11-09074-cgm Doc 220 Filed 05/20/13 Entered 05/20/13 16:22:09 … · incrimination in response to...

1

Hayward, Parker, O’Leary & Pinsky Attorneys for John F. Magee and Commercial Construction, Inc. 225 Dolson Ave., P.O. Box 929 Middletown, NY 10940 Tel: 845-343-6227 Email [email protected] Michael David Pinsky, Esq.

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK -----------------------------------------------------xIn re: Chapter 11 FKF 3, LLC, Case No. 10-37170 (cgm) Debtor. -----------------------------------------------------xGREGORY MESSER, as Trustee of the FKF Trust,

Plaintiff, Adv. Proc. No. 11-09074 (cgm)

-against- Case No. 13-cv-_____

JOHN F. MAGEE, et al.,1

Defendants. -----------------------------------------------------x

MEMORANDUM OF LAW IN SUPPORT OF THE RENEWED MOTION OF JOHN F. MAGEE TO WITHDRAW THE REFERENCE TO THE

BANKRUPTCY COURT OF ADVERSARY PROCEEDING NO. 11-09074 (CGM)

Movant John F. Magee ("Magee"), by his attorneys Hayward, Parker, O'Leary &

Pinsky, submits this memorandum of law in support of his renewed motion for an order

withdrawing the reference of this adversary proceeding (the “Action”) from the

1 The defendants include John F. Magee, Mitchell L. Klein, Burton R. Dorfman, Melissa A. Magee, Patrice L. Magee, Jonathan Magee, Lizbeth Magee Keefe, Lawrence J. Keefe, Jr., Valerie Magee, FKF Holding Company, LP, FKF V Holding Co., S.F. Properties, LLC, Commercial Construction, Inc., Bradley Industrial Park, Inc., FKF Edgewater, LLC, Aventine Edgewater LLC, FKF Retail LLC, Aventine Retail, LLC, Jerry’s Self-Storage, LLC, Rose Glasses, LLC, Bashert Developers, LLC, TA Group, LLC, JDJ Holding Co., LLC, Fasman, Klein & Feldstein, LLP, and Dorfman, Knoebel & Conway, LLP.

11-09074-cgm Doc 220 Filed 05/20/13 Entered 05/20/13 16:22:09 Main Document Pg 1 of 21

2

bankruptcy court, in accordance with Local Bankruptcy Rule 5011-1, Fed. R. Bankr. P.

5011, 28 U.S.C. § 157(d), and Article III, § 1 and the Seventh Amendment to the

Constitution, and respectfully shows as follows.

PROCEDURAL HISTORY

This motion was previously before the Hon. Kenneth M. Karas of this Court in

FKF 3, LLC, et al. v. Magee, 7:12-cv-00254-KMK, filed January 12, 2012. Judge Karas

first addressed whether the Southern District's Amended Standing Order of Reference

dated January 31, 2012 mooted the motion, see Order dated June 21, 2012 (ECF Doc. 5,

filed June 22, 2012) and letter brief in response of then-counsel to Movants Marc Stuart

Goldberg, Esq. dated June 28, 2012 (ECF Doc. 6, filed June 28, 2012). Judge Karas then

ordered that the parties submit briefs on the issues of the bankruptcy court's constitutional

authority to enter final judgments on specific claims asserted in the Action by the plaintiff

Trustee, and on how the factors in In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993)

should be applied in light of the foregoing, and the proceedings below. See Order dated

October 11, 2012 (ECF Doc. 7, filed October 10, 2012).

Before that could be done, Movants' counsel Marc Stuart Goldberg, Esq. sought

and was granted leave to withdraw. (ECF Docs. 8 through 12, filed October 23, 2012

through November 9, 2012, and culminating in an order permitting withdrawal.) In

response to a letter submitted by Patrick Burke, Esq. dated December 11, 2012, Judge

Karas declined to hold the motion in abeyance but permitted the movants to withdraw

their motion without prejudice. Movants have since filed their Notice of Dismissal; (ECF

Doc. 15, filed May 6, 2013), which Judge Karas "So Ordered" on May 7, 2013.


3

In the interim, pretrial proceedings have continued in the bankruptcy court, and

discovery is now closed except for the deposition of expert witnesses. Those depositions

are to be concluded by June 28, 2013. Now that the adversary proceeding is very nearly

trial ready, cause exists to withdraw the reference, including without limitation movants'

right to a jury trial on several of the Trustee's claims.

BACKGROUND

Plaintiff Gregory Messer is the Trustee of the FKF Trust. The FKF Trust is the

successor in interest to debtor FKF 3, LLC ("FKF 3"). FKF 3 was the debtor in Chapter

11 Case No. 10-37170 (cgm), Cecelia G. Morris, Chief Bankruptcy Judge, presiding, the

bankruptcy case having been commenced by the filing of an involuntary Chapter 11

petition. Under the First Amended Joint Plan of Liquidation of the Debtor and Official

Committee of Unsecured Creditors, dated January 28, 2011, (NYSB ECF Doc. 181) (the

"Plan"), as confirmed by Order Confirming First Amended Joint Plan of Liquidation of

the Debtor and Official Committee of Unsecured Creditors, filed April 18, 2011 (NYSB

ECF Doc. 250) (the "Confirmation Order"), the FKF Trust took an assignment of all of

the assets of debtor FKF 3, including the rights of action asserted here.2

As with its predecessors FKF Holding Company, L.P. ("FKF Holding") and FKF

II Holding Co., LLC ("FKF II"), debtor FKF 3 loaned money to real estate development

and construction projects, including some in which its principals (including Magee) had

an interest. The other principals in FKF 3 were co-defendants Burton R. Dorfman, an

attorney, and Mitchell L. Klein, a certified public accountant and financial planner.

2 Copies of the Plan and the Confirmation Order are annexed as Exhibits "1" and "2" respectively to the Affidavit of Michael David Pinsky.


4

Klein and Dorfman solicited a number of their wealthy clients to loan money to,

or to invest in, FKF 3. Those clients assert that Klein made material misrepresentations

to them about FKF 3 and the nature of their loans or investments, but for which

misrepresentations they would not have put their money in FKF 3, and as a result of

which they have suffered significant damages when their loans or investments could not

be repaid.

The allegations of misrepresentation include not being told that FKF 3 invested in

real estate development and construction projects in which the FKF 3 principals had an

interest, and not receiving collateral for the loans as promised to them by Klein. In his

original complaint and amended complaint, the Trustee alleges, inter alia, that Magee

and Dorfman were knowingly complicit with Klein. Magee vigorously denies knowing

of, participating in, or aiding and abetting Klein's misdeeds.3

The Trustee's complaint4, as amended, further alleges that FKF 3 devolved into a

Ponzi scheme and was used to defraud its third-party creditors. Magee denies the Ponzi

scheme allegations, pointing instead to actions taken by Klein and Dorfman that were not

known by, disclosed to, or authorized by Magee or CCI, and that, along with the collapse

of the real estate market beginning in 2008, resulted in FKF 3's failure.

The causes of action set out in the complaint against Magee include breach of

fiduciary duty in his capacity as a member of FKF 3, and the waste of its assets to the

detriment of creditors (Count One), turnover of property of the estate (Count Two),

constructive and actual fraudulent conveyances (Counts Three through Nine), conversion

3 Mr. Klein has not appeared in the Action, and the Trustee has taken a default judgment against him. Mr. Klein did not appear for deposition, and thereafter invoked his Fifth Amendment privilege against self-incrimination in response to 751 of the 755 written questions put to him in the Trustee's Examination of Mitchell L. Klein on Written Questions, dated March 22, 2013. 4 The complaint is annexed as Exhibit “3” to the Affidavit of Michael David Pinsky.


5

(Count Eleven), contribution (Count Fourteen), aiding and abetting breach of fiduciary

duty (Count Fifteen), objection to claim under 11 U.S.C. § 502(d) for receipt of

fraudulent conveyance(s) (Count Sixteen), equitable subordination under 11 U.S.C. §

510(b) (Count Seventeen), and recharacterization of claims from debt to equity (Count

Eighteen).

The Trustee filed his First Amended Complaint on January 11, 2013.5 The First

Amended Complaint adds two claims: one seeking a determination that FKF 3 was the

alter ego of Magee, Klein and Dorfman and holding them liable for all damages suffered

by FKF 3's third-party creditors, and another count against Magee alone for spoliation of

evidence.

ARGUMENT

A. Orion Pictures, The Supreme Court, And Withdrawal Of The Reference For Cause.

Section 157(d) of the Judicial Code, 28 U.S.C., provides for both mandatory and

discretionary withdrawal of the reference:

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 [the Bankruptcy Code] and other laws of the United states regulating organizations or activities affecting interstate commerce.

28 U.S.C. § 157(d) (emphasis supplied). The permissive first clause of § 157(d) applies

here, as "other laws of the United States regulating organizations or activities affecting

interstate commerce" are not in the case.

5 The amended complaint is annexed as Exhibit "4" to the Affidavit of Michael David Pinsky.


6

The leading case in this circuit on withdrawal of the reference is In re Orion

Pictures Corp., 4 F.3d 1095 (2d Cir. 1993). In Orion Pictures, the district court denied a

creditor's motion to withdraw the reference of an adversary proceeding that sought, inter

alia, to recover damages for breach of a prepetition contract,6 basing the denial on a

determination that the contract claim was core because it 'affected the administration of

the estate', 28 U.S.C. §157(b)(2)(A). In reversing, the panel held that the debtor's

prepetition contract claim was a non-core proceeding (one previously existing at

common-law) to which the Seventh Amendment guaranty of jury trial applied.7 4 F.3d at

1102. The debtor's contract claim in Orion Pictures was not distinguishable from the

debtor's prepetition contract claim against a creditor in Northern Pipeline Construction

Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).

Marathon invalidated the then-existing bankruptcy jurisdictional scheme wherein

Congress had assigned the bankruptcy courts the job of entering final judgments on

common-law claims. Orion Pictures stands in part for the proposition that,

notwithstanding expansive language in a given subsection of 28 U.S.C. § 157(b),

common-law claims may only be finally determined by Article III courts.

Congress responded to the Marathon decision by enacting the Bankruptcy

Amendments and Federal Judgeship Act of 1984 ("BAFJA"). BAFJA established a new

6 Appellate jurisdiction was based on the merger of that order into the dismissal of the adversary proceeding. 7 In Orion Pictures, the creditor had not filed a proof of claim based on its contract with the debtor. The debtor's prepetition claim was based on that same contract. Had the creditor filed such a claim with the bankruptcy court, the bankruptcy court, in ruling on the creditor's claim, would of necessity have to adjudicate the facts that would establish or negate the debtor's (counter)claim. That prior adjudication in equity of facts that are central to both the filed proof of claim (which the bankruptcy court has the power to allow or disallow) and to the debtor's related claim, would deprive the creditor of the right to a jury trial, by operation of offensive collateral estoppel. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 335, 99 S.Ct. 645, 653, 58 L.Ed.2d 552, 564-65 ("Thus the Court in Katchen v. Landy recognized that an equitable determination can have collateral-estoppel effects in a subsequent legal action and that this estoppel does not violate the Seventh Amendment.").


7

system to allocate bankruptcy jurisdiction, and in the process extensively amended the

Judicial Code and the Bankruptcy Code. BAFJA's innovations included (i) adding 28

U.S.C. §1334 to vest exclusive jurisdiction of bankruptcy cases and original but not

exclusive jurisdiction of civil proceedings "arising under title 11, or arising in or related

to cases under title 11" in the district court; (ii) enacting a new Chapter 6 of the Judicial

Code, including 28 U.S.C. § 151, making the bankruptcy court a "unit" of the district

court; (iii) enacting 28 U.S.C. §157 providing, inter alia, for referral of bankruptcy

matters to the bankruptcy court, establishing the core/non-core taxonomy in section

157(b) examined in Orion Pictures, and providing for the submission of proposed

findings of fact and conclusions of law by the bankruptcy court to the district court, in

connection with bankruptcy trials of non-core matters.

Despite Congress' efforts in BAFJA to overcome the constitutional deficiencies

identified by the plurality opinion in Marathon, the allocation of jurisdiction set out in

BAFJA has remained subject to constitutional challenge. See Granfinanciera, S.A. v.

Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989)(holding that the Seventh

Amendment right to a jury trial applies in a fraudulent conveyance action by the

bankruptcy estate against a creditor that did not file a claim, notwithstanding the "core"

designation of fraudulent conveyance proceedings in 28 U.S.C. § 157(b)(2)(H)); see also

Stern v. Marshall, 564 U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (holding

unconstitutional as applied the "core" designation in 28 U.S.C. § 157(b)(2)(C) of

counterclaims by the estate). Granfinanciera and Stern v. Marshall caution that, despite

being designated as "core" proceedings in section 157(b), in the absence of permissible

prior adjudication in equity resulting in an estoppel, common-law claims remain subject


8

to final determination only by an Article III court. Where an action or proceeding may

only be finally decided by an Article III court and the Seventh Amendment right to jury

trial applies, then the trial of that action or proceeding may only take place in the district

court.

Subject to the caveats in Granfinanciera and Stern v. Marshall, the Orion

Pictures court instructed that "[a] district court considering whether to withdraw the

reference should first evaluate whether the claim is core or non-core, since it is upon this

issue that questions of efficiency and uniformity will turn."

Section 157(b) of the Judicial Code, 28 U.S.C. § 157(b), identifies core proceedings as

follows:

(2) Core proceedings include, but are not limited to—

(A)matters concerning the administration of the estate;

(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11, but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;

(C) counterclaims by the estate against persons filing claims against the estate;

(D) orders in respect to obtaining credit;

(E) orders to turn over property of the estate;

(F) proceedings to determine, avoid, or recover preferences;

(G) motions to terminate, annul, or modify the automatic stay;


9

(H) proceedings to determine, avoid, or recover fraudulent conveyances;

(I) determinations as to the dischargeability of particular debts;

(J) objections to discharges;

(K) determinations of the validity, extent, or priority of liens;

(L) confirmations of plans;

(M) orders approving the use or lease of property, including the use of cash collateral;

(N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate;

(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and

(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.

B. The Nature Of The Trustee's Claims.

Trustee Messer brings both core and non-core claims against Magee. The core

claims alleged against Magee include: turnover of property (debtor loans allegedly

collected by Magee individually) under 11 U.S.C. § 542 (Count 2); fraudulent

conveyances under 11 U.S.C. § 548(a) (Counts 3 and 4); objection to/disallowance of

claims asserted by transferee of fraudulent conveyances pursuant to 11 U.S.C. § 502(d)

(Count 16); and equitable subordination under 11 U.S.C. § 510(b).


10

Although the turnover claim8 alleged under 11 U.C.S. § 542 in Count 2 and the

fraudulent conveyance claims alleged under 11 U.S.C. § 548(a) in Counts 3 and 4 are

labeled "core" by Congress in 28 U.S.C. § 157(b)(2)(H), all other things being equal,9

these claims may be common-law claims for purposes of Article III and the Seventh

Amendment. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43 109 S.Ct. 2782, 2791,

106 L.Ed.2d 26 (1989).

The non-core, common-law claims alleged against Magee include: breach of

fiduciary duty (Count 1); fraudulent conveyance (Counts 4 through 8, for the same

amounts, albeit on different theories under the applicable statutes of the New York

Debtor and Creditor Law, and Count 9 under the Debtor and Creditor Law, for attorneys'

fees); conversion (for the same amounts sought as in Count 2)10; contribution, based on

failed oversight of the lawyers and accountants for the debtor (Count 14); aiding and

abetting breach of fiduciary duty (Count 15); and recharacterization of debt to equity, and

return of interest paid (Count 18). The Trustee's amended complaint adds a prayer for an

alter ego determination, seeking to hold Magee (and the other principals of the debtor)

personally liable for all of the obligations of the debtor, a sum well in excess of $100

million. Magee has timely demanded a jury trial in his answer.

8 The turnover claim alleged in Count 2 is essentially an action for money had and received, an action triable at law at the time of the adoption of the Bill of Rights. See, e.g., Schoenthal v. Irving Trust Co., 287 U.S.92, 94 (1932). 9 In the absence of the use of offensive collateral estoppel as a result of a prior adjudication in equity, i.e., a ruling on a claim that coincidentally and necessarily finds facts which in turn establish or negate the common-law claim. 10 See Starr Int’l Co., v. Am. Int’l Group, Inc., 623 F. Supp. 2d 497, 501 (S.D.N.Y. 2009) (“[I]t is settled law that conversion is unmistakably [an action] at law triable to a jury.”


11

C. The Right To A Jury Trial And Its Impact On Withdrawal Of The Reference.

The Orion Pictures decision further provides that " . . . once a district court makes

the core/non-core determination, it should weigh questions of efficient use of judicial

resources, delay and costs to the parties, uniformity of bankruptcy administration, the

prevention of forum shopping, and other related factors." 4 F.3d at 1101. And, where the

right to jury trial is present, cause exists to withdraw the reference for that trial:

"The threshold core/non-core evaluation also determines the relevance of parties' jury trial rights to deciding a motion to withdraw the reference. While we held in Ben Cooper I that a bankruptcy court has the power to hold jury trials in core proceedings, we noted in dicta that the Seventh Amendment's Reexamination Clause, which states that "no fact tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common law," likely would prohibit jury trials in bankruptcy courts in non-core proceedings due to the district court's de novo review of such proceedings. See 896 F.2d at 1403; see also In re Kaiser Steel Corp., 911 F.2d 380, 391 (10th Cir. 1990) (disagreeing with our holding in Ben Cooper I as to bankruptcy court jury trials of core matters, but agreeing with our dicta regarding the effect of the reexamination clause on non-core jury trials in bankruptcy court); In re Cinematronics, Inc., 916 F.2d 1444, 1451 (9th Cir. 1990); Beard v. Braunstein, 914 F.2d 434, 442-43 (3d Cir. 1990). We now reach the issue reserved in Ben Cooper I, and hold that the constitution prohibits bankruptcy courts from holding jury trials in non-core matters. (Emphasis added.)

Id.

Numerous cases from this district hold that “[t]he fact that an adversary

proceeding concerns non-core matters for which there is the right to a jury trial is

sufficient cause to withdraw the reference.” Schachter v. Japan Indep. Commc’ns Corp.,

1995 WL 675486, at *1 (S.D.N.Y Nov. 14, 1995) (emphasis added) (granting motion to


12

withdraw the reference of an action alleging RICO violations, fraud, breach of fiduciary

duty and breach of contract); Kentile Floors, Inc. v. Congoleum Corp. (In re Kentile

Floors, Inc.), 1995 WL 479512, at *2 (S.D.N.Y. Aug. 10, 1995) (granting motion to

withdraw the reference of an action alleging tortious interference and unfair competition);

see also M. Fabrikant & Sons, Inc. v. Long's Jewelers, Ltd., 2008 WL 2596322, at *3

(S.D.N.Y. June 26, 2008) (relying on defendant’s jury right in granting motion to

withdraw the reference of an action seeking payment for delivery of goods sold).

Magee's right to a jury trial provides additional and sufficient cause for withdrawal of the

reference.

The bankruptcy court's essential or "core" adjudication in equity of the movants'

proofs of claim in this case will not establish the elements necessary to make out the

Trustee's various common-law claims, by working an estoppel. As more fully set out

below, since the bankruptcy court's adjudication of the movants' claims for money loaned

cannot as a matter of course resolve the Trustee's common-law claims, the trial of the

common-law claims and remedies in the Action must be heard here, by an Article III

court. Magee, having timely filed his jury demand, is entitled to a jury trial on the

common-law causes of action and does not consent to have the bankruptcy court conduct

that jury trial. 28 U.S.C. § 157(e).

Considerations of economy and judicial efficiency also strongly support

withdrawal. It would be unnecessarily wasteful and inefficient to have the Bankruptcy

Court hear the remaining claims in the Trustee's complaints that do not involve common-

law rights of action, and then try the remaining issues before this Court. Even if the right

to a jury trial did not apply to the common-law claims, meaningful review of the record


13

and consideration of proposed findings and conclusions by the Bankruptcy Court, after a

trial on a complaint consisting of 1,304 paragraphs over 226 pages (not including

exhibits)11 would be very cumbersome and unnecessarily consume a great deal of

additional time, money, and other scarce resources.

For all of these reasons, cause exists to withdraw the reference of the Action from

the Bankruptcy Court.

D. Estoppel By Prior Adjudication In Equity And The Right To Jury Trial.

The Supreme Court in Stern v. Marshall considered whether Article III, § 1, of

the Constitution precluded the California bankruptcy court from entering a final order on

the counterclaim under Texas law of debtor Vickie Lynn Marshall, a/k/a Anna Nicole

Smith, against her adult stepson and contingent creditor, Pierce Marshall. Pierce

Marshall had filed a claim in the debtor's bankruptcy case, based on her alleged

defamation of him through her lawyers, who had informed the press that Pierce had

fraudulently manipulated the assets of his deceased father, the wealthy and elderly Texas

oilman J. Howard Marshall II. The debtor filed a counterclaim in the bankruptcy court,

alleging that Pierce had tortiously interfered with J. Howard's intent to gift her one-half of

his Texas oil fortune. The bankruptcy court entered judgment for the debtor on her

counterclaim, and that judgment was affirmed by both the district court and the court of

appeals. The Supreme Court reversed, notwithstanding that, on its face, the debtor's

counterclaim was a "core" proceeding under 28 U.S.C. § 157(b)(2)(C), which Congress

had authorized the bankruptcy court to finally determine under 28 U.S.C. § 157(b)(1).

11 Not including the amended complaint.


14

Chief Justice Roberts' majority opinion held 28 U.S.C. § 157(b)(2)(C)

unconstitutional as applied, stating that Congress may neither share nor delegate the

Article III judicial power of the United States.

"When a suit is made of 'the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,' Northern Pipeline, 458 U.S. at 90, 102 S.Ct. 2858, 73 L.Ed.2d 598 (Rehnquist, J. concurring in judgment), and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. The Constitution assigns that job—resolution of 'the mundane as well as the glamorous, matters of common law and statute as well as of constitutional law, issues of fact as well as issues of law'—to the Judiciary. Id. at 86-87, n. 39, 102 S.Ct. 2858, 73 L.Ed.2d 598 (plurality opinion).

Stern v. Marshall, 131 S.Ct. 2594, 2609, 180 L.Ed.2d 475, 494-95 (2011).

In reaching its decision, the Court discussed the 'public rights' exception to Article

III's command, and rejected its application to the facts before it, to wit, " . . . the most

prototypical exercise of judicial power: the entry of a final, binding judgment by a court

with broad substantive jurisdiction, on a common-law cause of action,12 when the action

neither derives from nor depends upon any agency regulatory scheme." Id. 131 S.Ct. at

2615, 180 L.ed.2d at 501 (emphasis in original).

In rejecting the debtor's argument that creditor Pierce Marshall had voluntarily

submitted himself to the jurisdiction of the bankruptcy court to enter a final judgment by

filing a claim, the Stern majority analyzed the Court's prior decisions in Katchen v.

Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), and Langenkamp v. Culp, 498

U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (per curiam). Katchen v. Landy was

12 The majority in Stern cites approvingly to and reaffirms its holding in Grandfinanciera, S.A., v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) that, notwithstanding the inclusion of actions to avoid fraudulent conveyances in the Bankruptcy Code proper, they most nearly resemble suits at common law, and accordingly Article III requires their adjudication by an Article III court.


15

decided under the former Bankruptcy Act. There, the Court upheld the power of a

bankruptcy referee to exercise "summary jurisdiction" and enter a final judgment with

respect to a preference claim. The creditor, who filed a proof of claim against the

bankrupt, had sought a plenary hearing before an Article III judge and a jury.

The Stern Court distinguished Katchen v. Landy, as the bankruptcy court's ruling

on petitioner Katchen's claim necessarily also found the facts establishing the preference

Katchen received. The bankruptcy court sits as a court of equity. Pepper v. Litton, 308

U.S. 295, 303-04, 60 S.Ct. 238, 244, 84 L.Ed. 281, 287-88 (1939), and the claims

allowance process is at the heart of that equity jurisdiction. When the bankruptcy court in

Katchen v. Landy resolved the creditor's disputed claim in equity, nothing remained to be

tried at law. A prior adjudication in equity of facts that either establish or negate both (i)

the filed proof of claim (which the bankruptcy court has the power to allow or disallow)

and (ii) the bankruptcy estate's cause of action against the creditor, deprives the creditor

of a jury trial by operation of collateral estoppel. "Thus the Court in Katchen v. Landy

recognized that an equitable determination can have collateral-estoppel effects in a

subsequent legal action and that this estoppel does not violate the Seventh Amendment."

Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 335, 99 S.Ct. 645, 653, 58 L.Ed.2d

552, 564-65 (1979).

So also in Langenkamp, where creditors that had filed claims sought a jury trial

before the district court on the debtor's preference action. The Court held that "the

creditor's claim and the ensuing preference action by the trustee become integral to the

restructuring of the debtor-creditor relationship through the bankruptcy court's equity

jurisdiction." Langenkamp v. Culp, 498 U.S. at 44, , 111 S.Ct. at 331, 112 L.Ed.2d at


16

348. The resolution of the claim necessarily entailed the resolution of the factual and

legal elements making up the alleged preference.

Not so in Stern, where a determination of the creditor's defamation claim would

not resolve the legal or factual issues necessary to either establish or deny the debtor's

tortious interference counterclaim.

"In ruling on Vickie's counterclaim, the Bankruptcy Court was required to and did make several factual and legal determinations that were not 'disposed of in passing on objections' to Pierce's proof of claim for defamation, which the court had denied almost a year earlier Katchen, supra, at 332, n. 9, 86 S.Ct. 467, 15 L.Ed.2d 391. There was some overlap between Vickie's counterclaim and Pierce's defamation claim that led the courts below to conclude that the counterclaim was compulsory, 600 F.3d at 1057, or at least in an 'attenuated' sense related to Pierce's claim, 264 B.R. at 631. But there was never any reason to believe that the process of adjudicating Pierce's proof of claim would necessarily resolve Vickie's counterclaim. See, id., at 631, 632 (explaining that 'the primary facts at issue on Pierce's claim were the relationship between Vickie and her attorneys and her knowledge or approval of their statements,' and 'the counterclaim raises issues of law entirely different from those raise[d] on the defamation claim')." (Emphasis added.)

Stern v. Marshall, 131 S.Ct. at 2617-2618, 180 L.Ed.2d at 503.

In an echo of Parklane Hosiery v. Shore, Stern v. Marshall holds that when a set

of facts that forms the basis for the allowance or disallowance of a claim against a

bankruptcy estate necessarily includes the facts that form the basis for granting or

denying the bankruptcy estate's counterclaim, then, and only then, does the bankruptcy

court have the power to enter final judgment on the counterclaim. By filing a claim, the

creditor does not waive rights under Article III or under the Seventh Amendment.

Neither is a common-law cause of action magically converted into an equitable right.


17

What may happen, depending on the facts necessary to make out both the creditor's claim

and any right(s) asserted by the bankruptcy estate, is an estoppel: the result of a

determination in equity (the ruling on the creditor's claim) of facts that also include those

essential to decide the legal claim. Cf. Parklane Hosiery Co., Inc., 439 U.S. 322, 99 S.Ct.

645, 58 L.Ed.2d 552 (1979) (motion for partial summary judgment in the district court,

based on collateral estoppel as a result of a prior agency proceeding, does not violate the

Seventh Amendment). By submitting a claim, the creditor necessarily participates in the

bankruptcy court's process of allowing and disallowing claims, which includes the risk of

a (conceptually prior) adjudication in equity of facts dispositive of common-law disputes.

Stern v. Marshall, 131 S.Ct. at 2616-17, 180 L.Ed.2d at 502-03.

The Supreme Court's analyses in Stern v. Marshall, Parklane Hosiery,

Langenkamp v. Culp and Katchen v. Landy find a parallel in the Second Circuit's decision

in Germain v. The Connecticut Bank, 988 F.2d 1323 (2d Cir. 1993). In the Germain case,

the Court agreed that the Chapter 7 Trustee was entitled to have the estate's lender

liability claims heard by a jury, despite the creditor/defendant's having filed a proof of

claim in the bankruptcy for money lent. The Germain panel reasoned that, because the

facts necessary to determine the Trustee's tort claim were different from those necessary

to either allow or disallow the defendant bank's prepetition contract claim, the Trustee's

claim was not subsumed by the claims allowance process at the core of the bankruptcy

process. There was no estoppel, and the Trustee therefore retained his right to have the

common-law claims heard in an Article III court before a jury.


18

E. Magee's Claim For Money Loaned And The Trustee's Common-Law Causes Of Action.

A decision by the bankruptcy court in this case to allow or disallow Magee's proof

of claim for money loaned will not find the facts essential to establish or negate the

Trustee's various common-law claims, at least not those other than the fraudulent

conveyance claims.13 Accordingly, Magee is not precluded from litigating the common-

law causes of action for breach of fiduciary duty, aiding and abetting breach of fiduciary

duty, conversion, contribution, and alter ego at law, and for those claims the Seventh

Amendment grants the right to a jury trial. Since the bankruptcy court cannot hold a jury

trial on those common-law claims without consent, and as consent has been withheld, the

reference to the bankruptcy court must be withdrawn for cause, to permit that trial before

this Court. And rather than have the case litigated piecemeal in two courts, the interests

of economy and efficiency set out in Orion Pictures counsels withdrawal of the entire

proceeding for trial before the district court.

Magee filed two (2) claims in the FKF 3 bankruptcy case: Claim 38-1 in the

amount of $609,448.46 for money loaned14; and Claim 52-1, as amended by Claim 52-2,

seeking first an unstated amount and in Claim 52-2 seeking $30 million as both a direct

and a derivative claim, for damages suffered as a result of the malfeasance and omissions

of the Debtor.15

13 Section 502(d) of the Bankruptcy Code, 11 U.S.C. § 502(d), requires the return of avoidable transfers such as fraudulent conveyances before a creditor's claim may be allowed. 14 A copy of Claim 38 is attached as Exhibit "5" to the Affidavit of Michael David Pinsky. 15 A copy of Claim 52 is attached as Exhibit "6" to the Affidavit of Michael David Pinsky.


19

The Trustee objected to Claim 52-2 by motion before the bankruptcy court, on

several grounds.16 The Trustee argued that Magee had failed to attach necessary

supporting documentation to the claim, and that he did not allege facts sufficient to state a

claim against the debtor. More importantly, the Trustee argued that in any event the

claim was derivative in its entirety of the rights of the former bankruptcy estate of FKF 3,

rights that were assigned to the FKF Trust, and could therefore only be asserted by the

Trustee, i.e., Claim 52 did not belong and could not belong to Magee. By Order Granting

Trustee's Objection to the Allowance of Claim 52 Filed By John Magee, Sr., dated July 6,

2012 (NYSB ECF Doc. 417, filed July 6, 2012), the bankruptcy court expunged Claim

52-2, i.e., disallowing it completely.17 Claim 52 no longer exists. Even if Claim 52 had

not been expunged, by the Trustee's own admission the claim belonged to the FKF Trust

and not to Magee, making Claim 52 a legal nullity.

That leaves Magee's Claim 38 in the amount of $609,448.46 for money loaned.

The allowance or disallowance of Claim 38 and the Trustee's objection to same pursuant

to 11 U.S.C. § 502(d) as set forth in Count 16 involves: (i) proof of money loaned; and

(ii) proof of the existence of any avoidable transfers. As to Magee, the avoidable

transfers pleaded in the Trustee's complaint consist of: (a) property of the estate for which

the Trustee seeks a turnover order pursuant to 11 U.S.C. § 542, set forth in Count 2; and

(b) fraudulent conveyances pursuant to 11 U.S.C. § 548(a) and (b), set forth in Counts 3

through 9.

16 A copy of the Objection of Gregory Messer, as Trustee of the FKF Trust, to the Allowance of Claim 52 Filed By John Magee Sr., dated June 1, 2012, is attached to the Affidavit of Michael David Pinsky as Exhibit "7". 17 A copy of the bankruptcy court order expunging Claim 52 is attached to the Affidavit of Michael David Pinsky as Exhibit "8".


20

The basis alleged for the turnover claim is that Magee collected two (2) loans

whose repayment belonged to the debtor, and did not turn over those funds to the debtor.

The fraudulent conveyance claims allege that the debtor transferred funds to or for

the benefit of Magee (i) with the actual intent to hinder, delay or defraud creditors; (ii)

while the debtor was insolvent, without reasonably equivalent value for those transfers;

(iii) while the debtor was operating with an unreasonably small capital; and (iv) beyond

the debtor's ability to pay. Count 9 seeks attorney's fees for any actual fraudulent

transfers.

The Trustee's remaining common-law claims require the determination of legal

and factual issues completely separate from the facts needed to determine Claim 38. As

to Count 1, the Trustee must prove the existence of a relationship of special confidence

and trust, the breach of that trust, and damages. To prove up Count 2, the Trustee must

establish that Magee collected the funds and misapplied them, i.e., neither returned them

to the debtor nor properly applied them on the debtor's behalf. Count 11, conversion,

requires proof that Magee wrongfully exercised dominion and control over property of

the debtor. To make out his case on Count 14, contribution, the Trustee must prove

Magee somehow liable for the legal and accounting malpractice of Messer's Dorfman and

Klein. As to Count 15, aiding and abetting the breach of fiduciary duty by attorney

member Burton Dorfman and accountant/financial planner member Mitchell Klein, the

Trustee must prove that Magee was a knowing and willing participant in their misdeeds.

Unless the bankruptcy court goes very far afield in adjudicating whether to allow Magee's

Claim 38 and if so, in what amount, it cannot determine these facts, and therefore they

are subject to adjudication in this Court.


21

CONCLUSION

For the reasons set forth above, the reference of the Action to the bankruptcy

court should be withdrawn and the trial of the Action held before a jury in the district

court.

WHEREFORE, John F. Magee respectfully moves this Court for an order

withdrawing the reference of the Trustee’s adversary proceeding under 28 U.S.C. §

157(d) for cause shown, and for such other and further relief as is just and proper.

Dated: Middletown, New York May 20, 2013

/s/ Michael David PinskyHayward, Parker, O’Leary & Pinsky Attorneys for John F. Magee and Commercial Construction, Inc. 225 Dolson Avenue, Suite 303 PO Box 929 Middletown, NY 10940 Tel. (845) 343-6227 Email [email protected]


11-09074-cgm Doc 220 Filed 05/20/13 Entered 05/20/13 16:22:09 … · incrimination in response to...

Documents

Transcript of 11-09074-cgm Doc 220 Filed 05/20/13 Entered 05/20/13 16:22:09 … · incrimination in response to...