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In Re Arbco Capital Management, Llp, Debtor v. Movant

July 12, 2012


The opinion of the court was delivered by: J. Paul Oetken, District Judge:


Penson Financial Services ("Penson") moves, pursuant to 28 U.S.C. § 157(d), Rule 5011(a) of the Federal Rules of Bankruptcy Procedure, and Rule 5011-1 of the Local Bankruptcy Rules for the Southern District of New York, to withdraw the reference of this proceeding from the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") to the United States District Court for the Southern District of New York ("District Court").

For the reasons set forth below, the motion to withdraw the reference is denied.

I. Background*fn1

Prior to its involuntary bankruptcy, Arbco Capital Management, LLP ("Arbco"), an investment firm, operated ostensibly to invest money for its clients. In June 2009, Arbco's then-president, Hayim Regensberg, was convicted of seven counts of wire and securities fraud in connection with a Ponzi scheme orchestrated to defraud investors. Regensberg is currently serving a 100-month prison sentence.

Regensberg's investors filed an involuntary Chapter 7 bankruptcy proceeding against Arbco in the Bankuptcy Court in October 2007. See Arbco Capital Management, LLP in Bankruptcy Case No. 07-13283 (SCC). Richard O'Connell (the "Trustee") was appointed as Chapter 7 Trustee of Arbco's estate to investigate Arbco's financial affairs and to attempt to recover monies for distribution to creditors.

Penson, a Texas-based clearing firm, cleared and settled Arbco's trades prior to Arbco's involuntary bankruptcy. On October 15, 2009, the Trustee initiated the instant adversary proceeding against Penson in the Bankruptcy Court. In his complaint, the Trustee alleges that Mr. Regensberg used monies invested in Arbco to engage in highly speculative option and margin trading through Penson. In the two years prior to the filing of its involuntary bankruptcy, Arbco made 37 cash transfers to Penson totaling $10,927,500, which the Trustee now seeks to recover for the bankruptcy estate.

On February 22, 2010, Penson moved to dismiss the Trustee's complaint as factually insufficient. The Bankruptcy Court held a hearing on October 14, 2010, and directed the Trustee to amend the complaint to include more specific factual allegations concerning Penson's role in enabling Regensberg to maintain his Ponzi scheme. The Trustee filed his amended complaint on January 18, 2011.

In the amended complaint, the Trustee asserts seven causes of action against Penson:

1) Intentional fraud under Bankruptcy Code § 548(a)(1)(A);

2) Constructive fraud under Bankruptcy Code § 548(a)(1)(B); 2

3) Voidable preference under Bankruptcy Code § 547;

4) Aiding and abetting fraud in violation of securities law;

5) Common law breach of fiduciary duty;

6) Breach of contract; and

7) Negligence.

Penson moved in the Bankruptcy Court to dismiss the amended complaint on March 18, 2011.

During an August 4, 2011 conference before the Bankruptcy Court, Judge Shelley Chapman discussed the pending motion to dismiss*fn2 and the impact of the Supreme Court's recent decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), decided on June 23, 2011. (See Hearing Transcript; Declaration of Mark G. Hanchet ("Hanchet Decl.), Dkt. No. 4, ¶ 7.) Penson informed the Bankruptcy Court that it was considering filing a motion to withdraw the bankruptcy reference in light of Stern. The Bankruptcy Court instructed the parties to confer regarding Stern's implications and that, if no agreement could be reached, Penson should notify the Bankruptcy Court as to whether it intended to move to withdraw the reference. (Id.) On September 6, 2011, Penson notified the Bankruptcy Court that it intended to move to withdraw the reference. (Id. at ¶ 8.) Penson filed the instant motion to withdraw the reference in this Court on September 20, 2011.

II. Jurisdiction and Adjudicative Power of the Bankruptcy Court

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. Pursuant to 28 U.S.C. 157(a), the district court may refer actions within its bankruptcy jurisdiction to the bankruptcy judges of the district. The Southern District of New York has a standing order that provides for automatic reference of bankruptcy cases to the Bankruptcy Court. See In re Standing Order of Reference Re: Title 11, 12 Misc. 32 (S.D.N.Y. Feb. 1, 2012) ("Standing Order"). The Standing Order was recently amended on February 1, 2012 to make clear that the Bankruptcy Court retains jurisdiction to hear matters related to the bankruptcy proceedings and to issue proposed findings of fact and conclusions of law when the Bankruptcy Court lacks constitutional authority to enter a final judgment. Id.*fn3

Notwithstanding the initial automatic reference, a "district court may withdraw, in whole or in part, any case or proceeding referred [to the Bankruptcy Court] under this section, on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d). Prior to Stern, the Second Circuit's decision in In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993), provided guidance as to whether "cause" for withdrawal of the reference exists. Under the test formulated in Orion, a district court must "first evaluate whether the claim is core or non-core." Id. Pursuant to 28 U.S.C. § 157, the bankruptcy court has authority to "hear and determine" core matters, but must issue "proposed findings of fact and conclusions of law to the district court" with respect to non-core matters. Id. at 1100-01. Next, under the Orion test, the district court must consider whether the claim is "legal or equitable," followed by "considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law." Id. at 1101. No single factor is dispositive.

Post-Stern,the withdrawal analysis may differ. The Supreme Court's decision in Stern at least calls into question the utility of the first prong of the Orion test: the determination of whether the matter is core.

Congress codified the "core" and "non-core" categories in the Bankruptcy Amendments and Federal Judgeship Act of 1984, 28 U.S.C. ยง 157 (the "1984 Act"), in the wake of another Supreme Court decision, Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (plurality opinion). In Northern Pipeline, as in ...

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