcy judge or a district judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III of the United States Constitution[,] ... the bankruptcy judge shall ... submit proposed findings of fact and conclusions of law to the district court.” See Amended Standing Order of Reference, No. 12 Misc. 32 (S.D.N.Y. Jan. 31, 2012). Having now fully considered the parties' briefs and arguments, the Court adheres to the District's emerging consensus, adapting it, as described below, to the unique legal and factual considerations presented here.

The Court turns first to the question of whether the Bankruptcy Court may exercise the judicial power necessary to resolve avoidance claims. Article III of the United States Constitution reserves the “judicial Power” of the United States to federal judges who are selected according to specific procedures, “hold their Offices during good Behaviour,” and receive compensation in an amount the other branches of the government may not diminish. U.S. Const. art. II, § 2, cl. 2; U.S. Const. art. III, § 1. These requirements protect litigants' rights by ensuring the judiciary's independence. N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 58, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In accordance with Article III, and in furtherance of judicial independence, courts have “have long recognized that, in general, Congress may not ‘withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.’ ” Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 2609, 180 L.Ed.2d 475 (2011) (quoting Murray's Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272, 284, 18 How. 272, 15 L.Ed. 372 (1856)). Bankruptcy judges neither have life tenure nor are appointed according to the procedures required by Article III. See generally28 U.S.C. § 152. Thus, whether Congress may empower the Bankruptcy Court to finally resolve a claim, thereby withdrawing that claim from the “cognizance” of an Article III judge, depends on the type of claim at issue.

Specifically, Congress may empower administrative agencies or legislative courts (so called “Article I” courts)—including the Bankruptcy Court—to resolve matters involving public rights, but not matters involving private rights. N. Pipeline, 458 U.S. at 69–70, 102 S.Ct. 2858. Public rights relate to the “performance of the constitutional functions of the executive or legislative departments,” N. Pipeline, 458 U.S. at 68, 102 S.Ct. 2858 (quoting Crowell v. Benson, 285 U.S. 22, 50, 52 S.Ct. 285, 76 L.Ed. 598 (1932)), and are “closely integrated into a public regulatory scheme.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 54, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) (quoting Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 594, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985)). Congress can commit such matters entirely to the executive's discretion, and thus it also has the lesser power of providing for their resolution by an Article I court. See N. Pipeline, 458 U.S. at 68, 102 S.Ct. 2858 (“The understanding of these cases is that the Framers expected that Congress would be free to commit such matters completely to nonjudicial executive determination, and that as a result there can be no constitutional objection to Congress' employing the less drastic expedient of committing their determination to a legislative court or an administrative agency.”). In contrast, Congress cannot empower Article I courts to finally adjudicate matters “of private right, that is, of the liability of one individual to another under the law as defined.” Stern, 131 S.Ct. at 2612 (quoting Crowell, 285 U.S. at 50–51, 52 S.Ct. 285).

In Granfinanciera, the Supreme Court, considering whether a defendant had a Seventh Amendment right to a jury trial, held that a Trustee's right to recover a fraudulent transfer is “more accurately characterized as a private rather than a public right” because suits to avoid transfers “are quintessentially suits at common law that more nearly resemble state-law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res.” 492 U.S. at 55–56, 109 S.Ct. 2782.¹ In Stern, the Court applied the same analysis to the determination of whether Congress could empower a non- Article III tribunal to finally decide a claim. 131 S.Ct. at 2614. Specifically, the Court held that the state-law counterclaim at issue, “like the fraudulent conveyance claim at issue in Granfinanciera [, did] not fall within any of the varied formulations of the public rights exception in this Court's cases.” Id. Thus, the Court concluded that Congress had improperly vested judicial power in a non- Article III judge when it allowed bankruptcy courts “to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.” Id. at 2620. It reached this conclusion even though the counterclaim was a “core” bankruptcy proceeding. Id. at 2604.²

It is true, as the Court in Stern noted, that in certain circumstances, the Supreme Court has permitted bankruptcy courts to finally resolve avoidance actions. In Katchen v. Landy, the Supreme Court held that, when a creditor had filed a claim to the bankruptcy estate, and the bankruptcy trustee had sought both to disallow that claim and to avoid a preference, the Bankruptcy Court could decide the avoidance action. 382 U.S. 323, 336–38, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). In so doing, the Court first noted that the Bankruptcy Court had jurisdiction over whether to disallow the creditor's claim to the estate. Id. at 336, 86 S.Ct. 467. It also observed that, under the statute that then governed the disallowance of claims, “a bankruptcy court must necessarily determine the amount of preference, if any, so as to ascertain whether the claimant, should he return the preference, has satisfied the condition imposed by [the statute] on allowance of the claim.” Id. at 334, 86 S.Ct. 467. Because the Bankruptcy Court had jurisdiction to decide issues that would completely resolve the trustee's preference claim, the Supreme Court reasoned that the Bankruptcy Court necessarily also had the power to decide that preference claim. Id. at 336–37, 86 S.Ct. 467.³Langenkamp v. Culp, decided after Granfinanciera, reached an identical result. See498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (“[T]he creditor's claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction.”). In Stern, however, the Court distinguished Katchen and Langenkamp on the ground that the Bankruptcy Court did not need to resolve the debtor's counterclaim for defamation in order to decide the...