Mandatory Withdrawal of the Reference Where “Substantial and Material Issues” of Non-Bankruptcy Federal Law — and Especially Issues of First Impression — Are Involved

SIPC v. Bernard L. Madoff Inv. Secs. LLC, 454 B.R. 307 (S.D.N.Y. 2011):

JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. (collectively, "JPMorgan") have moved for an order under 28 U.S.C. § 157(d) withdrawing the reference of this action to the bankruptcy court. Irving H. Picard ("Trustee"), as trustee for the substantively consolidated liquidation of Bernard L. Madoff Investment Securities LLC ("BMIS") and the estate of Bernard L. Madoff, opposes JPMorgan's motion. For the reasons discussed, JPMorgan's motion is granted and the reference of this action to the bankruptcy court is withdrawn. ***

A. The standard for withdrawal of the reference

JPMorgan moves this Court under 28 U.S.C. § 157(d) for withdrawal of the reference from the bankruptcy court. Section 157(d) provides for withdrawal of the reference in two instances:

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). The first sentence in Section 157(d) provides for "permissive" withdrawal, or withdrawal for cause, while the second sentence provides for "mandatory" withdrawal.

1. Mandatory withdrawal

The mandatory withdrawal provision of Section 157(d) has been construed "narrowly" to apply only in cases "where substantial and material consideration of non-Bankruptcy Code federal statutes is necessary for the resolution of the proceeding." In re Ionosphere Clubs, Inc., 922 F.2d 984, 995 (2d Cir. 1990); see also Bear, Stearns Sec. Corp. v. Gredd, 2001 U.S. Dist. LEXIS 10324, 2001 WL 840187, at *2 (S.D.N.Y. July 25, 2001). Consideration is "substantial and material" when the case requires the bankruptcy judge to make a "significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes." City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991); In re Dana Corp., 379 B.R. 449, 453 (S.D.N.Y. 2007). Section 157(d) is meant to "assure that an Article III judge decides issues calling for more than routine application of [federal laws] outside the Bankruptcy Code." Enron Power Mktg., Inc. v. Cal. Power Exch. Corp. (In re Enron Corp.), 2004 U.S. Dist. LEXIS 23868, 2004 WL 2711101, at *2 (S.D.N.Y. Nov. 23, 2004) (quoting Eastern Airlines, Inc. v. Air Line Pilots Ass'n (In re Ionosphere Clubs, Inc.), 1990 U.S. Dist. LEXIS 741, 1990 WL 5203, at *5 (S.D.N.Y. Jan. 24, 1990)).

"Where matters of first impression are concerned, the burden of establishing a right to mandatory withdrawal is more easily met." Chemtura Corp. v. U.S., 2010 U.S. Dist. LEXIS 33258, 2010 WL 1379752, at *1 (S.D.N.Y. Mar. 26, 2010) (quoting In re Manhattan Inv. Fund Ltd., 343 B.R. 63, 67 (S.D.N.Y.2006) (citations omitted)). Nonetheless, in determining whether withdrawal of the reference is mandatory, this Court need not evaluate the merits of the parties' claims; rather, it is sufficient for the Court to determine that the proceeding will involve consideration of federal non-bankruptcy law. Gredd, 2001 U.S. Dist. LEXIS 10324, 2001 WL 840187, at *4; Chemtura, 2010 U.S. Dist. LEXIS 33258, 2010 WL 1379752, at *2.

B. JPMorgan has satisfied the standard for mandatory withdrawal of the reference under Section 157(d).

In support of its motion to withdraw the reference, JPMorgan argues that the Trustee's complaint raises issues of first impression under federal securities law—namely, whether the Trustee has standing to assert his common-law claims on behalf of BMIS customers and whether the Trustee's common-law claims are preempted by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). At oral argument, the Trustee conceded that permissive withdrawal of the reference was appropriate in light of Judge Rakoff's decision in Picard v. HSBC Bank PLC, 450 B.R. 406, 2011 U.S. Dist. LEXIS 44126, 2011 WL 1544494 (S.D.N.Y. Apr. 25, 2011). (See 5/4/11 H'rg Tr. 15:18-22.) Further, the SLUSA preemption and SIPA standing questions raised by the Trustee's complaint will require the bankruptcy court to engage in significant consideration of federal non-bankruptcy law. Therefore, the requirement for mandatory withdrawal of the reference under Section 157(d) is also satisfied.

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