UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
MARC S. KIRSCHNER,
as Trustee of the Refco Private Actions Trust,
Plaintiff,
-vs-
PHILLIP R. BENNETT, SANTO C.
MAGGIO, ROBERT C. TROSTEN, MAYER,
BROWN, ROWE & MAW, LLP, GRANT
THORNTON LLP, and ERNST & YOUNG
U.S. LLP,
Defendants.
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Case No. 07 CV 8165 (GEL)
ECF Filed
MEMORANDUM OF LAW IN SUPPORT PLAINTIFF’S MOTION
TO REMAND TO NEW YORK STATE COURT
Case 1:07-cv-08165-JSR Document 13 Filed 10/18/2007 Page 1 of 23
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .....................................................................................................1
FACTUAL BACKGROUND..........................................................................................................1
A. The Events Leading Up To Refco’s Bankruptcy Cases.......................................................1
B. The Non-Estate Private Actions Trust .................................................................................2
C. The New York State Action.................................................................................................4
D. Defendants’ Notice of Removal...........................................................................................5
ARGUMENT...................................................................................................................................5
A. This Court Does Not Have Subject Matter Jurisdiction Over the New York State
Action...................................................................................................................................5
1. The New York State Action Has No Effect on the Debtor......................................7
2. The New York State Action Would Not Impact on Property of the Refco
Estates. .....................................................................................................................8
3. The New York State Action Would Not Impact on the Distribution to
Creditors.................................................................................................................10
4. The New York State Action Would Not Impact the Administration of the
Bankruptcy Case. ...................................................................................................10
B. Even if this Court Had Subject Matter Jurisdiction, Remand is Mandatory. ....................14
C. The Applicable Factors Support Discretionary Abstention. ..............................................15
CONCLUSION..............................................................................................................................17
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TABLE OF AUTHORITIES
Page(s)
CASES
In re Amanat,
338 B.R. 574 (S.D.N.Y. 2005).................................................................................................14
In re Astropower Liquidating Trust,
335 B.R. 309 (Bankr. D.Del. 2005) .........................................................................................14
Bay Shore Union Free Sch. Dist. v. Kain,
485 F.3d 730 (2d Cir. 2007).......................................................................................................5
Bd. of Governors v. MCorp Fin., Inc.,
502 U.S. 32, 112 S. Ct. 459, 116 L. Ed. 2d 358 (1991)...........................................................12
Celotex Corp. v. Edwards,
514 U.S. 300 (1995)...................................................................................................................6
In re Chargit Inc.,
81 B.R. 243 (Bankr. S.D.N.Y. 1987).........................................................................................6
Crigger v. Fahnestock & Co., Inc.,
443 F.3d 230 (2d. Cir. 2006)....................................................................................................17
In re Daley,
224 B.R. 307 (Bankr. S.D.N.Y. 1998).......................................................................................6
In re Dilbert's Quality Supermarkets, Inc.,
368 F.3d 922 (2d Cir. 1966).....................................................................................................10
Drexel Burnham Lambert Group, Inc. v. Vigilant Ins. Co.,
130 B.R. 405 (Bankr. S.D.N.Y. 1991)...............................................................................16, 17
In re EXDS, Inc.,
352 B.R. 731 (Bankr. D.Del. 2006) .........................................................................................13
In re Enron Corp.,
353 B.R. 51 (Bankr. S.D.N.Y. 2006).........................................................................................7
Falise v. Am. Tobacco, Co.,
241 B.R. 48 (Bankr. E.D.N.Y. 1999).........................................................................7, 8, 10, 12
In re Fed.-Mogul Global, Inc.,
300 F.3d 368 (3d. Cir. 2002)......................................................................................................8
In re Federalpha Steel LLC,
341 B.R. 872 (Bankr. N.D. Ill. 2006) .....................................................................................18
In re Finnie,
2007 WL 1574294 (Bankr. S.D.N.Y. May 29, 2007)....................................................7, 11, 16
Case 1:07-cv-08165-JSR Document 13 Filed 10/18/2007 Page 3 of 23
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Gen. Elec. Capital Corp. v. Por-Fac Coop., Inc.,
2002 WL 1300054 (S.D.N.Y. Jun. 11, 2002) ................................................................8, 12, 16
In re Ha-Lo Indus.,
330 B.R. at 672) .........................................................................................................................9
In re Insilco Techs., Inc.,
330 B.R. 512 (Bankr. D. Del. 2005) ........................................................................................14
In re Kassover,
336 B.R. 74 (Bankr. S.D.N.Y. 2006).......................................................................................13
Luan Inv. S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.)
304 F.3d 223 (2d. Cir. 2002)....................................................................................................12
Mt. McKinley Ins. Co. v. Corning Inc.,
399 F.3d 436 (2d Cir. 2005)...............................................................................................15, 17
In re Olympia & York Maiden Lane Co. LLC,
1999 WL 58581 (Bankr. S.D.N.Y. Jan. 25, 1999).............................................................11, 16
In re Osage Exploration Co.,
39 B.R. 966 (Bankr. S.D.N.Y. 1984).......................................................................................16
Rahl v. Bande,
316 B.R. 127 (S.D.N.Y. 2004).................................................................................................17
Resnick v. Socolov,
5 A.D.3d 125 (N.Y. App. Div. 2004) ......................................................................................17
In re Resorts Int'l, Inc.,
372 F.3d, 154 (3d. Cir. 2004)...............................................................................6, 9, 10, 12, 13
Ret. Sys. of Ala. v. J.P. Morgan Chase & Co.,
285 B.R. 519 (M.D.Ala. 2002) ..............................................................................................8, 9
In re Savino Oil & Heating Co.,
1992 WL 118801 (E.D.N.Y. May 21, 1992) ...........................................................................16
In re Shirley Duke Assocs.,
611 F.2d 15 (2d. Cir. 1979)............................................................................................7, 11, 16
Steel Co. v. Citizens for a Better Env't,
523 U.S. 83 (1998).....................................................................................................................5
In re Turner,
724 F.2d 338 (2d Cir. 1983).............................................................................................6, 7, 12
Universal Well Servs., Inc. v. Avoco Natural Gas Storage,
222 B.R. 26 (W.D.N.Y. 1998) ...........................................................................................17, 18
Von Richthofen v. Family M. Found. Ltd.,
339 B.R. 315 (S.D.N.Y. 2005).................................................................................................14
Case 1:07-cv-08165-JSR Document 13 Filed 10/18/2007 Page 4 of 23
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W.G. v. Senatore,
18 F.3d 60 (2d Cir. 1994) ..........................................................................................................5
STATUTES
28 U.S.C. § 1334................................................................................................................14, 15, 17
28 U.S.C. § 1334(b) .........................................................................................................................6
28 U.S.C. § 1334(c) .......................................................................................................................17
28 U.S.C. § 1334(c)(1)...................................................................................................................16
28 U.S.C. § 1334(c)(2).............................................................................................................14, 15
28 U.S.C. § 1452(b) .......................................................................................................................16
28 U.S.C. § 157(b)(2)(A)-(P)...........................................................................................................9
28 U.S.C. § 157(b)(2)(B) .................................................................................................................9
United States Bankruptcy Code Title 11 .........................................................................................6
OTHER AUTHORITIES
1 Collier on Bankr. § 3.08 at 3.8 (15th ed. 1983) ..........................................................................16
1 Collier on Bankr, ¶ 3.01[4][c][v], at 3-30 (15th ed. 1999) ...........................................................7
Case 1:07-cv-08165-JSR Document 13 Filed 10/18/2007 Page 5 of 23
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PRELIMINARY STATEMENT
Defendants Mayer Brown LLP, Mayer Brown International LLP1 and Grant Thornton LLP
(the “Defendants”) removed this action, filed by the Refco Private Actions Trust (the “PAT”) in
New York State Supreme Court (the “New York State Action”), on the ground that it is “related to”
the Refco bankruptcy proceedings. Defendants’ removal of this action seeks to extend federal
“related to” jurisdiction far beyond the limits of both law and logic. The New York State Action
asserts private claims that belonged to Refco’s former foreign exchange currency customers, and any
recoveries on these claims will be distributed to the parties that contributed their claims to the PAT.
The New York State Action does not assert claims that ever belonged to any Refco debtor and its
resolution will not impact the administration or allocation of Refco estate property, or have any
connection or relationship to Refco’s bankruptcy or its bankruptcy plan, which was confirmed
almost a year ago. Defendants’ assertion that there is “related to” federal jurisdiction over the New
York State Action is belied by both the facts and settled Federal law. As this Court, respectfully,
does not have subject matter jurisdiction over the New York State Action, it should be remanded to
the New York State Supreme Court.
Even if this Court were to find that these state-law claims are somehow “related to” a federal
bankruptcy proceeding, black letter law requires the Court to abstain from exercising jurisdiction.
Moreover, the applicable discretionary abstention factors clearly warrant abstention.
FACTUAL BACKGROUND
A. The Events Leading Up To Refco’s Bankruptcy Cases.
Before the disclosure of fraud that led to its collapse, Refco presented itself to the public as
one of the nation’s leading independent providers of execution and clearing services for exchange
1 While Plaintiff’s complaint named Mayer, Brown, Rowe, & Maw, LLP as a defendant, around the time the
action was filed, Mayer Brown changed its name to Mayer Brown LLP and Mayer Brown International LLP.
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traded derivatives and a major provider of brokerage services in the fixed income and foreign
exchange (“FX”) markets. See New York State Action Complaint (the “Complaint”) at ¶ 4, attached
as Exhibit A to the Declaration of Robert C. Juman, dated October 17, 2007 (the “Juman Dec.”).
Unbeknownst to innocent Refco customers, since the late 1990s, members of Refco’s senior
management, with the active participation of certain of Refco’s professionals and financial advisors,
engaged in a fraudulent scheme to conceal Refco’s true financial condition so these senior
executives could cash out their interests in Refco. Complaint at ¶¶ 36-90. This lucrative cashing out
was ultimately realized through Refco’s August 2004 leveraged buyout (the “LBO”) and Refco’s
August 2005 initial public offering (“IPO”). Id. at ¶¶ 71-90.
On October 11, 2005, just two months after the IPO, Refco announced a previously
undisclosed $430 million receivable due from an entity controlled by Refco’s CEO, Philip R.
Bennett. Id. at ¶ 88. This related-party receivable was but one piece of a scheme to conceal
substantial Refco trading losses and operating expenses, record hundreds of millions in fictitious
Refco income, and fund Refco’s operating expenses and acquisitions with misappropriated customer
assets, so as to allow certain Refco insider’s to strip out Refco’s assets. Id. at ¶¶ 36-90.
Following the subsequent announcement that Refco’s financial statements for the preceding
four years could no longer be relied upon, Refco’s stock plummeted and the company (and certain of
its subsidiaries) were forced into bankruptcy. Id. at ¶ 89-90.
B. The Non-Estate Private Actions Trust
On December 15, 2006, approximately fourteen months after the Refco Chapter 11 cases
were filed, the Modified Joint Chapter 11 Plan of Refco Inc. and Certain of it Direct and Indirect
Subsidiaries was confirmed (the “Refco Plan”). See Declaration of Private Actions Trustee, Marc S.
Kirschner, dated October 17, 2007 (the “Kirschner Dec.”), at ¶ 6 and Ex. A. The Refco Plan, and the
transactions described therein, became effective on December 26, 2006. Id. at ¶ 10.
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Refco customers with claims against third-parties (such as Defendants herein) determined
that it would be in their interests to pool their claims and transfer them to a private actions trust.
Though such claim pooling and coordination could have occurred outside the Refco bankruptcy
process and indeed, could have occurred regardless of whether Refco had gone into bankruptcy, the
PAT was voluntarily created in conjunction with the Refco Plan to maximize efficiencies and
coordinate strategies. The Private Actions Trustee, Marc S. Kirschner, was appointed at the time of
the confirmation of the Refco Plan on December 26, 2006. Kirschner Dec. at ¶¶ 3, 10.
The mechanics of the PAT and all pertinent details regarding its operation, such as the
allocation of beneficial interests in the PAT among those that contributed claims, the role of the
PAT Trustee and PAT Committee, and the term of the PAT are set forth in the Refco Non-Estate
Private Actions Trust Agreement (the “PAT Agreement”), attached to the Kirschner Dec. at Ex. B.
Pursuant to Article 1.2(a) of the PAT Agreement, the only assets transferred to the PAT are “Non-
Estate Refco Claims.”2 As further described in the Refco 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.” Refco Plan at § 1.146 (emphasis added); see also id. at § 5.8(a).
As the PAT can only possess claims that were never assets of the Refco estates, the Refco
estates never had any interest in or rights to the claims which were transferred to the PAT, and any
recoveries obtained by the Private Actions Trustee will be distributed as PAT property to
beneficiaries of the PAT, not as debtor property to creditors.
2 The Refco Plan defines “Non-Estate Refco Claims” as “causes of action against: (i) all current and former
officers, directors or employees of the Refco Entities; (ii) all persons or entities that conducted transactions
with the Refco Entities; and (iii) all persons or entities that provided services to the Refco Entities, including,
without limitation, all attorneys, accountants, financial advisors and parties providing services to the Refco
Entities in connection with the public issuance of debt or equity.” See Refco Plan at ¶1.126.
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Moreover, only those who elected to assign their claims to the PAT became beneficiaries of
the PAT. Significantly, not every Refco creditor and shareholder elected to join the PAT, and so the
PAT beneficiaries are not co-extensive with the list of Refco creditors or shareholders. See
Kirschner Dec. at ¶ 12. The amounts the PAT beneficiaries receive from these distributions will
have no effect on the amount, if any, that these entities are entitled to receive by virtue of their status
as creditors of the Refco estates. See Kirschner Dec. at ¶ 13.
Further, the Refco Plan provided for establishment of a separate Refco Litigation Trust to
pursue estate claims and also for the irrevocable transfer of such claims to the Litigation Trust. See
Kirschner Dec. at ¶ 14; Refco Plan at § 1.48 & 5.7(a). While Marc Kirschner was also appointed
the Trustee of the Litigation Trust, the PAT and the Litigation Trust are two distinct entities,
governed by different trust agreements, with different beneficiaries, pursuing different claims and
with different, independent, distribution mechanisms. Kirschner Dec. at ¶ 15. Marc Kirschner
serves in completely separate capacities as Trustee of the PAT and the Litigation Trust. Id.
C. The New York State Action
On August 27, 2007, nine months after the Refco Plan was consummated, the Private
Actions Trustee filed suit in New York State Supreme Court against certain Refco insiders
(Defendants Bennett, Maggio and Trosten) as well as the professionals and advisors (Mayer Brown
LLP, Mayer Brown International LLP, Grant Thornton, LLP and Ernst & Young U.S. LLP) who
actively assisted and were complicit in the fraud and breaches of fiduciary duty perpetuated by the
Refco insiders.
The New York State Action asserts only state-law claims -- causes of action for breach of
fiduciary duty, fraud, conversion, and aiding and abetting breach of fiduciary duty, fraud and
conversion. Complaint at ¶¶ 210-238. These claims do not raise any federal question, the parties are
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not diverse, and the New York State Action does not raise any claims or issues that arise under, arise
in, or are related to a case under Title 11 of the United States Code.
D. Defendants’ Notice of Removal
On September 17, 2007, the removing Defendants (but not defendants Bennett, Maggio,
Trosten, and Ernst & Young) filed a notice of removal on the purported ground that the New York
State Action is “related to” the Refco Bankruptcy proceeding. See Notice of Removal, attached
hereto as Exhibit B to the Juman Dec. at ¶ 4.
Defendants assert that the New York State Action is “related to” the Refco Bankruptcy
proceeding on four grounds: (i) the outcome of the New York State Action “will impact distributions
to and relative compensation for creditors of the estate”; (ii) one of the defendants, Grant Thornton,
has “outstanding claims against Refco and RCM, including claims for contribution, that remain
pending in the bankruptcy”; (iii) the former executives of Refco may pursue claims for contribution
from the estate or its insurers for any judgment against them; and (iv) the PAT is “a creature” of the
bankruptcy plan. See Notice of Removal at 3-5. None of these grounds has merit.
ARGUMENT
A. This Court Does Not Have Subject Matter Jurisdiction Over the New York State
Action.
Subject matter jurisdiction is a threshold question because, without it, the “court cannot
proceed at all.” Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94 (1998); Bay Shore Union
Free Sch. Dist. v. Kain, 485 F.3d 730, 733 (2d Cir. 2007) (“[T]he parties’ consent . . . cannot confer
subject matter jurisdiction.”); W.G. v. Senatore, 18 F.3d 60, 64 (2d Cir. 1994) (“Neither the court by
exercising its inherent equitable discretion, nor the parties by entering into a stipulation, can confer
jurisdiction where none has been authorized.”); see also In re Resorts Int’l, Inc., 372 F.3d 154, 161
(3d. Cir. 2004) (“[N]either the bankruptcy court nor the parties can write their own jurisdictional
Case 1:07-cv-08165-JSR Document 13 Filed 10/18/2007 Page 10 of 23
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ticket. Subject matter jurisdiction ‘cannot be conferred by consent’ of the parties.”) (citation
omitted).
Where bankruptcy matters are concerned, 28 U.S.C. § 1334(b) provides that federal subject
matter jurisdiction exists only over claims that either arise under Title 11 of the United States Code
(the Bankruptcy Code) or that arise in or are “related to” a case under Title 11.3 Defendants
concede, as they must, that the New York State Action does not raise any “core” issues -- i.e., issues
that arise under, or arise in, a case under Title 11. See Notice of Removal at 5. The only remaining
question is whether this Court has “related to” jurisdiction over this matter.
Defendants suggest in their Notice of Removal that the test governing whether an action is
“related to” a case under Title 11 is “whether the outcome of [a civil] proceeding could conceivably
have any effect on the estate being administered in bankruptcy.” See Notice of Removal at 3
(emphasis added). While Defendants are correct that the nexus test adopted by the Second Circuit
speaks in terms of “conceivable impact” on a debtor’s estate, “related to” jurisdiction is not limitless.
See. e.g., Celotex Corp. v. Edwards, 514 U.S. 300, 308-09 (1995) (noting that a bankruptcy court’s
“related to” jurisdiction “cannot be limitless”); In re Turner, 724 F.2d 338, 341 (2d Cir. 1983)
(“Congress must have intended to put some limit on the scope of ‘related to’ jurisdiction.”); In re
Daley, 224 B.R. 307, 314 (Bankr. S.D.N.Y. 1998) (“‘Related to’ jurisdiction is broad, but not
limitless.”); In re Chargit Inc., 81 B.R. 243, 247 (Bankr. S.D.N.Y. 1987) (For purposes of
establishing “related to” jurisdiction, “[a]lthough the optimist may argue that anything is
‘conceivable,’ any practical definition of this term of art must be tempered by a measure of
reasonableness.”).
3 28 U.S.C. § 1334(b) provides, in relevant part, “[T]he district courts shall have original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”
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Courts in the Second Circuit have narrowed the breadth and application of “related to”
jurisdiction. Where, as here, the action will have “[1] no effect on the debtor or ‘[will] not impact
upon [2] the administration of the bankruptcy estate, or [3] on property of the estate, or [4] on the
distribution to creditors,’” related to jurisdiction does not lie. Falise v. Am. Tobacco, Co., 241 B.R.
48, 57 (Bankr. E.D.N.Y. 1999) (quoting 1 Collier on Bankr. ¶ 3.01[4][c][v], at 3-30 (15th ed. 1999));
see also Turner, 724 F.2d at 341 (limiting the scope of “related to” jurisdiction to situations where
an action possesses a “significant connection” with a bankruptcy proceeding) (Friendly, J.); In re
Enron Corp., 353 B.R. 51, 61 (Bankr. S.D.N.Y. 2006) (“[R]elatedness does not lie where the
dispute, while ‘conceivably’ related to the bankruptcy estate, is so only remotely”) (citation omitted).
Under these settled criteria, this Court does not have related to jurisdiction over the New York State
Action.
1. The New York State Action Has No Effect on the Debtor.
In the New York State Action, a private litigation trust is asserting private Refco customer
state law claims against third-parties. The Bankruptcy Court had no subject matter jurisdiction over
these third-party rights, and the claims are not, and never were, property of the Refco debtor estates.
For this reason, the New York State Action can and will have no effect on the debtors. See In re
Finnie, 2007 WL 1574294, at *12 (Bankr. S.D.N.Y. May 29, 2007) (“a bankruptcy court has no
jurisdiction to decide controversies between third parties which do not involve the debtor or his
property, unless the court cannot complete its administrative duties without resolving the
controversy.” (quoting In re Shirley Duke Assocs., 611 F.2d 15, 18 (2d. Cir. 1979)); Falise, 241 B.R.
at 60 (finding no effect on the debtor where damages are sought from a third party for the benefit of
a post-confirmation litigation trust).
The plain fact is that the claims asserted by the PAT in the New York State Action were
never debtor property, and the Refco Plan does not make them debtor property. Even if the parties
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to the bankruptcy had wanted to make these claims “related to” the bankruptcy, they could not draft
the Refco Plan or the PAT Agreement to create subject matter jurisdiction where it does not exist.
2. The New York State Action Would Not Impact on Property of the Refco
Estates.
The PAT asserts claims that are not, and never were, property of the Refco estates. As a
result, no matter what the outcome of the New York State Action, there can be no effect on the
property of the Refco estates.
Tacitly conceding this fact, Defendants attempt to manufacture some effect on the property
of the Refco estates by suggesting that the outcome of the New York State Action may impact a
contribution and/or indemnity claim that Grant Thornton filed against the Refco Debtors. This claim
is, on its face, entirely hypothetical, unduly speculative, and an insufficient basis upon which to
predicate federal jurisdiction. See, e.g., In re Fed.-Mogul Global, Inc., 300 F.3d 368, 381-82 (3d.
Cir. 2002) (affirming lack of subject matter jurisdiction where there was a potential for contribution
or indemnification claims); Falise, 241 B.R. at 58 (“This litigation might impact the distribution of
the Trust by increasing assets available to the claimants. This impact, however, is only relevant to
the issue of bankruptcy jurisdiction when it affects the pre-confirmation estate. . . . [T]he mere
possibility of increasing the size of the Trust’s assets post-confirmation is insufficient to create
jurisdiction.”); see also See Gen. Elec. Capital Corp. v. Por-Fac Coop., Inc., 2002 WL 1300054, at
*2 (S.D.N.Y. Jun. 11, 2002); Ret. Sys. of Ala. v. J.P. Morgan Chase & Co., 285 B.R. 519, 527 n. 12
(M.D.Ala. 2002) (listing cases involving indemnification claims and concluding that ‘related to’
jurisdiction did not exist).4
4 It is telling that while Defendants assert “related to” jurisdiction, they simultaneously acknowledge (as they
must) that the claims asserted in the New York State Action are not core (i.e., they are not issues that arise
under the bankruptcy code or arise solely in cases under the bankruptcy code and have nothing to do with the
bankruptcy process, see 28 U.S.C. § 157(b)(2)(A)-(P)) and that they do not consent to jurisdiction before the
(footnote continued)
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Indeed, any such claim defies logic. For Grant Thornton to successfully assert such a claim,
it will need to have been found liable to the PAT (meaning it aided and abetted fraud and/or breach
of fiduciary duty and/or conversion) and yet still be permitted to assert a claim for contribution or
indemnity against Refco. Such a fact pattern is nothing more than academic fantasy and not an
independent basis for federal jurisdiction. Moreover, if Grant Thornton is found to have been
culpable in the fraud committed by members of Refco’s management, any contribution or indemnity
claim will likely be equitably subordinated in priority below other creditor claims due to Grant
Thornton’s wrongful conduct and will therefore have no actual impact whatsoever on the amount of
property available for distribution to Refco creditors.5
Defendants’ argument that the former executives of Refco “may pursue claims for
contribution from the estate or its insurers” is equally baseless. As the former Refco executives6
know, the Refco estates have no protectable interest in the directors and officers’ insurance policy
and they have asserted greater rights to policy proceeds than the Refco estates. Nor are the Refco
Debtors indemnifying any costs or losses incurred by these former executives. Furthermore, the
bankruptcy court. See Notice of Removal at 5. It is wholly inconsistent for Defendants to concede that the
New York State Action is not core, but then hinge their argument for “related to” subject matter jurisdiction
on a “core” proceeding -- namely, the allowance or disallowance of claims by Grant Thornton and former
directors and officers of Refco. See 28 U.S.C. § 157(b)(2)(B) (enumerating “allowance or disallowance of
claims against the estate” as a “core” matter).
5 While Defendants’ may argue that Grant Thornton’s claim for $242,804.23 for pre-petition fees (see
Kirschner Dec. at ¶ 16, Ex. C) might be disallowed (or allowed) depending on the outcome of the New York
State Action, this is also an insufficient basis upon which to confer federal jurisdiction. See In re Resorts
Int’l, 372 F.3d at 170 (“Resorts may have a claim against the Litigation Trust, and an award in the malpractice
action could be distributed back to Resorts to pay on that claim. Such attenuated effect on the reorganized
debtor does not create a close nexus to the bankruptcy plan or proceeding sufficient to confer bankruptcy
court jurisdiction.”); In re Ha-Lo Indus., 330 B.R. at 672 (“While validity of the filed proofs of claim may be
litigated some day, that provides no source for jurisdiction here.”).
6 Notably, the former Refco executives named in the New York State Action -- Bennett, Maggio and Trosten
-- are not seeking removal.
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policy will almost certainly be exhausted by various other actions, including the criminal
prosecution, in which the these Refco executive are defendants.
3. The New York State Action Would Not Impact on the Distribution to
Creditors
As noted above, no matter how much the PAT recovers in the New York State Action, it will
not impact in any way the distribution of Refco estate property to Refco creditors. The fact that the
PAT beneficiaries also happen to be creditors of the Refco estates is entirely irrelevant -- the PAT
distributions are simply not, and never were, Refco assets. Distributions on recoveries of claims
transferred to the PAT will not reduce or impact on the amounts distributed to Refco creditors who
happen to be PAT beneficiaries. See Kirschner Dec., at ¶13
4. The New York State Action Would Not Impact the Administration of the
Bankruptcy Case.
After confirmation of a bankruptcy plan, the court’s bankruptcy jurisdiction is extremely
narrow, limited to “protect[ing] its confirmation decree, to prevent[ing] interference with the
execution of the plan and to aid[ing] otherwise in its operation.” In re Dilbert’s Quality
Supermarkets, Inc., 368 F.3d 922, 924 (2d Cir. 1966); see also Falise v. Am. Tobacco Co., 241 B.R.
48, 58 (E.D.N.Y. 1999) (distribution of trust assets to creditors is “only relevant to the issue of
bankruptcy jurisdiction when it affects the pre-confirmation estate”); see also In re Resorts Int’l,
Inc., 372 F.3d 154, 157 (3d. Cir. 2004) (“Because the Bankruptcy Court confirmed the
Reorganization Plan, the debtor’s estate no longer exists.”)
The New York State Action has absolutely nothing to do with administration of the
bankruptcy proceeding or the administration of the Refco Plan. Indeed, the New York State Action
asserts claims that could have been brought in state court regardless of whether the Refco bankruptcy
case was ever filed. The only nexus between the New York State Action and the Refco bankruptcy
case is that the beneficiaries of any recovery in the New York State Action might also be creditors of
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the Refco estates. This coincidence does not mean that claims brought by a private litigation trust
will have any impact on the estate. To the contrary: the claims asserted by the PAT will have no
impact on the estate or its administration. See In re Olympia & York Maiden Lane Co. LLC, 1999
WL 58581, at * 7 (Bankr. S.D.N.Y. Jan. 25, 1999) (noting that an action that has no impact on the
estate will not impact the bankruptcy court’s administration of the estate); see also In re Finnie,
2007 WL 1574294, at *12 (noting the Second Circuit has held that ‘“[a]s a general rule, a
bankruptcy court has no jurisdiction to decide controversies between third parties which do not
involve the debtor or his property, unless the court cannot complete its administrative duties without
resolving the controversy.’” (quoting In re Shirley Duke Assocs., 611 F.2d at 18).
Unable to draw a logical nexus between the PAT’s private customer claims and beneficiaries,
Defendants argue that the PAT is a “creature” of the bankruptcy plan and part of its implementation.
See Notice of Removal at 4. This argument exposes the overly broad jurisdictional scope upon
which Defendants premise their removal. That holders of private claims against third-parties chose
to assign their claims to a private litigation trust that was established in conjunction with the
confirmation of the Refco Plan does not establish federal jurisdiction over those claims. The claims
must affect the debtors’ estate or the administration of the estate in some fashion. Mere incidental
contact to a bankruptcy proceeding or a plan is insufficient to establish “related to” jurisdiction.
Turner, 724 F.2d at 341 (“Congress must have intended to put some limit on the scope of ‘related to’
jurisdiction.”); Falise, 241 B.R. at 61 ( adopting a standard whereby even the most tangential matters
become ‘related to’ the bankruptcy “stand[s] in marked contrast to the limited jurisdiction possessed
by the non-Article III bankruptcy courts.”); see also In re Resorts Int’l, 372 F.3d at 161 (“Congress
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has vested ‘limited authority’ in bankruptcy courts.” (quoting Bd. of Governors v. MCorp Fin., Inc.,
502 U.S. 32, 40 (1991)).7
Defendants also argue that because the Refco Plan specified the mechanism for assigning
claims to the PAT, disputes about the validity of these assignments will necessitate interpretation of
the Refco Plan. But the Refco Plan cannot affect the validity of the PAT claims. Nor is it relevant
to the merits of any of Plaintiff’s state law claims. Furthermore, there are no disputes about the
validity of any PAT members’ claims and Defendants do not identify any. An argument that there
may, sometime in the future, be hypothetical disputes about the validity of an assignment of a claim
(and that something in the Refco Plan may be relevant to that question) is pure speculation and
insufficient to support “related to” subject matter jurisdiction. See, e.g., Gen. Elec. Capital Corp. v.
Por-Fac Coop., Inc., 2002 WL 1300054, at *2 (noting that “potential ramifications [from litigation]
are insufficient to render the claims that have been asserted against the non-debtor Defendants
‘related to’ Debtor’s bankruptcy proceeding.”).8
7 The cases relied upon by Defendants in their Notice of Removal (at 4) are entirely distinguishable. Luan
Inv. S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.), 304 F.3d 223 (2d. Cir. 2002) involved a “core”
bankruptcy proceeding that was by definition connected to the bankruptcy reorganization. See id. at 231. As
Defendants themselves concede, the New York State Action is not a “core” proceeding, and therefore cannot
be analogized with Luan. Defendants also cite Resorts, which actually supports Plaintiff’s argument that
there is no nexus between the post-confirmation PAT and the Refco Plan. In Resorts, the court found that a
litigation trust’s claims against a third party lacked a “close nexus” to the bankruptcy plan because, among
other things, the creditors “exchanged their creditor status to attain rights to the litigation claims.” 372 F.3d at
169. The facts of this case are even more compelling than those in Resorts because here, the PAT’s claims
were never part of the estate and the beneficiaries of the PAT did not exchange their creditor status to become
entitled to rights in the PAT.
8 Even if such a dispute were to arise, the fact that it might require a reference to a few clauses out of the
sixty-six page Refco Plan does not mean that the New York State Action will “affect the interpretation” of the
Refco Plan for purposes of related to jurisdiction. Indeed, such reference would only lead to the conclusion
stated at the outset: the claims were never estate property. The test for determining whether “related to”
subject matter jurisdiction exists is whether the state court will need to interpret or construe the Refco Plan to
render a decision regarding the allegations in the New York State Action. See In re Kassover, 336 B.R. 74,
80 (Bankr. S.D.N.Y. 2006) (holding that because claims did not require the court to interpret the bankruptcy
plan, the claims “can have no conceivable effect on the Chapter 11 case”). Simply put, whether Mayer Brown
or Grant Thornton aided and abetted fraud or a duty owed to customers will not involve an interpretation of
the Refco Plan. See In re Resorts Int’l, Inc., 372 F.3d at 170.
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Finally, Defendants rely on the Refco Plan’s provision for jurisdiction in the Bankruptcy
Court for the claims asserted by the PAT. See Notice of Removal, at 5. This argument is meritless.
First, Defendants fail to note that the Refco Plan provides for a retention of jurisdiction only
“to the fullest extent permitted by law.” Refco Plan, § 11.1 (emphasis added). The law is clear that
boiler plate bankruptcy plan provisions that purport to preserve the bankruptcy court’s jurisdiction
are not sufficient to establish post-confirmation jurisdiction. See, e.g., See In re Resorts Int’l, 372
F.3d. at 161 (“Retention of jurisdiction provisions will be given effect, assuming there is bankruptcy
court jurisdiction, but neither the bankruptcy court nor the parties can write their own jurisdictional
ticket.”).
Second, while an attempt to preserve jurisdiction in a bankruptcy plan can, in some
circumstances, indicate a close nexus between a claim and the bankruptcy case, that is not the case
here. Cases which have held the retention of jurisdiction to be relevant proof of a close nexus have
uniformly required an express, specific reference to a claim not present here. See, e.g., In re EXDS,
Inc., 352 B.R. 731, 735-36 (Bankr. D.Del. 2006) (bankruptcy plan “describes plaintiff’s Claims with
sufficient specificity to warrant the application of post-confirmation jurisdiction” where it
specifically mentions claims arising out of the acquisition of “GlobalCenter, Inc.” and lists causes of
action against specifically named customers, including “CBRE”); In re Astropower Liquidating
Trust, 335 B.R. 309, 324 (Bankr. D.Del. 2005) (bankruptcy plan specifically references “causes of
action arising out of or in connection with the Debtor’s sale of stock in Xantrex Technology, Inc.”).
The Refco Plan merely states that the Bankruptcy Court retains jurisdiction to “[h]ear and determine
causes of action by or on behalf of the Contributing Debtor, FXA, RCM, the Reorganized Debtors,
the Litigation Trustee, the Private Actions Trustee or Post-Confirmation RCM.” Refco Plan
§11.1(k). There is no specific reference to the claims asserted in the New York State Action and no
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indication that these claims are of any significance whatsoever to the Refco Plan. “If the litigation is
truly so critical to the Plan’s implementation, it would have been more specifically described in the .
. . Plan so that creditors could have considered its effect when deciding whether to vote in favor of
the Plan.” In re Insilco Techs., Inc., 330 B.R. 512, 525 (Bankr. D. Del. 2005) (no close nexus found
between claim and bankruptcy plan because plan failed to specifically reference claim, instead
merely creating a “Creditor Trust” to pursue generally defined “Rights of Action”).
B. Even if this Court Had Subject Matter Jurisdiction, Remand is Mandatory.
Even if this Court had subject matter jurisdiction over the New York State Action -- which it
does not -- mandatory abstention and remand are required by 28 U.S.C. § 1334(c)(2). See In re
Amanat, 338 B.R. 574, 582 (S.D.N.Y. 2005) (abstaining where mandatory abstention factors were
satisfied). Under 28 U.S.C. § 1334(c)(2), a court must abstain from exercising jurisdiction over a
removed action if (1) the remand motion was timely; (2) the action is based on a state law claim; (3)
the state law claim is not a “core” bankruptcy proceeding; (4) the only basis for federal jurisdiction is
§ 1334; (5) the action was commenced in state court; and (6) the state court can timely adjudicate the
matter. See Von Richthofen v. Family M. Found. Ltd., 339 B.R. 315, 319 (S.D.N.Y. 2005). Each of
these elements is satisfied by the New York State Action.
First, Plaintiff timely filed this motion for remand within 30 days of its removal to Federal
court.
Second, as Defendants themselves concede, the New York State Action does not raise any
“core” bankruptcy issues. See Notice of Removal at 5.
Third, there is no basis for federal jurisdiction beyond 28 U.S.C. § 1334. The New York
State Action is brought by a New York-domiciled Private Actions Trustee against non-diverse
defendants and does not assert any issues of federal law. See Complaint at ¶¶ 210-238 (alleging
only state-law fraud, breach of fiduciary duty, conversion, and aiding and abetting claims).
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Fourth, the New York State Action was commenced in state court on August 27, 2007. The
removal of the case does not destroy the prior pendency of the New York State Action or preclude
mandatory abstention. See, e.g., Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436, 446 (2d Cir.
2005) (holding that the mandatory abstention provisions of Section 1334(c)(2) apply to removed
cases).
Fifth, this matter can be timely adjudicated in New York state court. The case involves
claims based solely on New York state law, and the action will be assigned to the Commercial
Division of the New York Supreme Court -- a division specifically created to handle complex
financial cases on a fast-track basis before judges experienced at handling claims such as those
asserted in the New York State Action. See Juman Dec. at ¶ 5 . Significantly, the state law claims at
issue in the New York State Action do not raise the same complex securities fraud issues arising
in some of the Refco-related cases currently pending before this Court. Indeed, joining the New
York State Action with claims that require the resolution of complex securities law questions, or that
are subject to delayed discovery under the PSLRA, could potentially slow down prosecution of the
Trustee’s state law claims -- to the detriment of the PAT beneficiaries.
C. The Applicable Factors Support Discretionary Abstention.
Underscoring the appropriateness of remand of the New York State Action, of the twelve
factors used by courts in the Second Circuit to determine discretionary abstention,9 all favor remand
of the New York State Action. See In re Olympia, 1999 WL 58581, at * 7 (listing factors and noting
that courts enjoy wide discretion to abstain under § 1334(c)(1)).
• Efficient administration of the estate. The claims asserted by the PAT are not and have
never been Refco’s property. The New York State Action thus has no impact on Refco’s
bankruptcy estate and exercising jurisdiction over it is unnecessary to ensure efficient
9 28 U.S.C. § 1452(b) allows a state proceeding removed due to bankruptcy jurisdiction to be remanded “on
any equitable ground.”
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administration of the estate. See, e.g., In re Finnie, 2007 WL 1574294, at *12 (Bankr.
S.D.N.Y. May 29, 2007) (noting the Second Circuit has held that ‘ “[a]s a general rule, a
bankruptcy court has no jurisdiction to decide controversies between third parties which
do not involve the debtor or his property, unless the court cannot complete its
administrative duties without resolving the controversy.’” (quoting In re Shirley Duke
Assocs., 611 F.2d 15, 18 (2d. Cir. 1979)). To the contrary, where the Trustee has chosen
state court as the forum in which to maximize results in the most efficient way possible
for the beneficiaries of the PAT, his choice of forum should be given deference because it
leads to the swiftest allocation of assets.
• State law issues predominate. State law issues do not merely predominate -- they are the
only issues in the New York State Action. See Complaint at ¶¶ 210-238 (alleging only
state-law fraud, breach of fiduciary duty, conversion, and aiding and abetting claims).
Principles of federalism and comity therefore strongly favor abstention and remand. See
In re Savino Oil & Heating Co., 1992 WL 118801, at *3 (E.D.N.Y. May 21, 1992) (“The
issues in the removed action are chiefly a matter of state law and the state court is a more
appropriate forum for their adjudication”); Drexel Burnham Lambert Group, Inc. v.
Vigilant Ins. Co., 130 B.R. 405, 208 (Bankr. S.D.N.Y. 1991) (finding equitable remand
appropriate and noting that state courts are better able to respond to suits involving state
law).
• Unsettled nature of applicable law. Any unique state law issues arising from the state
law claims, including choice of law questions, should be made by a state court. See In re
Osage Exploration Co., 39 B.R. 966, 968 (Bankr. S.D.N.Y. 1984) (“the court has broad
discretion to remand a claim or cause of action to the court from whence it came based
upon a finding that a state court is a more appropriate forum to try a suit involving
questions of state law.” (citing 1 Collier on Bankr. § 3.08 at 3.8 (15 ed. 1983)).
• Presence of related proceeding. While there are federal securities claims proceeding in
the Southern District of New York, including a class action claim against some, but not
all, of the Defendants in the New York State Action, these federal securities-based claims
raise legal issues that are simply not present in the New York State Action, which
concerns only state-law issues. As a result, because of the need to resolve complex
federal law issues, and because of the discovery stay imposed by the PSLRA, those
securities claims could potentially slow down prosecution of the Trustee’s state law
claims -- to the detriment of PAT beneficiaries.
• No other jurisdictional basis. As acknowledged in Defendants’ Notice of Removal, the
only alleged basis for federal jurisdiction in this case is “related to” jurisdiction under 28
U.S.C. § 1334. There are no federal claims or issues in dispute, and the parties are not
diverse.
• Remoteness of the suit from the bankruptcy proceeding. The claims at issue in this case
are completely and entirely remote from the post-confirmation Chapter 11 cases. The
claims were never property of the Refco Debtors’ estates, and they were transferred by
private litigants to the Private Actions Trust nine months ago.
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• Substance of asserted core proceeding. As conceded by Defendants’ Notice of
Removal, no core issues are raised in or by the New York State Action.
• Feasibility of severing state law claims from ‘core’ matters. Because this case is not
“core,” there is no need to sever state law claims from core bankruptcy matters.
• Burden on this Court’s docket. Given the remoteness of this action to any federal
interests, any additional burden to this Court’s docket from the New York State Action
cannot be justified.
• Forum shopping motivates claim of bankruptcy jurisdiction. Defendants’ remand
motion is clearly designed to gain some strategic advantage by anchoring the Defendants’
concurrently pending application to the Joint Panel for Multidistrict Litigation as well as
their removal of an action brought by the Litigation Trustee in Illinois state court.
• Jury trial right. Under New York law, the Trustee is entitled to a jury trial on its claims.
See, e.g., Crigger v. Fahnestock & Co., Inc., 443 F.3d 230, 234 (2d. Cir. 2006)
(recognizing right to jury trial on common law fraud claims under New York law);
Resnick v. Socolov, 5 A.D.3d 125 (N.Y. App. Div. 2004) (jury trial on breach of fiduciary
duty and conversion claims). Where, as here, a jury trial right exists, equitable remand is
particularly appropriate. See, e.g., Drexel Burnham, 130 B.R. at 409 (“Demands for jury
trials in non-core proceedings have been considered a sufficient ground for an equitable
remand.”).
• All parties are nondebtors. The presence of a few nondebtors is enough to weigh against
exercising § 1334(c) jurisdiction; the complete absence of any debtors, as is the case here,
strongly counsels against exercising that jurisdiction. See Mt. McKinley Ins. Co. v.
Corning Inc., 399 F.3d 436, 448-49 (2d Cir. 2005) (finding abstention appropriate
because “the debtor is not involved in this lawsuit, and plaintiffs here seek to adjudicate
the rights of non-debtors only.”); Rahl v. Bande, 316 B.R. 127, 137 (S.D.N.Y. 2004)
(“The fact that this proceeding involves only non-debtors weighs in favor of abstention or
equitable remand.”); Universal Well Servs., Inc. v. Avoco Natural Gas Storage, 222 B.R.
26, 32 (W.D.N.Y. 1998) (holding that where an action involved only non-debtors, and
plaintiffs’ claims were based exclusively on state law, abstention was appropriate) In re
Federalpha Steel LLC, 341 B.R. 872, 883 (Bankr. N.D. Ill. 2006) (abstaining and
remanding where claims were brought by Private Actions Trust, since “its plan
confirmed, debtor Federalpha has left the scene”).
CONCLUSION
For the foregoing reasons, the New York State Action should be immediately remanded to
the New York County Supreme Court.
Dated: October 17, 2007
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Respectfully submitted,
By: _/s/ Robert C. Juman____
Richard I. Werder, Jr.
Michael B. Carlinsky
Susheel Kirpalani
Sascha N. Rand
Robert C. Juman
QUINN EMANUEL URQUHART OLIVER &
HEDGES, LLP
51 Madison Avenue, 22nd Floor
New York, New York 10010-1601
Attorneys for Plaintiff
Marc S. Kirschner, as Trustee for the Refco
Private Actions Trust
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