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