In Re Refco, Inc. Securities Litigation
OPINION AND ORDER
Plaintiff Marc S. Kirschner, in his capacity as Trustee of the Refco Litigation Trust, originally filed this action in the Circuit Court of Cook County, Illinois, asserting claims under Illinois state law against certain Refco insiders, professionals, and advisors for,
inter alia,
fraud, breach of fiduciary duty, and malpractice. Certain defendants (the “Removing Defendants”
1
) removed the action to the United States District Court for the Northern District of Illinois on the ground that the case is “related to” Refco’s Chapter 11 bankruptcy, 28 U.S.C. 1334(b);
see id.
§ 1452(a),
2
and concurrently petitioned the
The MDL Panel’s transfer of this action to this Court effectively lifts the stay imposed by the Northern District of Illinois. This Opinion addresses the Trustee’s pending motion 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). For the reasons stated below, the Trustee’s motion will be denied.
BACKGROUND
I. Events Leading to Refco’s Bankruptcy
Prior to its collapse in the fall of 2005, Refco was among the world’s largest providers of brokerage and clearing services in thе international derivatives, currency, and futures markets. (Comply 56. 3 ) Beginning in the late 1990s, members of Ref-co’s senior management, with the aid of certain of Refco’s professionals and financial advisors (collectively, the “defendants”), allegedly orchestrated 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. ¶¶ 4-7, 32, 59-149.) Defendants allegedly carried out this scheme by “concealing substantial Refco trading losses and operating expenses, recording hundreds of millions in fictitious Refco income, and funding Refco’s operating expenses and acquisitions with misappropriated customer assets.” (P. Mem. 2-3, citing Compl. ¶¶ 59-149.)
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. (Comp. ¶¶ 147-48.) As a result, the company announced that its financial statements for the preceding four years could no longer be relied upon. (Id. ¶ 148.) Following these disclosures, Refeo’s stock plummeted and was de-listed by the New York Stock Exchange, leading to over $1 billion in lost market capitalization. (Id. ¶¶ 148^19.) On October 17, 2005, Refco Inc. and over twenty of its subsidiaries filed for protection under Chapter 11 of Title 11 of the United States Code. (See id. ¶¶ 32, 34.)
II. The Refco Litigation Trust
On December 15, 2006, approximately fourteen months after Refco filed for bankruptcy, the United States Bankruрtcy Court for the Southern District of New York confirmed the Modified Joint Chapter 11 Plan of Refco Inc. and Certain of its
Pursuant to the Plan, all “Contributed Claims,” defined as “any and all Litigation Claims of the Debtors, RCM or their estates,” would be irrevocably transferred to the Litigation Trust on the effective date of the Plan. (Id. Ex. B §§ 1.48, 5.7(b).) In exchange, “the Litigation Trust Beneficiaries,” who are the holders of allowed general unsecured claims against the Refco Debtors, would receive “Litigation Trust Interests,” which would be allocated on the basis of the beneficiaries’ allowed claims under the confirmed Plan. 4 (Id. Ex. B § 5.7(b); see id. ¶¶ 10-11, 13, 15.) The Plan expressly provided that “[u]pon transfer of the Contributed Claims to the Litigation Trust, the Debtors, RCM, and the Plan Administrator shall have no interest in or with respect to the Contributed Claims or the Litigation Trust.” 5 (Id. Ex. B § 5.7(b).)
The establishment of the Litigation Trust, plaintiff Marc S. Kirschner’s appointment as Trustee of the Litigation Trust, the transfer of Contributed Claims to the Litigation Trust, and the allocation of Litigation Trust Interests to the Litigation Trust Beneficiaries, became effective on December 26, 2006. (Id. ¶¶ 2, 9, 10.)
III. Procedural History
On August 21, 2007, nine months after the Plan was confirmed, the Trustee filed this action in the Circuit Court of Cook County, Illinois, asserting state-law claims against defendants for breach of fiduciary duty, fraud, aiding and abetting breach of fiduciary duty and fraud, malpracticе, and negligent misrepresentation. As noted above, certain defendants removed the case to the federal district court in the Northern District of Illinois and simultaneously petitioned the MDL Panel to transfer the case to this Court. The Trustee opposed the transfer petition and moved to remand the case on the ground that the federal court lacked subject matter jurisdiction over its purely state law claims.
See
28 U.S.C. § 1447(c). The Trustee also asserted that even if the court had subject matter jurisdiction, abstention was both mandatory and warranted in the exercise of discretion under 28 U.S.C. § 1334(c). Upon the Removing Defendants’ motion, the Northern District of Illinois stayed the action pending the decision of the MDL panel. On December 28, 2007, the MDL Panel transferred the action to this Court pursuant tо 28 U.S.C. § 1407, thus effectively lifting the stay imposed by the Northern District of Illinois and bringing the Trustee’s motion to re
DISCUSSION
The Trustee contends that (1) the Court lacks subject matter jurisdiction because the claims asserted in this case are not “related to” the Refco bankruptcy within the meaning of 28 U.S.C. § 1334(b); and (2) even if jurisdiction exists, abstention is both mandatory and warranted in the exercise of discretion pursuant to 28 U.S.C. § 1334(c). These arguments will be addressed in turn.
I. Subject Matter Jurisdiction
A. Removal and Jurisdiction in Bankruptcy Cases
The party seeking removal of an action from state to federal court bears the burden of proving federal jurisdiction.
See In re WorldCom, Inc. Secs. Litig.,
The propriety of removal under § 1452(a) is predicated on the scope of federal jurisdiction under 28 U.S.C. § 1334, which provides, in relevant part:
[Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the 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.
28 U.S.C. § 1334(b) (emphasis added). None of the parties contends that this action is a proceeding “arising under” Title 11 or “arising in” a Title 11 case. Thus, the crux of the jurisdictional dispute is whether the Trusteе’s claims, which arise solely under Illinois state law, are sufficiently “related to” the Refco bankruptcy to establish federal jurisdiction.
1. Applicable Legal Standard
As a threshold matter, the parties disagree as to whether the Second or Seventh Circuit’s standard for “related to” jurisdiction governs this case. The Second Circuit applies the expansive test for “related to” jurisdiction articulated by the Third Circuit in
In re Pacor, Inc.,
[T]he test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or against the debtor’s property. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.
In re Pacor, Inc.,
The Trustee contends that the Court should apply “Seventh Circuit law” in this case because “[u]pon remand of this action to the Northern District of Illinois for trial, that court (or the Seventh Circuit in the context of any appeal) will have to reevaluate whether there is federal jurisdiction over the action under the Seventh Circuit’s narrower ‘related to’ standard.” (P. Supp.Mem.2, 4.) According to the Trustee, even if this Court were to find subject matter jurisdiction under “Second Circuit law,” “when this action is returned to the Northern District of Illinois for trial it will still be subject to remand to Illinois state court,” and “[fjorcing the parties to conduct federal pretrial discovery without first determining that there is federal subject matter jurisdiction to try the action would be grossly inefficient and would substantially prejudice the parties.” (Id. at 2, 4.) To support this contention, the Trustee cites the different evidentiary rules for fact depositions in federal court and Illinois state court and argues that “much of the federal discovery may be rendered inadmissible at trial in Illinois state court” should the case ultimately be remanded by the Northern District of Illinois. (Id. at 4 & n. 4) Such an outcome, according to the Trustee, would undermine the MDL transfer statute’s goal of promoting the “just and efficient conduct” of the transferred case. 28 U.S.C. § 1407(a).
Preliminarily, the issue of whether to apply Second or Seventh Circuit “law,” as the Trustee frames it, is not a proper “choice of law” question. Although it is meaningful to ask whether New York or Illinois state law governs a case — because New York and Illinois are distinct sovereignties, each with power to regulate transactions within the scope of its legislative jurisdiction as it sees fit — -there is no such thing as “Second Circuit law” or “Seventh Circuit law” in this sense, as intermediate federal courts of appeals have no such sovereignty. As the Second Circuit has put it, “[fjederal courts comprise a
single
system applying a
single
body of law, and no litigant has a right to have the interpretation of one federal court rather than that of another determine his case.”
Desiano v. Warner-Lambert
&
Co.,
Moreover, “[tjhis obligation does not change in the context of transferred cases.”
Desiano,
There may be questions on which prudence dictates reference to the decisions of other circuits. Where, for example, as in cases transferred under the MDL process, a case will be returned to the transferor court for trial,
see Lexecon v. Milberg Weiss Bershad Hynes & Lerach,
The Trustee argues that this Court must defer to the Seventh Circuit’s views because, when the case is returned to the Northern District of Illinois for trial, that court will, in turn, be required to revisit the jurisdictional question, and it may then find itself obliged to remand the case in light of Seventh Circuit precedent. But it would be no more appropriate for this
To do so, in fact, would be imprudent as well as conceptually inappropriate. The Trustee’s claim that applying the Second Circuit’s jurisdictional standard would be “grossly inefficient” (P. Supp.Mem.4) rests on the inherently dubious business of forecasting the future course of litigation. And indeed, the Trustee’s prediction in this case is especially dubious. Its concerns are based fundamentally on the expectation that the case will be returned to the Seventh Circuit for trial. In the real world of litigation, upwards of 95% of civil cases never reach trial, but are settled without a trial or otherwise resolved by the parties or the court. See Stephen C. Yeazell, The Misunderstood Consequences of Modem Civil Process, 1994 Wis. L.Rev. 631, 633 (observing that in 1990, “only 4.3% of the filed civil cases resulted in trials”); Marc Galanter, The Hundred-Year Decline of Trials and the Thirty Years War, 57 Stan. L.Rev. 1255, 1259 (2005) (noting that in 2003, “only 1.7% of civil terminations occurred during or after trial”). And any experienced litigator knows that complex civil litigation of this particular sort even more rarely requires trial. It is a virtual certainty not only that these matters will, at some point, settle, but that they will necessarily settle by virtue of some comprehensive resolution of all of the claims pending against defendants in this matter, the vast majority of which are pending before this Court. Moreover, if the cases do proceed to trial someday, there is hardly a guarantee that current Seventh Circuit precedent will provide the rule of decision by which the transferor court will assess its jurisdiction at the trial stage. The circuit conflict may by then be resolved by the Supreme Court; the Seventh Circuit may, by en banc decision, bring its view into line with that of the othеr circuits, or, by future panel decisions, refine its rule in a manner more favorable to the position of the defendants here; facts may emerge that warrant a change of venue for trial; or other litigation contingencies presently unforeseeable may in some other way alter the case. All this Court can do is to decide the issue presently before it on the strength of the arguments that appear most persuasive to it, based on the binding precedents that must shape its judgment. 8
2. “Related to” Jurisdiction
The Removing Defendants contend that “related to” jurisdiction exists in this case because: (1) the Trustee is the “representative” of the Refco Debtors’ bankruptcy estates, on whose “behalf he acts, and thus the resolution of this action, which seeks to recover more than $2 billion to distribute to the Refco Debtors’ creditors”, “will, most assuredly, affect those estates”; (2) defendant Grant Thornton LLP has filed a proof of claim in the Refco bankruptcy for unpaid fees, contribution, and indemnification, and “the outcome of this action will directly impact how much Grant Thornton and the other defendants will receive from the estates”; and (3) several of the defendants, who are former Refco executives, are seeking access tо the Refco Debtors’ directors and officers’ liability insurance policies, which are treated in the Plan as property of the bankruptcy estates, to pay their defense costs. (D.Mem.2, 9-12.) The Trustee asserts that none of these grounds provides a basis for federal jurisdiction.
As described above, the general test for “related to” jurisdiction under § 1334(b) examines whether the outcome of an action “might have
any conceivable effect
on the bankrupt estate.”
In re Cuyahoga,
Given the broad sweep of the Pacor test, courts have observed that
applying the general [Pacor ] rule without qualification after the confirmation of a reorganization plan easily could result in the bankruptcy court retaining jurisdiction of all cases affecting the reorganized debtor for many years thereafter. This prospect not only would work an unwarranted expansion of federal court jurisdiction but also would unfairly advantage reorganized debtors by allowing such firms to funnel virtually all litigatiоn affecting them into a single federal forum.
In re Boston Reg’l Med. Ctr.,
The First Circuit, however, has distinguished between reorganization plans and liquidation plans, holding that in the latter scenario,
when a debtor (or a trustee acting to the debtor’s behoof) commences litigation designed to marshal the debtor’s assets for the benefit of its creditors pursuant to a liquidating plan of reorganization, the compass of related to jurisdiction persists undiminished after plan confirmation.
In re Boston Reg’l Med. Ctr.,
This case, which involves a liquidation plan, well illustrates the force of the First Circuit’s distinction. The plaintiff here is not a reorganized corporation that has put its debts behind it, but a Trustee whose function is virtually indistinguishable from that of the bankruptcy estate itself: to gather the assets of a defunct debtor for distribution to its creditors. See Kirschner Decl. Ex. B § 5.7(b) (providing that “the Litigation Trustee shall be a representative of the Estates ... with respect to the Contributed Claims”); id. Ex. C ¶ 23 (specifying that the Contributed Claims “shall be deemed asserted on behalf of each applicable Estate holding such claim immediately prior to contribution,” and that the Litigation Trustee “shall be deemed the successor-in-interest to each of the Contributing Debtors”). To permit this litigation to escape the usual test of federal jurisdiction would further none of the purposes underlying a more restrictive jurisdictional test in post-confirmation cases. Rather, it would permit creditors, through the vehicle of a post-confirmation litigation trust, to pursue potential assets in fragmented litigation, undermining the goal of unified administration of bankruptcy cases.
Several courts in this circuit have cited the First Circuit’s approach approvingly,
see, e.g., In re Cross Media Mktg. Corp.,
According to the line of decisions holding that federal jurisdiction shrinks post-confirmation,
a party invoking the bankruptcy court’s post-confirmation jurisdiction must satisfy two requirements. First, the matter must have a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution or administration of the confirmed plan andsecond, the plan must provide for the retention of jurisdiction over the dispute.
In re Kassover,
The Trustee nevertheless contends that “related to” jurisdiction does not exist because, upon confirmation of the Plan, the Refco Debtors irrevocably assignеd all of their causes of action to the Litigation Trust. As a result, any recovery of funds will be distributed directly to the Litigation Trust Beneficiaries, not to the Refco Debtors, and thus adjudication of the claims cannot affect the Refco Debtors’ estates. The Trustee’s arguments, however, are premised on the Seventh Circuit’s narrower standard for “related to” jurisdiction, which, as explained above, does not control here.
9
In contrast to the Seventh Circuit’s approach, which considers only whether a dispute “affects the amount of property for distribution
\i.e.,
the debtor’s estate] or the allocation of property among creditors,”
In re FedPak Sys.,
Even accepting as true the Trustee’s contention that no property of the Refco Debtors’ estates will be affected by this action, that fact alone is not dispositive of the jurisdictional inquiry. As described above, the Trustee’s claims in this case are precisely those that were transferred to it by the Refco Debtors pursuant to the Plan and the Litigation Trust Agreement. The Trustee’s claims thus “arise under the Plan,” and prosecution of this action directly implicates the “implementation” and “execution” of the “confirmed plan [and] incorporated litigation trust agreement.”
In re General Media,
The Court’s exercise of jurisdiction in this case, moreover, is entirely consistent with Congress’s intent in enacting § 1344(b) “to grant
comprehensive
jurisdiction to the bankruptcy courts so that they might deal
efficiently and expeditiously with all matters
connected with the bankruptcy estate.”
Celotex,
In addition, as a practical matter, adopting the Trustee’s position would effectively extinguish federal jurisdiction in all cases where a litigation trustee prosecutes claims specifically assigned to it by a confirmed bankruptcy plan.
See In re LGI, Inc.,
In sum, even assuming arguendo that federal jurisdiction diminishes post-confirmation, the existence of a “close nexus” between the Trustee’s claims and the Ref-co bankruptcy, coupled with the Plan’s express retention of jurisdiction over those claims, suffices to establish “related to” jurisdiction in this case. 10 Accordingly, the Trustee’s motion to remand on the ground of lack of subject matter jurisdiction must be denied.
II. Abstention
A. Mandatory Abstention
The Trustee asserts that even if subject matter jurisdiction exists, abstention is required by 28 U.S.C. § 1334(c)(2). Section 1334(c)(2) provides, in relevant part:
[u]pon timely motion of a рarty in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
28 U.S.C. § 1334(c)(2) (emphasis added). A party seeking mandatory abstention under § 1334(c)(2) thus must demonstrate that:
(1) the motion to abstain was timely; (2) the action is based on a state law claim; (3) the action is “related to” but not “arising in” a bankruptcy case or “arising under” the Bankruptcy Code; (4) Section 1334 provides thе sole basis for federal jurisdiction; (5) an action is commenced in state court; [and] (6) that action can be “timely adjudicated” in state court.
In re WorldCom,
In this case, mandatory abstention is not warranted because, as the Removing Defendants correctly contend, the Trustee has not met its burden of proving that its claims can be “timely adjudicated” in Illinois state court. 28 U.S.C. § 1334(c)(2). The Trustee relies on the declaration of a former judge of the Cook County Circuit Court, who states that it is his “impression that cases assigned to the commercial calendar are, by and lаrge, handled efficiently and expeditiously.” (Schiller Decl. ¶ 9.) The Trustee also presents statistics showing that in recent years, the average time to trial in Cook County has dropped significantly and cites a case from this district which purportedly found that the average “time from filing to date of trial in the Cook County courts was only longer than the comparable period in the Northern District of Illinois by a matter of months.”
As the
Bondi
court itself recognized, however, “[t]hese statistics ... do not tell the whole story.”
[Section] 1334(c)(2) is intended to require federal courts to defer to the state courts to handle lawsuits whiсh, although “related to” a bankruptcy, can be promptly resolved in state court without interfering with the proceedings pending in the federal courts. That intention simply has no application to litigation of this sort, in which a case properly removed to federal court is intertwined both with complex bankruptcy proceedings and equally complex securities class actions pending in federal court.
In re Global Crossing, Ltd. Sec. Litig.,
B. Discretionary Abstention
Neither is disсretionary abstention appropriate. Section 1334(c)(1) provides that “[n]othing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding ... related to a case under title 11.” 28 U.S.C. § 1334(c)(1). Federal courts, however, must be “sparing” in then-exercise of discretionary abstention,
Winstar Holdings, LLC v. Blackstone Group L.P.,
No. 07 Civ. 4634,
In this case, “there is little basis to invoke comity to the state courts, and every reason to invoke ... federal jurisdiction.”
Winstar,
it is beyond cavil that judicial economy and efficiency are best served by exercising the jurisdiction that so clearly exists. The MDL panel has consolidated scores of cases before this Court to promote the expeditious and efficient resolution of the claims arising from the collapse of WorldCom. The litigation is proceeding apace. Motions to remand ... and to dismiss have been fully briefed, and ... important discovery issues addressed. With the consolidation of the litigation in one court, the motion practice and discovery process can be managed to protect the rights of all parties and to preserve, to the extent possible, the maximum amount of assets for recovery by plaintiffs with meritorious claims.
In re WorldCom,
CONCLUSION
For the foregoing reasons, plaintiffs motion to remand, or in the alternative, to abstain, is denied.
SO ORDERED.
Notes
. The Removing Defendants are Credit Suisse Securities (USA) LLC, Bank of America Securities LLC, Deutsche Bank Securities, Inc., Grant Thornton LLP, Mayer Brown LLP, Mayer Brown International LLP, and PricewaterhouseCoopers LLP.
.
See California Pub. Employees’ Ret. Sys. v. WorldCom, Inc.,
. All references to the complaint in this opinion are to thе complaint originally filed in the Circuit Court of Cook County, Illinois. (Kirschner Deck Ex. A.) All factual allegations in the complaint are assumed to be true for purposes of this motion.
See Merritt v. Shuttle, Inc.,
. Although the estate of RCM was originally listed as a Litigation Trust Beneficiary, the RCM plan administrator "irrevocably instructed the Litigation Trustee to distribute beneficial interests in the Litigation Trust directly to creditors of RCM,” and thus no recoveries on the claims asserted by the Trustee in this case will be distributed to RCM creditors through the RCM estate. (Kirschner Decl. ¶ 13 n. 2.)
. Similarly, § 1.2(a) of the Litigation Trust Agreement provides that, as of the effective date of the Plan, RCM and the Refco Debtors "hereby transfer, assign, and deliver to the Litigation Trustee, without recourse, all of their respective rights, title, and interest in and to the Contributed Claims free and clear оf any and all liens.” (Kirschner Decl. Ex. D § 1.2(a).)
. In conjunction with the pending motion, the parties have submitted both the briefing materials originally filed in the Northern District of Illinois and supplemental briefs addressing the applicable legal standards in light of the MDL Panel's transfer of the action to this Court.
. The Trustee cites
In re Methyl Tertiary Butyl Ether (MTBE) Products Liability Litigation,
a case from this district which distinguished between pretrial and trial issues and held that “in the context of class certification and other issues inherently enmeshed with the trial,” "the law of the transferor circuit controls.”
. Moreover, the Trusteе's allegedly practical concern about what would happen if the Northern District of Illinois did decide to remand the case for trial is singularly unpersuasive. The Trustee argues that the parties should not be compelled to conduct discovery under federal rules if the case will be tried under state rules of procedure. It is hardly rare for parties to conduct discovery in one proceeding that will eventually be used in a trial in another matter in a different jurisdiction. The bulk of discovery is conducted for purposes of information-gathering that will not be affected by the venue or rules governing a subsequent trial. To the extent that depositions are expected to be used at trial in lieu of live testimony, it is easy enough for the depositions to be conducted in the mаnner necessary to meet the most conservative of potential trial rules. Indeed, in its supplemental brief, the Trustee admits as much by acknowledging that if this action were remanded, "the Trustee still has every intention of coordinating discovery with the Refco-related actions pending in this Court, but would do so under the supervision of, and pursuant to procedures approved by, the Illinois state trial court in which the action would be pending and tried.” (P. Supp. 4 n. 4.) If the Trustee can conduct effective discovery even after a remand to state court, there is no reason he cannot do so now.
. The Trustee's citation to two decisions by the bankruptcy court for the Northern District of Illinois,
see In re Commercial Loan Corp.,
. Accordingly, the Court need not address the Removing Defendants' alternative argumerits for jurisdiction.