Calling for an immediate withdrawal of the reference “borders on the absurd” when three district judges previously denied similar motions, Manhattan District Judge William H. Pauley, III said in allowing a lawsuit by Lehman Brothers to remain in bankruptcy court.
In 2008, Lehman Brothers Holdings Inc. and subsidiaries began the largest chapter 11 liquidation in history. Part of Lehman’s business involved the purchase and resale of residential home mortgages.
Originators of mortgages sometimes sold substandard mortgages that did not comport with warranties and representations they made about the quality of the paper. Lehman made comparable warranties to purchasers of the mortgages that it repackaged and sold. Purchasers in turn filed claims against Lehman based on their rights of indemnification. Ultimately, Lehman settled by allowing the claims for billions of dollars.
Based on indemnification agreements and alleged breaches of warranties, Lehman in turn filed suit in bankruptcy court against some 200 mortgage originators and brokers from whom it had purchased the mortgages. Three times before, district judges in New York denied motions to withdraw the reference under 28 U.S.C. § 157(d).
Judge Pauley dealt with a withdrawal motion filed by defendants who, he said, contended “that their cases require the unique attention of the court.” As described by Judge Pauley, the arguments for withdrawal of the reference were not unique.
The defendants argued that the claims against them were not “core” and that they were entitled to jury trials. Judge Pauley was not impressed.
In his August 23 opinion, Judge Pauley first laid out the settled law in the Second Circuit. See In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993). Orion calls for the court to consider three factors: (1) whether the claim is “core”; (2) whether the defendant is entitled to a jury trial; and (3) what other factors bear on withdrawal of the reference. The defendants relied mostly on the first two factors.
Lehman conceded that the claims were not “core.” However, Judge Pauley said that district courts in the Southern District of New York have routinely held that “non-core” status is not “dispositive” of a motion to withdraw the reference. The “proper course,” he said, is for the bankruptcy judge to issue proposed findings and conclusions for de novo review in district court.
Likewise, Judge Pauley said, “entitlement to a jury trial does not necessitate immediate withdrawal of the reference.” At an early stage of litigation, he said that the right to a jury trial is “speculative.”
The third Orion factor, according to Judge Pauley, “weighs heavily against withdrawal.” Specifically, he said the bankruptcy judge has already “shepherded” some 200 similar suits “from the very beginning.” Given “obvious efficiencies” in allowing the bankruptcy court to preside in early stages, Judge Pauley said that the defendants’ allusion to “unique” features of their cases “borders on the absurd.”
With regard to efficiency, one of the third Orion factors, Judge Pauley said that allowing the bankruptcy court to process the suits “‘will save the district court and the parties an immense amount of time,’” quoting one of the prior Lehman cases where the district court denied a motion for immediate withdrawal of the reference.
Finally, Judge Pauley dealt with the defendants’ request that he partially withdraw the reference by assuming final authority over discovery disputes and announcing his intent to withdraw the reference when the case is ready for trial.
Judge Pauley nixed both ideas. Presiding over discovery “would inefficiently shuffle the Adversary Proceedings between this Court and the Bankruptcy Court. Defendants’ second proposal is unnecessary because . . . the Adversary Proceeding may not reach trial.”
Judge Pauley denied the withdrawal motion without prejudice to renewal “at a later stage.”
Calling for an immediate withdrawal of the reference “borders on the absurd” when three district judges previously denied similar motions, Manhattan District Judge William H. Pauley, III said in allowing a lawsuit by Lehman Brothers to remain in bankruptcy court.
In 2008, Lehman Brothers Holdings Inc. and subsidiaries began the largest chapter 11 liquidation in history. Part of Lehman’s business involved the purchase and resale of residential home mortgages.
Originators of mortgages sometimes sold substandard mortgages that did not comport with warranties and representations they made about the quality of the paper. Lehman made comparable warranties to purchasers of the mortgages that it repackaged and sold. Purchasers in turn filed claims against Lehman based on their rights of indemnification. Ultimately, Lehman settled by allowing the claims for billions of dollars.
Based on indemnification agreements and alleged breaches of warranties, Lehman in turn filed suit in bankruptcy court against some 200 mortgage originators and brokers from whom it had purchased the mortgages. Three times before, district judges in New York denied motions to withdraw the reference under 28 U.S.C. § 157(d).
Judge Pauley dealt with a withdrawal motion filed by defendants who, he said, contended “that their cases require the unique attention of the court.” As described by Judge Pauley, the arguments for withdrawal of the reference were not unique.