Opinion
No. 11 civ. 6337 (CM)
12-23-2011
DEVELOPMENT SPECIALISTS, INC., in its capacity as Plan Administrator for Coudert Brothers LLP, Plaintiff, v. ORRICK, HERRINGTON & SUTCLIFFE, LLP, Defendant.
MEMORANDUM DECISION AND ORDER GRANTING DEFENDANT'S MOTION TO WITHDRAW THE REFERENCE
:
Before the Court is another motion to withdraw the reference to the Bankruptcy Court in a matter concerning the Coudert Brothers, LLP ("Coudert") Chapter 11 petition. See In re Coudert Bros. LLP, 2011 WL 5593147, at *1 (S.D.N.Y. Sept. 23, 2011) ("Retired Partners"), and Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, --- B.R. ----, 2011 WL 5244463, at *1 (S.D.N.Y. Nov. 2, 2011) ("DSI I"). For the reasons discussed below, the motion to withdraw the reference is GRANTED.
BACKGROUND
Development Specialists, Inc. ("DSI"), Coudert's Plan Administrator, filed this adversary proceeding against Defendant Orrick, Herrington & Sutcliffe, LLP ("Orrick"), in December 2010. (Aff. Of Barry Vasios, Ex. 1.) DSI's complaint arises out of a series of merger discussions between Coudert and Orrick in early 2005, and a series of asset transfer agreements Coudert entered into with Orrick while Coudert wound up its practice between late 2005 and late 2006. (Id. ¶¶ 14-79.)
The complaint includes causes of action for: (1) breach of contract (under New York law) (id. ¶¶ 80-84); (2) fraudulent conveyance and related claims (e.g., turnover of property) (under New York and Federal law) (id. ¶¶ 85-114); (3) recovery of "unfinished business" taken by former Coudert partners to their new jobs at Orrick (under New York contract and partnership law) (id. ¶¶ 115-125); and (4) tortious interference with business relations, aiding and abetting breach of fiduciary duty, and unjust enrichment (all under New York law) (id. ¶¶ 126-146). DSI seeks the return of property allegedly fraudulently conveyed, and/or money damages, which would supplement the Coudert estate for the benefit of its creditors.
DISCUSSION
The specifics of the merger discussions and the asset transfer transactions, and the merits of DSI's complaint, are not before the Court on this motion. Rather, the only issues are (1) whether I will withdraw the reference from the Bankruptcy Court, and if I do, (2) whether I will abstain and leave the determination of the merits to the New York State courts.
The resolution of those issues is controlled largely by determinations I have made already in the related decisions cited above. Retired Partners, 2011 WL 5593147, at *1; DSI I, 2011 WL 5244463, at *1.
In DSI I, I ruled that DSI's unfinished business claims against ten other law firms - many of which are identical to DSI's unfinished business claim against Orrick - involve only "private rights," and would not necessarily be resolved in ruling on any proof of claim submitted in the Coudert bankruptcy. 2011 WL 5244463, at *9. That being so, I concluded, in light of Stern v. Marshall, 131 S. Ct. 2594 (2011), that the Bankruptcy Court lacked constitutional authority to adjudicate DSI's claims to final judgment. Id. at *10-13. As a result, I withdrew the reference in DSI's cases against the law firms.
Although DSI opposes the withdrawal of the reference of any claims it asserts against Orrick, it barely bothers to argue against withdrawing the reference of the claims for breach of contract, recovery of unfinished business, tortious interference with business relations, aiding and abetting the former Coudert partners' breach of fiduciary duty, and unjust enrichment. I can perceive no principled basis to differentiate these claims against Orrick from the claims against the other thirteen law firms. In fact, there is less of a basis to contest withdrawing the reference of the claims against Orrick because two of DSI's arguments against withdrawal of the reference cannot be made against Orrick: there is no suggestion in the record that it ever consented to allow Judge Drain to adjudicate DSI's claims against it, and Orrick made its motion at the earliest possible opportunity, thus negating any contention that the motion was untimely.
I thus grant Orrick's motion to withdraw the reference of those claims.
DSI reserves its firepower on this motion for arguing that its claim against Orrick for fraudulent conveyance should not be withdrawn from the Bankruptcy Court. It argues that this one claim does indeed involve "public rights," and so should remain in the Bankruptcy Court.
The short answer is that - at least as to a party like Orrick, which filed no proof of claim in the Coudert bankruptcy and so is not a creditor of the Coudert estate - the Supreme Court rejected that argument long before it decided Stern. In Granfinanciera, 492 U.S. at 33, the high court "rejected a bankruptcy trustee's argument that a fraudulent conveyance action filed on behalf of a bankruptcy estate against a noncreditor in a bankruptcy proceeding fell within the 'public rights' exception." Stern, 131 S. Ct. at 2614. DSI suggests that this statement by the Stern court is simply dicta, but even if it were, the Supreme Court's actual holding in Granfinanciera - which the Stern court correctly summarizes - is not. In Granfinanciera, the Supreme Court specifically said:
Although the issue admits of some debate, a bankruptcy trustee's right to recover a fraudulent conveyance under 11 U.S.C. § 548(a)(2) seems to us more accurately characterized as a private rather than a public right as we have used those terms in our Article III decisions.492 U.S. at 55-56. That single sentence eliminated any "debate" about whether DSI's fraudulent conveyance claim against Orrick - a noncreditor of the Coudert estate - involves a private or a public right. Furthermore, the Supreme Court's express reliance on its Article III jurisprudence in disposing of the public rights/private rights issue in Granfinanciera effectively eviscerates DSI's suggestion that there might be some difference between the scope of public rights for Article III purposes and for Seventh Amendment purposes (Granfinanciera having arisen in the context of a noncreditor's insistence that it had a right to a jury trial on the fraudulent conveyance claim against it).
DSI argues that its fraudulent conveyance claims must involve public rights because they would not exist "but for" Coudert's bankruptcy. This is sophistry. Fraudulent conveyance claims are created by state law - in this case, New York's Debtor and Creditor Law - not under Title 11. And it goes without saying that fraudulent conveyance and other fraudulent transfer claims are routinely adjudicated outside the bankruptcy context; one need not be in bankruptcy to assert such a claim. They are, as the Supreme Court recognized in Granfinanciera, akin to claims arising under state law contract principles - both types of claims can lead to recoveries that would augment a bankruptcy estate, but they do so by vindicating private rights. Granfinanciera, 492 U.S. at 56-57. The Bankruptcy Code does no more than give the bankruptcy trustee the exclusive right to pursue fraudulent conveyance claims that would have the effect of returning assets to the bankruptcy estate; this reflects Congress' intent that the assets of an entity that invokes the protection of federal bankruptcy law should be marshaled and distributed equitably among all the bankrupt's creditors, rather than ending up in the hands of the few who win a race to the courthouse.
In several post-Stern cases - some of which appear to involve creditors of the bankruptcy estate - courts addressing this issue have agreed that, because fraudulent conveyance claims involve private rights, a Bankruptcy Court cannot finally adjudicate them. See In re Heller Ehrman LLP, --- F. Supp. 2d. ----, 2011 WL 6179149, at *3-5 (N.D. Cal. Dec. 13, 2011) (collecting post-Stern cases); see also In re Teleservices Group, Inc., --- B.R. ----, 2011 WL 3610050, at *14-15 (Bnkr. W.D. Mich. Aug. 17, 2011). Here, the issue is far simpler. The facts at bar are the facts of Granfinanciera: a party standing in the shoes of a bankruptcy trustee has brought a fraudulent conveyance action against a third party non-creditor of the estate, in order to recover assets allegedly belonging to the estate. Such an action lies beyond the final adjudicative power of the Bankruptcy Court.
The only real issue to which Orrick's motion gives rise is whether I should withdraw the reference on the fraudulent conveyance claims now, or let Judge Drain continue to oversee their pre-trial supervision, and take a first crack at the ultimate issues by issuing a report and recommendation in connection with any dispositive motions that might be made.
In the recently decided In re Heller Ehrman case, my colleague Judge Charles Breyer declined to withdraw the reference, allowing the Bankruptcy Court - which was familiar with the facts of the case and the substantive law - to continue supervising the fraudulent conveyance claims against several law firms to which Heller's former partners moved during Heller's dissolution. Judge Breyer understood Stern as suggesting that the division of labor between district and Bankruptcy courts ought not be disturbed.
I agree that it would promote the efficiency allocation of judicial resources if claims brought by bankruptcy trustees against non-creditor third parties in order to recover estate assets - whether they could be finally adjudicated by a Bankruptcy Judge or not - were in most instances supervised through the pretrial process in the Bankruptcy Court. That is especially true in a situation like this one, where DSI is bringing identical claims against multiple third parties on similar if not identical theories - and where, as here, the Bankruptcy is a long-running affair, and the Bankruptcy Judge has already acquired an intimate familiarity with the extremely complicated facts relevant to the case. A district court would be foolish, in such circumstances, not to cede to the Bankruptcy Court the task of pre-trial supervision and preliminary determination (via Report and Recommendation) of dispositive motions. Stern creates no impediment to so doing, Heller, 2011 WL 6179149, at *7-9, and the reference can readily be withdrawn when the case is trial-ready if the parties still do not consent to allow the Bankruptcy Court to preside at trial. In this sense, the district court would be using the Article I Bankruptcy Judge in the same manner as it routinely employs Article I Magistrate Judges: to supervise discovery, rule on non-dispositive motions, and report and recommend on dispositive motions.
But the unfinished business claims involve a pure - and novel - issue of New York law. Although Judge Drain has spoken to the legal viability of those claims, the Bankruptcy Court has no particular expertise to bring to bear on resolving it; and the Bankruptcy Judge's intimate familiarity with the facts of Coudert's demise give him no edge over this court where this particular issue of law is involved.
Moreover, I withdrew the reference of the cases against the other law firms - not just certain claims - because the viability all of those claims depended on the fate of the unfinished business claim. For example, DSI's claims against the law firms in DSI I for accounting, conversion, and unjust enrichment all were premised on DSI's contention that departing partners may be liable to their former firms for "unfinished business" on cases billed by the hour. DSI brings analogous claims against Orrick under the same unfinished business theory. Thus, final resolution of the legal viability of that contention could effectively terminate the proceedings without the need for further work by either the Bankruptcy or this Court.
This same interdependency is at play in DSI's case against Orrick. For example, the purported fraudulent conveyances, as I understand it, were Coudert's release of potential unfinished business claims against its departing partners at Orrick. For that reason, in this particular case, it seems prudent to withdraw the reference entirely, and allow the cases against the law firms to proceed in this court. Once the legal issue on the unfinished business claim is resolved, I will of course consult with Judge Drain, so that these matters are handled in a manner - and on a schedule - that will not impede final resolution of the bankruptcy.
In DSI I, I withdrew the entire case against Dechert, notwithstanding a fraudulent conveyance claim that was unrelated to the unfinished business claims. --------
CONCLUSION
Orrick's motion to withdraw the reference is therefore GRANTED.
On the other hand, Orrick's request that I abstain from deciding the issues DSI's complaint raises is DENIED. The reason for my refusal to abstain in this case is the same as the reason set forth in greater detail in DSI I, 2011 WL 5244463, at *13-14.
The Clerk of the Court is directed to close the motion at ECF No. 1. Dated: December 23, 2011
/s/_________
U.S.D.J. BY ECF TO ALL COUNSEL