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Adelphia Recovery Trust v. Flp Group

January 30, 2012

ADELPHIA RECOVERY TRUST, PLAITNIFF,
v.
FLP GROUP, INC., ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:

USDC SDNY

DOCUMENT

DOC #: _________________

OPINION & ORDER

This action involves a fraudulent transfer claim, brought by Plaintiff Adelphia Recovery Trust ("Plaintiff") against Defendants FPL Group, Inc. and West Boca Security, Inc. (collectively, "Defendants"), that for the last seven years has been litigated in Bankruptcy Court, under the above caption. Immediately after the Supreme Court's decision in Stern v. Marshall, 564 U.S. ---, 131 S.Ct. 2595 (2011) ("Stern"), concerning whether a Bankruptcy Court may constitutionally adjudicate a "core" state law claim to final judgment, Defendants moved, pursuant to 28 U.S.C. § 157(d), to withdraw the reference to Bankruptcy Court. Plaintiff opposes the motion.

For the reasons that follow, Defendants' motion to withdraw reference to the Bankruptcy Court is DENIED.

BACKGROUND*fn1

In January 1999, Adelphia, a cable company, repurchased approximately 1.1 million shares of its stock from Defendant FLP Group, Inc. for approximately $149 million. On June 25, 2002, Adelphia and its affiliated debtors filed for Chapter 11 bankruptcy. On June 24, 2004, Adelphia filed the instant action against Defendants for constructive fraudulent conveyance, in violation of Sections 544(b) and 550 of the Bankruptcy Code. Plaintiff alleged that in the January 1999 transaction, Adelphia did not receive the reasonably equivalent value to the $149 million it paid to FPL Group.

On January 3, 2007, the Bankruptcy Court confirmed Adelphia's plan of reorganization and, as a result, transferred title of the current action to Plaintiff, and vested the Bankruptcy Court with exclusive jurisdiction over this action. In December 2007, Plaintiff moved to withdraw the reference to Bankruptcy Court in this and another Adelphia action, in order to consolidate all litigation proceedings before one district court. Defendants opposed the motion. District Court Judge McKenna denied Plaintiff's motion to withdraw the reference in this particular action. See No. 07 Civ. 11152.

This matter proceeded in Bankruptcy Court and trial on Plaintiff's fraudulent transfer claims was scheduled for September 16, 2011. In January 2011, Defendants' new counsel move to amend Defendants' answer and assert an additional affirmative defense. On July 13, 2011, the Bankruptcy Court denied Defendants' motion. On August 17, 2011, Defendants notified the Bankruptcy Court that they wished to file a motion to withdraw the reference to Bankruptcy Court in light of Stern. On September 7, 2011, the Bankruptcy Court authorized Defendants to make their motion. In doing so, the Bankruptcy Court expressed no view on whether it has constitutional authority to adjudicate a fraudulent transfer action to a final judgment.

LEGAL STANDARD

District courts have original jurisdiction over bankruptcy cases and all civil proceedings "arising under" or "related to" cases under title 11. 28 U.S.C. § 1334. Under 28 U.S.C. § 157(a), a district court may refer actions within its bankruptcy jurisdiction to bankruptcy judges of the district. The Southern District of New York has a standing order that provides for automatic reference. See Standing Order M--61 Referring to Bankruptcy Judges for the Southern District of New York Any and All Proceedings Under Title 11, dated July 10, 1984 (Ward, Acting C.J.).

Under 28 U.S.C. § 157(b)(1), bankruptcy judges may hear and enter final judgments in "all core proceedings arising under title 11, or arising in a case under title 11," subject to deferential review by a district court. "Where a bankruptcy court acts in a non-core proceeding, a final order may be issued only in one of two ways: by the district court after denovo review of the bankruptcy court's proposed factual findings and legal conclusions, § 157(c)(1); or by the bankruptcy court with the consent of the parties, § 157(c)(2)." Cent. Vermont Pub. Serv. Corp. v. Herber, 341 F.3d 186, 190 (2d Cir. 2003). Congress provided a non-exclusive enumeration of "core matters" under 28 U.S.C. § 157(b)(2); a fraudulent transfer claim was designated a "core" proceeding under 28 U.S.C. § 157(b)(2)(H).

In Stern v. Marshall, the Supreme Court held that Congress's delineation of core matters in section 1572(b)(2) overstepped constitutional boundaries in at least one respect, and thus established "that identifying a claim as 'core' or 'non-core' under the bankruptcy law does not necessarily determine whether a bankruptcy court is constitutionally empowered to finally adjudicate the matter." Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, No 11 Civ. 5994(CM), 2011 WL 5244463, at *4 (S.D.N.Y. Nov. 2, 2011). In Stern, the Supreme Court held that Congress improperly vested judicial power in a non-Article III tribunal when it allowed bankruptcy courts "to enter a final judgment on a state law counterclaim" for tortious interference with contract, pursuant to ยง 157(b)(2)(C), that was brought by the estate and "not resolved in the process of ruling on a creditor's proof of claim." 131 S.Ct. at 2620. The Court held that the bankruptcy court did not have the constitutional authority to issue a final judgment on the counterclaim because the debtor had "failed to demonstrate that her counterclaim falls within one of the 'limited circumstances' covered by the public rights exception," despite the fact that such a claim is characterized by the Bankruptcy Code as a "core" claim. Id. at 2604, 2618 (quoting ...


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