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IN RE RECOTON CORPORATION

July 1, 2004.

In Re: RECOTON CORPORATION, et al., Debtors.


The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION AND ORDER

On March 1, 2004, the Official Committee of Unsecured Creditors (the "Committee") of the Recoton Corporation and others (the "Debtors") brought a motion in the Bankruptcy Court of this district seeking an order under Sections 1103 and 1109(b) of the Bankruptcy Code and Rules 2004 and 9016 of the Federal Rules of Bankruptcy Procedure authorizing the issuance of subpoenas for the production of documents and the oral examination of witnesses (the "Discovery Motion"). The Discovery Motion was opposed by four of the Debtors' former directors and officers, Robert L. Borchardt, Stuart Mont, Arnold Kezsbom and Tracy Clark (collectively, the "Former D&Os"). On April 13, the Hon. Allan L. Gropper granted the Committee's Discovery Motion. See In re Recoton Corp., 307 B.R. 751 (Bankr. S.D.N.Y. 2004).

  On May 5, 2004, this Court denied the motion of the Former D&Os for an emergency stay of the discovery. The Former D&Os now bring this motion to (1) withdraw the reference to the Bankruptcy Court of the Discovery Motion, and (2) transfer venue of the Discovery Motion to the Middle District of Florida. For the reasons cited below, the motion to withdraw is denied.

  Background

  On April 8, 2003, the Debtors filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court for the Southern District of New York; two weeks later the Committee was appointed by the United States Trustee in these cases. In June and July of that year, six complaints were filed in the Middle District of Florida against certain of the Debtors' present and/or former officers and directors, alleging securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The class actions were consolidated on September 29, 2003 (the "Class Action").

  After interviewing former employees of the Debtors, the Committee undertook an investigation into the existence of potential causes of action against the Former D&Os, as well as potential defenses against the multiple proofs of claim filed by the Former D&Os against the Debtors. To facilitate that investigation, on March 1, 2004, the Committee filed the Discovery Motion pursuant to Bankruptcy Rule 2004. The Discovery Motion sought documents and testimony from certain former and current officers and directors of the Debtors, including the Former D&Os. On March 23, Judge Gropper held a hearing on the motion, and indicated that he would likely grant the discovery sought by the Committee.

  Following Judge Gropper's prediction, the Former D&Os asked him to stay any order permitting the Rule 2004 discovery so as to allow the Former D&Os to move to withdraw the reference to the Bankruptcy Court. On April 13, Judge Gropper issued a fifteen-page decision granting the Discovery Motion, and denying the stay. See In re Recoton, 307 B.R. at 761. Judge Gropper noted that the Committee had agreed to be governed by a protective order prohibiting use of the information gathered through Rule 2004 discovery for any purpose other than the bankruptcy proceeding, and specifically prohibiting its disclosure to the plaintiffs in the Class Action. Id. at 756. The protective order was entered on April 14. On April 23, the Bankruptcy Court entered an order consistent with its decision in In re Recoton. No appeal was taken by the Former D&Os and the order became final on May 3.

  Meanwhile, on March 29, the Former D&Os filed in this Court the motion to withdraw the reference insofar as it relates to the Discovery Motion, and to transfer that motion to the Florida court presiding over the Class Action. By letter dated April 29, the Former D&Os requested a conference with this Court in order to obtain an emergency stay of the discovery. At a conference held on May 5, this Court denied the Former D&Os' application to stay the Bankruptcy Court order permitting Rule 2004 discovery.*fn1 Also on May 5, the Bankruptcy Court approved the Debtors' plan of liquidation (the "Plan"). The Plan provides that a liquidating trust will "step into the shoes" of the Committee in pursuing the Rule 2004 discovery against the Former D&Os. An order confirming the Plan was entered the next day.

  In support of the instant motion, the Former D&Os rely on the same arguments they previously articulated to the Bankruptcy Court in opposition to the Discovery Motion. Specifically, the Former D&Os argue that (i) Rule 2004 discovery is an impermissible attempt to obtain discovery relating to upcoming litigation certain to be brought by the Committee; and (ii) Rule 2004 discovery would deny the Former D&Os, as defendants in the Class Action, the discovery protections of the Private Securities Litigation Reform Act ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified in part at 15 U.S.C. § 77z-1, 78u), and the Securities Litigation Uniform Standards Act ("SLUSA"), Pub.L. No. 105-353, 112 Stat. 3227 (1998) (codified in scattered sections of Title 15 of the United States Code).

  Discussion

  Pursuant to 28 U.S.C. § 157(a), all Chapter 11 cases are automatically referred to this district's bankruptcy judges. A party can move to withdraw the reference to the Bankruptcy Court pursuant to 28 U.S.C. § 157(d) ("Section 157(d)"), which states:
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.
28 U.S.C. § 157(d) (emphasis supplied). The Former D&Os argue that the reference of the Discovery Motion should be withdrawn under either the mandatory or permissive standard of Section 157(d).*fn2 A. Mandatory Withdrawal

  The Former D&Os assert that the reference must be withdrawn due to the complexity of the issues presented in the Discovery Motion. According to the Former D&Os, consideration of the Discovery Motion requires the Bankruptcy Court to "resolve the conflict between the freedom from discovery to which [the Former D&Os] are entitled under the PSLRA and SLUSA, and the broad discovery seemingly permitted by Bankruptcy Rule 2004."*fn3

  Mandatory withdrawal under Section 157(d) is narrowly applied, and is appropriate only when "substantial and material potential conflicts exist between non-bankruptcy federal laws and Title 11." In re Keene Corp., 182 B.R. 379, 382 (Bankr. S.D.N.Y. 1995) (citation omitted). Mandatory withdrawal is required when resolution of the matter calls for the bankruptcy judge to "engage in significant interpretation, as opposed to simple application," of federal non-bankruptcy statutes. City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991).

  Mandatory withdrawal pursuant to Section 157(d) is not compelled in this case. By applying the unambiguous and plain language of the federal non-bankruptcy statutes at issue here, Judge Gropper correctly concluded that the Discovery Motion is not governed by and not in ...


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