Children’s Retailer Naartjie Custom Kids Filed for Chapter 11 Bankruptcy Protection in Utah

According to bankruptcy court filings, Naartjie is a children’s clothing brand that embraces bright, colorful, kid-friendly clothes and was founded in Cape Town, South Africa in 1989. Naartjie designs, manufactures, and sells children’s clothing, accessories, and footwear for ages newborn through 10 years old.
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View a Free Copy of NII Holdings, Inc.’s Chapter 11 Bankruptcy Petition, Filed Today in New York

NIl Holdings, Inc. is the ultimate parent and holding company for its debtor and non-debtor affiliates. Certain of the Debtors’ non-debtor affiliates provide wireless communication services under the Nextel™ brand name for businesses and consumers in Latin America.
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New Bankruptcy Opinion: GREDE v. ABN AMRO CLEARING CHICAGO LLC – Dist. Court, ND Illinois, 2014

FREDERICK J. GREDE, not individually but as Liquidation Trustee of the Sentinel Liquidation Trust, Plaintiff,

v.

ABN AMRO CLEARING CHICAGO LLC, Defendant.

Case No. 09-cv-00138.

United States District Court, N.D. Illinois, Eastern Division.

September 3, 2014.

ABN AMRO CLEARING CHICAGO LLC’S MOTION FOR ENTRY OF JUDGMENT ON COUNTS I, II, IV AND V OF THE TRUSTEE’S SECOND AMENDED COMPLAINT

JAMES B. ZAGEL, District Judge.

Defendant, ABN AMRO Clearing Chicago LLC (“ABN AMRO”), hereby submits this Motion for Entry of Judgment on Counts I, II, IV and V of the Trustee’s Second Amended Complaint. [1] In support of its Motion, ABN AMRO states as follows:

INTRODUCTION

1. This is one of 10 closely related adversary proceedings brought by the Trustee against former SEG 1 customers (collectively, the “SEG 1 Cases”) of Sentinel Management Group, Inc. (“Sentinel”). The defendants in the SEG 1 Cases are FCStone LLC (“FCStone”) IFX Markets, Inc., IPGL Ltd., Farr Financial, Inc., Cadent Financial Services, Rand Financial Services, Country Hedging Inc, Velocity Futures, LLC, American National Trading Corp., ABN AMRO and Crossland LLC (collectively, the “SEG 1 Defendants”).

2. The complaints in all these cases contain identical counts, cover the same core facts and transactions, and raise the same issues. These counts are: (1) Count I for avoidance and recovery of post-petition transfer under § 549 of the of Title 11 of the United States Bankruptcy Code (“Bankruptcy Code”); (2) Count II for avoidance and recovery of prepetition preferential transfer under § 547 of the Bankruptcy Code; (3) Count III for declaratory judgment regarding the ownership interest in the SEG 1 reserve funds held by the Trustee; (4) Count IV for unjust enrichment; and (5) Count V for reduction or disallowance of claims. All the Seg 1 Defendants have raised the same core defenses.

3. Pursuant to this Court’s instructions, the Trustee and the Seg 1 Defendants chose, and this Court approved Grede v. FCStone, Case No. 09-cv-136 (the “FCStone Test Case”), as the test case for all the SEG 1 Cases.

4. On January 4, 2013, after a bench trial, this Court entered final judgment for the Trustee on Counts I (post-petition transfer), Count II (pre-petition preferential transfer), Count III (declaratory judgment) and Count V (disallowance of claims) and for FCStone on Count IV (unjust enrichment). FCStone appealed those counts decided against it and the Trustee cross-appealed the finding as to Count IV. This Court has refrained from making any further decisions in the other Seg 1 Cases pending the appeal.

5. On March 19, 2014, the United States Court of Appeals for the Seventh Circuit found in favor of FCStone and reversed this Court’s judgment on Counts I, II, III and V. Grede v. FCStone, LLC, 734 F.3d 244, 246-47, 251-260 (7th Cir. 2014). The Seventh Circuit held that the post-petition transfer (Count I) was authorized by the Bankruptcy Court (id. at 246-47, 254-58)—and therefore that no avoidance action could be brought by the Trustee under 11 U.S.C § 549(a), and that the pre-petition preferential transfer (Count II) fell within both the “settlement payment” and “securities contract” safe harbor exceptions to claw back in § 546(e) of the Bankruptcy Code. Id. at 246-47, 251-54. The Seventh Circuit also denied the Trustee’s cross-appeal for reinstatement of his unjust enrichment claim (Count IV), affirming this Court’s holding that the Trustee’s unjust enrichment claim is preempted by federal bankruptcy law. Id. at 259-60

6. The Seventh Circuit’s opinion in the FCStone Test Case is binding precedent for all the SEG 1 Cases with respect to the Trustee’s claims for: (1) avoidance and recovery of Sentinel’s post-petition transfers (Count I); (2) avoidance and recovery of Sentinel’s pre-petition preferential transfers (Count II); (3) unjust enrichment (Count IV); and (4) reduction or disallowance of claims (Count V). [2] It also collaterally estops the Trustee from further litigation of these claims, as the Trustee had every incentive and opportunity to vigorously litigate these issues in the FCStone Test Case and may not now re-litigate the adverse determinations against him. See Ank v. Koppers Co., 1991 U.S. App. LEXIS 5381 (9th Cir. 1991) (“the situations that are most likely to create an implied agreement to be bound involve a shared understanding that a single action is to serve as a test case case that will resolve the claims or defenses of nonparties as well as parties.”); Grubbs v. United Mine Workers, 723 F. Supp. 123 (W.D. Ark. 1989) (“It is obvious that the parties regarded Royal as a test case as did the court and it was litigated accordingly. There are, to this court’s knowledge, no procedural opportunities available in this proceeding not available in Royal. The court perceives no `unfairness’ in precluding the Plan from relitigating the same issue ad infinitum. Although the doctrine of non-mutual offensive collateral estoppel should be cautiously invoked, it is appropriate here.”)(and collecting authority). Indeed, this Court has previously acknowledged that the Seventh Circuit’s reversal of the FCStone Test Case would extinguish the Trustee’s identical claims against the SEG 1 Defendants. See Jan. 22, 2013 Tr., pp. 8:23-9:1 (“It is true that if the Court of Appeals says I’m completely wrong in FCStone and everybody is off the hook as a result of that, you will have spent some money that perhaps your clients didn’t have to …”).

7. This Court, therefore, should enter judgment for ABN AMRO and against the Trustee on Counts I, II, IV and V of the Trustee’s Second Amended Complaint. [3]

WHEREFORE, ABN AMRO Clearing Chicago LLC respectfully requests this Court to enter judgment for ABN AMRO Clearing Chicago LLC and against the Trustee on Counts I, II, IV and V of the Trustee’s Second Amended Complaint.

[1] The Trustee is Frederick J. Grede as Liquidation Trustee for the Sentinel Liquidation Trust.

[2] ABN AMRO is entitled to judgment on Count V under Section 502(d) of the Bankruptcy Code, which provides for the disallowance of the claims of an entity that receives an avoidable transfer from the debtor’s estate and does not return such transfer to the estate. See 11 U.S.C. § 502(d). Here, the Seventh Circuit already has held that the post-petition and pre-petition transfers are not avoidable transfers from Sentinel’s estate. ABN AMRO, therefore, is entitled to judgment on Count V as well.

[3] ABN AMRO is not moving for the entry of judgment on Count III, which seeks a declaratory judgment regarding the ownership interest in the SEG 1 reserve funds held by the Trustee, because the Seventh Circuit did not decide the “property of the estate” issue.

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New Bankruptcy Opinion: PACA TRUST CREDITORS OF LENNY PERRY’S, INC. v. GENECCO PRODUCE, INC. – Dist. Court, WD New York, 2014

THE PACA TRUST CREDITORS OF LENNY PERRY’S, INC. Appellant/Appellee

v.

GENECCO PRODUCE, INC. Appellee/Appellant.

No. 14-MC-036S.

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

September 4, 2014.

DECISION AND ORDER

WILLIAM M. SKRETNY, District Judge.

I. INTRODUCTION

Lenny Perry’s Produce, Inc., a defunct corporation based in Buffalo, New York, filed for Chapter 7 bankruptcy in 2009. Because Lenny Perry’s was a produce distributor and seller, its bankruptcy implicates the Perishable Agricultural Commodities Act of 1930, 7 U.S.C. § 499a. et seq., commonly referred to by the acronym “PACA.” In 1984, Congress, concerned that bankruptcy proceedings often left produce-selling creditors with nothing, amended PACA to include certain statutory trust provisions. [1] Simply put, PACA creates a trust in favor of unpaid suppliers or sellers of such commodities; it provides suppliers with a right to payment before all other creditors, including secured lenders. See 7 U.S.C. § 499e(c).

In this bankruptcy case, the PACA Trust Creditors of Lenny Perry’s Produce Inc., — i.e., the beneficiaries of the statutory trust created by the Perishable Agricultural Commodities Act — initiated an adversary proceeding against Genecco Produce Inc., and its principal, David Genecco (collectively “Genecco”). The PACA trust argues that Genecco, a fellow dealer of perishable agricultural commodities, owes it over $200,000. In a Report and Recommendation issued on February 12, 2014, Bankruptcy Judge Michael J. Kaplan advised this Court to grant the motion. Both sides filed objections, and this Court must now undertake a de novo review of the summary-judgment motion. See 28 U.S.C. § 157(c)(1) and (2).

For the following reasons, the case is remanded for further proceedings.

II. BACKGROUND

Genecco and Lenny Perry’s frequently bought, sold or traded produce from, to, or with each other. There is no real dispute that Lenny Perry’s sold Genecco $204,778.88 of fresh produce from 2005 to 2008. The PACA Trust alleges that under the Perishable Agricultural Commodities Act “a statutory trust arose in favor of Lenny Perry’s as to all [p]roduce received by Defendants, all inventories of food or other products derived from said Produce, and the proceeds from the sale of such Produce until full payment is made by [Genecco] to Lenny Perry’s.” (Compl., ¶ 11.) The PACA Trust alleges that Genecco “failed and refused to pay Lenny Perry’s the principal sum of $204,778.88 from the statutory trust plus accrued interest and fees.” (Id., ¶ 26.)

Genecco sees it differently. There is no dispute that, in addition to the $204,778.88 in produce Lenny Perry’s sold Genecco, Genecco also sold or provided $263,056.92 in produce to Lenny Perry’s, resulting in a difference of $58,278.04. It appears that the parties simply recorded the value of the produce each had provided to the other, potentially with the intent to settle any balance later. Some money, however did exchange hands in the course of their dealings.

Genecco, which chose not to become a member of the PACA trust, asserted at an earlier stage of this litigation that it was entitled to a setoff. Genecco hoped to chalkup the difference after the setoff — $58,278.04 — as “cost of doing business” and move on. It represented that it would assert no claim for those funds.

On August 14, 2012, in a Report and Recommendation that was ultimately adopted by this Court, Judge Kaplan agreed that, despite the presence of the PACA Trust, Genecco retained the right to seek a setoff. Specifically, Judge Kaplan found (and this Court ordered) that the defense “shall [not] be stricken as a matter of law.” (Report and Recommendation, at 10; Docket No. 1 of 12-MC-055).

The case proceeded, and eventually the PACA Trust moved for summary judgment. In a Report and Recommendation addressing this motion, Judge Kaplan, focusing solely on one argument concerning whether the parties had a bartering relationship, found that Genecco “ha[d] failed to provide sufficient evidence to get to trial as to whether there was or was not a `bartering relationship.’” (Report and Recommendation, at 5; Docket No. 1.) The court continued by noting that it was “satisfied that the parties were simply selling commodities to each other . . . maintaining open, off-setting accounts that remained so (meaning never materially reconciled by set off) right up until [Lenny Perry's] went out of business.” (Id.) It found this sufficient to grant the PACA Trust’s motion for summary judgment. The court concluded that the PACA Trust should have a money judgment against Genecco in an amount that is “the difference between the dollar amount owed by [Genecco] to [Lenny Perry's] (on the one hand) and the dollar amount (on the other hand) to which [Genecco] would be entitled as a PACA Trust beneficiary if [Genecco] were to pay to the PACA Trust all of the money that it owed Lenny Perry’s and then await distribution.” (Id., at 6) (parenthesis in original; brackets supplied). In other words, the Bankruptcy Court found that Genecco had failed to raise a triable issue of fact concerning whether it was entitled to setoff the amount Lenny Perry’s owed it. It further found that Genecco should effectively pay the PACA Trust the $204,778.88 it owed Lenny Perry’s. And last, it found — without elaboration — that Genecco could become a beneficiary of the PACA trust and thus receive a pro rata share of the Trust’s assets. [2]

III. DISCUSSION

The central issue before this Court concerns the affirmative defense of setoff, which is also sometimes called “offset.” “Setoff is an established creditor’s right to cancel out mutual debts against one another in full or in part.” In re Patterson, 967 F.2d 505, 508 (11th Cir. 1992) . Its purpose is to avoid “the absurdity of making A pay B when B owes A.” Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528, 33 S. Ct. 806, 57 L. Ed. 1313 (1913) ).

Section 553 of the Bankruptcy Code preserves the right of a “creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case.” 11 U.S.C. §553(a). The requisite elements of a §553 setoff are that: (1) the creditor holds a claim against the debtor that arose before the commencement of the case; (2) the creditor owes a debt to the debtor that also arose before the commencement of the case; (3) the claim and debt are mutual; and (4) the claim and debt are each valid and enforceable. In re Steines, 285 B.R. 360, 362 (Bankr. D. N.J. 2002) .

As noted above, the Bankruptcy Court found that Genecco was not entitled to a setoff because it failed to prove that it and Lenny Perry’s had a bartering relationship. But even the PACA Trust agrees that “[w]hether Defendants `bartered’ or sold produce is irrelevant.” (PACA Trust Br., at 3; Docket No. 93 of 09-01269-MJK.) As noted by Genecco at oral argument before this Court, bartering and setoff are different concepts. If the parties were truly bartering there would be no debt to setoff. Two tomatoes might be traded for four apples, and that would end the matter.

Instead, there appears to be no dispute in this case that “A owed B and B owed A.” Specifically, Genecco owed $204,778.88 to Lenny Perry’s, and Lenny Perry’s owed $263,056.92 to Genecco. There further appears to be no dispute that these debts arose pre-petition. For its part, the PACA Trust argues that 11 U.S.C. §553 does not permit a setoff because the third element is not met: there is not (and never was) a “mutuality of obligations.” It argues that an unsecured debt cannot offset a trust debt. The PACA Trust, quoting the Bankruptcy Court in the Southern District of New York, maintains that “[w]here the liability of a the party claiming the right of offset arises from a fiduciary duty or is in the nature of a trust, the requisite mutability of debts or credits does not exist, so that such party may not offset against such liability a debt owing from the debtor stemming from a different relationship.” Ross-Viking Merchandise Corp. v. Am. Cyanamid Co., Lederle Div., 151 B.R. 71, 74 (Bankr. S.D.N.Y. 1993) .

Genecco counters that the right to setoff emerged before the proceeds became assets of the PACA Trust. And, therefore, when those assets became property of the trust, they remained encumbered with the defense of setoff. “Due to the fluidic nature of the asserts making up a PACA trust,” argues Genecco, “once assets are subject to a defense like setoff, they are no longer legitimate assets to which PACA trust beneficiaries are entitled.” (Genecco Br. at 14; Docket No. 1.)

Undeterred, the PACA Trust contends that Lenny Perry’s receivables from Genecco were, by virtue of the Perishable Agricultural Commodities Act, always trust assets. At no point, then, could the right to setoff have attached.

The Bankruptcy Court, finding dispositive the lack of evidence regarding bartering, did not address any of these contentions. Nor did it fully address the implications of its earlier finding and this Court’s ruling that “it is not unreasonable for [Genecco] to have relied upon its belief that ordinary setoff rights as to `receivables’ would apply.” (Report and Recommendation, at 10; Docket No. 1 of 12-MC-055.) This finding may preclude the PACA Trust’s argument that receivables were always PACA Trust assets.

Although this Court agrees with the Bankruptcy Court that there is insufficient evidence to establish that Genecco and Lenny Perry’s engaged in a bartering relationship, it cannot agree that this finding alone resolves the motion for summary judgment. For that reason, this Court will remand this action back to the Bankruptcy Court for further proceedings consistent with this opinion. On remand, the Bankruptcy Court should address whether the mutuality-of-obligations prong has been met, and, relatedly, whether the lack of “running setoffs” or a pre-petition “setoff agreement” means that any debt Genecco owes Lenny Perry’s is, statutorily, a PACA Trust asset, and thus not eligible for setoff under § 553. It should also address whether the earlier ruling in this case forecloses the PACA Trust’s mutuality-of-obligations argument.

IV. CONCLUSION

The Bankruptcy Court rested its decision on the lack of a bartering relationship between Genecco and Lenny Perry’s. But this Court finds that that conclusion does not entirely resolve the matter. In particular, it remains unclear whether the claim and the debt are “mutual.” Accordingly, the case is remanded for further proceedings.

V. ORDERS

IT HEREBY IS ORDERED that this case is REMANDED to the Bankruptcy Court for proceedings consistent with this Decision and Order.

SO ORDERED.

[1] In passing the law, Congress noted that “[m]any [buyers], in the ordinary course of their business transactions, operate on bank loans secured by [their] inventories, proceeds or assigned receivables from sales of perishable agricultural commodities, giving the lender a secured position in the case of insolvency. Under present law, sellers of fresh fruits and vegetables are unsecured creditors and receive little protection in any suit for recovery of damages where a buyer has failed to make payment as required by the contract.” H.R.Rep. No. 98-543, at 3 (1983), reprinted in 1984 U.S.C.C.A.N. 405, 406 (emphasis added).

[2] At oral argument before this Court, the PACA Trust repeatedly maintained that Judge Kaplan found that Genecco was indeed entitled to a setoff. It argued that “the setoff amount is what [Genecco] owe[s] the PACA Trust minus what [Genecco] would take [as its] pro rata share of trust assets.” (Oral Arg. Tr., 13:18-21). But this is not what Judge Kaplan found. Instead, Judge Kaplan found that Genecco could become a beneficiary of the Trust — that it could, in other words, receive a pro rata share of the estate after it paid into the estate. In this scenario, Genecco gets no setoff as to what Lenny Perry’s owed it.

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New Bankruptcy Opinion: IN RE WR GRACE & CO. – Bankr. Court, D. Delaware, 2014

In re: W.R. GRACE & CO., et al., Chapter 11, Debtors.

Case No. 01-01139 (KJC) (Jointly Administered).

United States Bankruptcy Court, D. Delaware.

September 3, 2014.

MEMORANDUM AND ORDER ADOPTING RECOMMENDATIONS OF THE RULE 706 EXPERT REGARDING THE LUKINS & ANNIS FEE ALLOCATION CLAIM [1]

Re: D.I. 31794, 32034

KEVIN J. CAREY, Bankruptcy Judge.

Background

On December 15, 2008, the claimants involved in extensive litigation with the Debtors regarding Zonolite Attic Insulation (“ZAI”) filed a motion to approve a class settlement and certification of the ZAI class, which the Court preliminarily granted on January 16, 2009, and finally approved on April 1, 2009 (the “ZAI Class Settlement”). The ZAI Class Settlement was contingent on confirmation of a plan that contained a trust with distribution procedures to effectuate the settlement.

The Debtors’ First Amended Joint Plan of Reorganization (D.I. 26368) took effect on February 3, 2014 (D.I. 31700). On February 7, 2014, ZAI Class Counsel filed a motion seeking a Common Fund Fee Award of 25 percent of the first two payments in the class settlement, for a total fee in the approximate amount of $16 million (the “Fee Award”) (D.I. 31718). [2] On February 28, 2014, Lukins & Annis, P.S. (“L&A”) filed a partial joinder to the Motion of ZAI Class Counsel for a Common Fund Fee Award, and Counter-Motion to Stay Disbursement of any Common Fund Fee Award Pending Resolution of All Common Fund Fee Allocation Disputes (the “Joinder and Counter-Motion”) (D.I. 31794). The Joinder and Counter-Motion consented to the request for the Fee Award, but objected to disbursement of the Fee Award pursuant to the allocation proposed by ZAI Class Counsel, which did not include any allocation for L&A. ZAI Class Counsel proposed the following allocation of the Fee Award:

(1) Scott will receive 42.5% of the Fee Award (approximately $6,675,000);

(2) Westbrook will receive 42.5% of the Fee Award (approximately $6,675,000);

(3) Cabraser will receive 15% of the Fee Award (approximately $2,400,000);

(4) McGarvey will receive $250,000 from the Fee Award; and

(5) Ness will receive 10 percent of Westbrook’s allocation of the Fee Award (approximately $667,500). [3]

L&A contends that it is entitled to a portion of the Fee Award due to its active involvement in the ZAI matters from their inception until December 31, 2004, when Scott, the attorney who principally was handling the ZAI litigation, left L&A to form The Scott Law Group, P.S. L&A argues that the firm’s efforts contributed to the development of the ZAI litigation, writing:

While L&A does not discount the work ZAI Class counsel put into this matter from January 2005 until it settled in December 2008, much of the claims development and class certification work was done during the 5-year time span preceding Mr. Scott’s departure from L&A. L&A spent many hours researching the possible merits of ZAI claims and formulating strategies for pursuing such claims. L&A also played an integral part in discovery, including identifying potential class claimants and taking many depositions.

(D.I. 31794, p. 7.) L&A stated that it did not have an agreement with Mr. Scott regarding a cost and fee sharing agreement related to the ZAI litigation. (Id. p. 3.)

On April 3, 2014, this Court entered an Order approving the Fee Award and reimbursement of ZAI Class Counsels’ expenses from the fund created by the ZAI Class Settlement, but requiring the Fee Award to be held in trust pending further order of the Court regarding the L&A Joinder and Counter-Motion (the “Fee Award Order”) (D.I. 31985).

Also on April 3, 2014, at the request of the parties, this Court entered an Order (the “Rule 706 Order”) appointing Judith K. Fitzgerald as a Rule 706 Expert to issue a report and recommendation regarding the L&A Joinder and Counter-Motion. [4] The Rule 706 Order included a schedule for L&A to file a motion and accompanying documentation supporting its claim to an allocation of the Fee Award, and for parties to file responses and replies thereto. Thereafter, Fitzgerald had discretion to, inter alia, determine the manner, timing and scope of evidence and other submissions with respect to the allocation dispute. The Rule 706 Order also set a deadline for filing responses to the Expert Report after it was issued by Fitzgerald.

On April 18, 2014, L&A filed the Motion of Lukins & Annis, P.S. for an Allocation of the ZAI Class Action Common Fund Fee Award (the “L&A Motion”) (D.I. 32034). On April 28, 2014, responses to the L&A Motion were filed by ZAI Class Counsel (D.I. 32063), the Reorganized Debtors (D.I. 32058), ZAI Class 7B Trustee (D.I. 32061), and the Property Damage Future Claimants’ Representative (D.I. 32061).

On June 25, 2014, Fitzgerald filed her Expert Report (D.I. 32259). Her expert opinions are summarized as follows:

(1) L&A did not withdraw from the case “voluntarily” as that term has been explained in applicable case law.

(2) L&A absorbed the risk of the state court Barbanti litigation, which indirectly led to the ZAI class settlement, and is entitled to a nominal fee but not to reimbursement of expenses.

(3) L&A’s efforts contributed an indirect benefit to the ZAI class.

(4) Although Class Counsels’ allocation of the $16 million fee is entitled to great weight, L&A has established an entitlement to a nominal share and, accordingly, Class Counsels’ proposed allocation should be adjusted to provide for such share.

(5) Alternatively, if the Court finds L&A’s services did not provide a benefit to the ZAI class sufficient to entitle L&A to an allocation of the Common Fund Fee then, similarly, this Court should find that neither McGarvey nor Ness provided a sufficient benefit to the ZAI class to be entitled to a fee.

(6) From the submissions of the parties and review of applicable law, the Court should award L&A ten percent (10%) of Darrell Scott’s share of the Common Fund Fee, in the amount of [$667,500]. [5]

Expert Report, p. 3. Fitzgerald further recommended that L&A be denied any reimbursement of its costs as no notice was provided to the ZAI class that such a request would be made and no other non-class counsel will receive a disbursement based on costs. Expert Report, p. 30.

On July 7, 2014, ZAI Class Counsel filed a response to the Expert Report (D.I. 32275), attaching a declaration of Darrell W. Scott, that challenged certain factual findings in the Expert Report regarding Scott’s representations to L&A about reaching a fee arrangement at a later time as incorrect.

Also on July 7, 2014, L&A filed a response to the Expert Report (“L&A’s Response”), asking that the Expert Report’s recommendation be revised to provide for an allocation to L&A of at least 17.03% of Scott’s share of the Common Fund Fee Award, or approximately $1,136,666.00 (D.I. 32276). L&A argues that the Expert Report recognized that it provided an important benefit to the ZAI Class Settlement, but then recommended only a “nominal” allocation to L&A from the Fee Award. L&A contends that the award does not recognize that it expended approximately 5,602 hours of time, with an actual dollar value of $1,136,666.00 (at historical rates), for investigating, developing, and litigating the state court Barbanti Litigation and the ZAI property damages claims in the bankruptcy proceedings. L&A further argues that Fitzgerald gave undue deference to ZAI Class Counsel’s proposed allocation of the Fee Award, especially in light of ZAI Class Counsel’s unreasonable attempt to completely bar L&A from any recovery. L&A also argues that the recommended allocation award is not fair and equitable when compared to the proposed allocation to other counsel and the contributions of those firms to the ZAI Class Settlement.

On July 10, 2014, ZAI Class Counsel filed a Motion for Leave to File Its Reply to Lukins & Annis, P.S.’s Response to Rule 706 Expert Report (D.I. 32283). [6] In the reply, ZAI Class Counsel asks the Court to accept Fitzgerald’s report and recommendation due to her experience in mass tort bankruptcies and her familiarity with the ZAI litigation. Further, ZAI Class Counsel responds to the comparison in L&A’s Response between L&A’s contribution to the ZAI Class Settlement and the work performed by other counsel. ZAI Class Counsel pointed out that L&A received $582,005.68 in court-approved post-petition special counsel fees, while the Fee Award represents the only compensation some other attorneys will receive in connection with the ZAI litigation.

Standard

The “common fund doctrine . . . provides that a private plaintiff, or plaintiff’s attorney, whose efforts create, discover, increase, or preserve a fund to which others also have a claim, is entitled to recover from the fund the costs of his litigation, including attorneys’ fees.” In re Cendant Corp. Sec. Litig., 404 F.3d 173, 187 (3d Cir. 2005) quoting In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 820 n. 39 (3d Cir. 1995) . The common fund doctrine gives courts significant flexibility in setting attorneys’ fees. Cendant, 4040 F.3d at 187. In traditional common fund cases, the court acts almost as a fiduciary for the class, performing some of the roles, i.e., monitoring and compensating class counsel, that clients in individual suits normally take on themselves. Id. See also Drazin v. Horizon Blue Cross Blue Shield of New Jersey, Inc., 528 F. App’x 211, 214 (3d Cir. 2013) quoting In re High Sulfur Content Gasoline Prods. Liab. Litig., 517 F.3d 220, 227 (5th Cir. 2008) (“In a class action settlement, the district court has an independent duty . . . to the class and the public to ensure that attorneys’ fees are reasonable and divided up fairly among plaintiffs’ counsel.”)

“Generally, a district court may rely on lead counsel to distribute attorneys’ fees among those involved, but we have recognized that the court may take a greater role when separate counsel requests fees for work performed prior to the appointment of the lead plaintiff.” Milliron v. T-Mobile USA, Inc., 423 F. App’x 131, 134 (3d Cir. 2011) citing Cendant, 404 F.3d at 194-95 .

The Milliron Court further wrote:

In deciding how to allocate fees, what is important is that the district court evaluate what class counsel actually did and how it benefitted the class. When awarding fees to non-lead counsel, only work that actually confers a benefit on the class will be compensable.

Milliron, 423 F. App’x at 134 (citations and internal punctuation omitted).

The two primary methods for calculating attorneys’ fees are the percentage-of-recovery method and the lodestar method. In re Cendant Corp. PRIDES Litig., 243 F.3d 722, 732 (3d Cir. 2001) . The percentage-of-recovery method is generally favored in cases involving a common fund and is designed to allow courts to award fees from the fund in a manner that rewards counsel for success and penalizes it for failure. Id. quoting In re Prudential Ins. Co. America Sales Practice Litig. Agent Actions, 148 F.3d 283, 333 (3d Cir. 1998) . The ultimate choice of methodology rests with the court’s discretion. Dewey v. Volkswagen Aktiengesellschaft, 558 F. App’x 191, 197 (3d Cir. 2014) quoting Sutter v. Horizon Blue Cross Blue Shield of N.J., 406 N.J. Super 86, 966 A.2d 508, 519 (N.J. App. Div. 2009).

Discussion

Fitzgerald has extensive experience in mass tort bankruptcy cases and, particularly relevant to the task at hand, Fitzgerald presided over the bankruptcy case of W.R. Grace & Co., et al, including the lengthy ZAI litigation prior to her retirement from the bench on May 31, 2013. Her consideration and evaluation of L&A’s request for an allocation of the Fee Award was based upon careful consideration of the parties’ submissions and her familiarity with the background of the bankruptcy case, as well as proper application of the appropriate legal standard.

I disagree with L&A’s contention that Fitzgerald relied too heavily on the proposed fee allocation by ZAI Class Counsel or that her award to L&A is not in proportion to the fees allocated to other non-class counsel. Fitzgerald used ZAI Class Counsel’s allocation as a starting point, then awarded a share to L&A after consideration the indirect benefit that L&A’s efforts provided to the ZAI Class Settlement. I conclude that Fitzgerald’s reasoned and informed factual determinations and legal conclusions regarding the L&A request for an allocation of fees from the Fee Award should be, and hereby are, adopted by this Court in full.

Conclusion

Upon consideration of the Joinder and Counter-Motion (D.I. 31794), the L&A Motion (D.I. 32034), and the Expert Report (D.I. 32259), and responses and replies thereto, and for the reasons set forth above, it is hereby ORDERED that

(1) consistent with the recommendations in the Expert Report, which are hereby adopted by this Court, the Joinder and Counter-Motion and the L&A Motion are GRANTED, in part, so that Lukins & Annis, P.S. is hereby awarded a 10% share of Darrell W. Scott’s portion of the Common Fund Fee Award ($667,500);

(2) any other requests for relief in the Joinder and Counter-Motion and the L&A Motion are DENIED. [7]

[1] This Memorandum and Order constitutes the findings of fact and conclusions of law required by Fed.R.Bankr.P. 7052. This Court has jurisdiction to decide the motions before it pursuant to 28 U.S.C. §1334 and §157(a). This is a core proceeding pursuant to 28 U.S.C. §157(b)(1) and (b)(2)(A) and (B).

[2] ZAI Class Counsel were appointed previously by this Order of this Court dated January 16, 2009, and includes the following attorneys and their respective firms: Darrell W. Scott of The Scott Law Group (“Scott”), Elizabeth Cabraser of Lieff, Cabraser, Heimann & Bernstein, L.L.P. (“Cabraser”), and Edward J. Westbrook of Richardson, Patrick, Westbrook & Brickman, LLC. (“Westbrook”) (D.I. 20535 at 4, ¶3.)

[3] Pursuant to an agreement, ZAI Class Counsel proposed to allocate part of the Fee Award to the law firms Ness Motley (“Ness”) and McGarvey Heberling (“McGarvey”).

[4] Prior to her retirement from the bench on May 31, 2013, Fitzgerald presided over this bankruptcy case and the ZAI litigation encompassed therein. The parties waived any conflict based on her prior status as the judge in the bankruptcy case. Further, during her tenure as a United States Bankruptcy Judge, Fitzgerald presided over more asbestos mass tort bankruptcies than any other bankruptcy judge in the country, including several of the largest asbestos-driven bankruptcy cases in history. (See Expert Report, p. 1 n. 1.)

[5] The Expert Report incorrectly states the amount of L&A’s 10% fee in the summary as $675,000. The correct amount is set forth on page 30 of the Expert Report ($667,500).

[6] The Rule 706 Order provided that parties could file responses to the Expert Report, but did not set any further time for filing replies to the responses. However, as no objection has been filed to ZAI Class Counsel’s reply, the Court will consider it.

[7] Counsel shall serve a copy of this Memorandum and Order upon all interested parties and file a Certificate of Service with the Court.

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New Bankruptcy Opinion: IN RE LEHMAN BROTHERS INC. – Dist. Court, SD New York, 2014

In re LEHMAN BROTHERS INC., Debtor.

Case No. 08-1420, No. 14-cv-1742(SAS)., 14-cv-1987(SAS), 14-cv-2305(SAS)

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

September 5, 2014.

Marshall R. King, Esq., Matthew J. Williams, Esq., Joshua Weisser, Esq., Gibson, Dunn, & Crutcher LLP, New York, NY, for Appellant Claren Road Credit Master Fund Ltd.

Joshua Dorchak, Esq., Bingham McCutchen LLP, New York, NY, for Appellant UBS Financial Services Inc.

Mitchell A. Lowenthal, Esq., Luke A. Barefoot, Esq., Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Appellants ANZ Securities, Inc., BMO Capital Markets Corp., BNY Mellon Capital Markets, LLC, Cabrera Capital Markets, LLC, DNB Markets, Inc., BNP Paribas FS, LLC, nabSecurities, LLC, National Australia Bank Ltd., SunTrust Robinson Humphrey, Inc. and The Williams Capital Group, L.P.

James B. Kobak, Jr., Esq., Michael E. Salzman, Esq., Ramsey Chamie, Esq., Dina R. Hoffer, Esq., Hughes Hubbard & Reed LLP, New York, NY, for Appellee James W. Giddens, as Trustee for the SIPA Liquidation of Lehman Brothers, Inc.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.

I. INTRODUCTION

On September 19, 2008, Lehman Brothers Inc. (“LBI”), a registered broker-dealer and wholly-owned subsidiary of Lehman Brothers Holdings Inc. (“LBHI”), was placed into liquidation pursuant to the Securities Investor Protection Act of 1970 (“SIPA”), and James W. Giddens was appointed as SIPA trustee (the “Trustee”). Before the Court are three related appeals from two orders entered by Bankruptcy Judge James M. Peck in LBl’s SIPA proceeding (the “Orders”). [1] In relevant part, the Orders grant a motion and sustain an objection filed by the Trustee seeking to subordinate certain claims pursuant to section 510(b) of the Bankruptcy Code. The Bankruptcy Court found that subordination of the claims to the claims of general unsecured creditors was mandated under the plain language of section 510(b).

Appellant Claren Road Credit Master Fund Ltd. (“Claren Road”) argues that its claim for damages against LBI, based on LBI’s failure to purchase bonds issued by LBHI from Claren Road pursuant to a prime brokerage account agreement, should not be subordinated because it does not “aris[e] from the purchase or sale” of the LBHI bonds within the meaning of section 510(b). [2] In addition, Claren Road and the remaining appellants, co-underwriters [3] with LBI in the issuance of LBHI securities, argue that section 510(b) is inapplicable because there are no claims or interests “represented by” LBHI securities in LBI’s SIPA proceeding. [4] For the reasons set forth below, the Orders are AFFIRMED.

II. BACKGROUND

A. Claren Road

1. Claren Road’s Claim

In December 2005, Claren Road and LBI entered into a prime brokerage agreement. [5] The PBA deems LBHI and certain LBHI affiliates as parties and is signed by LBI “as signatory for itself and as agent for the affiliates named herein.” [6] As prime broker, LBI agreed to “`settl[e] trades executed on [Claren Road's] behalf by [its] executing broker(s).’” [7] On September 12, 2008, LBI and Claren Road entered into two separate trades in which LBI agreed to purchase LBHI bonds from Claren Road at a discount to par. LBI breached its agreement to purchase the LBHI bonds on September 17, 2008, when it failed to settle the trades. Claren Road filed a claim against LBI in the SIPA liquidation for over $8.5 million, representing the difference between the amount that LBI had agreed to pay for the LBHI bonds and their market price on September 19, 2008. [8]

2. The Trustee’s Motion and the Bankruptcy Court’s Order

On October 25, 2013, the Trustee filed a motion seeking to confirm the non-customer status [9] of Claren Road’s claim under SIPA and to subordinate it to the claims of general unsecured creditors pursuant to section 510(b). [10] Claren Road argued that on a literal reading of section 510(b), its claim does not arise from a purchase or sale of a security because LBI did not complete the purchase of the LBHI bonds. [11] It further argued that under Second Circuit case law, section 510(b) is ambiguous when applied to its claim and that subordination of its claim would not further the policy objectives underlying the statute. [12] The Bankruptcy Court held that under the plain language of the statute, Claren Road’s claim was subject to subordination as a claim arising from the purchase or sale of a security of a debtor affiliate. [13] The Bankruptcy Court also rejected Claren Road’s argument that because section 510(b) states that an arising from claim “shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security,” claims based on LBHI bonds may not be subordinated in LBI’s SIPA proceeding where holders of LBHI bonds have no claims against LBI’s estate. [14] The Bankruptcy Court explained that

Claren Road’s approach is too narrow and fails to recognize the common meaning of the words used in the statute. A more reasonable interpretation of the statutory language is that the “claim . . . represented by [the LBHI Bonds]” is not directed to a recovery from LBI on account of the LBHI Bonds but extends to the breach of contract claim asserted by Claren Road against LBI with respect to these bonds. Such a claim is a general unsecured claim that is connected to the subject matter of the securities in question. The essence of the claim is the failure to purchase the LBHI Bonds. This reading of the plain language of the statute leads to the conclusion that the Claren Road Claim “shall be subordinated to all claims . . . that are senior to or equal” the general unsecured claims against LBI.

Interpreting the phrase “claim or interest represented by such security” in this fashion is a common sense interpretation of section 510(b) that infuses the words of section 510(b) with meaning. If a claim “represented by such security” were to be restricted to a recovery from the issuer for amounts outstanding under the security, then no claim arising from the purchase or sale of affiliate securities would ever fit within the regime for subordination. Such a result would contradict express provisions of the statute which direct that such claims shall be subordinated. [15]

The Bankruptcy Court entered an order allowing Claren Road’s claim as a noncustomer claim in its asserted amount, and subordinated that claim to the claims of general unsecured creditors.

B. The Co-underwriters

1. ANZ

In the course of its business as a broker-dealer, LBI served as lead underwriter in connection with offerings of registered securities issued by LBHI. [16] LBI and ANZ entered into a Master Agreement Among Underwriters dated December 1, 2005, which governed the relationship among the underwriters. [17] “The agreement required each underwriter to contribute, based on its agreed percentage participation in an offering, toward losses or liabilities incurred by another underwriter arising from allegations that the offering materials contained untrue statements or omissions.” [18]

After LBHI’s collapse, a number of purchasers of LBHI securities filed lawsuits, including class actions, against ANZ. [19] LBI was not named as a defendant because of the bar created by the automatic stay under section 362. These actions alleged that LBHI’s offering documents contained material misstatements and omissions and sought to hold ANZ liable for damages under federal securities laws. [20] ANZ’s legal fees and settlement payments came to nearly seventy-eight million dollars and ANZ filed claims in LBI’s SIPA proceeding based on asserted contractual and statutory rights to contribution.

2. UBSFS

Pursuant to a purchase agreement entered into by UBSFS and LBI in 2007, “[i]n 2007 and 2008, UBSFS purchased from LBI, in LBI’s capacity as underwriter, certain notes, including certain Medium Term Notes, Series I, U.S. Structured Notes issued by LBI [], expressly earmarked for sale to UBSFS clients.” [21] There were approximately eighty-four issuances of the LBHI notes pursuant to the parties’ agreements. UBSFS did not purchase or hold any of the notes for its own account. [22] Following the commencement of LBI’s SIPA case, a number of UBSFS clients filed class action lawsuits or initiated arbitration proceedings against UBSFS, asserting securities fraud and related claims based on alleged material misstatements and omissions in the offering materials concerning the LBHI notes. [23] UBSFS filed a claim for over two hundred and fifty million dollars based on its statutory right to contribution. [24]

3. The Trustee’s Objection and the Bankruptcy Court’s Order

On July 12, 2013, the SIPA Trustee filed an objection to the underwriter claims arguing that such claims should be subordinated under section 510(b). The co-underwriters argued that their claims could not be subordinated “because the LBHI securities do not represent a claim that can be made in the LBI case.” [25] The Bankruptcy Court rejected the co-underwriters’ “hyper-technical” focus “on what it means for claims to be represented by securities of an affiliate of the debtor,” disagreeing that “the claims must be based on securities within the capital structure of an enterprise that includes a debtor and affiliated entities.” [26] The Bankruptcy Court explained that this rested on “the false premise [] that the claims represented by the securities of an affiliate of the debtor must be the same kinds of claims that could be made by a holder of those securities against that affiliate” and concluded that the co-underwriters’ claims “are simply claims for reimbursement and contribution based on the sale of securities of LBHI, an affiliate of the debtor, and such claims do not rank equally with other unsecured claims against LBI. [27] In reaching this conclusion, the Bankruptcy Court relied on the plain language of the statute and therefore did not consider legislative history or any other external material.

III. LEGAL STANDARD

A district court functions as an appellate court in reviewing orders entered by bankruptcy courts. [28] Findings of fact are reviewed for clear error, [29] whereas findings that involve questions of law, or mixed questions of fact and law, are reviewed de novo. [30] A district court “may affirm, modify, or reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for further proceedings.” [31]

IV. APPLICABLE LAW [32]

Section 510(b), as amended in 1984, provides that

For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority

as common stock. [33] Section 510(b) thus describes three categories of claims that are subject to mandatory subordination and then addresses how subordination is to occur. [34] The two categories relevant here are claims (i) “for damages arising from the purchase or sale of [a security of the debtor or of an affiliate of the debtor]” and (ii) “for reimbursement or contribution . . . on account of such a claim[.]” [35] With regard to the level of subordination, a leading treatise describes the operation of section 510(b) as follows:

A shareholder claimant who seeks to rescind an equity interest and to obtain a debt claim will have the debt claim subordinated. Rescission will lead to subordination below the interest held before rescission. However, if the security is common stock, the claim has the same priority as common stock. If the security is an unsecured debt instrument, the claim that is represented by that security is a general, unsecured claim. Since the claim represented by the instrument is a general, unsecured claim, any claim for rescission will be subordinated until the claims of the general unsecured creditors have been satisfied. [36]

A report of the United States House of Representatives sheds light on the purpose of section 510(b):

A difficult policy question to be resolved in a business bankruptcy concerns the relative status of a security holder who seeks to rescind his purchase of securities or to sue for damages based on such a purchase: Should he be treated as a general unsecured creditor based on his tort claim for rescission, or should his claim be subordinated? . . . [Professors Slain and Kripke] conclude that allocation of assets in a bankruptcy case is a zero-sum situation, and that rules of allocation in bankruptcy should be predicated on allocation of risk. The two risks to be considered are the risk of insolvency of the debtor and the risk of an unlawful issuance of securities. While both security holders and general creditors assume the risk of involvency[,] Slain and Kripke conclude that the risk of illegality in securities issuance should be borne by those investing in securities and not by general creditors. [37]

As explained by the Second Circuit in Med Diversified, “Congress . . . adopted Slain and Kripke’s policy rationales for mandatory subordination: `1) the dissimilar risk and return expectations of shareholders and creditors; and 2) the reliance of creditors on the equity cushion provided by shareholder investment.’” [38] Either rationale can justify subordination under section 510(b), but courts have focused mainly on the risk-allocation rationale. [39] The risk-allocation rationale “represents a Congressional judgment that, as between shareholders and general unsecured creditors, it is shareholders who should bear the risk of illegality in the issuance of stock in the event the issuer enters bankruptcy.” [40]

Notably, this statement concerning the risk-allocation rationale is incomplete for two reasons. First, as recognized in Med Diversified, section 510(b) is not limited to claims based on fraud in the issuance. [41] Indeed, Slain and Kripke were “only incidentally concerned with the precise predicate of a disaffected shareholder’s efforts to recapture his investment from the corporation.” [42] Second, section 510(b) is not limited to shareholder claims. [43] Section 510(b) uses the term “security,” which is defined in section 101(49) of the Bankruptcy Code as including stocks, bonds, and notes, among other instruments. Accordingly, section 510(b) has been applied broadly to subordinate claims arising in a variety of contexts, such as claims based on fraudulent retention, [44] as well as other torts or breach of contract claims involving the failure to deliver, exchange, or register securities. [45] Courts have also subordinated claims for contribution, indemnification, and reimbursement asserted by underwriters and others, [46] and claims based on securities of an affiliate of the debtor. [47] Courts also recognize that the claimant need not be an actual security holder, [48] and the debtor need not be the issuer of the security for section 510(b) to apply. [49]

In a number of differing contexts, courts have found the phrase “arising from the purchase or sale of a security” to be ambiguous. The source of this ambiguity is typically the terms “arising from,” which imply a causal connection. [50] For example, in Telegroup, parties to a stock purchase agreement that required the seller to use its best efforts to register the stock brought a claim based on the theory that had the seller registered the stock, they would have sold their shares and avoided their losses. [51] The Third Circuit deemed section 510(b) ambiguous in this context, and explained that

[f]or a claim to “aris[e] from the purchase or sale of . . . a security,” there must obviously be some nexus or causal relationship between the claim and the sale of the security, but § 510(b)’s language alone provides little guidance in delineating the precise scope of the required nexus. On the one hand, it is reasonable, as a textual matter, to hold that the claims in this case do not “arise from” the purchase or sale of Telegroup’s stock, since the claims are predicated on conduct that occurred after the stock was purchased. On the other hand, it is, in our view, more natural, as a textual matter, to read “arising from” as requiring some nexus or causal relationship between the claims and the purchase of the securities, but not as limiting the nexus to claims alleging illegality in the purchase itself. [52]

In the Third Circuit’s view, section 510(b) “is reasonably read to encompass” claims based on the failure to register securities, as they “would not have arisen but for the purchase of Telegroup’s stock and allege a breach of a provision of the stock purchase agreement.” [53]

The Second Circuit considered the ambiguity of the phrase “arising from” in Med Diversified. [54] In that case, a departing employee, David Rombro, entered into a severance agreement whereby Med Diversified agreed to issue shares of its common stock to Rombro in exchange for Rombro’s shares in PrimeRX, an unaffiliated company. [55] After Med Diversified filed for bankruptcy protection, Rombro asserted a claim based on its failure to consummate the exchange. Relying on “case law broadly construing section 510(b),” the bankruptcy court determined “that the claim need not flow directly from the securities transaction, but can be viewed as `arising from’ the transaction if the transaction is part of the causal link leading to the injury.” [56]

Rombro argued on appeal that “the phrase `arising from’ in section 510(b) is unambiguous and plainly applies only to claims stemming directly from a purchase, sale, or rescission of the debtor’s security, none of which occurred here.” [57] According to Rombro, “his claim did not arise from damages flowing from the purchase or sale of debtor’s stock but from the purchase by the debtor of Rombro’s PrimeRx stock, which in any event never occurred.” [58] The Trustee argued that “claims `arising from’ the purchase of a security . . . include claims that are predicated on the failure to issue stock, relying on case law broadly interpreting the statute.” [59] Although the Second Circuit found section 510(b) to be ambiguous, it nonetheless held that Rombro’s claim arose from the purchase or sale of a security of the debtor in large part because once Rombro entered into the stock exchange agreement “he became bound by the choice he made to trade the relative safety of cash compensation for the upside potential of shareholder status — the very choice highlighted by Slain and Kripke.” [60]

V. DISCUSSION

A. The Bankruptcy Court Did Not Err in Subordinating Claren Road’s Claim

Claren Road argues that the Bankruptcy Court erred in finding that section 510(b) was unambiguous when applied to its claim. [61] While Claren Road suggests that on a literal reading section 510(b) does not apply in the absence of an actual purchase or sale, it stresses that the Second Circuit deemed the statute to be ambiguous under a “similar factual scenario in Med Diversified.” [62] Thus, Claren Road argues that the Bankruptcy Court was obligated to consider section 510(b)’s legislative history and purpose to resolve this ambiguity, and, that if it had, it would have recognized that subordination of Claren Road’s claim did not advance the statute’s purpose. [63]

Claren Road argues that section 510(b) is squarely aimed at investors that attempt to bootstrap their way to parity with unsecured creditors by transforming their investment interests into unsecured claims. [64] According to Claren Road, subordination of its claim does not further either the risk-allocation or equity-cushion policy rationales identified in Med Diversified as the only two policy rationales justifying subordination. [65] This is because Claren Road did not “assume the risk or return expectations of a Lehman investor, much less an LBI equity holder” insofar as its claim arises from an attempt to dispose of the bonds for “a fixed sum of cash.” [66] In addition, Claren Road warns that “[a]llocating the risk associated with a prime-broker’s insolvency to the broker’s customers will have a negative impact on the prime-brokerage industry,” because customers, who cannot easily identify whether a security has been issued by an affiliate of a broker-dealer, will refuse to do business with financially troubled broker-dealers for fear their claims will be subordinated under section 510(b), leading to more broker-dealer failures. [67]

The Bankruptcy Court did not err in holding that Claren Road’s claim was subject to subordination under section 510(b). First, even if the statute were ambiguous as to whether an “actual” purchase or sale is needed, under Med Diversified and other case law it is now well-settled that section 510(b) applies in the absence of an actual purchase or sale. [68] Indeed, in Med Diversified the Second Circuit was “influenced by what appears to be the uniform determination of courts presented with similar claims” that section 510(b) mandated subordination even in the absence of a purchase or sale. [69] As discussed below, the fact that Rombro bargained to buy securities and Claren Road was attempting to sell securities does not immunize Claren Road’s claim from subordination. In short, given “[t]he weight of precedent favoring subordination” even where no purchase or sale has occurred, “and the absence of persuasive precedent upholding the contrary position, the ambiguity vel non of the statutory text” is beside the point. [70]

Second, applying the statute to Claren Road’s claim does not require “arising from” to be read nearly as broadly as permitted under the case law. [71] For example, unlike Rombro in Med Diversified, Claren Road held the LBHI bonds and was attempting to sell them, and the failure of that sale was a direct cause of Claren Road’s damages. [72] For another example, even though causal ambiguity weighs less heavily for Claren Road’s claim than for claims under a fraudulent retention theory, Claren Road’s failed attempt to dispose of the bonds is the functional equivalent of the fraudulent retention claims subordinated in cases like Geneva Steel, Granite Partners, Enron, and Motor Liquidation. Indeed, regardless of the type of claim, precedent requires subordination of claims by security holders that seek to recover, as Claren Road does, for the loss in value of a security issued by the debtor or an affiliate. Neither section 510(b) nor SIPA suggests an exception for transactions involving broker-dealer debtors either purchasing or selling affiliate bonds. SIPA provides that section 510(b) applies in liquidation proceedings; [73] bonds, in keeping with their common meaning, are included in the definition of security; [74] and section 510(b) explicitly references both debtor and debtor-affiliate securities. [75]

Finally, the risk-allocation policy rationale supports subordination of Claren Road’s claim. As the putative seller of LBHI bonds, there is no doubt that Claren Road was an LBHI bondholder. [76] The elephant in the room is that Claren Road entered into its agreement with LBI on Friday, September 12, 2008, and as is well known, on Monday September 15, 2008, LBHI and certain of its affiliates filed petitions for relief under chapter 11 of the Bankruptcy Code, followed days later by LBI’s SIPA proceeding. [77] But Claren Road’s motivation for selling the bonds is beside the point — “Just as the opportunity to sell or hold belong exclusively to the investors, the risk of illegal deprivations of that opportunity should too.” [78] Whether by holding an interest in the LBHI bonds or by entering into the agreement to have LBI purchase those bonds, Claren Road assumed the risk of exactly what happened here — the loss of its investment. [79] Claren Road argues that the risk-allocation rationale does not apply because LBI agreed to pay a fixed sum of cash for the LBHI bonds, and that “in contrast to Med Diversified, where the claimant contracted to acquire more stock, Claren Road sought to dispose of the LBHI Bonds, thereby terminating its right to share in any appreciation in price.” [80] However, Claren Road still held the LBHI bonds as of the petition date, and its claim is based in part on the diminished value of those bonds. [81] Furthermore, the distinction drawn by Claren Road between Rombro’s attempt to acquire securities in Med Diversified and Claren Road’s attempt to divest its interest in securities is legally irrelevant. [82] “The fact that the value of the [bonds] declined while [Claren Road] held them . . . should not enable [Claren Road] to eviscerate the absolute priority rule, and shift to creditors the investment risk assumed by the [bond] holders.” [83] In short, subordination of Claren Road’s claim pursuant to section 510(b) is justified because it prevents Claren Road from converting its investment loss into a creditor claim. [84]

B. The Bankruptcy Court Did Not Err in Subordinating Appellants’ Claims to the Claims of General Unsecured Creditors

1. Claren Road

Claren Road argues that the “language directing subordination of the asserted claim to claims or interests `represented by such security’ makes no sense where the applicable security creates no claim on the debtor’s estate.” [85] According to Claren Road, its claim “and claims `represented by’ LBHI Bonds simply do not exist in the same priority chain.” [86] Claren Road thus contends that “[a]s written, section 510(b) offers no guidance regarding its application when the debtor and the issuer of the subject security are separate entities” and therefore the phrase “represented by such security” is ambiguous when applied to a claim arising from securities of an affiliate. [87] In support of this point, Claren Road argues that “[f]our separate interpretations of the phrase were put forward in this case alone, including two articulated by the Bankruptcy Court.” [88] Claren Road’s interpretation was that the language refers to the underlying security and that subordination is proper only when there is a close nexus between the affiliate security and the asserted claim, “such as when the debtor has guaranteed the security in question or entered into an agreement to deliver to a creditor the debtor’s subsidiary’s securities in full satisfaction of a debt . . . .” [89]

The Trustee, in turn, argued that “because the LBHI Bonds have `no valid interests’ against LBI, the Claren Road Claim must be subordinated to zero.” [90] At the hearing on the claim objection, the Bankruptcy Court suggested a “virtual security” where one assumes that the security of an affiliate is the security of the debtor. Finally, Claren Road argues that the Bankruptcy Court “rejected all of these approaches” and found that a claim represented by the LBHI bonds includes “all claims with respect to or connected to the subject matter of the LBHI Bonds.” [91] Thus, Claren Road argues that the Bankruptcy Court erred by not considering the legislative history and purpose of section 510(b), and that subordination of a claim based on securities issued by an affiliate is proper only when such subordination furthers either the risk-allocation or equity-cushion rationales identified in Med Diversified. [92] As discussed earlier, Claren Road argues that neither rationale applies.

However, the statute directs that Claren Road’s claim “for damages arising from the purchase or sale of [the LBHI bonds]” be subordinated for purposes of distribution to “all claims or interests that are senior to or equal the claim or interest represented by [the LBHI bonds.]” In other words, the statute separately refers to the claim subject to subordination, the underlying debtor or affiliate security, and the claim or interest represented by that security.

But nothing in section 510(b) ties subordination to a security within the capital structure of the debtor. Claren Road’s argument to the contrary simply assumes that this must be the case because otherwise the claim to be subordinated and the claim represented by the security would not be in the same priority scheme which, Claren Road argues, makes it impossible to define the level of subordination. Claren Road’s substantive argument — that the security must exist within the capital structure of the debtor — is not only unsupported by the plain language of the statute, but contradicted by the statute’s inclusion of affiliate securities.

This is not to say that Claren Road’s assumption about the priority scheme is implausible. As one court notes, “[i]t is true that generally shareholders of a subsidiary have no claim against the parent and thus are not part of any priority scheme of claims against the parent.” [93] However, section 510(b) unambiguously states that rescission, arising-from, and contribution claims involving securities of an affiliate of the debtor are subject to subordination. Thus, any ambiguity in the statute lies not in whether claims based on securities of an affiliate are to be subordinated but how that subordination is to occur. For this reason, Claren Road’s assumption about the priority structure is untenable as it would automatically exclude claims arising from the purchase or sale of securities of an affiliate in derogation of the plain language of the statute.

At the same time, Claren Road’s procedural argument — that it is impossible to define the relevant priorities — is easily overcome. Under section 510(b), Claren Road’s claim is a claim based on LBI’s breach, the securities involved in that claim are the LBHI bonds, and because the LBHI bonds are unsecured debt instruments, the most natural way to read section 510(b) is that the claim “represented by” such unsecured debt instruments is an unsecured claim. Accordingly, Claren Road’s claim is properly subordinated to claims of unsecured creditors. [94] This focus on the type of claim the security represents, rather than where the security falls in the capital structure of the debtor, promotes the purpose of section 510(b), which is to ensure that creditors receive their distribution ahead of investors. By contrast, Claren Road places greater importance on the structure of the priority scheme than the requirement of subordinating certain types of claims for the benefit of creditors.

In addition, it is not reasonable to read section 510(b) as applying only when there is a close nexus between the affiliate security and the asserted claim. Section 510(b) states that a claim “arising from the purchase or sale of” a security of a debtor or an affiliate of the debtor “shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security . . . .” The statute’s application to securities of an affiliate is therefore unambiguous. Furthermore, the phrase “arising from” — which implies a causal connection — modifies the types of claims that are subject to mandatory subordination, not how those claims are to be subordinated. Neither the phrase “represented by” nor its placement in section 510(b) implies a causal connection requiring a close nexus between the security and the asserted claim. [95] Finally, for the reasons discussed above, subordination of Claren Road’s claim fits within the purpose of section 510(b). After all, had Claren Road not entered into the transaction with LBI involving LBHI bonds, it would not have a claim against LBI relating to the diminished value of the LBHI bonds at all (although it would still have a claim against LBHI). Section 510(b) prevents Claren Road from collecting pari passu with LBI’s general unsecured creditors by virtue of its failed attempt to sell the LBHI bonds.

2. The Co-Underwriters

The co-underwriters concede that their claims are for contribution within the meaning of the first portion of section 510(b). They argue that claims “represented by” LBHI securities must mean claims that are based on ownership of LBHI securities. They then argue that because LBHI securities “do not represent a claim that can be made in the LBI case” there are no claims in LBI’s case to which their claims can be subordinated. [96] Alternatively, the co-underwriters argue that subordination of their claims does not serve the purposes behind section 510(b). [97]

As explained by the Bankruptcy Court, the co-underwriters’ “strained argument . . . assumes that the claims must be based on securities within the capital structure of an enterprise that includes a debtor and its affiliated securities.” [98] However, as discussed in connection with the Claren Road claim, that assumption is not supported by the statutory text. A straightforward and practical application of section 510(b) recognizes that unsecured, non-equity securities represent unsecured claims, meaning that claims involving such securities must be subordinated to general unsecured claims, and when the relevant security is common stock the underlying claim is subordinated to the level of common stock. [99]

As one court notes, when a “provision such as section 510(b) [] plainly incorporates a broad standard,” textual analysis “has a tendency to miss the forest for the trees.” [100] The co-underwriters’ arguments seize on the opportunity to parse section 510(b) in the relatively untested context of the treatment of claims based on securities issued by an affiliate of the debtor in a SIPA liquidation. What is lost in this effort is that there is no question that their claims would be subordinated to the claims of general unsecured creditors if they were based on LBI securities in the SIPA proceeding or LBHI securities in LBHI’s bankruptcy case. In either scenario, the precise meaning of “represented by” would not be relevant to the issue of subordination. [101] Because claims for contribution arising from transactions based on securities of an affiliate of the debtor are plainly subject to subordination under section 510(b), it would be anomalous to restrict section 510(b)’s application to the rare contexts suggested by the co-underwriters. [102] For example, the Bankruptcy Code does not expressly provide for substantive consolidation, making it unlikely that Congress would have relied on that mechanism to provide meaning to the “affiliate” language in section 510(b). [103]

The co-underwriters argue that the risk-allocation rationale does not apply when the securities have been issued by an affiliate of the debtor. [104] But by including securities of affiliates in section 510(b), Congress has already made the judgment that claims for contribution based on such securities must be subordinated. This is because “underwriters are in a better position to allocate risks associated with the issuance of securities and [] it is inconsistent with the policies articulated in the legislative history of section 510(b) to force unsecured creditors to subsidize the underwriters’ litigation costs.” [105]

VI. CONCLUSION

In sum, section 510(b) mandates the subordination of arising-from and contribution claims, provided such claims are based on securities of a debtor or an affiliate of the debtor. The level of subordination can be determined by reference to the type of claim or interest represented by such security — e.g., secured, unsecured, common stock, or equity. In cases involving affiliate securities, the type of security dictates the level of subordination whether or not that security represents an actual claim in the debtor’s case. For the foregoing reasons, the two Orders entered by the Bankruptcy Court are AFFIRMED. The Clerk of the Court is directed to close these appeals.

SO ORDERED.

[1] See In re Lehman Brothers Inc., No. 08-1420 (JMP) (SIPA), Dkt. Nos. 8176 and 8177; In re Lehman Brothers, Inc., 503 B.R. 778 (Bankr. S.D.N.Y. 2014) (“Decision Below”).

[2] See Opening Brief of Appellant Claren Road Credit Master Fund Ltd. (“Claren Road Mem.”), Case No. 14-cv-1742, at 8-10 (quoting 11 U.S.C. § 510(b)); Reply Brief of Appellant Claren Road Credit Master Fund Ltd. (“Claren Road Reply”), Case No. 14-cv-1742, at 3-5.

[3] A joint appeal was filed by underwriters ANZ Securities, Inc. (“ANZ”), BMO Capital Markets Corp., BNY Mellon Capital Markets, LLC, Cabrera Capital Markets, LLC, DNB Markets, Inc., BNP Paribas FS, LLC, nabSecurities, LLC, National Australia Bank Ltd., SunTrust Robinson Humphrey, Inc. and The Williams Capital Group, L.P. I will refer to these underwriters collectively as “ANZ.” Underwriter UBS Financial Services Inc. (“UBSFS”) is represented by separate counsel and has filed a separate appeal. I will refer to UBSFS and ANZ collectively as the “co-underwriters.”

[4] Opening Brief of Appellant UBS Financial Services Inc. (“UBSFS Mem.”), Case No. 14-cv-2305, at 1 (quoting 11 U.S.C. § 510(b)); Opening Brief of Junior Underwriter Appellants (“ANZ Mem.”), Case No. 14-cv-1987, at 3 (same).

[5] See Claren Road Mem. at 4; Customer Account Agreement Prime Brokerage (“PBA”), Ex. 2 to 3/26/14 Declaration of Joshua Weisser, counsel to Claren Road, in Support of Opening Brief of Appellant Claren Road Credit Master Fund Ltd.

[6] PBA at 1, 11.

[7] Claren Road Mem. at 5 (quoting PBA ¶ 21(b)).

[8] See id.

[9] Congress enacted SIPA in response to customer losses that resulted from stockbroker failures in 1969 and 1970. The purpose of SIPA is “to protect individual investors from financial hardship; to insulate the economy from the disruption which can follow the failure of major financial institutions; and to achieve a general upgrading of financial responsibility requirements of brokers and dealers to eliminate, to the maximum extent possible, the risks which lead to customer loss.” S. Rep. No. 1218, 91st Cong., 2d Sess., at 4 (1970). To effectuate this purpose, “a fund of `customer property’ is established [] consisting of cash and securities held by the broker-dealer . . . for priority distribution exclusively among customers,” and “[t]he Trustee allocates the customer property so that customers `share ratably in such customer property . . . to the extent of their respective net equities.’” In re Bernard L. Madoff Inv. Sec. LLC, 740 F.3d 81, 85 (2d Cir. 2014) (quoting 15 U.S.C. § 78fff-2(c)(1)(B)).

[10] See Decision Below, 503 B.R. at 781 .

[11] See Claren Road Mem. at 8 (“Although section 510(b), by its terms, is limited to claims “arising from the purchase or sale” of a security of the debtor or an affiliate of the debtor, no such `purchase or sale’ occurred in connection with the Claren Road Claim. The Claim arises out of the absence of a purchase or sale, caused by LBI’s failure to consummate the purchase to which it had agreed, thereby breaching its contract with Claren Road.”) (emphasis in original).

[12] See Decision Below, 503 B.R. at 781 . A number of facts relevant to consideration of these policy rationales are not included in the record, such as what business Claren Road is engaged in, when and for what purpose it purchased the LBHI bonds, whether the LBHI bonds were freely tradeable, etc. In this regard, it is unclear why these appeals come to this Court on the Trustee’s motion/objection and not in the context of an adversary proceeding in which the factual record could have been more fully developed. See Fed. R. Bankr. P. 7001(8) (stating than an adversary proceeding must be brought “to subordinate any allowed claim or interest, except when a chapter 9, chapter 11, chapter 12, or chapter 13 plan provides for subordination); but see Lernout & Hauspie Speech Prods., N.V. v. Baker (In re Lernout & Hauspie Speech Prods, N.V.), 264 B.R. 336, 339-40 (Bankr. D. Del. 2001) (explaining that Rule 7001(8) “appears to limit subordination complaints to allowed claims,” and, in any event declining to elevate form over substance where there had been due process). While the parties have not challenged the Bankruptcy Court’s decision on procedural grounds, the Trustee raises a number of fact-based arguments. See, e.g., Brief for the Appellee Trustee, Case No. 14-cv-1742, at 2, 19. Ultimately, however, the absence of factual findings by the Bankruptcy Court does not impact this Court’s holdings.

[13] See Decision Below, 503 B.R. at 783-84 .

[14] 11 U.S.C. § 510(b) (emphasis added); see Decision Below, 503 B.R. at 784 .

[15] Decision Below, 503 B.R. at 784 (alterations and emphasis in original).

[16] See ANZ Mem. at 5 (noting that between 2006 and 2008, LBI was the largest underwriter of offerings of registered securities issued by LBHI).

[17] See id.

[18] Decision Below, 503 B.R. at 781 .

[19] ANZ Mem. at 5. These suits were consolidated in a securities class action in this district captioned In re Lehman Brother Equity/Debt Securities Litigation, No. 08-cv-5523 (the “Class Action”).

[20] See id. at 5-6.

[21] UBSFS Mem. at 3.

[22] See id.

[23] See id. at 4. Some of these actions were consolidated in the Class Action.

[24] See id. at 5.

[25] Decision Below, 503 B.R. at 786-87 .

[26] Id. at 787.

[27] Id.

[28] See In re Sanshoe Worldwide Corp., 993 F.2d 300, 305 (2d Cir. 1993) .

[29] See Fed. R. Bankr. P. 8013.

[30] See In re Adelphia Commc’ns Corp., 298 B.R. 49, 52 (S.D.N.Y. 2003) (citing In re United States Lines, Inc., 197 F.3d 631, 640-41 (2d Cir. 1999) ).

[31] Fed. R. Bankr. P. 8013.

[32] SIPA incorporates section 510(b). See 15 U.S.C. § 78fff(b); Securities Investor Protection Corp. v. Stratton Oakmont, Inc., 229 B.R. 273, 279 (Bankr. S.D.N.Y. 1999) (citations omitted) (stating that “[a] SIPA Proceeding is essentially a bankruptcy liquidation” and noting that “SIPA incorporates chapters 1, 3, and 5 of title 11 (all of which are also applicable in a [bankruptcy liquidation]“). SIPA proceedings are initiated in the district court and then transferred to the bankruptcy court. See 15 U.S.C. § 78eee(a)(3), (b)(4).

[33] The 1978 version of section 510(b) provided:

Any claim for recission [sic] of a purchase or sale of a security of the debtor or of an affiliate or for damages arising from the purchase or sale of such a security shall be subordinated for purposes of distribution to all claims and interests that are senior or equal to the claim or interest represented by such security.

Apart from correcting a typographical error, the 1984 amendment added claims based on contribution or indemnification and states that when the underlying security is common stock, the claim is subordinated to the level of common stock.

[34] See KIT digital, Inc. v. Invigor Grp. Ltd. (In re KIT digital, Inc.), 497 B.R. 170, 178 (Bankr. S.D.N.Y. 2013) (“KIT digital”) (“[B]y reason of the `shall’ in the second to last clause, subordination of any claims subject to section 510(b) is mandatory.”).

[35] 11 U.S.C. § 510(b).

[36] 16 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 510.04[1] (16th ed. 2013) (“Collier”).

[37] H. Rep. No. 595, 95th Cong., 1st Sess. (1977) at 194-95 (citing John J. Slain and Homer Kripke, The Interface Between Securities Regulation and Bankruptcy — Allocating the Risk of Illegal Securities Issuance Between Securityholders and the Issuer’s Creditors, 48 N.Y.U. L.Rev. 261 (1973) (“Slain and Kripke”)). Congress was greatly influenced by Slain and Kripke. See id. at 196 (stating that “[t]he bill generally adopts the Slain/Kripke position”), 195 (“The argument for mandatory subordination is best described by Professors Slain and Kripke.”).

[38] Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251, 256 (2d Cir. 2006) (“Med Diversified”) (citations omitted).

[39] See id. at 259 (relying on the risk-allocation rationale and stating that of the two rationales it is “`more integral to any policy analysis of section 510(b)’”) (quoting In re Enron Corp., 341 B.R. 141, 166 (Bankr. S.D.N.Y. 2006) (“Enron”)). As explained in Enron, it is “unclear which rationale Slain and Kripke regarded as superior, if these concepts can even be neatly severed,” but “Congress and the courts have clearly elevated the issue of risk [rather than creditor reliance] to the fore.” Id. at 166 n.21.

[40] Med Diversified, 461 F.3d at 256 .

[41] See id. at 257 (recognizing that “the holdings of most prominent decisions of local bankruptcy courts also support the broad interpretation of section 510(b)”); Enron, 341 B.R. at 163 (stating that “the broad applicability of section 510(b) is now quite settled”); KIT digital, 497 B.R. at 181 (“While I certainly agree that other Circuits have construed section 510(b) broadly, so has the Second Circuit, along with bankruptcy and district court judges in the Second Circuit.”).

[42] Slain and Kripke, 48 N.Y.U. L. Rev. at 267.

[43] See id. at 268 (“Hereafter, the discussion is focused upon the rescinding stockholder. Mutatis mutandis, the discussion is equally applicable to holders of subordinated debentures and to other creditors whose debt securities are contractually subordinated.”); Levine v. Resolution Trust Corp. (In re Coronet Capital Co.), No. 94 Civ. 1187, 1995 WL 429494, at *8 (S.D.N.Y. July 12, 1995) (finding that promissory notes are within the meaning of section 510(b) and explicitly rejecting the argument that section 510(b) should be restricted to equity securities); Allen v. Geneva Steel Co. (In re Geneva Steel Co.), 281 F.3d 1173, 1177, 1182-83 (10th Cir. 2002) (“Geneva Steel”) (upholding subordination of claims related to bonds).

[44] See Geneva Steel, 281 F.3d at 1182-83 ; In re Granite Partners, L.P., 208 B.R. 332, 339 (Bankr. S.D.N.Y. 1997) (“Granite Partners”).

[45] See Med Diversified, 461 F.3d at 255 (failure to exchange); Baroda Hill Invs., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 138-42 (3d Cir. 2002) (“Telegroup”) (failure to register); American Broadcasting Sys., Inc. v. Nugent (In re Betacom of Phoenix, Inc.), 240 F.3d 823 (9th Cir. 2001) (“Betacom”) (failure to deliver); In re PT-1 Commc’ns, Inc., 304 B.R. 601, 608 (Bankr. E.D.N.Y. 2004) (tortious interference); Frankum v. International Wireless Commc’ns Holdings, Inc. (In re International Wireless Commc’ns Holdings, Inc.), 257 B.R. 739 (Bankr. D. Del. 2001) (breach of stock purchase agreement), aff’d, 279 B.R. 463 (D. Del. 2002), aff’d, 68 Fed. App’x 275 (3d Cir. Apr. 16, 2003) ; In re NAL Fin. Grp., Inc., 237 B.R. 225, 231 (Bankr. S.D. Fla. 1999) (failure to register debentures).

[46] See In re Jacom Computer Servs., Inc., 280 B.R. 570, 572 (Bankr. S.D.N.Y. 2002) (“Jacom”) (“[U]nderwriters are in a better position to allocate risks associated with the issuance of securities and [] it is inconsistent with the policies articulated in the legislative history of section 510(b) to force unsecured creditors to subsidize the underwriters’ litigation costs.”); In re Touch America Holdings, 381 B.R. 95, 104-06 (Bankr. D. Del. 2008) (subordinating statutory indemnification claim asserted by directors and officers); In re Mid-American Waste Sys., Inc., 228 B.R. 816, 824-26 (Bankr. D. Del. 1999) ; Official Comm. of Creditors Holding Unsecured Claims v. PaineWebber Inc. (In re De Laurentiis Entm’t Grp., Inc.), 124 B.R. 305, 308 (C.D. Cal. 1991).

[47] See In re VF Brands, Inc., 275 B.R. 725, 728 (Bankr. D. Del. 2002) (concluding that “[a]pplying section 510(b) requires that the [claimant's claim] (which is based on damages from the purchase of stock of an affiliate of the [debtors]) must be subordinated to the claims of the general unsecured creditors of the [debtors] which in the absence of that section would be equal in priority to its claim.”); Liquidating Trust Comm. of the Del Biaggio Liquidating Trust v. Freeman (In re Del Biaggio), No. 12 Civ. 6447, 2013 WL 6073367, at *7-8 (N.D. Cal. Nov. 18, 2013) (“Del Biaggio”) (rejecting argument that affiliate and debtor securities “are not senior or junior to each other because they simply do not compete for the same assets and distributions” and subordinating fraud claim to those of debtor’s unsecured creditors), appeal docketed, No. 13-17500 (9th Cir. Dec. 9, 2013). Accord Collier ¶ 510.04[4] (“Section 510(b) applies whether the securities were issued by the debtor or by an affiliate of the debtor.”). However, the legislative history of section 510(b) does not discuss the inclusion of affiliates in the statute.

[48] See Med Diversified, 461 F.3d at 258 (“[A] claimant need not be an actual shareholder for his claim to be covered by the statute.”); In re Walnut Equip. Leasing Co., No. 97-19699, 1999 WL 1271762, at *6 (Bankr. E.D. Pa. Dec. 28, 1999) (“[T]he language of § 510(b) does not limit its application to any particular type of claimant . . . but, rather, focuses on the type of claim possessed (e.g., claim for reimbursement or contribution).”). By the same token, “[n]othing . . . would require the subordination of a claim simply because the identity of the claimant happened to be a shareholder . . . .” Telegroup, 281 F.3d at 144 n.2 . “A typical example of such an excluded claim is a personal injury tort claim asserted by a shareholder. In such a case, although there was a purchase of the debtor’s security, the tort claim does not `arise from’ that purchase . . . .” Enron, 341 B.R. at 156 n.12 .

[49] See, e.g., In re Lehman Bros. Holdings Inc., No. 08-13555, 2014 WL 3726123, at *6 (Bankr. S.D.N.Y. July 28, 2014) (“The plain language of section 510(b) does not include the term `issuer,’ nor does it refer to securities `issued by’ or `sold by’ the debtor or an affiliate of the debtor; the Court is unwilling to read such terms, or any ambiguity, into the statute.”).

[50] See Granite Partners, 208 B.R. at 339 (explaining that “[s]omething `arises’ from a source when it originates from that source. Webster’s New International Dictionary 117 (unabridged ed. 1976); Black’s Law Dictionary 108 (6th ed. 1990). The phrase `arising from’ signifies some causal connection. Cf. Black’s Law Dictionary 108 (defining `arises out of’).”).

[51] See Telegroup, 281 F.3d at 136 .

[52] Id. at 138.

[53] Id. (emphasis added).

[54] Med Diversified is the Second Circuit’s only published opinion addressing section 510(b).

[55] See Med Diversified, 461 F.3d at 253 .

[56] Id. at 254 (quotation marks omitted).

[57] Id. at 255.

[58] Id. at 254.

[59] Id. at 255. The Second Circuit thus found that the phrase “`arising from’ is ambiguous as applied to the claims in this case” and reviewed the purposes behind the statute to determine if there was a sufficient causal link. While Med Diversified is the only published Second Circuit decision interpreting section 510(b), the Second Circuit found section 510(b) to be unambiguous when applied to different facts in an unpublished decision. See In re MarketXT Holdings Corp., No. 08-5560, 346 Fed. App’x 744, 746 (2d Cir. Sept. 28, 2009) (“The bankruptcy court correctly began with the plain meaning of the statute. Furthermore, we agree with the bankruptcy court that Waltzer’s claim, based on a state court judgement for damages in connection with the sale of stock, fell within the plain meaning of the statute.”).

[60] Med Diversified, 461 F.3d at 256 .

[61] See Claren Road Mem. at 8-10.

[62] Id. Claren Road points out that the Third (Telegroup), Fifth (Seaquest Diving), Ninth (Betacom), and Tenth (Geneva Steel) Circuits, have also found section 510(b) ambiguous when applied to certain claims.

[63] See id. at 8-9.

[64] See id. at 17 (“Section 510(b) is intended to prevent shareholders from obtaining creditor status by asserting tort or contract claims associated with an underlying equity transaction. Section 510(b) thus protects the priority scheme established by the Bankruptcy Code.”).

[65] See id. at 15.

[66] Id. at 15, 16, 18. Claren Road also notes that there are no allegations concerning the equity-cushion rationale.

[67] Id. at 19-20.

[68] See Med Diversified, 461 F.3d at 258 (citing Betacom, 240 F.3d at 830-21 ); Enron, 341 B.R. at 150-51, 162-63 ; PT-1 Commc’ns, 304 B.R. at 609 ; In re Worldwide Direct, Inc., 268 B.R. 69, 73 (Bankr. D. Del. 2001) ; In re Einstein/Noah Bagel Corp., 257 B.R. 499, 508 (Bankr. D. Ariz. 2000) (subordinating claim based on failed purchase and stating that “the critical point is that the claim arises because of the inability to sell or the failure to purchase the security itself, not merely because the party asserting the claim may hold an equity security of the Debtor.”).

[69] Med Diversified, 461 F.3d at 257 (citing Betacom, 240 F.3d at 830 ; Telegroup, 281 F.3d at 136 ). The Second Circuit also noted that it found “a measure of support in the fact that Congress did not elect to address this trend in the courts, leaving section 510(b) unchanged by the recent bankruptcy reform legislation . . . .” Id. at 257 n.1.

[70] Enron, 341 B.R. at 157 . Accord In re Motor Liquidation Co., No. 11 Civ. 7893, 2012 WL 398640, at *3 (S.D.N.Y. Feb. 7, 2012) (“Motor Liquidation”) (“Regardless of whether the language of § 510(b) is ambiguous [] `fraudulent retention’ claims must be subordinated to the claims of general creditors. Both Spirnak’s fraudulent inducement and his fraudulent retention claims therefore fall squarely within the scope of § 510(b) and were properly subordinated by the Bankruptcy Court.”).

[71] Compare Telegroup, 281 F.3d at 138 (finding the statute ambiguous but subordinating claim based on the failure of seller to register securities) with Kit digital, 497 B.R. at 178 (subordinating claim based on failure to deliver additional stock under stock purchase agreement and stating that, “The clause `arising from the purchase or sale’ is not ambiguous at all when it’s applied to an alleged breach of the agreement of purchase or sale itself, or to a fraud that induced such an agreement.”) and Enron, 341 B.R. at 152 (subordinating fraudulent retention claims and noting that, “Whereas the phrase `arising from’ unambiguously describes the claims of defrauded purchasers, the same cannot immediately be said of fraudulent retention claims.”).

[72] See Claren Road Reply at 3 (describing the Claren Road claim as a “damage claim arising from the debtor’s contractual breach of an agreement to buy securities of the debtor’s affiliate”); Claren Road Mem. at 5 (describing the Claren Road claim as “representing the difference between the amount that LBI had agreed to pay for the LBHI Bonds and their market price” on the date LBI was placed into SIPA liquidation).

[73] See 15 U.S.C. § 78fff(b) (“To the extent consistent with the provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3, and 5 and subchapters I and II of chapter 7 of [the Bankruptcy Code]“).

[74] See 11 U.S.C. § 101(49)(A).

[75] See id. § 510(b) (stating that “a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated”). As recognized by the Bankruptcy Court, courts applying section 510(b) where the debtor is a broker-dealer must “differentiat[e] between those claims arising from the purchase or sale of [] affiliated securities and those that arise from the purchase or sale of securities issued by unaffiliated third parties.” Decision Below, 503 B.R. at 786 . Thus, “[i]f Claren Road had a breach of contract claim against LBI for failing to close a trade relating to securities of an unaffiliated issuer, 510(b) would not apply.” Id. at 786 n.12. Similarly, courts have held that section 510(b) does not apply to mortgage backed securities held in securitization trusts because the trusts are not affiliates of the debtor. See Lehman Bros. Holdings Inc., 2014 WL 3726123, at *6 ; In re Washington Mutual, 462 B.R. 137, 145-46 (Bankr. D. Del. 2011) .

[76] See Med Diversified, 461 F.3d at 257 ; Geneva Steel, 260 B.R. at 523.

[77] “[T]ogether these filings constitute the largest business bankruptcy in history.” Lehman Brothers Special Financing Inc. v. BNY Corporate Trustee Services Limited (In re Lehman Brothers Holdings Inc.), 422 B.R. 407, 420 (Bankr. S.D.N.Y. 2010) (“Their various corporate entities comprise an integrated enterprise and, as a general matter, the financial condition of one affiliate affects the others.”) (quotation marks omitted).

[78] Granite Partners, 208 B.R. at 342 .

[79] Under the PBA, LBHI was not only listed as an affiliate but as a contracting party. That LBI’s and LBHI’s fates were tied together was thus apparent from the face of the PBA alone. I also note that the PBA undercuts Claren Road’s policy argument to the extent it concerns the inability of investors to know whether they are purchasing affiliate securities.

[80] See Claren Road Mem. at 16 (emphasis in original).

[81] These facts distinguish the cases cited by Claren Road. See CIT Grp. Inc. v. Tyco Int’l Ltd. (In re CIT Grp.), 460 B.R. 633, 640 (Bankr. S.D.N.Y. 2011) (“CIT Group”) (claimant sold its shares over seven years before the debtor filed for bankruptcy protection), aff’d, No. 12-1692, 479 Fed. App’x 393 (2d Cir. Sept. 6, 2012); Nisselson v. Softbank AM Corp. (In re Marketxt Holdings Corp.), 361 B.R. 369, 390 (Bankr. S.D.N.Y. 2007) (“Marketxt”) (“Softbank may have taken an equity risk when it purchased preferred stock, but by the date of the initial bankruptcy petition it was a creditor, not an equity holder. It is black letter law that claims are analyzed as of the date of the filing of a petition, not as of a hypothetical date in the past.”); Burtch v. Gannon (In re Cybersight LLC), No. 05-112, 2004 WL 2713098, at *4 (D. Del. Nov. 17, 2004) (“In contrast to the circumstances in Telegroup, Mr. Gannon’s equity stake in Cybersight extinguished pre-petition and with it Mr. Gannon’s ability to participate in any of Cybersight’s profits or losses.”); Official Comm. of Unsecured Creditors v. American Capital Fin. Servs., Inc. (In re Mobile Tool Int’l, Inc.), 306 B.R. 778, 782 (Bankr. D. Del. 2004) (“Mobile Tool”) (same); In re Wyeth Co., 134 B.R. 920, 921 (Bankr. W.D. Mo. 1991) (“Wyeth”) (same). As explained in CIT Group, the “`causal connection’ between the purchase or sale of a security” in the cases cited by Claren Road “was too remote to require subordination of a contract claim when the purpose and intent of the statute was considered.” CIT Group, 460 B.R. at 643 (describing Marketxt, Mobile Tool, and Wyeth). CIT Group is distinguishable for the further reason that its analysis applies only to equity securities and would arguably exclude any claim based on debt securities.

[82] As noted earlier, Slain and Kripke were “only incidentally concerned with the precise predicate of a disaffected shareholder’s efforts to recapture his investment from the corporation.” Slain and Kripke, 48 N.Y.U. L. Rev. at 267.

[83] Geneva Steel, 260 B.R. at 523 (quotation marks and alterations omitted). Accord Jacom, 280 B.R. at 572 (“[I]t is readily apparent that the rationale for § 510(b) is not limited to preventing shareholder claimants from improving their position vis-a-vis general creditors; Congress also made the decision to subordinate based on risk allocation.”) (quotation marks omitted).

[84] This is true regardless of whether the record establishes that Claren Road benefitted from appreciation based on its ownership of the LBHI bonds — section 510(b) does not contain an exception for either unsuccessful or short-term investors.

[85] Claren Road Reply at 6.

[86] Claren Road Mem. at 10.

[87] Id. at 10-11.

[88] Id. at 11.

[89] Id.

[90] Id. (quotation marks omitted).

[91] Id. at 12 (quotation marks omitted).

[92] See Claren Road Reply at 7 n.5.

[93] VF Brands, 275 B.R. at 727 (subordinating claims based on affiliate securities). In VF Brands, the court rejected the argument that because “there is no general principle which states that claims of general unsecured creditors of a parent are senior to the claims of shareholders of its subsidiary[,]” section 510(b) does not require subordination of claims based on affiliate securities to claims held by the debtor’s creditors. Id. Similar to the Bankruptcy Court here, the court in VF Brands looked to the type of claim asserted by the claimant and determined that because the claim was an unsecured claim, section 510(b) required that it be subordinated to the claims of general unsecured creditors. See id.

[94] Thus, while I reach the same result as the Bankruptcy Court, I do so not by looking at the type of claim asserted, but rather by looking at the type of claim represented by the security. See Decision Below, 503 B.R. at 784 ; VF Brands, 275 B.R. at 726-27 . Regardless of the approach, I agree with the Bankruptcy Court and other courts that arising-from claims in the affiliate context must at the very least be subordinated to general unsecured claims to effectuate the purpose of the statute. See Del Biaggio, 2013 WL 6073357, at *7; VF Brands, 275 B.R. at 726-27 ; Lernout & Hauspie Speech Prods., 264 B.R. at 343-44 .

[95] See ANZ Mem. at 10 (citing to dictionaries defining “represent” to mean “to correspond in kind” and “to correspond in essence: Constitute”) (citations omitted).

[96] Decision Below, 503 B.R. at 786-87 .

[97] See ANZ Mem. at 20-24; UBSFS Mem. at 11-14.

[98] Decision Below, 503 B.R. at 787 .

[99] As discussed above in footnote 94, I reach the same result as the Bankruptcy Court but based on the type of security and not the type of claim. However, it is not entirely clear what types of securities were involved in the numerous transactions underwritten by ANZ. Accordingly, to the extent that unsecured creditors will be paid in full, leaving a distribution to subordinate claimants, the Bankruptcy Court is directed to determine the appropriate level of subordination of ANZ’s claims.

[100] Enron, 341 B.R. at 159 (“Distinctions between possible and actual word choices, or analysis of the textual construction and word placement, are of minimal independent value, particularly where alternative analyses at the same level of specificity produce contrary conclusions.”).

[101] ANZ states that “neither courts nor commentators have indicated that `the claim or interest represented by such security’ was anything other than a claim based on ownership of the security.” ANZ Mem. at 12. However, those courts and commentators were not considering the affiliate issues raised here.

[102] See UBSFS Mem. at 9 (arguing that its position does not mean that a claim based on a security issued by the debtor’s affiliate would never be subordinated because “there are at least two such situations: `when the debtor has guaranteed payment or the estates are consolidated’”) (quoting Decision Below, 503 B.R. at 787 ); ANZ Mem. at 3 (advancing the same argument).

[103] See In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518 (2d Cir. 1988) (“Substantive consolidation has no express statutory basis but is a product of judicial gloss.”). In chapter 11, a plan must provide adequate means for implementation, such as merger or consolidation with other entities. See 11 U.S.C. § 1123(a)(5)(C). Courts have interpreted this provision as permitting substantive consolidation under a plan of reorganization. Substantive consolidation in the SIPA context is rare and works to bring individuals or entities into the SIPA liquidation, not into a case under the Bankruptcy Code. See, e.g., In re New Times Sec. Servs., Inc., 371 F.3d 68, 73 (2d Cir. 2004) .

[104] See ANZ Mem. at 21-24; UBSFS Mem. at 11-12.

[105] Jacom, 280 B.R. at 572 . This statement is no less true when securities are issued by an affiliate or when the securities do not represent a claim that can be made in the debtor’s case — these facts do not change the status of either the underwriters or the creditors or their respective claims. The Court has considered the other arguments raised by the co-underwriters and rejects them.

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New Bankruptcy Opinion: IN RE GREEKTOWN HOLDINGS, LLC. – Bankr. Court, ED Michigan, 2014

In re: GREEKTOWN HOLDINGS, LLC, et al., Chapter 11, Debtors.

BUCHWALD CAPITAL ADVISORS, LLC, solely in its capacity as Litigation Trustee to the GREEKTOWN LITIGATION TRUST, Plaintiff,

v.

DIMITRIOS (“JIM”) PAPAS, VIOLA PAPAS, TED GATZAROS, MARIA GATZAROS, BARDEN DEVELOPMENT, INC., LAC VIEUX DESERT BAND OF LAKE SUPERIOR INDIANS, SAULT STE. MARIE TRIBE OF CHIPPEWA INDIANS, KEWADIN CASINOS GAMING AUTHORITY, and BARDEN NEVADA GAMING, LLC, Defendants.

Case No. 08-53104, Jointly Administered, Adv. Pro. No. 10-05712.

United States Bankruptcy Court, E.D. Michigan, Southern Division — Detroit.

August 12, 2014.

OPINION DENYING DEFENDANTS DIMITRIOS (“JIM”) PAPAS, VIOLA PAPAS, TED GATZAROS, AND MARIA GATZAROS’ MOTION FOR SUMMARY JUDGMENT (DKT. 187)

WALTER SHAPERO, Bankruptcy Judge.

INTRODUCTION

Plaintiff, as Litigation Trustee, seeks to avoid transfers made by a debtor corporation to Defendants, arguing that the transfers were fraudulent transfers under applicable Michigan law. Defendants moved for summary judgment on the basis that Plaintiff’s action is an “impermissible collateral attack” on the order of the Michigan administrative agency that investigated and approved the overall transaction, including the subject transfers to Defendants. The motion is denied.

UNDISPUTED FACTS

Prior to 2000, Dimitrios (“Jim”) and Viola Papas (together, “the Papases”) and Ted and Maria Gatzaros (together, “the Gatzaroses”), owned approximately 86% of the membership interests in Monroe Partners, LLC (“Monroe”). Monroe owned a 50% interest in Greektown Casino, LLC (“Greektown Casino”). Kewadin Greektown Casino, LLC (“Kewadin”) owned the other 50% interest. Greektown Casino owned and operated a casino in downtown Detroit, Michigan. On or about July 28, 2000, by agreement, Monroe redeemed the membership interests of the Papases and the Gatzaroses (together, “Defendants”) in exchange for specified installment payments. Incident thereto, Kewadin contemporaneously purchased equivalent membership interests in Monroe and agreed to make the installment payments on Monroe’s behalf. Thus, in effect, Monroe and Kewadin became obligated, either directly or indirectly, to make the installment payments to Defendants. The casino opened in November 2000. By 2004, these payment obligations to Defendants were in default.

In 2005, the various parties negotiated a multi-faceted amended redemption agreement and financing arrangement (“the Transaction”) whereby, among other things, (a) the Papases would agree to a discounted cash buyout of about $95 million and (b) the Gatzaroses would agree to a partial payment of about $55 million, leaving about $50 million outstanding. As part of the Transaction, Monroe and Kewadin would convey all their membership interests in Greektown Casino to a new special-purpose entity called Greektown Holdings, LLC (“Holdings”). Holdings was formed in September 2005 and its assets would be limited to a subsidiary corporation and the 100% interest in Greektown Casino.

The Transaction required the approval of the Michigan Gaming Control Board (MGCB), a state regulatory agency created by the Michigan Gaming Control and Revenue Act, Mich. Comp. Laws § 432.201 et seq. (“the Gaming Act”). The MGCB’s authority is defined as “the powers and duties specified in this act and all other powers necessary and proper to fully and effectively execute and administer this act for the purpose of licensing, regulating, and enforcing the system of casino gambling established under this act.” Mich. Comp. Laws § 432.204(1). Mich. Comp. Laws § 432.203(3) states “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” Additionally, Mich. Comp. Laws § 432.204(17)(d) empowers the MGCB to promulgate appropriate rules, which are codified as Mich. Admin. Code r. § 432.1101 et. seq. Mich. Admin. Code r. § 432.1509 requires that a casino licensee “may not enter into any debt transaction affecting the capitalization or financial viability of its Michigan gambling operation or casino operation without first receiving the approval of the board.”

Greektown Casino first began discussions with the MGCB regarding the Transaction around June 2005. Because the Transaction qualified as a “debt transaction,” the MGCB conducted an investigation over several months, pursuant to its authority and procedures. See Mich. Admin. Code r. § 432.1509. The MGCB contemplated and understood that the discounted redemption payments to Defendants would be part of the Transaction, and that such funds would be sourced from Holdings issuing unsecured senior notes to qualified institutional buyers (“Noteholders”). [1] The Transaction also included other financing and restructuring aspects, which need not be discussed in detail here. At these hearings before the MGCB, Merrill Lynch, Pierce, Fenner & Smith Inc., the issuer and initial purchaser of the senior notes and predecessor in interest to the Noteholders, participated in the discussions regarding the Transaction and advocated for its approval. The MGCB unanimously approved the Transaction and issued a written order on November 15, 2005 (“Order”). Dkt. 187 Ex. 5-A. On November 22, 2005, Holdings issued an Offering Memorandum for the senior notes, advising potential note purchasers that Holdings “will not be insolvent or rendered insolvent as a result of issuing the notes; we will be in possession of sufficient capital to run our business effectively; and we will have incurred debts within our ability to pay as the same mature or become due.” Dkt. 187 Ex. 5-K, at 25. On December 2, 2005, the monetary transfers were made to Defendants via wire payments, together with other monetary transfers contemplated as part of the Transaction. More or less contemporaneously, Holdings acquired 100% ownership of Greektown Casino.

THE BASIS OF THIS ADVERSARY PROCEEDING

After Greektown Casino, Holdings, Monroe, Kewadin, and other related entities filed their present Chapter 11 bankruptcies on May 29, 2008, the Litigation Trustee (“Plaintiff”), on behalf of the Noteholders and other creditors, sought to avoid the aspects of the Transaction whereby Holdings transferred money to Defendants and other persons. [2] Plaintiff brought this action under 11 U.S.C. §§ 544 and 550 and two provisions of the Michigan Uniform Fraudulent Transfer Act (MUFTA): Mich. Comp. Laws §§ 566.34 and 566.35. Plaintiff’s principal allegation against Defendants is that Holdings did not receive fair consideration for these transfers to Defendants, thereby rendering Holdings insolvent or inadequately capitalized. Defendants moved for summary judgment on the basis that Plaintiff’s action is an “impermissible collateral attack” on the MGCB’s Order, which (a) approved the Transaction and (b) stated that the Transaction “has a low probability of having an adverse impact on the ongoing financial viability of [Holdings] and Greektown [Casino].” Dkt. 187 Ex. 5-A, at 3.

The starting point of Plaintiff’s case is 11 U.S.C. § 544(b)(1), which provides:

Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

(emphasis added). In Plaintiff’s complaint, “under applicable law” solely incorporates and alleges the pertinence of MUFTA. Thus, the Court’s task is to determine the extent to which MUFTA is “applicable” to the present situation in light of the asserted arguments. If the Gaming Act renders MUFTA inapplicable here, as Defendants argue, then there exists no “applicable law” by which Plaintiff can avoid the transfers under § 544. At one point, Plaintiff contended that Defendants are improperly arguing that MUFTA limits the jurisdiction of federal courts, particularly regarding enforcement of § 544. However, the Court views Defendants’ allegations as instead only attempting to define whether MUFTA is “applicable” in light of the asserted arguments. Similarly, Defendants argued that if Plaintiff’s case is successful, it would allow federal action to improperly impinge upon the important state interests of regulating casinos, discussing BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) . Again, because the Court is only asked to determine the applicability of a state statutory cause of action, as it might be incorporated into this adversary proceeding, that argument is irrelevant.

Plaintiff brings MUFTA allegations pursuant to Mich. Comp. Laws § 566.34, which states:

(1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation in either of the following:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor.

(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor did either of the following:

(i) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.

(ii) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.

Plaintiff also brings makes MUFTA allegations pursuant to Mich. Comp. Laws § 566.35, which states:

(1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

(2) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

Assuming that the transfers are avoided under either of these provisions, Plaintiff seeks recovery from Defendants pursuant to 11 U.S.C. § 550.

JURISDICTION

This is a core proceeding under 28 U.S.C. § 157(b)(2)(H). The Court has jurisdiction under 28 U.S.C. §§ 1334(b) and 157, and E.D. Mich. L.B.R. 83.50(a).

SUMMARY JUDGMENT STANDARD

Fed.R.Civ.P. 56 provides the statutory basis for summary judgment, and is made applicable to adversary proceedings via Fed.R.Bankr.P. 7056. “Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. The initial burden is on the moving party to demonstrate that an essential element of the non-moving party’s case is lacking.” Kalamazoo River Study Group v. Rockwell Intern. Corp., 171 F.3d 1065, 1068 (6th Cir. 1999) (internal citation omitted). The Court should draw all justifiable inferences in favor of the non-moving party and it should not determine credibility or weigh evidence. Id. “[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis original). “There is no genuine issue of material fact when `the record taken as a whole could not lead a rational trier of fact to find for the non-moving party.’” Williams v. Leatherwood, 258 Fed. Appx. 817, 820 (6th Cir. 2007) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) ).

DISCUSSION

I. The Principal Arguments and an Overview of the “Impermissible Collateral Attack” Doctrine

Defendants assert the doctrine of “impermissible collateral attack” and allege that “Plaintiff is making a belated effort to have this Court second guess a debt transaction approved by the MGCB and supplant its judgment for that of the administration agency specifically empowered to review and approve the transaction.” Def. Reply to Pl. Sur-Reply, Dkt. 248, at 16. It is important to note that the basis for Defendants’ motion is not collateral estoppel (nor apparently res judicata). [3] Id. Defendants view this action as, in effect, an improper and belated attempt to second guess the MGCB’s Order or usurp the MGCB’s exclusive original jurisdiction, whereas Plaintiff’s proper recourse should have been to file an appropriate and timely appeal. See generally Blue Cross & Blue Shield of Mich. v. Comm’r of Ins., 155 Mich. App. 723, 728-29 (1986) (outlining procedures for appealing administrative orders). Defendants stress that this action and the matter that was before the MGCB in 2005 share a common nucleus of facts and would require a very similar, if not identical, inquiry, i.e. the effect that the Transaction (particularly the transfers to Defendants) would have on Holdings’ and Greektown Casino’s capitalization and financial viability. Defendants’ position is that Plaintiff’s MUFTA action is “inconsistent” with the MGCB’s Order approving the transaction and that, pursuant to Mich. Comp. Laws § 432.203(3), MUFTA is inapplicable.

The “impermissible collateral attack” doctrine has been described under various nomenclatures, including improper collateral attack, exclusive original jurisdiction, exhaustion of remedies, and preemption. Despite the various descriptive labels, the essential nature of the doctrine has been clearly described as follows: “Our second task … is to determine whether Woods’s position in this proceeding is a collateral attack. It is well-established in Michigan that, assuming competent jurisdiction, a party cannot use a second proceeding to attack a tribunal’s decision in a previous proceeding[.]” Dir., Workers Comp. Agency v. MacDonald’s Indus. Products Inc., 2014 WL 1267304 (Mich. Ct. App. Mar. 27, 2014). Defendants contend that Michigan courts have clearly and consistently upheld this basic principle under the term “preemption.” For example, in Kraft v. Detroit Entm’t, L.L.C., 261 Mich. App. 534, 543-46 (2004), that Court held that the Gaming Act “preempts” the plaintiff’s common law claims of fraud and unjust enrichment. That Court noted that the use of “preemption” is something of a misnomer because “preemption” traditionally applies to a situation where federal law takes precedence over state law. Id. at 545 n.5. However, the Kraft Court noted that the Michigan Supreme Court has used the label “preemption” and, as a result, opined that “if a statute provides for an exclusive remedy or otherwise limits or bars application of other laws, including the common law, any conflicting common law simply cannot apply.” Id. For the sake of consistency, this Court will also use the term “preemption” to mean any limiting or nullifying effect that the Gaming Act might have on Plaintiff’s MUFTA action, either on the face of the statutes or as-applied in this case. In McEntee v. Incredible Technologies, Inc., 2006 WL 659347 (Mich. Ct. App. Mar. 16, 2006), that Court opined that the Gaming Act “preempts” inconsistent statutory causes of action. In Cowsert v. Greektown Casino, L.L.C., 2005 WL 1633725 (Mich. Ct. App. July 12, 2005), the Court held that where a plaintiff’s asserted causes of action were within the exclusive jurisdiction of the MGCB, his failure to exhaust his remedies before the MGCB and subsequent filing of a civil suit caused the civil court to lack subject matter jurisdiction.

Plaintiff challenges the asserted “impermissible collateral attack” doctrine, both in theory and in application. In any event, Plaintiff stresses that it is not seeking to overturn or challenge the MGCB’s Order, argue that the MGCB acted beyond its authority, or otherwise make any case that is inconsistent with the Order. Plaintiff instead views the MGCB’s authority and jurisdiction to be narrowly limited to casino licensure, gambling regulation, and other related matters, but not extending to the areas of fraudulent transfers and the adjudication and enforcement of MUFTA actions. Distilling these arguments, insofar as relates to the Transaction, the legal issue before the Court is: does the Gaming Act “preempt” MUFTA or create an inconsistency such that the Gaming Act renders MUFTA inapplicable here?

II. The Disputed Facts and Exhibits

To some extent, the parties take sharply conflicting factual positions on the MGCB’s investigation into the Transaction. Defendants argue that the MGCB’s investigation (a) was lengthy, meticulous, and thorough; (b) involved multiple requests for information, inquiries, amendments, and supplements; (c) required several meetings, including meetings open to the public; and (d) involved the MGCB retaining the accounting firm of Grant Thornton as its independent expert and reviewing a voluminous report authored by Grant Thornton. Plaintiff, however, argues that the MGCB’s investigation was (a) delegated by the MGCB to its staff; (b) more administrative than adjudicative, meaning there was no service of process, formal admission of evidence, etc.; (c) largely confidential, given that the relevant substantive issues were not discussed at the brief public meetings; (d) essentially a one-sided presentation with no objection, opposition, or cross-examination; and (e) not as lengthy or as thorough as Plaintiff contends. In furtherance of their arguments, the parties’ briefs include as exhibits the MGCB’s meeting minutes and transcripts, copies of the materials presented to the MGCB, and the Grant Thornton report.

The Court will not consider the substance of these arguments or the exhibits offered in support. First, these arguments and exhibits present contested issues of determining facts and/or weighing evidence, which are both outside the scope of what the Court should consider in this summary judgment context. Second, they are essentially irrelevant to the dispositive legal issues, which relate to statutory interpretation and a legal determination of the interplay between two statutory schemes. It is sufficient for the Court to simply note that the MGCB did in fact, as required, conduct an investigation into the Transaction and that such investigation included a review of the Grant Thornton report and an inquiry into how the Transaction would affect the capitalization and financial viability of Holdings and Greektown Casino. Those facts are undisputed and the Court need not here further consider the substance or specifics of the MGCB’s investigation.

Further, Plaintiff objected to Defendants’ apparent reliance on the Grant Thornton report, characterizing it as inadmissible hearsay that should not be considered because it is offered to prove that the Transaction was not a fraudulent transfer. See Smoot v. United Transp. Union, 246 F.3d 633, 649 (6th Cir. 2001) (only admissible evidence may be considered in ruling on motion for summary judgment). Defendants argue that the report is not hearsay because it is instead offered to show that the MGCB undertook an exhaustive analysis. Regardless of whether or not the report is inadmissible hearsay, the Court will not now consider its substance because it is irrelevant to the narrower legal questions at hand. In any event, it is undisputed, as noted, that the MGCB conducted an investigation into the Transaction, as required, including reviewing the Grant Thornton report. There is no dispute that the MGCB was required to, and indeed did, pass upon the pertinent questions of capitalization and viability. A review of that report would add no germane facts (let alone undisputed germane facts) to the disposition of the relevant legal issues. If Defendants are able to admit the report into evidence at trial, it might be relevant to and probative of Defendants’ argument that the Transaction was not a fraudulent transfer.

Similarly, Defendants attached as an exhibit a letter addressed to Defendants’ counsel by which a division of the office of the Michigan Attorney General indicates its support for Defendants’ motion for summary judgment. It summarizes the investigation the MGCB made into the Transaction and states that the MGCB views its Order as a final order not subject to collateral attack. Plaintiff contends the letter is inadmissible hearsay. This brief letter likewise adds nothing material or germane to the disposition of the present issues. The Attorney General merely states that the MGCB has a certain view of the legal issue that is presently before the Court. Regardless of whether or not the letter is inadmissible hearsay, it would be inappropriate for the Court to now consider it for any intent or purpose.

III. The Gaming Act Does Not Explicitly Preempt or Limit MUFTA

The Gaming Act and MUFTA do not specifically refer to or limit one another in any way, which is a relevant consideration. See Estes v. Titus, 481 Mich. 573, 579 (2008) (“We note initially that the language of [MUFTA] does not exempt from its reach property transferred pursuant to divorce judgments.”). This is in contrast to Michigan’s Business Corporation Act, for instance, which explicitly states that “[t]he uniform fraudulent transfer act … does not apply to distributions governed by this act.” Mich. Comp. Laws § 450.1122(3). Also, the Michigan Consumer Protection Act specifically limits itself from applying to “[a] transaction or conduct specifically authorized under laws administered by a regulatory board or officer acting under statutory authority of this state or the United States.” Mich. Comp. Laws Ann. § 445.904(1). Plaintiff argues the failure of the Michigan Legislature to explicitly limit MUFTA’s application or make MUFTA submissive or deferential to the Gaming Act (despite having the clear ability to do so) indicates that it did not so intend to limit MUFTA. The Court finds this argument persuasive and agrees with Plaintiff on this point. “When construing a statute, we consider the statute’s plain language and we enforce clear and unambiguous language as written.” In re Bradley Estate, 494 Mich. 367, 377 (2013) (citation omitted). Looking to the plain language of the statutes, the Court finds that the Gaming Act does not explicitly preempt or limit MUFTA.

IV. The Gaming Act Does Not Implicitly or Effectively Preempt or Limit MUFTA

A deeper analysis is required to determine whether preemption is implicit in the purpose, substance, and effect of the two statutory schemes, either on their face or as-applied in this case. The standard for implicit repeal of a statute has been described as follows:

The [Michigan] Supreme Court has stated that it is axiomatic that repeals by implication are disfavored, and that it is to be presumed in most circumstances “that if the Legislature had intended to repeal a statute or statutory provision, it would have done so explicitly.” Wayne Co. Prosecutor v. Dep’t of Corrections, 451 Mich. 569, 576, 548 N.W.2d 900 (1996), citing House Speaker v. State Admin Bd., 441 Mich. 547, 562, 495 N.W.2d 539 (1993) . Therefore, repeal by implication will not be found if any other reasonable construction may be given to the statutes, Wayne Co Prosecutor, supra at 576 , 548 N.W.2d 900, such as reading in pari materia two statutes that share a common purpose or subject, or as one law, even if the two statutes were enacted on different dates and contain no reference to one another. See State Treasurer v. Schuster, 456 Mich. 408, 417, 572 N.W.2d 628 (1998), quoting Detroit v. Michigan Bell Tel. Co., 374 Mich. 543, 558, 132 N.W.2d 660 (1965) . However, a repeal of a statute may be inferred in two instances: (1) where it is clear that a subsequent legislative act conflicts with a prior act; or (2) when a subsequent act of the Legislature clearly is intended to occupy the entire field covered by a prior enactment.

City of Kalamazoo v. KTS Indus., Inc., 263 Mich. App. 23, 36-37 (2004) . That case did not specifically deal with a statute preempting certain causes of action, as is alleged here. Rather, it dealt with two conflicting statutes, one providing for a jury trial on a certain issue and the other not so providing. The Court stated that although it was “extremely hesitant” to find that the Legislature’s enactment of the subsequent statute implicitly repealed the prior statute, that was a rare case where no reasonable harmonious construction could be otherwise given. Id. at 37. The question presented in this case is largely analogous. Here, the question is whether the Legislature’s enactment of the Gaming Act, particularly the aspects granting the MGCB exclusive original jurisdiction over certain matters, implicitly preempts or limits Plaintiff’s ability to bring the present MUFTA action. As such, the Court will consider and incorporate into its analysis the two part City of Kalamazoo test.

A. The Scope of the MGCB’s Authority

Defendants’ principal argument is that the MGCB had exclusive original jurisdiction over the Transaction, including the crucial matters of how the Transaction would impact Holdings’ and Greektown Casino’s capitalization and financial viability. Mich. Comp. Laws § 432.204(1) states: “The board shall have the powers and duties specified in this act and all other powers necessary and proper to fully and effectively execute and administer this act for the purpose of licensing, regulating, and enforcing the system of casino gambling established under this act.” Mich. Comp. Laws § 432.203(3) states “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” [4]

Given the scope of its defined jurisdiction and the various opinions of Michigan courts, it is clear that the MGCB at least has purview over matters related to acts of gambling and the persons engaging in such acts. That is uncontested by the parties. Thus, where a gambler claimed that a casino improperly refused to pay him the jackpot he claimed to have won, he was first required to exhaust his administrative remedies before the MGCB because it had exclusive jurisdiction over such a gambling dispute. Cowsert, 2005 WL 1633725. Similarly, gamblers may not file a civil suit against licensed casinos for allegedly fraudulent gambling games. Kraft, 261 Mich. App. 534 . Because the Michigan Consumer Protection Act does not apply to transactions specifically authorized by the Gaming Act and because the Gaming Act preempted the common law claims of fraud and unjust enrichment, the gamblers’ proper remedy was to seek appropriate redress from the MGCB. Id. Similarly, in McEntee, 2006 WL 659347, it was held that the Gaming Act precluded the plaintiff’s civil suit for money lost playing an arcade game that had a monetary reward because such dispute was within the MGCB’s gaming jurisdiction.

Further, although Mich. Comp. Laws § 432.203(4) states “[t]his act and rules promulgated by the board shall apply to all persons who are licensed or otherwise participate in gaming under this act” (emphasis added), the Gaming Act also regulates the conduct of persons other than licensees and persons who are directly involved in acts of gaming, for example, it regulates the licensee’s suppliers and vendors. Mich. Comp. Laws §§ 432.207a and 432.204a(1)(s).

The Michigan Appeals Court has held that “the Legislature vested the board with exclusive jurisdiction over all matters relating in any way to the licensing, regulating, monitoring, and control of the non-Indian casino industry.” Papas v. Michigan Gaming Control Bd., 257 Mich. App. 647, 658-59 (2003) . Despite the broad language “over all matters relating in any way,” it is clear that the Gaming Act does not preempt or curtail every single law or dictate that might apply to regulate or control casinos for any intent or purpose. Id. (emphasis added). Defendants concede that notwithstanding the breadth of the Gaming Act, casinos are not exempt from certain laws of general application, such as local health and safety codes. The Transaction itself contemplated some such regulations being applicable because Holdings’ Offering Memorandum states:

Generally, we are subject to a variety of federal, state and local governmental laws and regulations relating to safety and the use, storage, discharge, emission and disposal of hazardous materials. Failure to comply with such laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts that could adversely affect operations.

Dkt. 187 Ex. 5-K, at 17.

In fact, the MGCB’s rules, which are promulgated pursuant to its authority under the Gaming Act, specifically indicate that other agencies also have some limited authority to regulate licensed casinos. For example, Mich. Admin. Code r. § 432.1306(3) requires that a casino license application shall include “[t]he status of all required governmental and regulatory permits and approvals and any conditions of all required governmental and regulatory permits and approvals” and “[o]ther information and documentation as may be required by the board concerning the applicant’s plans for providing food and beverage and other concessions, the status of all relevant required governmental and regulatory permits and approvals, and any conditions of all relevant required governmental and regulatory permits and approvals.” A request for approval of a debt transaction (such as the subject one that was before the MGCB) shall contain “[a]ll filings that must be submitted to any regulatory agency in association with the debt transaction.” Mich. Admin. Code r. § 432.1509(3). A person notifying the MGCB of a public offering must provide “[a] statement of intended compliance with all applicable federal, state, local, and foreign securities laws.” Mich. Admin. Code r. § 432.1403. “A casino licensee shall comply with all federal and state regulations for the withholding of taxes from winnings or the filing of currency transaction reports, or both.” Mich. Admin. Code r. § 432.1820. A casino licensee that is a foreign corporation operating in Michigan shall provide to the MGCB upon request “a certificate of authority from the Michigan corporations and securities bureau authorizing it to do business in Michigan.” Mich. Admin. Code r. § 432.11201. What can be distilled from these rules is that licensed casinos are regulated and controlled, to some extent, by authorities other than the MGCB and by laws of general application. Thus, not all laws that directly or indirectly regulate or control a licensed casino are preempted by, or are necessarily inconsistent with, the Gaming Act. Rather, preemption applies only to laws that are at odds with the MGCB’s prescribed statutory jurisdiction.

B. The MGCB had no Subject Matter Jurisdiction over a MUFTA Claim

Plaintiff argues that the MGCB has no jurisdiction or power relating to MUFTA claims, even if such claims directly involve licensed casinos. Plaintiff views the MGCB’s jurisdiction as being limited predominantly to the licensure of casinos and the regulation of licensees. The MGCB has sweeping powers to regulate and control casinos, including the ability to appoint a conservator to take possession of a casino and sell it in bulk. Mich. Comp. Laws § 432.224(7). However, none of the MGCB’s enumerated powers include undoing or recovering fraudulent transfers pursuant to MUFTA. Defendants have not directed the Court to any provision that would include MUFTA actions within the stated authority of the MGCB, i.e. “the powers and duties specified in this act and all other powers necessary and proper to fully and effectively execute and administer this act for the purpose of licensing, regulating, and enforcing the system of casino gambling established under this act.” Mich. Comp. Laws § 432.204(1). Indeed, when reviewing a debt transaction such as the Transaction, Mich. Admin. Code r. § 432.1205 limits the scope of the MGCB’s authority, providing:

An action of the board regarding an applicant or licensee relates only to the applicant’s or licensee’s qualification for licensure under the act and these rules and does not indicate or suggest that the board has considered or passed on the qualifications or application of the applicant or licensee for any other purpose.

In this regard, Defendants’ argument that the Gaming Act impliedly preempted MUFTA, as MUFTA might apply here, is unavailing. Defendants argue that various cases cited by Plaintiff holding that licensed casinos are subject to personal injury and employment claims [5] are distinguishable because, unlike the present issue of financial viability, the MGCB did not have exclusive original jurisdiction over employment or personal injury claims and was not required to initially and exhaustively analyze such matters. Plaintiff argues that the present fraudulent transfer action is similarly outside the realm of the MGCB’s jurisdiction. Plaintiff is correct. The MGCB has no jurisdiction over MUFTA claims, and certainly not exclusive original jurisdiction.

The conclusion that the MGCB has no subject matter jurisdiction over MUFTA claims (particularly when reviewing the Transaction) is an important one. “A collateral attack `is permissible only if the court never acquired jurisdiction over the persons or the subject matter.’” Dir., Workers Comp. Agency, 2014 WL 1267304, at *7 (quoting Edwards v. Meinberg, 334 Mich. 355, 358 (1952) ). In other words, if a legal issue is beyond the subject matter jurisdiction of the initial tribunal, raising that legal issue in a subsequent proceeding is not an impermissible collateral attack on the initial tribunal’s order. Several cases illustrate this point. In Cowsert, a reason why the MGCB was deemed the appropriate tribunal for the gambling dispute was because the MGCB could fully redress the gambler’s asserted claims of damages. 2005 WL 1633725. In Estes, a creditor alleged in a civil action that a prior divorce judgment was a fraudulent transfer under MUFTA because the divorcing parties had conspired to transfer nearly all the marital assets to the wife in order to prevent the creditor from collecting on a claim held solely against the husband. 481 Mich. at 577-78 . The divorce court had properly refused to allow the creditor to intervene in the divorce proceeding because Michigan law strictly limits a divorce court’s jurisdiction to the rights and obligations of the divorcing parties, and not of third parties. Id. at 582-83. The Michigan Supreme Court found that the creditor’s subsequent MUFTA action was not an impermissible collateral attack because it was not premised on any irregularity in the divorce proceedings, but rather was premised on the divorce court’s lack of statutory authority to conduct a MUFTA analysis and offer the creditor appropriate relief. Id. at 588-89. That is akin to the situation here because the divorce court in Estes was as powerless to rule on the creditor’s MUFTA claim as the MGCB was to rule on a MUFTA claim that any person might have brought.

Perhaps the best illustration of this principle is ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208 (2011), which is remarkably similar to the facts of this case. There, an insurance company proposed a substantial restructuring, which required the approval of the New York State Insurance Department Superintendent. The Superintendent thoroughly investigated the restructuring on an ex-parte basis, concluded it was fair to policyholders, and approved it. Subsequently, policyholders brought a state law fraudulent transfer action, alleging the restructuring left the insurer insolvent. The insurer contended the action was an “impermissible collateral attack” on the Superintendent’s investigation into and approval of the restructuring. This argument was presented in the sense that the insurance laws preempted the fraudulent transfer laws. The Court opined:

In this case, defendants essentially ask us to construe the Superintendent’s exclusive original jurisdiction to approve the Transformation under the relevant provisions of the Insurance Law to mean that he is also the exclusive arbiter of all private claims that may arise in connection with the Transformation—including claims that the restructuring rendered MBIA Insurance insolvent and was unfair to its policyholders. Defendants’ contention, taken to its logical conclusion, would preempt plaintiffs’ Debtor and Creditor Law and common-law claims. We reject this argument and conclude that there is no indication from the statutory language and structure of the Insurance Law or its legislative history that the Legislature intended to give the Superintendent such broad preemptive power …

If the Legislature actually intended the Superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions under the Debtor and Creditor Law or the common law, we would expect to see evidence of such intent within the statute. Moreover, we would expect that, in such a situation, affected policyholders, such as plaintiffs, would have notice and an opportunity to be heard before the Superintendent made his determinations. Here, we find no such intent in the statute. Nor do we see a provision that required the Superintendent to provide notice and an opportunity to be heard to plaintiffs before he approved the Transformation …

Defendants nonetheless look to Insurance Law § 326 (a) as a provision conferring exclusive authority on the Superintendent to adjudicate plaintiffs’ private claims. Defendants’ reliance on such provision, however, is entirely misplaced … A cursory reading of the plain language reveals that it does not vest the Superintendent with the power to consider causes of action such as plaintiffs’ … The Superintendent’s determinations, however, have never included the adjudication of claims like those plaintiffs have put forward in this action.

Id. at 224-25 (footnote omitted). Defendants seek to distinguish ABN AMRO because there, the Superintendent acted in confidentiality and the policyholders had no notice or opportunity to be heard. In the present case, however, the Noteholders (via their predecessor in interest) clearly had notice, substantially participated in discussions with the MGCB, and advocated for the Transaction. Defendants speculate that if the ABN AMRO Court was presented with the facts of this case, it would find the fraudulent transfer action to be an “impermissible collateral attack” because of the existence of notice and opportunity to be heard. That speculation is unfounded and unpersuasive. Defendants’ argument ignores the emphasis that Court placed on the limited scope of the Superintendent’s prescribed authority. A person’s opportunity to be heard regarding a fraudulent transfer claim is of little value if the tribunal at which he is to be heard is completely powerless to adjudicate the fraudulent transfer claim or to grant appropriate relief. Thus, the City of Kalamazoo factors do not support an implicit preemption because there is no statutory conflict and the Gaming Act was not intended to occupy the field of fraudulent transfers at all, let alone to entirely occupy that field. 263 Mich. App. at 36-37 . This is not one of the rare situations where one statute should be seen to implicitly preempt another.

C. Plaintiff’s MUFTA Action is not Inconsistent with the Gaming Act

The starting point of this analysis is Mich. Comp. Laws § 432.203(3), which states “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” The term “inconsistent” is not defined in the statute. Black’s Law Dictionary (9th ed. 2009) defines “inconsistent” as “[l]acking agreement among parts; not compatible with another fact or claim …” In addressing the existence of any inconsistency, the Court will consider whether MUFTA’s purpose, subject, implementation, and effect can be reasonably construed as being compatible with the Gaming Act and not intruding upon its scope.

Defendants stress that the Legislature used the benchmark “inconsistent,” rather than more stringent benchmarks such as “direct conflict” or “actual conflict.” Defendants argue that this adversary proceeding presents a clear “inconsistency” with the MGCB’s Order because of the overlap in the relevant inquiry into the capitalization and financial viability of Holdings and Greektown Casino as a result of the Transaction and the transfers to Defendants. Defendants contend that the MGCB appropriately fulfilled its duty to investigate the Transaction, including its pertinent effects. Indeed, Defendants are correct that the factual inquiry required in this adversary proceeding will be principally similar to that conducted by the MGCB. However, that alone is not sufficient for Defendants to meet their burden of proving inconsistency. The above quoted statute requires that the law be inconsistent with the Gaming Act, not just the inquiry that stems from that law. An overlap in the nucleus of facts and the inquiries involved is insufficient to find that two statutory schemes are inconsistent. For example, in Estes, the divorce court necessarily decided that awarding nearly all the marital assets to the wife was equitable between the spouses, but obviously did not pass upon the question of whether it was equitable as to the aggrieved non-party creditor. 481 Mich. at 584 . The creditor was not precluded from subsequently pursuing a MUFTA action and alleging that the property division was fraudulent, despite the fact that the divorce court had already conducted a related, if not identical, inquiry as to the suitability of the asset division.

For three reasons, the Court finds that MUFTA, as Plaintiff would employ it here, is not an “inconsistent” law vis-à-vis the Gaming Act. First, as previously discussed, the MGCB has no jurisdiction over MUFTA claims and cannot provide an appropriate remedy for such. “A tribunal’s subject matter jurisdiction depends on the kind of the case before it, not on the particular facts of the case …” Dir., Workers Comp. Agency, 2014 WL 1267304, at *7. Pursuant to Mich. Admin. Code r. § 432.1205, the MGCB’s purview and its Order were limited to licensure issues, which are not disputed in this adversary proceeding. Because the MGCB’s scope of authority is thus limited, the Court holds that it is reasonable to see a vacancy in the legal landscape where MUFTA applies to licensed casinos without being inconsistent with the Gaming Act. In this case, the MGCB’s lack of jurisdiction over MUFTA claims is in itself enough to create and preserve such a vacancy for another tribunal to occupy. This interpretation is well supported by the above quoted maxims that statutes should be interpreted harmoniously and consistently with one another unless such interpretation is impossible. This situation is not one of the rare exceptions to the rule described in City of Kalamazoo 263 Mich. App. at 36-37 .

Second, Mich. Comp. Laws § 432.203(3) provides that “[a]ny other law that is inconsistent with this act does not apply to casino gaming as provided for by this act.” (emphasis added). This MUFTA action, although it would affect a licensed casino, does not per se apply to “casino gaming” or to the scope of the Gaming Act. Defendant argues that although this MUFTA action might not necessarily and directly pertain to “casino gaming,” it would inevitably have a serious impact on the gambling operations of a licensed casino. If Defendants’ liberal reading of the term “inconsistent” is adopted, it might preclude a variety of causes of action pursuant to laws of general application that, although they might apply to licensed casinos, at most have only an incidental relation to and impact on casino gaming. This statutory provision should be viewed narrowly as applying to casino gaming and to the specifically defined scope of the Gaming Act, for example, to matters over which the MGCB clearly has exclusive jurisdiction, such as allegations that a casino game is fraudulent. E.g. Kraft, 261 Mich. App. 534 . MUFTA claims are simply outside this scope. If a law might apply to a licensed casino (whether the law pertains to corporate governance, taxation, securities, health and safety, etc.), it is not perforce inconsistent with the Gaming Act. Although the application of MUFTA here might have a substantial impact on a licensed casino (and perhaps even frustrate or defeat the casino’s ability to carry out its essential gambling operations), the same might arguably be said regarding the penalties for a casino’s noncompliance with the local fire or building codes. As previously discussed, the Gaming Act and the MGCB rules clearly indicate that licensed casinos are subject to a variety of regulations, including some that might pertain to debt transactions such as this.

Third, there would not necessarily be an inconsistency in the results. Plaintiff notes that the MGCB’s Order specifically states that the Transaction “has a low probability of having an adverse impact on the ongoing financial viability of [Holdings] and Greektown [Casino].” Dkt. 187 Ex. 5-A, at 3. Plaintiff contends that this statement is merely a prediction, used as a prophylactic measure to further the public interest in ensuring that debt transactions are appropriate. The Court agrees with Plaintiff based on the clear language of the MGCB’s Order. While it may have been a highly educated and thoroughly investigated prediction, it was still a prediction. The MGCB’s Order also required Holdings and Greektown Casino to demonstrate their ongoing financial viability by meeting certain future benchmarks for as long as they remained indebted under the borrowing aspects of the Transaction. Id. at 7-9. This demonstrates their need for continued oversight and compliance in order to avoid being rendered insolvent by the debts incurred by the Transaction. That tends to prove that the question of whether the Transaction rendered, or would subsequently render, the entities insolvent was not firmly answered on the date of the transfers, but rather depended on the unfolding of subsequent events, specifically, the success of the casino’s operations. As such, MUFTA gives a creditor a fraudulent transfer cause of action even if the claim arose after the transfer was made. Mich. Comp. Laws § 566.34(1). Thus, it is possible for the MGCB to have made an accurate finding that, at the time of its Order, the transfers were unlikely to render the entities insolvent, but that subsequent events caused or contributed to the transfers becoming fraudulent transfers.

Holdings’ Offering Memorandum, issued after the MGCB approved the Transaction, marketed the senior notes to potential Noteholders and thoroughly described the Transaction and the risks involved. Dkt. 187 Ex. 5-K. It stated in relevant part, “[o]ur substantial indebtedness could adversely affect our financial results and prevent us from fulfilling our obligations under the notes and our other outstanding indebtedness.” Id. at 22. It further specified:

A portion of the net proceeds from the notes will be distributed to our members. The incurrence of the indebtedness evidenced by the outstanding notes and the making of the distribution are subject to review under relevant federal and state fraudulent conveyance statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of [Holdings] … .

We believe that, after giving effect to the offering of the outstanding notes and the new credit facility and the distribution to us of a portion of the net proceeds therefrom, we will not be insolvent or rendered insolvent as a result of issuing the notes; we will be in possession of sufficient capital to run our business effectively; and we will have incurred debts within our ability to pay as the same mature or become due. There can be no assurance, however, as to what standard a court would apply to evaluate our intent or to determine whether we were insolvent at the time of, or rendered insolvent upon, the consummation of the offering of the notes and new credit facility, and the making of the distribution or that, regardless of the standard, a court would not determine that we were insolvent at the time of, or rendered insolvent upon, the consummation of the offering of the outstanding notes and the new credit facility, and the making of the distribution.

Id. at 25. Holdings itself recognized this possibility of insolvency, informed the prospective Noteholders of it, and offered assurances that Holdings believed this possibility would be unlikely to occur. Nonetheless, it was clear at that time that all parties recognized the possibility existed.

The Court finds that the MGCB left issues of potential MUFTA claims to a different date and to a different tribunal. Plaintiff’s adversary proceeding essentially seeks for the Court to determine whether this contemplated possibility came to fruition. It is a retrospective action and seeks a remedy after-the-fact. If Plaintiff is able to prove its case, this will produce a remedial result, different from the prophylactic result produced by the MGCB. Thus, while the Court might engage in a related factual inquiry as the MGCB, there is a clear distinction in the subject matter of the inquiry, its purpose, its effect, and the perspective from which it is to be viewed. The Gaming Act was not intended to entirely occupy the same field as MUFTA and the two statutes are consistent and complementary. See also Mathis v. Interstate Motor Freight Sys., 408 Mich. 164, 179 (1980) (“The Worker’s Disability Compensation Act (WDCA) and the No-Fault Insurance Act are complete and self-contained legislative schemes addressing discrete problems.”). By way of further analogy, if a doctor makes a well-reasoned prediction that a procedure poses low risk to a patient, but the patient later dies, it is not “inconsistent” with the doctor’s prediction for other persons to conduct an autopsy or adjudicate a wrongful death claim. The Court does not find MUFTA to be inconsistent with the Gaming Act or with the MGCB’s Order, either on their face or as-applied to this case.

D. Defendants’ Argument that Plaintiff’s Sole Remedy was to Appeal the MGCB’s Order is Unavailing

Defendants argue that Plaintiff’s sole remedy should have been timely appealing the MGCB’s Order, rather than instituting this separate action. Defendants argue that the Gaming Act incorporates various procedures for appealing the MGCB’s Order, which neither Plaintiff nor any other person pursued. Defendants cite Womack-Scott v. Dep’t of Corr., 246 Mich. App. 70, 80 (2001), which states:

Considering the function that the [Civil Service Commission] serves to resolve employment disputes of state employees and the availability of a direct appeal to the circuit court from a CSC decision, we hold that a party aggrieved by a ruling of the CSC cannot file an independent action to seek redress of the claims made during the administrative process, but rather must pursue those claims through a direct appeal to the circuit court pursuant to the [Administrative Procedure Act].

Plaintiff contends that an appeal of the MGCB’s Order would have been legally and factually impossible. The Court agrees. Plaintiff would not have had standing to appeal the MGCB’s Order in 2005 because Plaintiff had yet to be appointed as trustee for the Litigation Trust and there was then no bankruptcy estate in existence for any trustee to represent. The Noteholders also likely faced a standing obstacle because, when the MGCB approved the Transaction, they were only future creditors of Holdings and did not yet have a cognizable claim of injury. On a more practical level, an appeal by any person would not have made sense because the unchallenged proponents of the Transaction, including the Noteholders, had received the exact licensure approval they sought from the MGCB (as opposed to a case where an applicant appeals the denial of what it requested, which could actually provide a rational appellate remedy). It would defy logic for a party to appeal a favorable ruling. See Estes, 481 Mich. at 591 (“If a debtor agrees to a transfer of substantially all the marital assets in order to defraud a creditor, he or she cannot be expected to appeal that transfer.”). In any event, given the MGCB’s lack of jurisdiction over a MUFTA claim, such an appeal likely would not have touched upon any potential MUFTA issues. See ISB Sales Co. v. Dave’s Cakes, 258 Mich. App. 520, 532-33 (2003) (issue not raised at trial court is not preserved for appellate review). If the Noteholders were required to first exhaust their available appellate remedies, as Defendants claim, they clearly satisfied that requirement because there was no aggrievement to appeal. Womack-Scott is distinguishable because the plaintiff there had feasible appellate remedies available at the administrative level and could have obtained appropriate relief on appeal, but she failed to pursue those remedies. 246 Mich. App. at 79-80 . Although the Womack-Scott court recognized the existence of avenues by which the plaintiff could have had the appellate court review constitutional issues that were beyond the original administrative agency’s jurisdiction (such as by having the appellate court entertain legal briefs and take additional evidence), the other above-noted obstacles to functional appellate review would have precluded such avenues in this case. Id. at 80-81.

The Court concludes that an appeal of the MGCB’s Order was not practical or feasible, and failed to provide an appropriate remedy (let alone the sole remedy) for parties who claim they are aggrieved by this allegedly fraudulent transfer. Not only did the MGCB lack jurisdiction over a MUFTA claim, but the identity of the parties, their lack of privity, and the distinct nature of the proceedings made an appeal an inoperable course of action for bringing any MUFTA claim. The lack of a functional appellate remedy strikes at the essence of Defendants’ “collateral attack” allegation, particularly because the failure to appeal an initial ruling is an element of a “collateral attack” allegation. See Dir., Workers Comp. Agency, 2014 WL 1267304, at *6.

Insofar as Defendants argued that it would be unfair or inequitable for the Noteholders to attack the Transaction because they were originally proponents for and participants in it, such argument is better raised at trial on the merits of Defendants’ defenses. It is beyond the narrower scope here, i.e. the availability and efficacy of an appellate remedy.

CONCLUSION

The Court finds that Defendants have not met their summary judgment burden and their motion for summary judgment (Dkt. 187) is denied. Plaintiff shall present an appropriate order.

[1] Originally, the Transaction was structured so that Greektown Casino itself would incur the various financing debts, including the unsecured senior notes. The MGCB apparently suggested or requested that such debts be incurred by a newly-created entity, Holdings, which had no operating history or prior creditors.

[2] In an order entered on June 13, 2008 in the main Chapter 11 case (Case No. 08-53104, Dkt. 114), these several bankruptcies were consolidated for procedural purposes only and became jointly administered. In an order entered on April 22, 2010 in the main Chapter 11 case (Dkt. 2279), the Court granted the Official Committee of Unsecured Creditors (“Committee”) authority to pursue bond avoidance claims on behalf of Holdings. In accordance with that order, the Committee initiated this adversary proceeding on May 28, 2010. Through a consent order entered in this adversary proceeding on August 14, 2010 (Adv. Pro. No. 10-05712, Dkt. 64), Buchwald Capital Advisors, LLC, solely in its capacity as Litigation Trustee for The Greektown Litigation Trust, substituted in for the Committee, and thereafter has prosecuted this action.

[3] Under Michigan law, collateral estoppel applies to a prior decision if “(1) a question of fact essential to the judgment was actually litigated and determined by a valid and final judgment, (2) the same parties had a full and fair opportunity to litigate the issue, and (3) there was mutuality of estoppel.” People v. Trakhtenberg, 493 Mich. 38, 48 (2012) (quoting Estes v. Titus, 481 Mich. 573, 585 (2008) ).

[4] Mich. Comp. Laws § 432.202 defines some pertinent terms:

(g) “Casino” means a building in which gaming is conducted.

(w) “Gambling operation” means the conduct of authorized gambling games in a casino.

(x) “Gaming” means to deal, operate, carry on, conduct, maintain or expose or offer for play any gambling game or gambling operation.

It should be noted that the Gaming Act does not define “gambling” as a standalone term and at times appears to use the terms “gaming” and “gambling” interchangeably. The Court does not intend to make any distinction between the two terms.

[5] Pl. Sur-Reply Br. Dkt. 239, at 10-11 n.4.

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New Bankruptcy Opinion: GREDE v. COUNTRY HEDGING, INC. – Dist. Court, ND Illinois, 2014

FREDERICK J. GREDE, not individually but as Liquidation Trustee of the Sentinel Liquidation Trust, Plaintiff,

v.

COUNTRY HEDGING, INC., Defendant.

Case No. 09 C 00130.

United States District Court, N.D. Illinois, Eastern Division.

September 3, 2014.

COUNTRY HEDGING, INC.’S MOTION FOR ENTRY OF JUDGMENT ON COUNTS I, II, IV AND V OF THE TRUSTEE’S SECOND AMENDED COMPLAINT

JAMES B. ZAGEL, District Judge.

Defendant, Country Hedging, Inc. (“CHS”), [1] hereby submits this Motion for Entry of Judgment on Counts I, II, IV and V of the Trustee’s Second Amended Complaint. [2] In support of its Motion, CHS states as follows:

INTRODUCTION

1. This is one of 10 closely related adversary proceedings brought by the Trustee against former SEG 1 customers (collectively, the “SEG 1 Cases”) of Sentinel Management Group, Inc. (“Sentinel”). The defendants in the SEG 1 Cases are CHS, FCStone LLC (“FCStone”) IFX Markets, Inc., IPGL Ltd., Farr Financial, Inc., Cadent Financial Services, Rand Financial Services, Velocity Futures, LLC, American National Trading Corp., ABN AMRO Clearing Chicago LLC and Crossland LLC (collectively, the “SEG 1 Defendants”).

2. The complaints in all these cases contain identical counts, cover the same core facts and transactions, and raise the same issues. These counts are: (1) Count I for avoidance and recovery of post-petition transfer under § 549 of the of Title 11 of the United States Bankruptcy Code (“Bankruptcy Code”); (2) Count II for avoidance and recovery of prepetition preferential transfer under § 547 of the Bankruptcy Code; (3) Count III for declaratory judgment regarding the ownership interest in the SEG 1 reserve funds held by the Trustee; (4) Count IV for unjust enrichment; and (5) Count V for reduction or disallowance of claims. All the Seg 1 Defendants have raised the same core defenses.

3. Pursuant to this Court’s instructions, the Trustee and the Seg 1 Defendants chose, and this Court approved Grede v. FCStone, Case No. 09-cv-136 (the “FCStone Test Case”), as the test case for all the SEG 1 Cases.

4. On January 4, 2013, after a bench trial, this Court entered final judgment for the Trustee on Counts I (post-petition transfer), Count II (pre-petition preferential transfer), Count III (declaratory judgment) and Count V (disallowance of claims) and for FCStone on Count IV (unjust enrichment). FCStone appealed those counts decided against it and the Trustee cross-appealed the finding as to Count IV. This Court has refrained from making any further decisions in the other Seg 1 Cases pending the appeal.

5. On March 19, 2014, the United States Court of Appeals for the Seventh Circuit found in favor of FCStone and reversed this Court’s judgment on Counts I, II, III and V. Grede v. FCStone, LLC, 734 F.3d 244, 246-47, 251-260 (7th Cir. 2014). The Seventh Circuit held that the post-petition transfer (Count I) was authorized by the Bankruptcy Court (id. at 246-47, 254-58) —and therefore that no avoidance action could be brought by the Trustee under 11 U.S.C § 549(a), and that the pre-petition preferential transfer (Count II) fell within both the “settlement payment” and “securities contract” safe harbor exceptions to claw back in § 546(e) of the Bankruptcy Code. Id. at 246-47, 251-54. The Seventh Circuit also denied the Trustee’s cross-appeal for reinstatement of his unjust enrichment claim (Count IV), affirming this Court’s holding that the Trustee’s unjust enrichment claim is preempted by federal bankruptcy law. Id. at 259-60

6. The Seventh Circuit’s opinion in the FCStone Test Case is binding precedent for all the SEG 1 Cases with respect to the Trustee’s claims for: (1) avoidance and recovery of Sentinel’s post-petition transfers (Count I); (2) avoidance and recovery of Sentinel’s pre-petition preferential transfers (Count II); (3) unjust enrichment (Count IV); and (4) reduction or disallowance of claims (Count V). [3] It also collaterally estops the Trustee from further litigating these claims, as the Trustee had every incentive and opportunity to vigorously litigate these issues in the FCStone Test Case and may not now re-litigate the adverse determinations against him. See Ank v. Koppers Co., 1991 U.S. App. LEXIS 5381 (9th Cir. 1991) (“the situations that are most likely to create an implied agreement to be bound involve a shared understanding that a single action is to serve as a test case case that will resolve the claims or defenses of nonparties as well as parties.”); Grubbs v. United Mine Workers, 723 F. Supp. 123 (W.D. Ark. 1989) (“It is obvious that the parties regarded Royal as a test case as did the court and it was litigated accordingly. There are, to this court’s knowledge, no procedural opportunities available in this proceeding not available in Royal. The court perceives no “unfairness” in precluding the Plan from relitigating the same issue ad infinitum. Although the doctrine of non-mutual offensive collateral estoppel should be cautiously invoked, it is appropriate here.”). Indeed, this Court has previously acknowledged that the Seventh Circuit’s reversal of the FCStone Test Case would extinguish the Trustee’s identical claims against the SEG 1 Defendants. See Jan. 22, 2013 Tr., pp. 8:23-9:1 (“It is true that if the Court of Appeals says I’m completely wrong in FCStone and everybody is off the hook as a result of that, you will have spent some money that perhaps your clients didn’t have to . . .”).

7. This Court, therefore, should enter judgment for CHS and against the Trustee on Counts I, II, IV and V of the Trustee’s Second Amended Complaint. [4]

WHEREFORE, CHS respectfully requests this Court to enter judgment in its favor and against the Trustee on Counts I, II, IV and V of the Trustee’s Second Amended Complaint.

[1] Country Hedging, Inc. changed its name to CHS Hedging, Inc. on October 30, 2012. CHS Hedging, Inc. remains a wholly owned subsidiary of CHS Inc. and conducts the same business functions as did Country Hedging.

[2] The Trustee is Frederick J. Grede as Liquidation Trustee for the Sentinel Liquidation Trust.

[3] CHS is entitled to judgment on Count V under Section 502(d) of the Bankruptcy Code, which provides for the disallowance of the claims of an entity that receives an avoidable transfer from the debtor’s estate and does not return such transfer to the estate. See 11 U.S.C. § 502(d). Here, the Seventh Circuit already has held that the post-petition and pre-petition transfers are not avoidable transfers from Sentinel’s estate. CHS, therefore, is entitled to judgment on Count V as well.

[4] CHS is not moving for the entry of judgment on Count III, which seeks a declaratory judgment regarding the ownership interest in the SEG 1 reserve funds held by the Trustee, because the Seventh Circuit did not decide the “property of the estate” issue.

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New Bankruptcy Opinion: IN THE MATTER OF TMT PROCUREMENT CORPORATION – Court of Appeals, 5th Circuit, 2014

In the Matter of: TMT PROCUREMENT CORPORATION; A WHALE CORPORATION; B WHALE CORPORATION; C WHALE CORPORATION; D WHALE CORPORATION; E WHALE CORPORATION; G WHALE CORPORATION; H WHALE CORPORATION; A DUCKLING CORPORATION; F ELEPHANT INCORPORATED; A LADYBUG CORPORATION; C LADYBUG CORPORATION; D LADYBUG CORPORATION; A HANDY CORPORATION; B HANDY CORPORATION; C HANDY CORPORATION; B MAX CORPORATION; NEW FLAGSHIP INVESTMENT COMPANY LIMITED; RORO LINE CORPORATION; UGLY DUCKLING HOLDING CORPORATION; GREAT ELEPHANT CORPORATION, Debtors.

TMT PROCUREMENT CORPORATION; A WHALE CORPORATION; B WHALE CORPORATION; C WHALE CORPORATION; D WHALE CORPORATION; E WHALE CORPORATION; G WHALE CORPORATION; H WHALE CORPORATION; A DUCKLING CORPORATION; F ELEPHANT INCORPORATED; A LADYBUG CORPORATION; C LADYBUG CORPORATION; D LADYBUG CORPORATION; A HANDY CORPORATION; B HANDY CORPORATION; C HANDY CORPORATION; B MAX CORPORATION; NEW FLAGSHIP INVESTMENT COMPANY LIMITED; RORO LINE CORPORATION; UGLY DUCKLING HOLDING CORPORATION; GREAT ELEPHANT CORPORATION, Appellees,

v.

VANTAGE DRILLING COMPANY, Appellant.

No. 13-20622, Consolidated with No. 13-20715.

United States Court of Appeals, Fifth Circuit.

Filed September 3, 2014.

Before: HIGGINBOTHAM, DAVIS, and HAYNES, Circuit Judges.

PER CURIAM.

Vantage Drilling Company (“Vantage”) appeals three orders from the district court and two orders from the bankruptcy court. The orders were entered during the course of the Chapter 11 proceedings of twenty-one shipping companies. Their combined effect was to place certain shares of Vantage stock in custodia legis with the clerk of the court. Because we find that both courts below lacked subject-matter jurisdiction, we VACATE and REMAND.

I

A

In 2012, Vantage, an offshore drilling company, brought an action in Texas state court against Hsin-Chi Su, also known as Nobu Su, alleging breach of fiduciary duty, fraud, fraudulent inducement, negligent misrepresentation, and unjust enrichment (the “Vantage Litigation”). In its original petition, Vantage alleged that Su made material misrepresentations to induce Vantage to contract with companies controlled by Su for the acquisition of certain offshore drilling rigs and drillships. Vantage alleges that, in exchange, it issued approximately 100 million shares of Vantage stock to F3 Capital, an entity solely owned and wholly controlled by Su, and granted Su three seats on Vantage’s board of directors, including a seat for himself. According to Vantage, the subsequent disclosure of Su’s misrepresentations placed Vantage in severe financial duress, threatening its ability to obtain necessary financing and its ability to perform on several critical contracts. Vantage alleges that Su leveraged Vantage’s financial crisis to extract additional Vantage stock and other benefits. Among other relief, Vantage sought a “[j]udgment imposing a constructive trust upon all profits or benefits, direct or indirect, obtained by Su.”

Su removed the Vantage Litigation pursuant to 28 U.S.C. § 1446 to the United States District Court for the Southern District of Texas, alleging diversity jurisdiction. [1] Vantage moved to remand, which the district court denied. [2] On appeal, this Court reversed and remanded the Vantage Litigation to the district court with instructions to remand the case to state court. [3]

B

Meanwhile, in 2013, twenty-three foreign marine shipping companies, each owned directly or indirectly by Su, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. [4] Certain creditors of the shipping companies moved to dismiss the bankruptcy actions, arguing, among other things, that: (a) the shipping companies had filed the petitions in bad faith to delay or withhold any recovery by the creditors; (b) the shipping companies had manufactured jurisdiction to stay the creditors’ collection efforts; and (c) there was not a reasonable likelihood of rehabilitating the shipping companies.

The bankruptcy court held an evidentiary hearing on the motion to dismiss. At the hearing, Su offered to place approximately 25 million shares of Vantage stock held by F3 Capital into an escrow to be administered by the bankruptcy court to secure the shipping companies’ compliance with court orders and to serve as collateral for post-petition borrowing or working capital. The bankruptcy court denied the motion to dismiss, except with respect to F Elephant Corporation and TMT USA Shipmanagement LLC. In its order (the “Dismissal Order”), the bankruptcy court ordered that the twenty-one remaining shipping companies (the “Debtors”) “must cause non-estate property (the `Good Faith Property’) with a fair market value of $40,750,000 to be provided to the Estates,” and that, if the Good Faith Property was not provided in cash, then it “must include at least 25,000,000 shares of the common stock of” Vantage. The bankruptcy court provided that the Good Faith Property would be used to, among other things: (a) ensure compliance with court orders; (b) pay sanctions; (c) serve as collateral for working capital loans; and (d) satisfy any amounts arising under § 507(b) of the Bankruptcy Code.

The Debtors moved the bankruptcy court to approve a proposed escrow agreement, by which F3 Capital would deposit 25 million shares of Vantage stock with the clerk of the court to be held in custodia legis for the benefit of the Debtors. [5] In that motion, F3 Capital and Su represented and warranted that they could “enter into the Share Escrow Agreement and deliver the Good Faith Property to the Court without violating any requirements of, or injunctive relief granted in, the [Vantage Litigation].”

Vantage responded in two ways. First, Vantage filed an application for a preliminary injunction with the district court in the Vantage Litigation, requesting that Su be enjoined from “transferring, selling, pledging or otherwise encumbering any of the Vantage stock . . . obtained as a result of his fraud and breaches of fiduciary duty to [Vantage], including by placing the shares into escrow to serve as collateral in an unrelated bankruptcy recently initiated by twenty-three insolvent foreign companies that are wholly-owned and controlled by Su.” [6] In response, the district court entered an order in which it stated: (a) “[c]omplaints about the encumbrance of [Vantage's] stock arising out of the bankruptcy must be addressed to the bankruptcy court,” and (b) Su “may not otherwise sell, transfer, pledge, or encumber his Vantage stock without court permission.” [7]

Second, Vantage also appeared as a “party in interest” before the bankruptcy court and opposed the Debtors’ motion to approve the proposed escrow agreement. The bankruptcy court held a hearing on the Debtors’ motion, at which it concluded that:

[T]he shares owned by F3 Capital are not subject to a constructive trust as a matter of law and, therefore, may be placed in custodia legis without complaint by any other party who has claimed ownership of the shares. . . .

. . . .

I find that this is a due process issue and that an entity that is not a party to a lawsuit, which is the situation with F3 Capital in [the Vantage Litigation], may not be deprived of its property in a suit in which, (a) it is not a party, and (b) it received the assets prior to the commencement of the lawsuit.

The bankruptcy court entered an order (the “Escrow Order”) in which, among other things, it: (a) authorized the deposit of 25,107,142 shares of Vantage stock with the clerk of the court in custodia legis; (b) provided that the deposited shares of Vantage stock would be used for the same reasons enumerated in the Dismissal Order; (c) required F3 Capital to deposit an additional 900,000 shares of Vantage stock; (d) provided that F3 Capital would retain its voting rights in the deposited shares of Vantage stock; and (e) required F3 Capital to transfer to the Debtors “all of its interests in any chose of action arising against [Vantage], its officers, agents or directors.” Vantage filed an interlocutory appeal of the Escrow Order with the United States District Court for the Southern District of Texas.

C

The district court withdrew the reference to the bankruptcy court and denied leave to appeal. It then set a hearing to reconsider, among other issues, Vantage’s objections to the Escrow Order. Before the hearing, the Debtors filed an emergency motion in which they requested permission to borrow up to $20 million in post-petition financing (the “DIP Facility”), including up to $6 million on an interim basis pursuant to an attached term sheet. The district court approved in principle the emergency motion and entered an order (the “Interim DIP Order”), which authorized an initial loan of $6 million under the DIP Facility. The Interim DIP Order granted Macquarie Bank Limited (the “DIP Lender”) a first priority lien and security interest in the deposited shares of Vantage stock. The Interim DIP Order further provided that the DIP Lender’s interests in the deposited shares of Vantage stock “shall not be withdrawn, modified, abridged, compromised, stayed, reprioritized or otherwise affected in any matter by any subsequent order [of] the Bankruptcy Court . . . in the Chapter 11 [actions] or that [the District Court] might enter in either the Chapter 11 [actions] or in [the Vantage Litigation].” It also provided that the DIP Lender had extended financing to the Debtors in good faith and was entitled to “the full protections of sections 363(m) and 364(e) of the Bankruptcy Code.” It further ordered that “[i]f any or all of the provisions of [the Interim DIP Order] are hereafter reversed, modified, vacated or stayed, that action will not affect . . . the validity and enforceability of any lien . . . authorized or created hereby or pursuant to [the term sheet], including . . . the special provisions concerning [the deposited shares of Vantage stock].”

The next day, the district court entered an order (the “DIP Addendum”), in which it ordered F3 Capital to deposit an additional 4 million shares of Vantage stock (together with the 25,107,142 shares of Vantage stock originally deposited, the “Vantage Shares”) with the clerk of the court to be held in custodia legis. The district court also entered another order (the “Order Affirming Escrow”), which provided that the Vantage Shares would “remain under the control” of the bankruptcy court. The district court then re-referred the action to the bankruptcy court. Vantage timely appealed these three district court orders to this Court. [8]

D

After holding hearings, the bankruptcy court entered two orders (the “Final DIP Order” and the “Cash Collateral Order”) over the objections of Vantage. The Final DIP Order approved the remaining $14 million in post-petition financing under the DIP Facility requested by the Debtors on terms substantially identical to those memorialized in the Interim DIP Order. Like the Interim DIP Order, the Final DIP Order granted the DIP Lender a first priority lien and security interest in the Vantage Shares. The Final DIP Order also provided that the “DIP Lender [was] extending financing to the [Debtors] in good faith and in express reliance upon the protections afforded by sections 363(m) and 364(e) of the Bankruptcy Code and the DIP Lender is entitled to the benefits of the provisions of sections 363(m) and 364(e) of the Bankruptcy Code.” [9] The Cash Collateral Order granted the Debtors’ pre-petition lenders a first priority lien in the 4 million shares of Vantage stock deposited pursuant to the DIP Addendum “to secure any rights, claims or grants that were given to the [pre-petition lenders] in any prior order” of the bankruptcy court. Among other things, it also provided that “[a]ny rights in [the Vantage Shares] are fully subordinated to the rights granted in [the Final DIP Order] to the DIP Lender.”

Vantage timely appealed these two bankruptcy court orders. The bankruptcy court certified the appeal for direct review by this Court. This Court accepted that direct appeal [10] and consolidated it with the prior pending appeal of the district court orders.

II

In reviewing the rulings of the bankruptcy court on direct appeal and the district court sitting in bankruptcy, we review findings of fact for clear error and conclusions of law de novo. [11] We review mixed questions of law and fact de novo. [12]

III

The Debtors assert that Vantage’s appeal of all the orders is moot under 11 U.S.C. § 363(m) and 11 U.S.C. § 364(e). The Bankruptcy Code contains statutory mootness provisions in § 363(m) and § 364(e). Section 363(m) provides:

The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal. [13]

Section 364(e) provides:

The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal. [14]

As noted by the Ninth Circuit, § 364(e) was modeled after § 363(m). [15] A failure to obtain a stay of an authorization under these sections moots an appeal of that authorization where the purchaser or lender acted in good faith. [16] It is undisputed that Vantage did not seek or obtain a stay of any of the orders. Vantage argues that this appeal is not statutorily moot for several reasons.

We begin first with Vantage’s assertion that the appeal is not moot under either § 363(m) or § 364(e) because § 363 and § 364 only authorize actions in connection with “property of the estate,” [17] and the Vantage Shares are not “property of the estate.” This is essentially a statutory attack, but with undertones of subject-matter jurisdiction. This is because whether something is “property of the estate” is an inquiry also relevant to determining subject-matter jurisdiction. [18] Consistent with our precedent, we do not reach the issue of whether the Vantage Shares are “property of the estate” before deciding the statutory mootness issue because of Vantage’s failure to obtain a stay pending appeal. [19] For the same reason, even though Vantage raises a challenge to subject-matter jurisdiction, we do not reach that issue before deciding the statutory mootness issue. [20]

We next turn to Vantage’s argument that the appeal is not moot under either § 363(m) or § 364(e) because the DIP Lender did not act in “good faith.” [21] The Debtors contend that we should not reach the issue of “good faith” because Vantage failed to contest that issue below and is only raising it for the first time on appeal. “It is well established that we do not consider arguments or claims not presented to the bankruptcy court.” [22] Vantage argues that it sufficiently raised the issue before the courts below by repeatedly asserting that F3 Capital had fraudulently obtained the Vantage Shares; Vantage had an adverse claim to the Vantage Shares; and Vantage’s right to assert a constructive trust over the Vantage Shares would survive any attempt to pledge, sell, or transfer the Vantage Shares to a purchaser or lender who was on notice of Vantage’s adverse claim, including the DIP Lender. We agree. Vantage sufficiently raised the issue of the DIP Lender’s “good faith” so as to pursue this issue on appeal. Therefore, we must determine whether the DIP Lender acted in “good faith” within the meaning of § 363(m) and § 364(e).

The proponent of “good faith” bears the burden of proof. [23] Both the district court sitting in bankruptcy and the bankruptcy court held that the DIP Lender was acting in good faith. Whether a determination by a lower court that a party acted in “good faith” should be review de novo or under clear error is a matter of some confusion in our circuit. [24] However, under either standard of review, we find that the determination of good faith does not pass muster.

The Bankruptcy Code does not explicitly define “good faith.” In the context of § 363(m), we have defined the term in two ways. On the one hand, we have defined a “good faith purchaser” as “one who purchases the assets for value, in good faith, and without notice of adverse claims.” [25] On the other hand, we have noted that “the misconduct that would destroy a purchaser’s good faith status . . . involves fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders.” [26] Here, there is no suggestion of fraud, collusion, or an attempt to take grossly unfair advantage by the DIP Lender. Rather, Vantage only argues that the DIP Lender was on notice of Vantage’s adverse claim to the Vantage Shares.

Before we turn to whether the DIP Lender had notice of an adverse claim, however, we must address a threshold argument. Essentially, the Debtors want us to discard one of the definitions of “good faith.” The Debtors argue that knowledge of an adverse claim should not preclude a finding of “good faith” because this requirement would undermine the purposes of § 363(m) and § 364(e). We acknowledge that there is some power in this argument. The purpose of § 363(m)’s stay requirement “is in furtherance of the policy of not only affording finality to the judgment of the bankruptcy court, but particularly to give finality to those orders and judgments upon which third parties rely.” [27] Similarly, the purpose of § 364(e) is “to overcome a good faith lender’s reluctance to extend financing in a bankruptcy context by permitting reliance on a bankruptcy judge’s authorization.” [28] Thus, both § 363(m) and § 364(e) contemplate situations where the good faith purchaser or lender has knowledge of the pendency of an appeal. Yet the good faith purchaser or lender “does not forfeit the protections of the statute,” “even though such knowledge implies the further knowledge that there are objections to the order.” [29] “[I]t is clear as we have said that knowledge that there are objections to the transaction is not enough to constitute bad faith.” [30] We do not disagree with this accent on the meaning of “good faith.” But we think it is irrelevant here. There is a difference, as demonstrated by this case, between simply having knowledge that there are objections to the transaction and having knowledge of an adverse claim. Having knowledge that there are objections to the transaction usually involves those situations in which “some creditor is objecting to the transaction and is trying to get the district court or the court of appeals to reverse the bankruptcy judge.” [31] Having knowledge of an adverse claim requires something more. That is why the former does not preclude a finding of good faith, whereas the latter does. Here, the DIP Lender’s knowledge was not simply limited to objections by creditors of the Debtors. The DIP Lender had knowledge that a third-party, entirely unrelated to the bankruptcy proceedings, had an adverse claim to the Vantage Shares. On these facts, the DIP Lender does not qualify as a good faith purchaser or lender. To our eyes, both definitions have to be applied. [32]

We turn our attention, then, to whether the DIP Lender had notice of an adverse claim. The Bankruptcy Code does not provide a definition of “adverse claim.” But it defines “claim” broadly to include a right to payment or a right to equitable remedy. [33] The Debtors assert that there was no “adverse claim” because F3 Capital, the owner of the Vantage Shares, was not a named defendant in the Vantage Litigation. But Vantage instituted the Vantage Litigation to, among other things, recover the Vantage Shares and has repeatedly asserted before the bankruptcy court and the district court that F3 Capital had fraudulently obtained the Vantage Shares and that Vantage had an adverse claim to the Vantage Shares. We find that this was enough: the DIP Lender had adequate notice of the adverse claim, and the DIP Lender does not come within the meaning of “good faith” as envisioned by § 363(m) and § 364(e). The statutory mootness provisions are not applicable here, and Vantage may challenge the orders issued by the bankruptcy court and the district court.

IV

Vantage argues that the district court and the bankruptcy court erred in entering the orders because they lacked subject-matter jurisdiction over both the Vantage Shares and the Vantage Litigation. [34]

A

Jurisdiction for bankruptcy cases is defined by 28 U.S.C. § 1334. [35] Under § 1334, district courts have exclusive jurisdiction of “all cases under title 11,” [36] including over “all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.” [37] Districts courts also have “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” [38] The district court can refer cases to the bankruptcy court, [39] whose jurisdiction is more limited. [40] c/w No. 13-20715 Because § 1334(b) defines jurisdiction conjunctively, “a district court has jurisdiction over the subject matter if it is at least related to the underlying bankruptcy.” [41] A matter is “related to” the bankruptcy if “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” [42]

B

Vantage first asserts that the district court and the bankruptcy court lacked jurisdiction over the Vantage Shares because they are not property of the Debtors or “property of the estate.”

Although the Bankruptcy Code does not define “property of the debtor,” the meaning of the term “property of the estate” is outlined in 11 U.S.C. § 541. Under § 541(a)(1), “property of the estate” includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” [43] Under § 541(a)(6), it includes “[p]roceeds, product, offspring, rents, or profits from property of the estate.” [44] Finally, under § 541(a)(7), it also includes “[a]ny interest in property that the estate acquires after the commencement of the case.” [45] “The party seeking to include property in the estate bears the burden of showing that the item is property of the estate.” [46]

To begin, it is undisputed that the Debtors had no legal or equitable interest in the Vantage Shares at the commencement of the case. The Vantage Shares thus could not have been “property of the estate” under § 541(a)(1). Similarly, they could not be “[p]roceeds, product, offspring, rents, or profits from property of the estate” under § 541(a)(6). Therefore, they could not be considered “property of the estate” under these provisions.

But the Debtors assert that the Vantage Shares are “property of the estate” under § 541(a)(7) because they are “interest[s] in property that the estate acquire[d] after the commencement of the case.” Specifically, the Debtors assert that they acquired an interest in the Vantage Shares after the Vantage Shares were deposited in custodia legis pursuant to the orders. Vantage asserts that the Vantage Shares are not property of the estate under § 541(a)(7) for several reasons.

Vantage contends that the Debtors never acquired an interest in the Vantage Shares. “Property interests are created and defined by state law,” in this case Texas law. [47] The Escrow Order required the Debtors to deposit “non-estate property” with the clerk of the court. F3 Capital deposited the Vantage Shares in custodia legis; however, F3 Capital continues to retain title to the Vantage Shares and control their voting rights. Moreover, the deposit of the Vantage Shares is neither a loan nor a gift. The Debtors also did not acquire the right to control or retain the Vantage Shares. [48] As a result, Vantage argues that the Debtors have not acquired any cognizable interest. The Debtors reply that they acquired an interest in the Vantage Shares because they can use the Vantage Shares as collateral to secure loans from the DIP Lender pursuant to the Escrow Order. But Vantage correctly notes that courts have consistently held that other forms of collateral do not constitute “property of the estate” under § 541. [49] Vantage therefore asserts that the Debtors did not acquire an interest in the Vantage Shares simply by using them as collateral to secure lending from the DIP Lender.

We need not decide this question of state law, however. Even assuming arguendo that the Debtors acquired an interest, Vantage asserts that the Vantage Shares are not property of the estate under § 541(a)(7) because that provision is limited to property interests that are themselves traceable to “property of the estate” or generated in the normal course of the debtor’s business. We agree. As we previously recognized in In re McLain, [50] “Congress enacted § 541(a)(7) to clarify its intention that § 541 be an all-embracing definition and to ensure that property interests created with or by property of the estate are themselves property of the estate.” [51] Other courts have adopted similar reasoning. [52] Thus, the Vantage Shares are not “property of the estate” under § 541(a)(7) because they were not created with or by property of the estate, they were not acquired in the estate’s normal course of business, and they are not traceable to or arise out of any prepetition interest included in the bankruptcy estate.

The Debtors do not assert that they have an interest in the Vantage Shares that was created with or by other “property of the estate” or that arose in the normal course of business. But they assert that these tracing limitations apply to individual debtors in Chapter 7 or Chapter 11 bankruptcies, not to corporate debtors in Chapter 11 bankruptcies. For corporate debtors in Chapter 11 bankruptcies, the Debtors assert that § 541(a)(7) covers “”[a]ny interest in property that the estate acquires after the commencement of the case.” [53] But the Debtors cite no case standing for the proposition that these restrictions on the application § 541(a)(7) do not apply to the estate of a corporate debtor in a Chapter 11 proceeding, and we refuse to adopt such a holding.

Finally, Vantage points out that the Debtors cannot rely on the orders as the means by which the Vantage Shares became “property of the estate” because the bankruptcy court and the district court had no authority to issue the orders unless the Vantage Shares were already “property of the estate.” The bankruptcy court and the district court could not manufacture in rem jurisdiction over the Vantage Shares by issuing orders purporting to vest the Debtors with a post-petition interest in the Vantage Shares. [54] We agree. The Debtors cannot use the orders as “jurisdictional bootstrap[s]” to allow the district court and bankruptcy court to “exercise jurisdiction that would not otherwise exist.” [55]

For these reasons, we conclude that the Vantage Shares are not property of the Debtors or “property of the estate.” [56] Therefore, the district court and the bankruptcy court lacked jurisdiction on this basis.

C

Vantage next asserts that the district court and bankruptcy court lacked jurisdiction to adjudicate Vantage’s claim in the Vantage Litigation because it is not “related to” the Debtors’ Chapter 11 proceedings. A matter is “related to” a bankruptcy proceeding if “the outcome of the proceeding could conceivably affect the estate being administered in bankruptcy.” [57] Certainty, therefore, is “unnecessary; an action is `related to’ bankruptcy if the outcome could alter, positively or negatively, the debtor’s rights, liabilities, options, or freedom of action or could influence the administration of the bankrupt estate.” [58] But “`related to’ jurisdiction cannot be limitless.” [59]

Vantage asserts that the bankruptcy court and the district court lacked jurisdiction to interfere with its rights in the Vantage Shares, which are the subject of the Vantage Litigation, because the outcome of that proceeding could not conceivably affect the Debtors’ estates. We agree. This Court has previously held that bankruptcy jurisdiction does not extend to state law actions between non-debtors over non-estate property. [60] The Supreme Court in Celotex read the “related to” prong more broadly to cover non-debtor actions involving non-estate property that nonetheless affect the estate:

[T]he `related to’ language of § 1334(b) must be read to give district courts (and bankruptcy courts under § 157(a)) jurisdiction over more than simple proceedings involving the property of the debtor or the estate. We also agree . . . that a bankruptcy court’s `related to’ jurisdiction cannot be limitless. [61]

However, even under Celotex’s broad reading, there is no justifiable basis for exercising jurisdiction over the Vantage Litigation. The only discernable link between the Vantage Litigation and the Debtors’ Chapter 11 proceedings is that F3 Capital and the Debtors’ have a common owner. This is not enough. The resolution in the Vantage Litigation would not have had any effect on the bankruptcy. As a result, the bankruptcy court and the district court improperly interfered with the Vantage Litigation by ordering that the Vantage Shares be deposited in custodia legis with the clerk of the court; that no subsequent orders in the Vantage Litigation could impair the DIP Lender’s interest in the Vantage Shares; that any rights in the Vantage Shares, including those of Vantage, are subordinated to those of the DIP Lender; and that the Vantage Shares are not subject to a constructive trust as a matter of law.

The Debtors maintain that the bankruptcy court and the district court had jurisdiction to enter the orders because the orders deal with core proceedings involving the administration of the estate, the acquisition of credit, and the use of property, including cash collateral. [62] This argument muddies the water somewhat because before a court can decide whether an action is a core or a non-core proceeding, it must first determine whether subject-matter jurisdiction under § 1334 even exists. [63] But in any event, we can reject this argument without much explanation. The Vantage Litigation does not fall within the meaning of core proceedings. Our sister circuits have previously rejected this kind of argument in cases where bankruptcy courts adjudicated a non-debtor’s right in non-estate property. [64] Similarly, in In re Wood, [65] we held that the term “core proceedings” under 28 U.S.C. § 157 did not cover unrelated and independent state court proceedings, such as the Vantage Suit:

We hold, therefore, that a proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case. The proceeding before us does not meet this test and, accordingly, is a non-core proceeding. The plaintiff’s suit is not based on any right created by the federal bankruptcy law. It is based on state created rights. Moreover, this suit is not a proceeding that could arise only in the context of a bankruptcy. It is simply a state contract action that, had there been no bankruptcy, could have proceeded in state court. [66]

But as explained above, not only was the Vantage Litigation not a core proceeding, it was not even a non-core proceeding because there is no “related to” jurisdiction in this case. Simply put, the Debtors confuse the argument by putting the matter of placement of jurisdiction (core versus non-core proceedings) before the matter of the existence of subject-matter jurisdiction.

The Debtors also assert that the orders did not interfere with or impair the Vantage Litigation or Vantage’s claim to the Vantage Shares. They note that the bankruptcy court and the district court expressed no views on the collateral estoppel effect of their rulings in the Vantage Litigation. This argument fails to persuade because the orders authorized the imposition of liens on the Vantage Shares, subordinated Vantage’s rights in the Vantage Shares to those of the DIP Lender, prevented the district court in the Vantage Litigation from impairing the DIP Lender’s interest in the Vantage Shares, and held that the Vantage Shares were not subject to a constructive trust as a matter of law. Finally, the Debtors contend that, in any event, Vantage’s right to due process under the Fifth Amendment was not infringed because it had the opportunity to be heard at every stage of the proceedings that resulted in the orders. [67] This argument misses the mark—the question is whether the bankruptcy court and the district court had jurisdiction to enter the orders, not whether Vantage’s right to due process was violated.

For these reasons, we conclude that Vantage’s claim in the Vantage Litigation was not “related to” the Debtors’ Chapter 11 proceedings. Before the district court and the bankruptcy court exercised jurisdiction over the Vantage Shares, the outcome of the Vantage Litigation could not have had any conceivable effect on the Debtors’ estate. In essence, the Debtors have again attempted to use the orders as “jurisdictional bootstrap[s]” by arguing that the Vantage Litigation is “related to” the Debtors’ Chapter 11 proceedings because the orders have linked them. [68] This we cannot allow.

V

We conclude that the appeals are not moot, that the Vantage Shares are not “property of the estate,” and that the Vantage Litigation is not “related to” the bankruptcy proceedings. The district court and the bankruptcy court had no subject-matter jurisdiction to enter the orders. The orders of the district court and the bankruptcy court are VACATED and this case is REMANDED for proceedings consistent with this opinion. Accordingly, the Debtors’ Motion to Dismiss Appeals is DENIED.

[1] See Notice of Removal, Vantage Drilling Co. v. Su, No. 4:12-CV-03131 (S.D. Tex. Oct. 22, 2012), Dkt. No. 1.

[2] See Opinion on Remand, Vantage Drilling Co. v. Su, No. 4:12-CV-03131 (S.D. Tex. Apr. 3, 2013), Dkt. No. 43.

[3] Vantage Drilling Co. v. Su, 741 F.3d 535, 539 (5th Cir. 2014) .

[4] The shipping companies were: (1) A Whale Corporation; (2) B Whale Corporation; (3) C Whale Corporation; (4) D Whale Corporation; (5) E Whale Corporation; (6) G Whale Corporation; (7) H Whale Corporation; (8) A Duckling Corporation; (9) F Elephant Corporation; (10) F Elephant Inc.; (11) A Ladybug Corporation; (12) C Ladybug Corporation; (13) D Ladybug Corporation; (14) A Handy Corporation; (15) B Handy Corporation; (16) C Handy Corporation; (17) B Max Corporation; (18) New Flagship Investment Co., Ltd.; (19) RoRo Line Corporation; (20) Ugly Duckling Holding Corporation; (21) Great Elephant Corporation; (22) TMT Procurement Corporation; and (23) TMT USA Shipmanagement LLC.

[5] The Debtors later filed an amended motion.

[6] Vantage Drilling Co.’s Application for Preliminary Injunction and Motion for Expedited Discovery at 1, Vantage Drilling Co. v. Su, No. 4:12-cv-03131 (S.D. Tex. Aug. 14, 2013), Dkt. No. 75.

[7] Order on Stock Encumbrance at 1, Vantage Drilling Co. v. Su, No. 4:12-cv-03131 (S.D. Tex. Aug. 14, 2013), Dkt. No. 79.

[8] The appeal was filed under Case No. 13-20622.

[9] The bankruptcy court also reiterated its finding twice that the DIP Lender had negotiated in good faith and “should be deemed a good faith lender in accordance with the Bankruptcy Code” on the record at the hearing.

[10] The appeal was filed under Case No. 13-20715.

[11] See In re Vitro S.A.B. de CV, 701 F.3d 1031, 1042 (5th Cir. 2012) ; In re Martinez, 564 F.3d 719, 725-26 (5th Cir. 2009) .

[12] In re ASARCO, L.L.C., 702 F.3d 250, 257 (5th Cir. 2012) .

[13] 11 U.S.C. § 363(m).

[14] Id. § 364(e).

[15] In re Adams Apple, Inc., 829 F.2d 1484, 1489 (9th Cir. 1987) .

[16] See In re Pac. Lumber Co., 584 F.3d 229, 240 n.15 (5th Cir. 2009) ; In re Gilchrist, 891 F.2d 559, 560-61 (5th Cir. 1990) ; In re First S. Sav. Ass’n, 820 F.2d 700, 704 (5th Cir. 1987) .

[17] See 11 U.S.C. § 363(b)(1) (“The trustee . . . may use, sell, or lease . . . property of the estate. . . .”); Id. § 364(c) (“[T]he trustee . . . may authorize the obtaining of credit or the incurring of debt . . . secured by a lien on property of the estate . . . or secured by a junior lien on property of the estate. . . .”).

[18] See infra Part IV(B).

[19] See In re Gilchrist, 891 F.2d 559, 561 (5th Cir. 1990) ; In re Ginther Trusts, 238 F.3d 686, 689 (5th Cir. 2001) .

[20] See In re Gilchrist, 891 F.2d at 561 ; In re Ginther Trusts, 238 F.3d at 689 .

[21] Because we find Vantage’s “good faith” argument persuasive, we do not address the two additional reasons offered against mootness. First, Vantage argues that only the Interim DIP Order and the Final DIP Order refer to § 363(m) or § 364(e); authorize post-petition financing; or contain an explicit finding of “good faith.” Because the Order Affirming Escrow, the DIP Addendum, and the Cash Collateral Order do not refer to § 363(m) or § 364(e), do not authorize a sale, lease, or post-petition financing, and do not contain an explicit finding of “good faith,” Vantage argues that the appeal is not moot as to these orders. Second, Vantage asserts that the protections enumerated in § 363(m) do not apply because none of the orders authorizes “a sale or lease of property” pursuant to § 363.

[22] In re Gilchrist, 891 F.2d at 561 (refusing to address the appellant’s challenge to the buyer’s good faith under § 363(m) because it had not been raised before the bankruptcy court); see also In re Ginther Trusts, 238 F.3d 686, 689 (5th Cir. 2001) .

[23] In re M Capital Corp., 290 B.R. 743, 747 (B.A.P. 9th Cir. 2003) .

[24] On the one hand, we have stated that when a district court hearing a bankruptcy appeal dismisses an appeal from the bankruptcy court as moot, we review that dismissal de novo. In re Ginther Trusts, 238 F.3d at 688 . Similarly, the Sixth Circuit has held that “good faith” is a mixed question of law and fact. In re Revco D.S., Inc., 901 F.2d 1359, 1366 (6th Cir. 1990) (reviewing finding of “good faith” under § 364(e)). This would suggest that the good faith determinations by the lower courts are subject to a de novo determination. On the other hand, we have previously reviewed a bankruptcy court’s “good faith” determination under § 363(m) for clear error. In re Beach Dev. LP, No. 07-20350, 2008 WL 2325647, at *2 (5th Cir. Jun. 6, 2008). District courts in our circuit have done the same. In re Camp Arrowhead, Ltd., 429 B.R. 546, 550-52 (W.D. Tex. 2010) .

[25] Hardage v. Herring Nat’l Bank, 837 F.2d 1319, 1323 (5th Cir. 1988) (quoting In re Willemain, 764 F.2d 1019, 1023 (4th Cir. 1985) ); see also SEC v. Janvey, 404 F. App’x 912, 916 (5th Cir. 2010) (applying the “good faith” standard set forth in Hardage); see also Jeremiah v. Richardson, 148 F.3d 17, 23 (1st Cir. 1998) (“A `good faith’ purchaser is one who buys property in good faith and for value, without knowledge of adverse claims.” (internal quotation marks omitted) (emphasis in original)).

[26] In re Bleaufontaine, Inc., 634 F.2d 1383, 1388 n.7 (5th Cir. 1981) (quoting In re Rock Indus. Mach. Corp., 572 F.2d 1195, 1198 (7th Cir. 1978) ).

[27] In re Sax, 796 F.2d 994, 998 (7th Cir. 1986) (internal quotation marks omitted).

[28] In re Adams Apple, 829 F.2d at 1488 ; see also In re W. Pac. Airlines, Inc., 181 F.3d 1191, 1195 (10th Cir. 1999) ; In re Saybrook Mfg. Co., 963 F.2d 1490, 1493 (11th Cir. 1992) ; In re EDC Holding Co., 676 F.2d 945, 947 (7th Cir. 1982) .

[29] In re EDC Holding Co., 676 F.2d at 947 .

[30] Id.

[31] Id.

[32] See In re Rock Indus. Mach. Corp., 572 F.2d at 1197-98 (defining “good faith purchaser” as “one who purchases the assets for value, in good faith, and without notice of adverse claims” while also noting that “the misconduct that would destroy a purchaser’s good faith status at a judicial sale involves fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders”).

[33] 11 U.S.C. § 101(5). A claim means a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Id. Similarly, a claim means “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.” Id.

[34] See In re Querner, 7 F.3d 1199, 1201 (5th Cir. 1993) (“Where a federal court lacks jurisdiction, its decisions, opinions, and orders are void.”).

[35] In re Walker, 51 F.3d 562, 568 (5th Cir. 1995) .

[36] 28 U.S.C. § 1334(a).

[37] 28 U.S.C. § 1334(e)(1); see also Kane Enters. v. MacGregor (USA) Inc., 322 F.3d 371, 374 (5th Cir. 2003) (“The district in which a chapter 11 petition is filed has exclusive jurisdiction over the property of the estate.”).

[38] See 28 U.S.C. § 1334(b).

[39] 28 U.S.C. § 157(a).

[40] Bankruptcy judges “may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11″ and “enter appropriate orders and judgment.” 28 U.S.C. § 157(b); In re Wood, 825 F.2d 90, 95 (5th Cir. 1987) . In contrast to core proceedings, bankruptcy judges have the limited power to “hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11″ and to “submit proposed findings of fact and conclusions of law to the district court,” subject to de novo review. 28 U.S.C. § 157(c); In re Wood, 825 F.2d at 95 .

[41] In re Querner, 7 F.3d at 1201 .

[42] In re Wood, 825 F.2d at 93 .

[43] 11 U.S.C. § 541(a)(1).

[44] Id. § 541(a)(6).

[45] Id. § 541(a)(7).

[46] In re Klein-Swanson, 488 B.R. 628, 633 (B.A.P. 8th Cir 2013) .

[47] In re Swift, 129 F.3d 792, 795 & n.12 (5th Cir. 1997) ; In re Klein-Swanson, 488 B.R. at 633 .

[48] See In re IFS Fin. Corp., 669 F.3d 255, 262 (5th Cir. 2012) (noting that, under Texas law, “control over funds in an account is the predominant factor in determining an account’s ownership”); see also In re Kemp, 52 F.3d 546, 551-53 (5th Cir. 1995) (per curiam) (holding that funds held in escrow are “property of the estate” only to the extent of the debtor’s independent right to that property); In re Missionary Baptist Found. of Am., Inc., 792 F.2d 502, 505-06 (5th Cir. 1986) (same).

[49] In re Stonebridge Techs., Inc., 430 F.3d 260, 269 (5th Cir. 2005) (per curiam) (“It is well-established in this circuit that letters of credit and the proceeds therefrom are not property of the debtor’s bankruptcy estate.”); see also In re Lockard, 884 F.2d 1171, 1178 (9th Cir. 1989) (“[W]e conclude that the surety bond at issue in this case is not `property of the estate,’ within the meaning of 11 U.S.C. § 541.”).

[50] 516 F.3d 301 (5th Cir. 2008).

[51] Id. at 312 (internal quotation marks omitted).

[52] In re Trinity Gas Corp. (Reorganized), 242 B.R. 344, 350 (Bankr. N.D. Tex. 1999) (“[T]he obvious purpose of § 541(a)(7) is to include property and rights which are acquired in the estate’s normal course of business in property of the estate.”); In re Doemling, 116 B.R. 48, 50 (Bankr. W.D. Pa. 1990) (“Relatively few courts have been called upon to determine whether a property interest which was acquired postpetition in a Chapter 11 case qualifies as property of the estate pursuant to § 541(a)(7). The following principle can, however, be extracted from certain of those cases: a property interest acquired postpetition during the pendency of a Chapter 11 case qualifies as property of the estate, for purposes of § 541(a)(7), only if said property interest is traceable to (or arises out of) some prepetition property interest which already is included in the bankruptcy estate.”); see also Segal v. Rochelle, 382 U.S. 375, 380 (1966) (holding that whether property is included in an estate depends on whether it “is sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts’ ability to make an unencumbered fresh start”).

[53] 11 U.S.C. § 541(a)(7) (emphasis added).

[54] See Celotex Corp. v. Edwards, 514 U.S. 300, 327 (1995) (holding that a bankruptcy court could not use “jurisdictional bootstrap[s]” to “exercise jurisdiction that would not otherwise exist”); In re Guild & Gallery Plus, Inc., 72 F.3d 1171, 1182 (3d Cir. 1996) (holding that a consent order purporting to exert jurisdiction over non-estate property cannot “be utilized to support a finding of subject matter jurisdiction over claims that otherwise could not be heard in bankruptcy court”).

[55] Celotex, 514 U.S. at 327 .

[56] Because we conclude that the Vantage Shares are not “property of the estate,” the Interim DIP Order and the Final DIP Order were not authorized under § 364 which only authorizes the imposition of liens on “property of the estate.” See 11 U.S.C. § 364(c)(2)-(3), (d)(1).

[57] In re TXNB Internal Case, 483 F.3d 292, 298 (5th Cir. 2007) .

[58] Id.

[59] Celotex, 514 U.S. at 308 .

[60] See In re Paso Del Norte Oil Co., 755 F.2d 421, 424 (5th Cir. 1985) (“A court of bankruptcy has no power to entertain collateral disputes between third parties that do not involve the bankrupt or its property, nor may it exercise jurisdiction over a private controversy which does not relate to matters pertaining to bankruptcy.” (citations omitted)); see also In re Vitek, Inc., 51 F.3d 530, 533-38 (5th Cir. 1995) .

[61] 514 U.S. at 308 ; see also In re Prescription Home Health Care, Inc., 316 F.3d 542, 547 (5th Cir. 2002) (“It is well-established that, to be `related to’ a bankruptcy, it is not necessary for the proceeding to be against the debtor or the debtor’s property.”).

[62] See 28 U.S.C. § 157(b)(2)(A), (D) & (M).

[63] In re Wood, 825 F.2d at 92-95 .

[64] See In re Guild & Gallery Plus, 72 F.3d at 1180 (“Since the Summertime painting was not part of the bankrupt estate, then a fortiori this matter cannot fall within § 157(b)(2)(A), which can only be applied to matters concerning the administration of the bankrupt estate. . . . The plain language of § 157(b)(2)(A) applies only to property of the bankrupt estate.”); Howell Hydrocarbons, Inc. v. Adams, 897 F.2d 183, 190 (5th Cir. 1990) (“Whatever else a core proceeding must be, it must involve a decision that ultimately affects the distribution of the debtor’s assets.”).

[65] 825 F.2d 90 (5th Cir. 1987).

[66] Id. at 97.

[67] See Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (“The fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.” (internal quotations omitted)).

[68] See Celotex, 514 U.S. at 327 .

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New Bankruptcy Opinion: IN RE MF GLOBAL INC. – Bankr. Court, SD New York, 2014

In re: MF GLOBAL INC., Debtor.

Case No. 11-2790 (MG) SIPA.

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

September 4, 2014.

MEMORANDUM OPINION AND ORDER SUSTAINING THE TRUSTEE’S SEVENTY-SECOND AND SEVENTY-THIRD OMNIBUS OBJECTIONS TO CERTAIN CLAIMS

MARTIN GLENN, Bankruptcy Judge.

Pending before the Court are the SIPA Trustee’s Seventy-Second and Seventy-Third Omnibus Objections to General Creditor Claims (Post-Petition Loss Claims) (the “Objections”). [1] The Court previously entered an order sustaining the Objections to claims as to which the Objections were uncontested. (ECF Doc. ## 8224, 8232.) This Opinion and Order addresses responses filed by the following claimants: (1) Frank Buckley; [2] (2) Douglas Bry; [3] and (3) a group of claimants referred to as the Calatrava Claimants. [4] The Trustee filed an omnibus reply (the “Reply,” ECF Doc. # 8175), supported by the Declaration of Kenneth Aulet (the “Aulet Decl.,” Reply Ex. A). The Court heard oral argument on the Objection on August 21, 2014. While each of the responses raises a different theory of recovery, each argument fails for substantially the same reason: Customers of a failed brokerage firm cannot recover in a SIPA proceeding for market losses that occur between the date the SIPA proceeding is commenced and the date on which their securities or commodities are returned to them. For that reason, as explained in greater detail below, the Court SUSTAINS the Objections.

I. BACKGROUND

On October 31, 2011 (the “Filing Date”), the Honorable Paul A. Engelmayer, Judge for the United States District Court for the Southern District of New York, entered the Order Commencing Liquidation of MFGI (the “MFGI Liquidation Order”) pursuant to the provisions of SIPA in the case captioned Securities Investor Protection Corp. v. MF Global Inc., Case No. 11-CIV-7750 (PAE) (ECF Doc. # 1). The MFGI Liquidation Order appointed James W. Giddens as the Trustee for the liquidation of the business of MF Global Inc. (“MFGI”) in accordance with SIPA § 78eee(b)(3) and removed the case to this Court as required by SIPA § 78eee(b)(4). As soon as this SIPA proceeding was commenced, all MFGI accounts were “frozen,” to allow the Trustee to make an assessment of the securities on hand at the failed broker-dealer and to return securities to customers in a timely, orderly manner.

II. DISCUSSION

In SIPA proceedings, customer claims are determined by the trustee based on the “net equity” of the claimant’s account with the liquidating broker. See In re MF Global Inc., No. 11-2790 (MG) SIPA, 2013 WL 5232578, at *3 (Bankr. S.D.N.Y. Sept. 17, 2013). “Net equity” is determined under SIPA by “calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date” all of the customer’s securities positions, less “any indebtedness of such customer to the debtor on the filing date . . . .” SIPA § 78lll(11) (emphasis added). “As is clear from the definition, net equity is calculated as of the filing date.” In re Lehman Bros. Inc., 433 B.R. 127, 133 (Bankr. S.D.N.Y. 2010) ; see also In re Adler, Coleman Clearing Corp., 195 B.R., 266, 270 (Bankr. S.D.N.Y. 1996) (“A customer’s account is valued as of the date the SIPA liquidation is commenced.”); 1 COLLIER ON BANKRUPTCY ¶ 12.14[1][a] (“SIPA requires, and courts have consistently held, that net equity is calculated as of the filing date.”).

Under SIPA, the trustee endeavors to deliver securities to customers holding claims for such securities, rather than the cash equivalent. SIPA § 78fff-2(b). “For purposes of distributing securities to customers, all securities shall be valued as of the close of business on the filing date.” Id. A customer’s net equity claim is fully satisfied upon receipt of the securities held on the filing date, regardless of any drop in value of such securities between the filing date and the date of the distribution. SIPA does not protect customers against the diminution in value of the securities. See Adler, 195 B.R. at 273 (“Congress did not include compensation for market losses suffered by a customer during the pendency of a SIPA liquidation proceeding within the definition of net equity.”); Hill v. Spencer Sav. & Loan Ass’n (In re Bevill, Bresler & Schulman, Inc.), 83 B.R. 880, 892 (D.N.J. 1988) (“By use of a uniform filing date, SIPA is designed to insulate the calculation of net equity claims and distributions made on the basis thereof from market fluctuation.”); 1 COLLIER ON BANKRUPTCY ¶ 12.14[1][a] (stating that “courts have consistently held that SIPA does not protect customers against market loss accruing during the period between the filing date and the date on which a claim is determined or paid, regardless of which way the market has moved”).

A. Frank Buckley

Buckley filed claim number 5325 (the “Buckley Claim”) against MFGI in the amount of $143,993.13—the amount he alleges was in his MFGI account on the Filing Date. (See Buckley Resp. at 1.) MFGI objects to the Buckley Claim as an impermissible claim for postpetition interest. (See Seventy-Second Omnibus Obj. Ex. 1.) Buckley received a full distribution on his allowed net equity, as calculated by the Trustee. (See Reply ¶ 7; Buckley Declaration and Release, Reply Ex. A.) This amount was approximately $30,000 less than what was in his MFGI account on the Filing Date. (See Buckley Resp. at 1-2.) Buckley asserts that he should be entitled to the full amount in his MF Global account as of the Filing Date because MFGI took away his ability to access the account and liquidate his position. (See id.) Buckley compares MFGI to an insurance company, which is required to pay out the value of goods at the time they were destroyed, not the value of the goods after they were destroyed. (See id.).

Buckley’s assertions run contrary to the CFTC Rules and SIPA. “SIPA was not designed to provide full protection to all victims of a brokerage collapse.” Sec. & Exch. Comm’n v. Packer, Wilbur & Co., 498 F.2d 978, 983 (2d Cir. 1974) ; see also SIPC v. Bernard L. Madoff Inv. Secs, LLC (In re Madoff), 496 B.R. 744, 756 (Bankr. S.D.N.Y. 2013) (stating that “SIPC is not an insurer and does not guarantee that customers will recover their investments which may have diminished as a result of . . . market fluctuations or broker-dealer fraud” (internal quotation marks omitted)). Under the CFTC Rules, “property held by a commodity broker on behalf of commodity customers must be valued as of the date of its return or transfer and not as if it had been liquidated as of the filing date.” 46 Fed. Reg. 57535-01, 57546. This Court has previously rejected claims similar to Buckley’s. See, e.g., MF Global Inc., 2013 WL 5232578, at *3 (“A customer has no claim for a decline in the value of securities between the filing date and the date on which such securities are returned to him.”). Therefore, the Court SUSTAINS the Objection to the Buckley Claim.

B. Douglas Bry/Northfield Capital

Douglas Bry is president of Northfield Trading LP, which is the general partner of Northfield Capital. (See Bry Resp. at 3.) He submitted the Bry Response on behalf of ten claimants, including Northfield Capital. (See id.) Northfield Capital is a commodity trading advisor to the nine other claimants listed in the Bry Responses, and Bry had power of attorney to trade their positions at MFGI. (See id. at 2.)

On the Filing Date, MF Global UK Limited (“MF Global UK”) was placed into special administration and Joint Special Administrators were appointed. All trade orders placed with MF Global UK after this date had to be authorized by the Joint Special Administrators. (See Email to Douglas Bry, Bry Resp. at 19.) On November 9, 2011, Northfield Capital attempted to liquidate certain positions through MF Global UK (the “Northfield Positions”), without receiving the Joint Special Administrators’ authorization. On November 11, 2011, Northfield Capital received a daily statement reflecting a reversal of the trades liquidating the Northfield Positions. (Bry Resp. at 2, ¶ 3.) On December 16, 2011, Northfield Capital was informed that the Northfield Positions were liquidated as of November 11, 2011, two days after the attempted liquidation. (Id. at 2, ¶ 5.) Bry argues that (1) Northfield Capital and its clients are entitled to the November 9, 2011 prices of their positions; (2) the Trustee arbitrarily set a price for the Northfield Positions; and (3) the delay from November 9, 2011 to December 16, 2011 violated the CFTC and Exchange Rules. (Id. at 2-3, ¶¶ 5-6.) Northfield Capital’s proof of claim asserts that it is entitled to recover based on liquidation prices as of November 9, 2011, because MFGI failed, “in the ordinary course of its business to properly accept duly authorized orders for the account of the Creditor and . . . improperly cancel[ed] such orders after their execution . . . .” (See id. at 5.)

“[T]he Trustee’s role is not that of a substitute broker.” In re Adler Coleman Clearing Corp., 211 B.R. 486, 497 (Bankr. S.D.N.Y. 1997) (quoting In re Weis Sec. Inc., 3 Bankr. Ct. Dec. (CRR) 88 (Bankr. S.D.N.Y. 1977)). Once the Trustee was appointed, his only authority was to liquidate the business. See 15 U.S.C. § 78fff(a) (stating that the SIPA Trustee’s purpose is “to liquidate the business”); see also Thielmann v. MF Global Holdings Ltd. (In re MF Global Holdings Ltd.), 481 B.R. 268, 283 (Bankr. S.D.N.Y. 2012) (stating that after the SIPA proceeding was commenced, “[e]ven if the SIPA Trustee had wanted to continue operating the business as a going concern, he was statutorily prohibited from doing so”). While Bry’s initial post-filing request for trade execution was honored by a lower-level MF Global Hong Kong employee, he was informed shortly thereafter that this was a mistake, and that all trades had to be authorized by the Joint Special Administrators of MF Global UK. (See Email to Douglas Bry, Bry Resp. at 19.) The SIPA Trustee did not have authority to execute the trades requested by Bry. Additionally, the Trustee asserts that the Northfield Positions were valued in accordance with the CFTC Rules, the Bankruptcy Code, and SIPA. (See Aulet Decl. ¶ 5.) Bry has not offered any evidence to the contrary, stating simply that the Northfield Positions “were liquidated with an `as of’ date of November 11, 2011 at what appears to be an arbitrary price on the Trustee’s part inasmuch as those markets were not trading at any similar levels on that date.” (Bry Resp. at 2, ¶ 5.) But the Trustee valued the positions in accordance with his responsibilities, and Bry’s bald statement otherwise does not support a claim for recovery. For these reasons, the Court SUSTAINS the Objection to the claims included in the Bry Response.

C. The Calatrava Claimants

Before the Filing Date, each of the Calatrava Claimants entered into an agreement with MFGI (a “Customer Agreement”), [5] under which MFGI opened and maintained one or more accounts on behalf each signing Claimant. Section 10 of each Customer Agreement, titled “Limitation of Liability,” sets out a broad and detailed exculpation of liability of MFGI. The last sentence of that section contains a specific capstone provision which reads: “[MFGI] shall only be liable for actions or inactions by [MFGI] which amount to gross negligence or willful misconduct.” (See Customer Agreement § 10.)

Due to the commencement of this SIPA proceeding, the Claimants did not have access to their MFGI accounts from the Filing Date through the date on which those accounts were liquidated or transferred by the SIPA Trustee. (Calatrava Resp. ¶ 15.) According to the Claimants, their inability to affect their MFGI positions during this period resulted in losses from a decline in the value of those positions (the “Position Losses”). Each of the Claimants timely filed a commodity customer claim and a separate general unsecured claim. The general unsecured claims seek recovery of Position Losses, as well as legal fees and expenses in connection with this proceeding. [6]

The Claimants do not dispute that SIPA does not provide for recovery to commodities customers of Position Losses. Nor do they contest the Trustee’s calculation of their net equity claims or the allowed amount of their commodity customer claims. (Id. ¶ 26.) But the Claimants assert they are nevertheless entitled to recovery of Position Losses as contractual damages under the Customer Agreements. (Id. ¶ 21.) The Calatrava Claimants argue that MFGI and its officers and directors engaged in gross negligence and willful misconduct leading up to the commencement of this SIPA proceeding [7] —behavior for which MFGI expressly assumed liability in the Customer Agreement. (See id. ¶¶ 8-13; 24-25; Customer Agreement § 10.) The Claimants contend that they are therefore entitled to contractual damages, separate and apart from their customer claims.

The Court rejects the Claimants’ argument. Under Illinois law, [8] “[c]lear and unambiguous contract terms must be given their ordinary and natural meaning . . . .” Frydman v. Horn Eye Ctr., Ltd., 676 N.E.2d 1355, 1359 (Ill. App. Ct. 1997) . The Customer Agreement clearly and unambiguously limits MFGI’s liability to its customers and does not create a cause of action based on Position Losses like those sought here. Section 10 of the Customer Agreement states that customers have “no claim against [MFGI] for any loss, damage, liability, cost, charge, expense, penalty, fine or tax caused directly or indirectly by,” inter alia, (1) “any Applicable Law, or any order of any court;” (2) “suspension or termination of trading,” and (3) “any other causes beyond [MFGI's] control.” (Customer Agreement § 10.) Here, the MFGI Liquidation Order led to the freezing of MFGI’s customers’ accounts; an automatic result from the commencement of the case and a cause beyond MFGI’s control.

The Calatrava Claimants assert that the last sentence of section 10—imposing liability on MFGI for gross negligence or willful misconduct—should be read into the beginning of section 10, imposing liability on MFGI if any of the occurrences listed in that section result from MFGI’s gross negligence or willful misconduct. According to the Claimants, MFGI is liable for the Position Losses because those Losses were caused by operation of the MFGI Liquidation Order, which in turn was caused by MFGI’s gross negligence and willful misconduct. The Claimants read liability for gross negligence and willful misconduct into the section of the Customer Agreement that explicitly exculpates MFGI from liability resulting from the required termination or suspension of trading upon the commencement of the SIPA proceeding. The plain language of the contract bars that result.

In support of their argument, the Claimants cite Contact Lenses Unlimited, Inc. v. Johnson, 531 N.E.2d 928, 931 (Ill. App. Ct. 1988), which held that a contract action was created by a clause providing for liability for gross negligence and willful misconduct. But the contract in that case is not analogous to the one at issue here. The contract in Contact Lenses stated: “The Agent shall also not be liable for any error of judgment or for any mistake of fact of [sic] law, or for anything which it may do or refrain from doing hereinafter, except in cases of willful misconduct or gross negligence.” See id. The defendant in that case argued that it could be liable under that clause only for its intentional torts, and that it had immunity from all other claims. Id. The court disagreed, holding that the clause in question did not preclude contract actions. Id. The court explained that it had to construe the contract as a whole to give effect to the intention of the parties, and that other requirements in the contract—such as the requirement that the defendant undertake due diligence—would be meaningless if the defendant “could ignore those provisions with no penalty.” Id.

The exculpation clause in the Customer Agreement is distinguishable from the one in Contact Lenses because the clause here lists specific occurrences for which MFGI cannot be held liable. See Customer Agreement § 10; see also Rayner Covering Sys., Inc. v. Danvers Farmers Elevator Co., 589 N.E.2d 1034, 1038 (Ill. App. Ct. 1992) (enforcing a limitation of damages clause and explaining that the exculpatory clause in Contact Lenses “attempted to exclude all liability on the part of the seller, at times in conflict with other portions of the contract” (emphasis in original)). The contract here excludes liability for all losses or damages for certain specifically identified reasons listed in the beginning of section 10, and limits liability for losses or damages for any other reason to cases involving gross negligence or willful misconduct. This reading of the contract does not bar MFGI customers from bringing contract damage actions. See, e.g., Sabena Belgian World Airways v. United Airlines, Inc., No. 91 C 0789, 1991 WL 78175, at *2 n.1 (N.D. Ill. May 7, 1991) (“Despite defendants’ assertion to the contrary, allegations of willful misconduct or conversion in breaching a contract do not convert a breach of contract action into a tort action.”); Contact Lenses, 531 N.E.2d at 931 (holding that a contract clause imposing liability for gross negligence or willful misconduct gives rise to contract action). The Claimants simply cannot bring this contract action—i.e., one for losses that occurred due to one of the enumerated occurrences in the beginning of section 10, for which MFGI is expressly not liable. [9]

The Claimants also assert that they are entitled to attorneys’ fees and other legal costs under the Customer Agreement since those fees and costs are losses that were directly caused by MFGI’s gross negligence or willful misconduct. “To have a contractual right to attorneys’ fees in Illinois, that right must be specifically mentioned in the contract. General promises to pay `costs,’ `expenses,’ or the like, are not promises to pay attorneys’ fees.” Prudential Ins. Co. of Am. v. Curt Bullock Builders, Inc., 626 F. Supp. 159, 170 (N.D. Ill. 1985) ; see also Hous. Auth. of Champaign Cnty. v. Lyles, 918 N.E.2d 1276, 1279 (Ill. App. Ct. 2009) (stating that contracts “must allow for attorney fees by specific language, such that one cannot recover if the provision does not specifically state that `attorney fees’ are recoverable”). “When faced with cost or expense-shifting provisions in contracts, Illinois courts have consistently refused to read attorney fees into imprecise language.” Negro Nest, LLC v. Mid-N. Mgmt., Inc., 839 N.E.2d 1083, 1091 (Ill. App. Ct. 2005) . The Customer Agreement does not give customers the right to recover attorneys’ fees and legal costs. The Customer Agreement expressly provides that MFGI may recover “attorneys’ fees” from customers in certain circumstances. (See Customer Agreement § 10 (customers agree to “to indemnify [MFGI] and hold [MFGI] harmless from and against any and all liabilities, penalties, losses and expenses, including legal expenses and attorneys’ fees”) (emphasis added).) But nothing in the Customer Agreement permits customers to recover attorneys’ fees. The Court cannot rewrite the contract to expand the remedies available to customers. See, e.g., Santorini Cab Corp. v. Cross Town Cab Co., Nos. 1-11-0428, 1-11-1607 & 1-11-2539, 2012 WL 6955471, at *6 (Ill. App. Ct. 2012) (“The purchasers drafted the contract and clearly knew how to expressly refer to attorney fees, but chose not to do so in paragraph 4(b).”).

For all of these reasons, the Court SUSTAINS the objection to the claims filed by the Calatrava Claimants. [10]

III. CONCLUSION

For all of the above reasons, the Objections are SUSTAINED. The Trustee shall submit a proposed order expunging all of the claims subject to this Order.

IT IS SO ORDERED.

[1] The Seventy-Second Omnibus Objection is at ECF Doc. # 7944, and the Seventy-Third Omnibus Objection is at ECF Doc. # 7992.

[2] Buckley filed a letter response (the “Buckley Response”), identical copies of which were filed at ECF Doc. ## 8019, 8023.

[3] Bry filed a letter response (the “Bry Response,” ECF Doc. # 8025) on behalf of Northfield Capital Fund, LP (“Northfield Capital”) and other claimants, along with a supplement (ECF Doc. # 8048). Bry is the president of Northfield Trading LP, which is the general partner of Northfield Capital. Bry is not authorized to practice law in this Court and is not a named claimant affected by the Objections. On June 25, 2014, Sara E. Echenique, an attorney at the law firm of Hughes Hubbard & Reed LLP called Bry as a professional courtesy to inform him that his letter to the Court on behalf of certain claimants likely qualified as unauthorized practice of law under Federal Rule of Bankruptcy Procedure 9010. (See Aulet Decl. ¶ 4; FED. R. BANKR. P. 9010(a) (requiring that an attorney be “authorized to practice in the court”).) Bry subsequently filed the supplement, stating that, while he is an attorney currently on inactive status in Colorado, he is not seeking to enter an appearance as an attorney in this proceeding. Rather, as a commodity trading advisor with a limited power of attorney, he felt it was his fiduciary duty to include his clients’ claims with the response filed on behalf of Northfield Capital. Neither Bry nor any of his clients retained counsel or appeared at the scheduled hearing on the Objections.

[4] The Calatrava Claimants are: Calatrava Grain Fund LLC, Elustria Capital Partners Master Fund LP, Inbay Ltd., James River Navigator Hub Fund LLC, RSJ A.S., RSJ II Powerfunds PCC Cell Turboequities, RSJ II Powerfunds PCC Cell FITS, RSJ Prop PCC Cell STS, Shawver, John, Stelbar Oil Corporation, Inc., and TradeLink LLC. Together, they filed the Claimants’ Response to Trustee’s Seventy-Second and Seventy-Third Omnibus Objection to General Creditor Claims (the “Calatrava Response,” ECF Doc. # 8049).

[5] A redacted example of a Customer Agreement is attached as Exhibit A to the Calavatra Response.

[6] Some of the Calatrava Claimants’ general unsecured claims also sought recovery for losses (“30.7 Losses”) resulting from MFGI’s alleged failure to properly secure assets held for MFGI commodity customers trading on foreign exchanges pursuant to rule 30.7 of the CFTC regulations. (See Calatrava Resp. ¶ 17 n.4.) Based on the SIPA Trustee’s intended 100% distribution on all allowed 30.7 customer claims, the Calatrava Claimants agreed to withdraw the 30.7 Losses amounts from their general unsecured claims. (See id.)

[7] In making this allegation, the Claimants rely upon submissions by the SIPA Trustee and the Chapter 11 Trustee to this Court, the District Court, and to MFGI’s creditors. (See Calatrava Resp. at 4 n.2, ¶ 24-25.)

[8] The Customer Agreements are governed by Illinois law. (See Customer Agreement § 13(a).)

[9] This holding also comports with SIPA, which does not provide relief for the type of losses sought by the Calatrava Claimants. The Customer Agreement was part of a form set of documents created by MFGI (see Calatrava Resp. ¶ 5) that was ostensibly signed by many other MFGI customers. The MFGI account freeze—and the market losses that occurred as a result—was the result of the proper, statutory, mechanical operation of bankruptcy procedure, CFTC Rules, and SIPA. Such losses are expressly contemplated by—and non-compensable under—SIPA. See MF Global Inc., 2013 WL 5232578, at *3 (noting SIPA’s “underlying assumption that customers desire to retain the securities in which they have invested” and that customers are exposed “to the same risk and rewards that otherwise would exist if the broker-dealer were still in operation, with the exception that, during the period from the filing date to the distribution date, the customer has no power to sell or otherwise dispose of securities to which the customer has a claim”) (quoting 1 COLLIER ON BANKRUPTCY ¶ 12.14[1][a] (16th ed. 2013)). Allowing the Calatrava Claimants’ claims for their Position Losses would undermine the purpose and rules laid out in SIPA, and could open the floodgates to similar claims.

[10] The Trustee also asserts that the Claimants’ request for attorneys’ fees should be disallowed since the Claimants did not submit sufficient justification for the fees requested. (See Reply ¶ 17 n.11.) Further, even if the Court did allow attorneys’ fees here, the Trustee asserts that the fees requested are unreasonable in amount and should be reduced. (See id.) The Court need not reach this issue, however, since the Claimants do not have a contractual right to the fees and expenses in the first instance.

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