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Kirschner v. Bennett

May 6, 2008

MARC S. KIRSCHNER, AS TRUSTEE OF THE REFCO PRIVATE ACTIONS TRUST, PLAINTIFF,
v.
PHILLIP R. BENNETT, SANTO C. MAGGIO, ROBERT C. TROSTEN, MAYER, BROWN, ROWE & MAW, LLP, GRANT THORNTON LLP, AND ERNST & YOUNG U.S. LLP, DEFENDANTS.



The opinion of the court was delivered by: Gerard E. Lynch, District Judge

OPINION AND ORDER

Plaintiff Marc S. Kirschner, in his capacity as Trustee of the Refco Private Actions Trust ("Trustee" or "Private Actions Trustee"), originally filed this action in New York State Supreme Court asserting claims under New York state law against certain Refco insiders, professionals, and advisors for, inter alia, fraud, breach of fiduciary duty, and conversion. Defendants Grant Thornton LLP, Mayer Brown LLP, and Mayer Brown International LLP*fn1 (collectively, the "Removing Defendants"), subsequently removed the action to this Court on the ground that the case is "related to" Refco's Chapter 11 bankruptcy, 28 U.S.C. § 1334(b), which is currently pending in this district, see In re Refco, Inc., No. 05-60006 (RDD) (Bankr. S.D.N.Y.). The Trustee now moves to remand for lack of subject matter jurisdiction, or in the alternative, to abstain under 28 U.S.C. §§ 1334(c)(1) and (c)(2).

The issues raised in this case are substantially similar to those raised by the parties in In re Refco, Inc. Securities Litigation, No. 07 Civ. 11604, 2008 WL 1827644 (S.D.N.Y. April 21, 2008). There, the Trustee of the Refco Litigation Trust ("Litigation Trustee") filed an action in Illinois state court asserting state law claims against certain Refco insiders, professionals, and advisors, including the defendants in this case. The case was removed to the Northern District of Illinois and subsequently transferred by the Panel on Multidistrict Litigation ("MDL Panel") to this Court, where a multitude of other Refco-related actions are pending. The Litigation Trustee moved to remand or, in the alternative, to abstain. This Court denied the motion, holding that the action was sufficiently "related to" the Refco bankruptcy to support jurisdiction and that neither mandatory nor discretionary abstention was warranted. Id. at *13. For largely the same reasons, the motion of the Private Actions Trustee in this case to remand, or in the alternative, to abstain, will likewise be denied.

BACKGROUND

I. Events Leading to Refco's Bankruptcy

Prior to its implosion in the fall of 2005, Refco presented itself to the public as a leading independent provider of execution and clearing services for exchange-traded derivatives and a major provider of brokerage services in the fixed income and foreign exchange markets. (Compl. ¶ 4.*fn2 ) Beginning in the late 1990s, members of Refco's senior management, allegedly with the active participation of certain of Refco's professionals and financial advisors (collectively, the "defendants"), engaged in a fraudulent scheme to artificially boost Refco's performance and conceal Refco's true financial condition so that these senior executives, through the company's August 2004 leveraged-buy-out and August 2005 initial public offering ("IPO"), could cash out their interests in Refco on lucrative terms. (Id. ¶¶ 71-90.) Defendants allegedly carried out this scheme by "conceal[ing] substantial Refco trading losses and operating expenses, record[ing] hundreds of millions in fictitious Refco income, and fund[ing] Refco's operating expenses and acquisitions with misappropriated customer assets." (P. Mem. 2, citing Compl. ¶¶ 36-90.)

On October 10, 2005, just two months after its IPO, Refco announced that it had discovered an undisclosed $430 million receivable due from an entity controlled by Refco's CEO, Philip R. Bennett. (Compl. ¶¶ 88-89.) As a result, the company announced that its financial statements for the preceding four years could no longer be relied upon. (Id. ¶ 89.)

Following these disclosures, Refco's stock plummeted and the company, along with many of its subsidiaries, was forced into bankruptcy. (Id. ¶¶ 89-90.)

II. The Refco Private Actions Trust

On December 15, 2006, approximately fourteen months after Refco filed for bankruptcy, the United States Bankruptcy Court for the Southern District of New York confirmed the Modified Joint Chapter 11 Plan of Refco Inc. and Certain of its Direct and Indirect Subsidiaries (the "Plan"). (See Kirschner Decl. ¶ 6; id. Ex A.) The Plan provided for the establishment of two different post-confirmation trusts, each with its own Trustee and governing trust agreement:

(1) the Litigation Trust, which was created to pursue "estate" claims - i.e., causes of action owned by the Refco Debtors themselves;*fn3 and (2) the Private Actions Trust ("PAT"), which was formed to prosecute "non-estate" claims - i.e., claims owned by Refco creditors or shareholders that were "independent" of those held by the Refco Debtors.*fn4 (Id. ¶¶ 12, 14.) Pursuant to the PAT Agreement, funding for the PAT was provided in the form of loans from the Litigation Trust. (Id. Ex. B § 1.6.)

As described in the Plan, the PAT was formed to pursue "certain claims and causes of action against third-parties owned by Holders of Claims or Interests against RCM or the Debtors and which claims, even after contribution, are not assets of the [Refco] Estates." (Id. Ex. A ¶ 1.146.) In order to join the PAT, Refco creditors or shareholders were required to assign their independent, "non-estate" claims to the PAT. (Id. ¶ 12.) Only those creditors and shareholders who voluntarily assigned their claims became PAT beneficiaries, and not every Refco creditor and shareholder elected to join the PAT. (See id.) In exchange for contributing their claims, PAT beneficiaries became entitled to a pro rata share of any proceeds of PAT litigation. Recoveries by the PAT would be distributed only to those creditors and shareholders who contributed claims to the PAT, while recoveries by the Litigation Trust would be distributed to all Refco creditors. The PAT thus "offered each creditor the opportunity to seek additional compensation apart from estate distributions and independent of the merits of the particular causes of action it held." (D. Mem. 3.)

On December 26, 2006, both the PAT and the Litigation Trust became effective and plaintiff Marc Kirschner was appointed as Trustee for both trusts. (Kirschner Decl. ¶¶ 10-11, 14.)

III. Procedural History

On August 27, 2007, nine months after the Plan was confirmed, the Private Actions Trustee filed this action in New York State Supreme Court asserting state-law claims against defendants for breach of fiduciary duty, fraud, conversion, and aiding and abetting breach of fiduciary duty, fraud, and conversion. (Compl. ¶¶ 210-238.) As noted above, certain defendants removed the case to this Court on the ground that the action is "related to" the Refco bankruptcy pending in this district. 28 U.S.C. § 1334(b); see id. § 1452(a).*fn5 The Trustee now moves to remand the case for lack of subject matter jurisdiction. See 28 U.S.C. ยง 1447(c). In the alternative, the ...


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