Irving H. Picard, Trustee for the Liquidation of B v. Bam L.P., et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------ --------X
In re: 	:
: 	Adv. Pro. No. 08-01789 (SMB)
SECURITIES INVESTOR PROTECTION 	:
CORPORATION, 	: 	SIPA Liquidation
: 	(Substantively Consolidated)
Plaintiff-Applicant, :
:
‒ against ‒ 	:
:
BERNARD L. MADOFF INVESTMENT 	:
SECURITIES LLC, 	:
:
Defendant. 	:
--------------------------------------------------------X
In re: 	:
:
BERNARD L. MADOFF, 	:
:
Debtor. 	:
--------------------------------------------------------X
IRVING PICARD, Trustee for the Liquidation 	:
of Bernard L. Madoff Investment Securities 	:
LLC, 	:
:
Plaintiff, 	:
:
‒ against ‒ 	: 	Adv. Pro. No. 10-04390 (SMB)
:
BAM L.P., MICHAEL MANN and MERYL 	:
MANN, 	:
:
Defendants. 	:
--------------------------------------------------------X
MEMORANDUM DECISION AND ORDER
UPHOLDING COURT’S EQUITABLE JURISDICTION
A P P E A R A N C E S:
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
David J. Sheehan, Esq.
Dean D. Hunt, Esq.
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Lan Hoang, Esq.
Nicholas J. Cremona, Esq.
Seanna R. Brown, Esq.
Of Counsel
Attorneys for Plaintiff
SECURITIES INVESTOR PROTECTION
CORPORATION
1667 K St., NW, Suite 1000
Washington, D.C. 20006
Josephine Wang, Esq.
General Counsel
Kevin H. Bell, Esq.
Senior Associate General Counsel
For Dispute Resolution
Nathanael S. Kelley, Esq.
Associate General Counsel
Of Counsel
Attorneys for Securities Investor Protection
Corporation
DENTONS US LLP
1221 Avenue of the Americas
New York, New York 10016
Carole Neville, Esq.
Of Counsel
Attorneys for Defendants
STUART M. BERNSTEIN
United States Bankruptcy Judge:
The Defendants filed proofs of claim and the Trustee responded with a fraudulent
transfer action. The Defendants subsequently withdrew their claims with prejudice,
moved in the District Court to withdraw the reference and moved in this Court to stay a
previously scheduled trial of this adversary proceeding. The latter motion raises the
question of whether a bankruptcy court loses its equitable jurisdiction over a fraudulent
transfer action because the defendant-creditor withdraws his proof of claim after the
adversary proceeding was filed but before the bankruptcy court has tried the matter.
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The Court concludes that it acquired equitable jurisdiction over the Trustee’s fraudulent
transfer action when it was commenced under the time-of-filing rule, and the
Defendants’ withdrawal of their claims did not destroy it. Accordingly, the Defendants’
motion to stay the trial on that basis is denied. 1
BACKGROUND2
This adversary proceeding arises out of the Ponzi scheme perpetrated by Bernard
Madoff through Bernard L. Madoff Investment Securities LLC (“BLMIS”). The
background to Madoff’s scheme has been recounted in numerous reported opinions, see,
e.g., Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773 F.3d 411, 415 (2d Cir.
2014), cert. denied, 135 S. Ct. 2859 (2015); Picard v. JPMorgan Chase & Co. (In re
BLMIS), 721 F.3d 54, 58-59 (2d Cir. 2013), cert. denied, 134 S. Ct. 2895 (2014); SIPC v.
BLMIS (In re BLMIS), 424 B.R. 122, 125-32 (Bankr. S.D.N.Y. 2010), aff’d, 654 F.3d 229
(2d Cir. 2011) (“Net Equity Decision”), cert. denied, 567 U.S. 934 (2012), and the Court
limits the discussion to the facts necessary to explain this decision.
On December 15, 2008, the Securities Investor Protection Corporation (“SIPC”)
commenced a liquidation against BLMIS under the Securities Investor Protection Act,
15 U.S.C. § 78aaa et seq. (“SIPA”). 3 The District Court appointed Irving H. Picard, Esq.
1 	Notwithstanding this conclusion, the trial is not imminent. The Trustee has moved for summary
judgment, and even if that motion is denied, the Court will await the District Court’s disposition of the
motion to withdraw the reference.
2 	The citation “ECF Doc. #” refers to the electronic docket in this adversary proceeding. Where the
Court refers to the electronic docket in the main case (o8-01789) or another proceeding, the citation so
indicates.
3 	The SEC had commenced an action against BLMIS on December 11, 2008, and thereafter
consented to the combination of its own action with the SIPA proceeding. December 11, 2008 is deemed
the “Filing Date” of the SIPA proceeding for purposes of computing the reach back of the fraudulent
transfer claims at issue. See SIPA § 78lll(7).
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as trustee (“Trustee”), see SIPA § 78eee(b)(3), and removed the liquidation to this Court,
SIPA § 78eee(b)(4), where it is to be conducted, to the extent consistent with SIPA, in
accordance with chapters 1, 3 and 5 and subchapters I and II of chapter 7 of title 11. See
SIPA § 78fff(b).
A. 	Claims Allowance Process
SIPA § 78fff-2 sets out the general parameters of the claims procedure in a SIPA
liquidation. Following his or her appointment, the SIPA trustee must publish notice of
the proceedings and mail notice to each customer. SIPA imposes two time limits for
filing a statement of claim keyed to the notice of publication – an initial time limit of
sixty days or less and an outer time limit of six-months. A customer who files the claim
during the initial period has greater rights regarding the satisfaction of his net equity
claim than the customer who files after the initial period but before the six-month
deadline, see Camp v. Morey (In re Gov’t Sec. Corp.), 107 B.R. 1012, 1018-1019 (S.D.
Fla. 1989), but the distinction is irrelevant in this case. After receipt of the written
statement of claim, the SIPA trustee is required to promptly discharge the obligations or
net equity claims owed to the customer “insofar as such obligations are ascertainable
from the books and records of the debtor or are otherwise established to the satisfaction
of the trustee.” SIPA § 78fff-2(b). SIPA does not set out a claims objection or claims
resolution procedure.
Accordingly, the Court established a thorough procedure for resolving claims, see
Peskin v. Picard, 440 B.R. 579, 585 (S.D.N.Y. 2010), in the Order on Application for an
Entry of an Order Approving Form and Manner of Publication and Mailing of Notices,
Specifying Procedures for Filing, Determination, and Adjudication of Claims; and
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Providing Other Relief, Dec. 23, 2008 (“Claims Procedure Order”) (ECF Main Case
Doc. # 12). The Claims Procedure Order tracked the time limits under SIPA. (See
Claims Procedure Order at 7.) In the event the Trustee determined that the customer’s
statement of claim was not supported by BLMIS’ books and records, the following
procedures governed the resolution of the dispute: (i) the Trustee notified the customer
in writing of his determination to disallow the claim, in whole or in part, and his
reasons, (id. at 6); (ii) if the customer disagreed with the Trustee’s determination, he
had thirty days to file a written statement of his opposition along with supporting
documentation, failing which “the Trustee’s determination shall be deemed approved by
the Court and binding on the claimant,” (id. at 7); and (iii) upon receipt of the
customer’s opposition, the Trustee would obtain a hearing date from the Court and
notify the customer. (Id.)
B. 	The Defendants’ Claims and the Trustee’s Determinations
Per the Claims Procedure Order, Michael Mann and Meryl Mann served the
Trustee with a statement of claim, dated June 16, 2009, for BLMIS Account No. 1CM363
(the “Mann Claim”), in the amount $7,192,467.45.4 	The Mann Claim was based on the
handwritten, corrected balance shown on the Manns’ last customer statement, dated
November 30, 2008. BAM L.P. (“BAM”) served the Trustee with the BAM Claim, dated
June 16, 2009, regarding Account No. 1CM579, in the amount of $714,333.85. The
4 	The Defendants’ claims (the Mann Claim, the “BAM Claim,” and together, the “Defendants’
Claims”), the Trustee’s determinations relating to those claims (the “Mann Determination,” the “BAM
Determination,” and together, the “Determinations”) and the Defendants’ objections to the Trustee’s
Determinations (the “Mann Objection,” the “BAM Objection,” and together, the “Objections”), all
discussed in the succeeding text, are annexed as Exhibit 3 to the Declaration of Nicholas J. Cremona in
Support of Memorandum of Law in Opposition to Motion for a Stay of Trial Pursuant to Rule 5011(c)
Pending Ruling by District Court on Defendants’ Motion to Withdraw the Reference, dated Nov. 27, 2018
(“Cremona Declaration”) (ECF Doc. # 128).
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BAM Claim was also based on the handwritten, corrected balance shown on BAM’s last
customer statement, dated November 30, 2008.
The Trustee denied the Defendants’ Claims. (See Determinations.) He explained
that no securities were ever purchased for their BLMIS accounts, and the Defendants
withdrew more than they deposited into their accounts over the lives of the accounts. 5
The Manns withdrew $5.8 million more than they deposited, and BAM withdrew
$1,135,993.39 more than it deposited. Each Determination included a chart showing all
deposits into and withdrawals from the account.
The Defendants filed the same Objections to the Determinations. 6 For the most
part, the Objections raised purely legal issues. They primarily argued that the Last
Statement Method, under which net equity was determined by the balance shown in the
November 30, 2008 monthly customer statement, rather than the Trustee’s Net
Investment Method, which offset withdrawals against deposits, should control. They
further argued that the Trustee’s net equity calculation was barred by the statute of
limitations on avoidance actions and should include interest or a similar adjustment to
reflect the passage of time. In paragraph 10 of the Objections, the Defendants also
asserted that the Determinations violated the Claims Procedure Order because they
failed to state the reason for the disallowance of the claims and the relevant facts and
legal theories on which the Determination was based (citing relevant bankruptcy law),
(Mann Objection ¶ 10(a), (c)), failed to rebut the prima facie validity of the claims
5 	The Mann account was opened in 1996 and the BAM account was opened in 1999.
6 	Accordingly, the Court cites only to the Mann Objection.
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(citing Bankruptcy Code § 502(a) and F ED. R. B ANKR. P. 3001(f)) (Mann Objection ¶
10(b)), and as a factual matter, “includes an exhibit which purportedly calculates the
money deposited less subsequent withdrawals, but is completely unsubstantiated and
incorrect.” (Mann Objection ¶ 10(d)) (collectively, the “Paragraph 10 Objections”).
Finally, the Defendants reserved “the right to revise, supplement, or amend” their
Objections. (Mann Objection ¶ 24.)
C. 	This Adversary Proceeding
The Trustee filed his original complaint commencing this adversary proceeding
on November 30, 2010 (the “Complaint”) (ECF Doc. # 1) and filed an amended
complaint (the “Amended Complaint”) in the District Court while a motion to withdraw
the reference was pending. (See Amended Complaint, dated Jan. 25, 2012 (ECF Dist.
Ct. No. 11 Civ. 07667 Doc. # 9).) As noted in the Determinations, the Defendants were
“net winners” because they withdrew more than they deposited. The Trustee sought,
inter alia, to avoid and recover the excess transfers to the Defendants, i.e., the negative
net equity, made during the six years and two years (the “Two-Year Transfers”) prior to
the Filing Date under bankruptcy and state fraudulent transfer law. 7
Both the Complaint and the Amended Complaint included, as Exhibit B, the
Trustee’s calculation of all deposits into and withdrawals from the Defendants’ BLMIS
accounts. The calculations in Exhibit B were identical to the calculations evidencing the
7 	The Trustee had also asserted a claim against NTC & Co. LLP which was dismissed by stipulation
and order. (Stipulation and Order for Voluntary Dismissal Without Prejudice, dated Apr. 20, 2011 (ECF
Doc. # 12).) In addition, by stipulation and order dated August 19, 2015, the Trustee dismissed counts
seeking to avoid obligations (with prejudice), subsequent transfer claims against two other defendants
(without prejudice) and all fraudulent transfer claims (with prejudice) except for claims to avoid the Two-
Year Transfers under Bankruptcy Code § 548(a)(1)(A). (Stipulation and Order, dated Aug. 19, 2015 (ECF
Doc. # 46).)
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Defendants’ negative net equity included in the Determinations. Exhibit B showed that
the Manns and BAM had received $2.25 million and $563,000, respectively, within two
years of the Filing Date. Neither pleading included a count to disallow the Defendants’
Claims under 11 U.S.C. § 502(d) or for any other reason. Instead, they stated that “[t]he
Trustee intends to resolve the Mann Customer Claim, BAM Customer Claim, and Claims
Objections to the Trustee’s determination of such claims through a separate hearing as
contemplated by the Claims Procedures Order.” (Complaint ¶ 52; accord Amended
Complaint ¶ 55.)
D. 	Disposition of the Defendants’ Claims
Prior to the filing of the adversary proceeding, the Bankruptcy Court had rejected
the Last Statement Method, upheld the use of the Net Investment Method to calculate
net equity, and overruled certain objections, including the Defendants’ Objections,
“insofar as those objections are based upon using the Final Customer Statements rather
than the Net Investment Method to determine Net Equity.” (Order (1) Upholding
Trustee’s Determination Denying Customer Claims for Amounts Listed on Last
Customer Statement; (2) Affirming Trustee’s Determination of Net Equity; and (3)
Expunging Those Objections with Respect to the Determinations Relating to Net
Equity, dated Mar. 8, 2010 (ECF Main Case Doc. # 2020).) 8 The Court’s order was
appealed directly to the Second Circuit which affirmed in 2011, see Net Equity Decision,
and the Supreme Court denied petitions for a writ of certiorari in 2012. See Velvel v.
8 	The order is annexed as Exhibit 4 to the Cremona Declaration, and refers to the claims identified
in Exhibit A to the Trustee’s earlier motion. (See ECF Main Case Doc. # 530.) The latter included the
Mann Claim but not the BAM Claim because the Trustee’s motion and Exhibit A were filed before BAM
filed the BAM Objection. Nevertheless, the parties agree that the order also covers the BAM Claim.
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Picard, 567 U.S. 934 (2012). The Supreme Court’s action ended any further challenge to
the use of the Net Investment Method. The Net Equity Decision also implicitly rejected
the contention that the Net Investment Method violated any statute of limitations
because the Net Investment Method required the Trustee to compute withdrawals and
deposits over the entire life of the account.
After this adversary proceeding was commenced, the Bankruptcy Court overruled
the objection based on the Trustee’s failure to make any adjustments to account for
time-based damages such as interest. SIPC v. BLMIS (In re BLMIS), 496 B.R. 744, 761
(Bankr. S.D.N.Y. 2013). The Court’s order was appealed directly to the Second Circuit
which affirmed. SIPC v. 2427 Parent Corp. (In re BLMIS), 779 F.3d 74 (2015). The
Supreme Court denied a petition for a writ of certiorari later that year. See Peshkin v.
Picard, 136 S. Ct. 218 (2015).
With the latter denial, only the Paragraph 10 Objections, including the
Defendants’ factual objections to the computation of the deposits and withdrawals listed
in the Determinations, remained unresolved. These were the same computations listed
in Exhibit B to the Complaint and the Amended Complaint. To compute net equity, the
Trustee is required to subtract withdrawals from deposits over the life of each BLMIS
account. See Net Equity Decision, 654 F.3d at 238-39 (“[T]he Net Investment Method
allows the Trustee to make payments based on withdrawals and deposits, which can be
confirmed by the debtor’s books and records, and results in a distribution of customer
property that is proper under SIPA.”).
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To compute the amount of fictitious profits, the Trustee must engage in the same
exercise. SIPC v. BLMIS (In re BLMIS), 499 B.R. 416, 430 (S.D.N.Y. 2013) (“[T]he
Court finds that a straight netting method—subtracting total withdrawals from total
deposits of principal—is the appropriate way to calculate not only net equity but also a
defendant’s fraudulent-transfer liability.”), cert. for interlocutory appeal denied, 987 F.
Supp. 2d 309 (S.D.N.Y. 2013); Picard v. Greiff (In re BLMIS), 476 B.R. 715, 729
(S.D.N.Y. 2012) (Under the first step in computing potential clawback liability,
“amounts transferred by Madoff Securities to a given defendant at any time are netted
against the amounts invested by that defendant in Madoff Securities at any time.”), aff’d
sub nom. on other grounds, Picard v. Ida Fishman Revocable Trust (In re BLMIS), 773
F.3d 411 (2d Cir. 2014), cert. denied, 135 S. Ct. 2859 (2015); see Transcript of 9/26/18
Hr’g at 17:19-22 (concession by Defendants’ counsel) (ECF Main Case Doc. # 18045);
Transcript of 11/28/18 Hr’g (“Tr. 11/28/18”) at 13:3-7 (same) (ECF Doc. # 130).
However, because the Trustee can only recover fictitious profits transferred within two
years of the Filing Date, see 11 U.S.C. § 548(a)(1), the aggregate amount of the Two-Year
Transfers caps the Defendants’ clawback liability. Picard v. Greiff, 476 B.R. at 729
(After netting deposits and withdrawals, “if the amount transferred to the defendant
exceeds the amount invested, the Trustee may recover these net profits from that
defendant to the extent that such monies were transferred to that defendant in the two
years prior to Madoff Securities’ filing for bankruptcy. Any net profits in excess of the
amount transferred during the two-year period are protected from recovery by the
Bankruptcy Code’s statute of limitations. See 11 U.S.C. § 548(a)(1).”). In other words, a
good faith defendant’s clawback liability is the lesser of the fictitious profits received
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over the life of his BLMIS account (i.e., all of the negative net equity) and the aggregate
amount of transfers from the account received within two years of the Filing Date. 9
E. 	The Withdrawal of the Defendants’ Claims
The Court conducted a pre-trial conference on September 26, 2018 and
scheduled a trial for December 3, 2018. (Order Setting Trial, dated Sept. 28, 2018 (ECF
Doc. # 108).) In response, the Defendants moved one month later to withdraw the
reference, and on or about November 20, 2018, moved to stay the December 3 trial. The
Court scheduled a hearing for November 28, 2018. By then, the parties had submitted a
proposed joint pre-trial order in which they stipulated to the deposits and withdrawals
and the Two-Year Transfers in the amounts of $2.25 million from the Mann account and
$563,000 from the BAM account. Putting aside the objection relating to the legal
sufficiency of the Determinations (and the Defendants’ reservation of their rights, if any,
to amend or supplement their Objections), it seemed that the Defendants’ Objections
had been resolved through judicial determinations or by stipulation.
The effect of the pendency of the Defendants’ Claims on this Court’s ability to try
the adversary proceeding was much debated. Since their Objections now appeared to
have been resolved and there was no point to forcing the Defendants to litigate their
claims when they no longer asserted a right to payment, the Court offered the
Defendants the opportunity at the November 28 hearing to make an oral motion to
withdraw the Defendants’ Claims with prejudice. The Defendants accepted the
9 	A “good faith” defendant is one who did not know or willfully blinded himself to the fact that
BLMIS was engaged in a Ponzi scheme and the transactions listed on his monthly customer statements
were entirely fictitious. The Defendants are “good faith” defendants.
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invitation, (Tr. 11/28/18 at 16:6-14), and the Court granted the motion. (Order
Withdrawing Claims and Objections with Prejudice and Finally Determining Net
Equity, dated Dec. 20, 2018 (ECF Doc. # 138).) However, the order made clear that it
did not determine “this Court’s jurisdiction over the adversary proceeding or any other
issues in that case.” In addition, the Trustee announced his intention to move for
summary judgment (which he has done), and the Court stated that it would deal with
the question of its equitable jurisdiction, which the parties had already briefed, 10 either
before or in the context of the summary judgment motion. (Transcript of 12/19/18 Hr’g
at 51:3-7 (ECF Doc. # 147).) This memorandum reflects the Court’s disposition of that
issue.
DISCUSSION
A. 	The Basis of the Court’s Equitable Jurisdiction
Bankruptcy Code § 502(d) mandates the disallowance of any claim filed by a
creditor that received a fraudulent transfer unless and until the creditor restores the
transferred property or its value to the estate. 11 Section 502(d) establishes the link
10 	See Trustee’s Memorandum of Law on the Legal Effect of the Ruling Withdrawing Claims and
Objections with Prejudice and in Support of Motion to Strike the Mann Defendants’ Jury Demand, dated
Dec. 5. 2018 (ECF Doc. # 131); Memorandum of Law of the Securities Investor Protection Corporation
on the Legal Effect of the Order Withdrawing Claims and Objections with Prejudice and in Support of
Motion to Strike the Mann Defendants’ Jury Demand, dated Dec. 5, 2018 (ECF Doc. # 132); Defendants’
Response to Trustee and the Securities Investor Protection Corporation’s Memoranda on the Legal
Effect of the Order Withdrawing Claims and Objections with Prejudice and in Support of the Motion to
Strike the Defendants’ Jury Demand, dated Dec. 12, 2018 (“Defendants Memo”) (ECF Doc. # 137).
11 	Section 502(d) states:
Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim
of any entity from which property is recoverable under section 542, 543, 550, or 553 of
this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544,
545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the
amount, or turned over any such property, for which such entity or transferee is liable
under section 522(i), 542, 543, 550, or 553 of this title.
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between this adversary proceeding to avoid and recover fraudulent transfers and the
claims allowance process triggered by the Defendants’ Claims. An objection under
section 502(d) “is, like other objections, part and parcel of the allowance process and is
subject to adjudication by a bankruptcy court.” Katchen v. Landy, 382 U.S. 323, 330
(1966) (discussing section 502(d)’s predecessor, section 57g of the former Bankruptcy
Act, 11 U.S.C. § 93(g) (repealed)). Thus, even if a defendant would be entitled to a jury
trial on the avoidance claim had he not filed a claim against the bankruptcy estate,
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 36 (1989), the filing of a claim brings
the creditor within the bankruptcy court’s equitable jurisdiction where the avoidance
action will be determined by the bankruptcy court without a jury. Langenkamp v. Culp,
498 U.S. 42, 45 (1990); Katchen v. Landy, 382 U.S. at 336-37.
Not every claim filing triggers the bankruptcy court’s equitable jurisdiction and
defeats the defendant-creditor’s right to a jury trial. Bankr. Servs., Inc. v. Ernst &
Young (In re CBI Holding Co., Inc.), 529 F.3d 432, 466 (2d Cir. 2008) (“[F]iling a proof
of claim is a necessary but not sufficient condition to forfeiting a creditor’s right to a jury
trial.”), cert. denied, 556 U.S. 1183 (2009); Germain v. Conn. Nat’l Bank, 988 F.2d
1323, 1327 (2d Cir. 1993) (“We agree that the filing of a proof of claim is a necessary
condition – the claims – allowance process can hardly begin before a claim is made –
however, it is not a sufficient condition.”) (emphasis in original). “Rather, a creditor
loses its jury trial right only with respect to claims whose resolution affects the
For purposes of section 502(d), there is no distinction between preferences under Bankruptcy
Code § 547 and fraudulent transfers under Bankruptcy Code §§ 544 and 548. In either case, the claims are
disallowed if the transfer is avoided.
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allowance or disallowance of the creditor’s proof of claim or is otherwise so integral to
restructuring the debtor-creditor relationship.” CBI Holding, 529 F.3d at 466; accord
Stern v. Marshall, 564 U.S. 462, 496-99 (2011).
Principles of collateral estoppel and res judicata dictate whether a proceeding
affects the claims allowance process or the restructuring of the debtor-creditor
relationship. Katchen v. Landy, 382 U.S. at 334. If the bankruptcy court must
determine the same issues or claims in connection with the adversary proceeding and
the allowance of the proof of claim, a determination of the issue or claim in one
proceeding will preclude the relitigation of the same issue or claim in the other
proceeding. Avoidance claims always implicate the claims allowance process because
the trustee must avoid the transfer to recover against the defendant-creditor and
disallow the defendant-creditor’s claim under Bankruptcy Code § 502(d).
The filing of a statement of claim under SIPA is the “functional equivalent” of
filing a claim in a bankruptcy case. SIPC v. BLMIS (In re BLMIS), 513 B.R. 437, 443
(S.D.N.Y. 2014). In the absence of a conflict between SIPA and Bankruptcy Code §
502(d), “section 502(d) applies to customer claims brought under SIPA section 78fff-2,”
id., and the filing of the statement of claim subjects the customer to the bankruptcy
court’s equitable jurisdiction to the same extent as in an ordinary bankruptcy case. 12
Picard v. Saren-Lawrence (In re BLMIS), No. 17 Civ. 5157 (GBD), 2018 WL 2383141, at
*3-5 (S.D.N.Y. May 15, 2018), reconsideration denied, 2018 WL 4659476 (S.D.N.Y.
Sept. 11, 2018); Zaremba v. Pheasant (In re Cont’l Capital Sec.), No. 3:06 CV 02394
12 	The Defendants’ argument that a customer claim under SIPA is not the “functional equivalent” of
a proof of claim in a bankruptcy case, (Defendants Memo ¶¶ 35-36), ignores the contrary case law.
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(JGC), 2007 WL 5964307, at *2 (N.D. Ohio Sept. 19, 2007); Keller v. Blinder (In re
Blinder Robinson & Co., Inc.), 135 B.R. 892, 895-97 (D. Colo. 1991). Although the
Defendants contest this conclusion for reasons discussed later, the determination in
favor of the Trustee on his fraudulent transfer claims would mandate the disallowance
of the Defendants’ Claims.
B. 	The Effect of Disallowance or Withdrawal of the Claim
The principal question is whether the Defendants’ withdrawal of their claims on
the eve of trial strips the Court of its equitable jurisdiction. The majority of cases that
have considered the issue have concluded that it does not. E.g, Seven Ctys. Servs., Inc.
v. NextGen Healthcare Info. Sys., Inc., Civil Action No. 3:14CV330-S (CRS), 2014 WL
3941789, at *2 (W.D. Ky. Aug. 12, 2014) (a creditor cannot “un-ring the bell” by
withdrawing its claim “after ‘recognizing the [unforeseen] alleged implications of the
filing ...’”) (internal citation omitted); Wagner v. Appelman (In re Vaughan Co.), No.
12-CV-0197 WJ/SMV, 2014 WL 12789686, at *6 (D.N.M. July 22, 2014) (“[E]ven if a
proof of claim is withdrawn, the right to a jury trial is not thereby restored. Once a proof
of claim is filed, the right to a jury trial is extinguished as to any issue that bears on the
claims-allowance process.”) (citing Langenkamp, 498 U.S. at 44–45); Siegel v. Cal. Self-
Insurers’ Sec. Fund (In re Circuit City Stores, Inc.), No. 08-35653-KRH, 2016 WL
1714515, at *7 (Bankr. E.D. Va. Apr. 26, 2016) (“The fact that the Fund later withdrew its
proofs of claim is of no moment. The general rule is that ‘by filing a claim against a
bankruptcy estate the creditor triggers the process of ‘allowance and disallowance of
claims,’ thereby subjecting himself to the bankruptcy court’s equitable power.’ It follows
that a creditor cannot seemingly un-pull the trigger of this Court’s equitable power by
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withdrawing its proof of claim.”) (quoting Langenkamp, 498 U.S. at 44); Kriegman v.
Phillips (In re LLS AMERICA, LLC), No. 09-06194-PCW11, 2013 WL 12122309, at *2
n.2 (Bankr. E.D. Wash. May 2, 2013) (“[W]ithdrawal [of a proof of claim] has no effect
upon jurisdiction.”); MCI WorldCom Commc’ns, Inc. v. Commc’ns Network Int’l (In re
WorldCom, Inc.), 378 B.R. 745, 754 (Bankr. S.D.N.Y. 2007) (“[I]t is immaterial whether
the proof of claim has been disallowed prior to the Court’s determination of the jury trial
demand. . . . [T]he filing of the proof of claim invokes the claims-allowance process and
the creditor subjects itself to the equitable jurisdiction of the Court thereby waiving its
right to a jury trial as to any issue that bears directly on the claims-allowance process.”);
Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 349 B.R. 108, 114 n.2 (Bankr.
S.D.N.Y. 2006) (“The disposition of a claim, alone, does not nullify the consequences of
a creditor’s invocation of jurisdiction premised upon such claim.”); EXDS, Inc. v. RK
Elec., Inc. (In re EXDS, Inc.), 301 B.R. 436, 440 (Bankr. D. Del. 2003) (“[Claimant] lost
its right to a jury trial because it elected to participate in the equity court proceeding.
Given the unequivocal language of Langenkamp and Travellers as to the effect of filing
a proof of claim, I do not believe that a creditor can, for strategic reasons, reverse the
result it triggered by filing a proof of claim by later withdrawing the claim.”); Acad., Inc.
v. James, Hoyer, Newcomer and Smiljanich, P.A. (In re Acad., Inc.), 289 B.R. 230, 234
(Bankr. M.D. Fla. 2003) (“The defendants voluntarily came to this court to assert their
claims against the plaintiff. In so doing, they consented to the jurisdiction of the court
for the purpose of their claims against the plaintiff and the plaintiff’s claims against
them. The fact that they no longer wish to assert claims against the plaintiff should not
impact in any way the court’s jurisdiction over them for the purpose of the plaintiff’s
claims against them.”); see also Moore v. Mobley (In re Sea Island Cotton Trading,
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Inc.), No. 00-06033A (JSD), 2000 WL 33952877, *3 (Bankr. S.D. Ga. July 25, 2000)
(“A consequence of filing a proof of claim is waiving the right to a jury trial. Defendants’
assignment of the claims does not reverse their submission to this court’s jurisdiction.”).
The Defendants cite several decisions for the contrary proposition, (Defendants
Memo ¶ 27), but all save one are distinguishable or incorrectly decided. Both Germain
v. Conn. Nat’l Bank and Picard v. Katz, 825 F. Supp. 2d 484 (S.D.N.Y. 2011) (“Katz”)
dealt with the defendant-creditor’s opposition to the trustee’s request for a jury trial. In
Germain, the defendant had filed a proof of claim and the trustee thereafter sued the
defendant alleging it had used its power as the debtor’s primary lender to exercise
control over the debtor to its detriment. 988 F.2d at 1325-26. The Second Circuit noted
the limitation on the jury trial waiver; under Katchen, Granfinanciera, and
Langenkamp, “for a waiver to occur, the dispute must be part of the claims-allowance
process or affect the hierarchical reordering of creditors’ claims. Even there the right to
a jury trial is lost not so much because it is waived, but because the legal dispute has
been transformed into an equitable issue.” Germain, 988 F.2d at 1329-30. However,
the Court would “not presume that the same creditor or debtor has knowingly and
willingly surrendered its constitutional right to a jury trial for the resolution of disputes
that are only incidentally related to the bankruptcy process.” Id. at 1330 (emphasis
added). Unlike the claims asserted in the litigation against the creditor in Germain, the
fraudulent transfer claims in this case are directly related to the claims allowance
process through Bankruptcy Code § 502(d).
Katz involved a similar issue except that the Trustee had brought a fraudulent
transfer action against the defendants. The District Court concluded that the fraudulent
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transfer claims were legal in nature, and the Trustee had a right to a jury trial. Katz, 825
F. Supp. 2d at 485-86. Noting that a waiver occurs when the dispute is part of the
claims allowance process or affects the reordering of creditor claims, the District Court
ruled that it had withdrawn the reference “substantially severing adjudication of the
Trustee’s fraudulent transfer actions from both ‘the claims-allowance process’ and ‘the
hierarchical reordering of creditors’ claims.’” Id. at 486-87. As a result, Congress’
regulatory scheme for the adjudication of claims embodied in SIPA “simply cannot take
priority over the Trustee’s Seventh Amendment right to a jury trial.” Id. at 487. Here,
the District Court has not withdrawn the reference or “severed” the connection with the
claims allowance process. 13
In Riederer v. Kutak Rock, LLP (In re Brooke Corp.), Adv. No. 10–06246 (DLS),
2011 WL 4971503 (Bankr. D. Kan. Sept. 14, 2011) (report and recommendation),
adopted, No. 11–2517–JAR, 2011 WL 4972076 (D. Kan. Oct. 19, 2011), the trustee sued
13 	I do not suggest that the withdrawal of the reference or the other grounds for the Katz Court’s
conclusions should make a difference. In U.S. Bank Nat’l Ass’n v. Verizon Commc’ns, Inc., No. 3:10–CV–
1842–G (AJF), 2012 WL 987539 (N.D. Tex. Mar. 21, 2012), aff’d, 761 F.3d 409 (5th Cir. 2014), cert.
denied, 135 S. Ct. 1430 (2015), the Court questioned the soundness of Katz’s reasoning on three bases.
First, Katz failed to recognize Germain’s statement that a preference action would implicate the claims
allowance process. Second, Katz failed “to recognize that Section 502(d) seems to make preference and
fraudulent conveyance actions necessarily integral to this process.” Third, Katz cited no authority to
support the proposition that the withdrawal of the reference “substantially severed” the adjudication of
the fraudulent transfer action from the claims allowance process, and motions to withdraw the reference
have found that Langenkamp applies. Id. at *5; accord In re Vaughn Co., 2014 WL 12789686, at *3 (“The
[Katz] court cites no authority for the proposition that withdrawal of the reference under 28 U.S.C. §
157(b) severs proceedings from the claims-allowance process. Nor does the [Katz] court explain why
Langenkamp does not apply. Therefore, this Court declines to follow [Katz].”) (footnote omitted); Kapila
v. Bank of Am., N.A. (In re Pearlman), 493 B.R. 878 (Bankr. M.D. Fla. 2013) (disagreeing with Katz’s
reasoning because “[t]he district courts serve as the original courts of equity for all bankruptcy related
proceedings. Trying a fraudulent conveyance claim in the district court, which has all the equitable
powers assigned to a bankruptcy court, no more disrupts the equitable distribution process or severs legal
claims from equity than if the district court chose to resolve the bankruptcy matter in its entirety, which it
is entitled to do.”) (footnote omitted). In other words, even if the District Court withdraws the reference,
the disposition of the fraudulent transfer action will still affect the claims allowance process through
Bankruptcy Code § 502(d).
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the defendants for allowing the debtor to pay unlawful redemptions and dividends and
for breach of fiduciary duty. Addressing a motion to withdraw the reference, the
Bankruptcy Court concluded that the filing of proofs of claim did not waive the
defendants’ jury trial rights because the issues in the adversary proceeding did not
directly involve the claims allowance process, and importantly, “[t]he Trustee has made
no argument that resolution of the Adversary Case will directly implicate the claims
resolution process.” Id. at *4. In contrast, the Trustee’s fraudulent transfer claims
implicated the claims allowance process because avoidance of the Two-Year Transfers
would have mandated the disallowance of the Defendants’ Claims under Bankruptcy
Code § 502(d).
In Mirant Corp. v. S. Co., 337 B.R. 107 (N.D. Tex. 2006), the debtor and the
creditors committee sued the defendants asserting, inter alia, common law and
fraudulent transfer claims. The defendants moved to withdraw the reference and
transfer the case based on their jury demand. The District Court concluded that the
defendants were entitled to a jury trial on the fraudulent transfer claims because the
right to a jury trial is presumed, “[t]here is no suggestion in the record that Southern
has knowingly, voluntarily, and intelligently waived its right to trial by jury,” and the
fraudulent transfer claims did not implicate the claims allowance process because only
preference claims implicated the claims allowance process. Id. at 121 (citing
Langenkamp and Katchen).
The decision was subsequently criticized in another decision by the same court
(but a different judge) in U.S. Bank Nat’l Ass’n v. Verizon Commc’ns, Inc., No. 3:10–
CV–1842–G (AJF), 2012 WL 987539 (N.D. Tex. Mar. 21, 2012), aff’d, 761 F.3d 409 (5th
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Cir. 2014), cert. denied, 135 S. Ct. 1430 (2015). There, the District Court concluded that
Mirant’s waiver analysis was incorrect; the filing of the proof of claim transformed the
legal dispute into an equitable dispute regardless of what the creditor intended.
Moreover, there is no basis to distinguish between preference actions and fraudulent
transfer actions. Id. at *4; William M. Condrey, P.C. v. Endeavour Highrise, L.P. (In re
Endeavour Highrise L.P.), 425 B.R. 402, 408 n. 3 (Bankr. S.D. Tex. 2010) (“This Court
can see no way to harmonize its own interpretation of Katchen, Granfinanciera, and
Langenkamp with the District Court’s interpretation, in Mirant, of these three cases.”).
The one case cited by the Defendants that does support their position is Messer v.
Magee (In re FKF 3, LLC), Case No. 13-CV-3601 (KMK), 2016 WL 4540842 (S.D.N.Y.
Aug. 30, 2016). There, the principals of the debtor operated a fraudulent scheme
inducing investors to lend money to the debtor based on the misrepresentation that the
debtor would make secured loans at higher interest rates. In fact, the principals
converted the funds for their own benefit. Id. at *2. Following the commencement of an
involuntary case and the entry of an order for relief, one of the principals (Magee) filed
two claims: a claim for $609,448.46 based on a loan evidenced by a promissory note
and a claim in the sum of $30 million based on breaches of fiduciary duty and
mismanagement. Id. at *1. The $30 million claim was eventually expunged, but before
that had happened, the trustee commenced an adversary proceeding against Magee and
many others on a variety of common law and fraudulent transfer theories and sought
disallowance of their claims under 11 U.S.C. § 502(d). Id. at *2-3.
Addressing a motion to withdraw the reference, the District Court concluded that
the Bankruptcy Court lacked adjudicative authority over the breach of fiduciary duty
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claims. Even if Magee’s filing of the breach of fiduciary duty claim might have
authorized the Bankruptcy Court to decide the Trustee’s common law breach of
fiduciary duty claims as part of the claims allowance process, that claim had been
expunged, the expungement did not resolve the trustee’s counterclaims, and there was
no longer any possibility that resolving Magee’s claim would resolve the trustee’s state
law counterclaims. Id. at *8. 14 “In other words, timing matters.” Id. The District Court
also rejected reliance on contrary authority decided before Stern v. Marshall. Id. at *8
n. 3 (“Stern suggests that the relevance of filing a proof of claim to the Article III
analysis is limited by its practical implications for the claims resolution process. In
particular, the justification for the ‘necessarily resolved’ rule is practical: where a
Trustee’s counterclaims are resolved by the bankruptcy court in the process of
adjudicating a creditor’s proof of claim, the creditor has ‘no basis’ for demanding a
second adjudication of those claims in an Article III court.”) (citing Stern, 564 U.S. at
496).
In reaching its conclusion regarding “timing,” the District Court cited a decision
of this Court (also cited by the Defendants) which reached the same conclusion. See
SIPC v. BLMIS, 531 B.R. 439, 455 (Bankr. S.D.N.Y. 2015) (“The Court’s authority to
enter a final judgment depends, therefore, on whether a particular defendant filed a
claim that is still subject to allowance or disallowance through the claims allowance
process [but] no § 502(d) disallowance claim would lie against a defendant who filed a
14 	The District Court reached the opposite conclusion with respect to the Trustee’s fraudulent
transfer and turnover claims because Magee’s remaining claim based on the promissory note remained
unresolved and section 502(d) mandated its disallowance if the trustee prevailed on those counterclaims.
FKF 3, LLC, 2016 WL 4540842, at *11.
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claim that has been finally disallowed.”); cf. Picard v. Estate of Igoin (In re BLMIS ),
525 B.R. 871, 887–88 (Bankr. S.D.N.Y. 2015) (Trustee could not base personal
jurisdiction on the filing of a SIPA claim that had been finally disallowed because the
adversary proceeding did not implicate the claims allowance process). In light of the
fuller briefing on this issue submitted by the parties, the Court is persuaded to revisit its
reasoning regarding the timing issue and reach a different conclusion for the reasons
discussed immediately below. See SIPC v. BLMIS (In re BLMIS), 513 B.R. at 442
(revisiting and reversing the earlier determination in Picard v. Katz, 462 B.R. 447, 456
(S.D.N.Y. 2011) that Bankruptcy Code § 502(d) does not apply in SIPA).
C. 	Jurisdiction and the Time-of-Filing Rule
While the Court agrees that timing matters, it is the time of filing rather than the
time of trial that determines the existence of the bankruptcy court’s equitable
jurisdiction. “It has long been the case that ‘the jurisdiction of the court depends upon
the state of things at the time of the action brought,’” Grupo Dataflux v. Atlas Glob.
Grp., L.P., 541 U.S. 567, 570 (2004) (quoting Mollan v. Torrance, 9 Wheat. 537, 539
(1824)), and “[e]vents occurring subsequent to the institution of suit . . . do not oust
jurisdiction.” St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289-90
(1938); accord Wolde-Meskel v. Vocational Instruction Project Cmty. Servs., Inc., 166
F.3d 59, 62 (2d Cir. 1999); Chase Manhattan Bank, N.A. v. Am. Nat’l Bank & Tr. Co., 93
F.3d 1064, 1071 (2d Cir. 1996). The time-of-filing rule is most frequently invoked in
connection with diversity jurisdiction. E.g., Grupo Dataflux, 541 U.S. at 570-71 (“This
time-of-filing rule is hornbook law (quite literally) taught to first-year law students in
any basic course on federal civil procedure. It measures all challenges to subject-matter
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jurisdiction premised upon diversity of citizenship against the state of facts that existed
at the time of filing.”) (footnote omitted); Freeport–McMoRan, Inc. v. K N Energy, Inc.,
498 U.S. 426, 428 (1991) (per curiam) (stating “the well-established rule that diversity
of citizenship is assessed at the time the action is filed [and] if jurisdiction exists at the
time an action is commenced, such jurisdiction may not be divested by subsequent
events”); see generally 13E CHARLES ALAN W RIGHT , ET AL., F EDERAL PRACTICE &
PROCEDURE § 3608 (3d. ed. Oct. 2018 Update) (“It has long been hornbook law, applied
by courts at all levels of the federal judiciary throughout the nation, that whether federal
diversity of citizenship jurisdiction exists is determined by examining the citizenship of
the parties at the time the action is commenced by filing the complaint with the court. . .
.”). However, the time-of-filing rule is not limited to diversity jurisdiction and applies
generally in determining the existence of federal jurisdiction. CIT, Inc. v. 170 Willow St.
Assocs., No. 93 Civ. 1201 CSH, 1997 WL 528163, at *7 (S.D.N.Y. Aug. 26, 1997) (“[W]hile
this rule may trace its origins to the diversity context, courts have applied it in resolving
other jurisdictional disputes.”) (collecting cases); see, e.g., Dole Food Co. v. Patrickson,
538 U.S. 468, 478 (2003) (plain text of 28 U.S.C. § 1441(d), which authorizes removal of
state court action brought against a foreign state as defined in section 1603(a), “requires
that instrumentality status be determined at the time suit is filed.”); Keene Corp. v.
United States, 508 U.S. 200, 208 (1993) (in determining whether Court of Federal
Claims jurisdiction is barred over a claim “for or in respect to which” the plaintiff “has [a
suit or process] pending” in any other court, 28 U.S.C. § 1500, the “general rule” that
“subject-matter jurisdiction turns on the facts upon filing” applies); FDIC v. Four Star
Holding Co., 178 F.3d 97, 100 (2d Cir. 1999) (FDIC’s transfer of subject property to a
private third party did not divest district court of subject matter jurisdiction under
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statute granting federal courts jurisdiction over suits to which FDIC is a party) (quoting
Freeport–McMoRan, 498 U.S. at 428)).
Importantly, the time-of-filing rule also governs the bankruptcy court’s subject
matter jurisdiction. In determining whether the outcome in a proceeding will have a
“conceivable effect” on the estate for the purpose of “related to” jurisdiction under 28
U.S.C. § 1334(b), “[c]onceivability is determined at the time the lawsuit is filed.” Nuveen
Mun. Tr. v. WithumSmith Brown, P.C., 692 F.3d 283, 294 (3d Cir. 2012) (citing Grupo
Dataflux and Dole Food); accord In re WorldCom, Inc. Sec. Litig., 294 B.R. 553, 556
(S.D.N.Y. 2003) (The “conceivable effect” test “does not require federal district courts
constantly to revisit jurisdictional findings to determine whether the effect of the
litigation on the bankruptcy estate remains ‘conceivable.’ Instead, federal jurisdiction
arising under Section 1334 is determined, like federal jurisdiction generally, on the basis
[of] the facts at the time of removal.”), aff’d, 368 F.3d 86 (2d Cir. 2004), cert. denied,
543 U.S. 1080 (2005); see also Fried v. Lehman Bros. Real Estate Assocs. III, L.P., 496
B.R. 706, 710 (S.D.N.Y. 2013) (quoting WorldCom). Consequently, the dismissal of the
bankruptcy case does not automatically strip the bankruptcy court of jurisdiction over
pending litigation. Jamaica Shipping Co. Ltd. v. Orient Shipping Rotterdam, B.V. (In
re Millenium Seacarriers, Inc.), 458 F.3d 92, 96 (2d Cir. 2006); Porges v. Gruntal &
Co., Inc. (In re Porges), 44 F.3d 159, 162 (2d Cir. 1995); Certain Underwriters at
Lloyd’s, London v. ABB Lummus Glob., Inc., 337 B.R. 22, 25 (S.D.N.Y. 2005).
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This case concerns the Court’s equitable rather than its subject matter
jurisdiction, 15 but the same time-of-filing rule should apply. In re EXDS is directly on
point. There, the creditor (RK) filed a proof of claim, and the debtor subsequently
commenced an adversary proceeding against RK to avoid and recover a preference. RK
answered the complaint and demanded a jury trial. RK then moved for leave to
withdraw its proof of claim under Federal Bankruptcy Rule 3006 16 in order to reinstate
its right to a jury trial, and the debtor moved to strike the jury demand. EXDS, 301 B.R.
at 437.
The bankruptcy court concluded that while RK sought to withdraw the proof of
claim to reinstate its right to a jury trial, the withdrawal would not divest the bankruptcy
court of its equitable jurisdiction. Id. at 438. In reaching its conclusion, the bankruptcy
court focused on Langenkamp’s reliance on the sequence of events. 17 If the creditor’s
15 	The Court has subject matter jurisdiction over this adversary proceeding under SIPA §
78eee(b)(4), 28 U.S.C. §§ 1334(b), 157(a) & (b) and Order No. M 10-450 (S.D.N.Y. July 10, 1984), as
amended by Amended Standing Order of Reference No. M 10-468, 12 Misc. 00032 (S.D.N.Y. Jan. 31,
2012).
16 	Rule 3006 provides in pertinent part:
A creditor may withdraw a claim as of right by filing a notice of withdrawal, except as
provided in this rule. If after a creditor has filed a proof of claim an objection is filed
thereto or a complaint is filed against that creditor in an adversary proceeding, . . . the
creditor may not withdraw the claim except on order of the court. . . . The order of the
court shall contain such terms and conditions as the court deems proper. . . .
17 	The Bankruptcy Court noted that in Travellers Int’l v. Robinson, 982 F.2d 96 (3d Cir. 1992), the
Court upheld the bankruptcy court’s equitable jurisdiction even though the adversary proceeding was
commenced before the proof of claim was filed. EXDS, 301 B.R. at 439. Some courts have expressly
concluded that the sequence is irrelevant, and the adversary proceeding is part of the claims allowance
process and subject to the bankruptcy court’s equitable jurisdiction whether it is filed before or after the
creditor-defendant files the proof of claim triggering the claims allowance process. SNA Nut Co. v.
Häagen-Dazs Co., 302 F.3d 725, 730 (7th Cir. 2002) (quoting In re Peachtree Lane Assocs., Ltd., 150
F.3d 788, 798 (7th Cir. 1998)); WorldCom, 378 B.R. at 754. Other cases have concluded, consistent with
the time-of-filing rule, that “the successful withdrawal of a creditor’s claim prior to the initiation of an
adversarial proceeding by the trustee renders the withdrawn claim a legal nullity for purposes of
submission to the equitable jurisdiction of the bankruptcy court.” Smith v. Dowden, 47 F.3d 940, 944
(8th Cir. 1995); accord In re 20/20 Sport, Inc., 200 B.R. 972, 979 (Bankr. S.D.N.Y. 1996); cf. Lehman
Bros. Special Fin. Inc v. Bank of Am. Nat’l Ass’n (In re Lehman Bros. Holdings Inc.), 544 B.R. 16, 34-36
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claim is “met” by a preference action, the claim and the “ensuing” avoidance action
“become integral to the restructuring of the debtor-creditor relationship through the
bankruptcy court’s equity jurisdiction.” EXDS, 301 B.R. at 439 (emphasis in original)
(quoting Langenkamp, 498 U.S. at 44-45 (in turn citing Granfinanciera, 492 U.S. at
57–58)).
At the time of filing of the adversary proceeding, RK was subject to the
Bankruptcy Court’s jurisdiction, there was no right to a jury trial, and RK could not
reverse the result it triggered by later withdrawing its claim. Id. at 440. The Bankruptcy
Court found support for its conclusion in the time-of-filing rule:
In the matter before me, as in the Langenkamp case, the proof of claim
was filed before the avoidance action was commenced. That fact pattern
suggests a result similar to that involving federal jurisdiction based on
diversity. Federal diversity jurisdiction depends on the citizenship of the
parties at the time suit is filed. . . . In the matter before me, when the
avoidance action complaint was filed, RK had already subjected itself to
the jurisdiction of this bankruptcy court.
Id. at 440-41 (citations omitted).
There are several reasons supporting the conclusion that the time-of-filing rule
governs the determination of a bankruptcy court’s equitable jurisdiction. First, a
concern animating the time-of-filing rule ─ improper manipulation of federal
(Bankr. S.D.N.Y. 2015) (claim withdrawn before adversary proceeding commenced cannot serve as basis
for personal jurisdiction); Cruisephone, Inc. v. Cruise Ships Catering & Servs. (In re Cruisephone, Inc.),
278 B.R. 325, 331 (Bankr. E.D.N.Y. 2002) (same).
The Court need not address this issue because the Defendants filed their claims before the Trustee
commenced the adversary proceeding. That said, one could argue that a creditor that files a claim after he
has already been sued in an adversary proceeding waives any objection and impliedly consents to the
exercise by the bankruptcy court of equitable jurisdiction to decide any issues in the adversary proceeding
that affect the allowance of his claim.
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jurisdiction, New Rock Asset Partners, L.P. v. Preferred Entity Advancements, Inc., 101
F.3d 1492, 1503 (3d Cir. 1996); CIT v. 170 Willow Street Assocs., 1997 WL 528163, at *7
─ is equally applicable to a situation like the present one involving the Court’s equitable
jurisdiction. If equitable jurisdiction depended on the status of the defendant-creditor’s
claim, the defendant-creditor could manipulate the bankruptcy jurisdiction at any time
simply by withdrawing the claim. Taking this argument to its logical conclusion, the
defendant could seek to withdraw the claim at any time prior to final judgment if the
defendant did not like the way the proceedings were unfolding. Here, the Defendants’
Claims were pending for nearly ten years, but they sought to withdraw them with
prejudice at the Court’s invitation only a few days before the trial was scheduled to
begin. Until then, the Paragraph 10 Objections continued to raise a live dispute and the
Defendants’ reservation of rights, if any, to amend or supplement their Objections
remained a possibility.
It is no answer that Fed. R. Bankr. P. 3006 permits the bankruptcy court to
condition the withdrawal of the claim, and consequently, could theoretically condition
withdrawal on the retention of equitable jurisdiction over the companion adversary
proceeding. See, e.g., In re Kaiser Grp. Int’l, Inc., 272 B.R. 852, 856 (Bankr. D. Del.
2002) (conditioning withdrawal of claim on retention of jurisdiction). 	First, if the
bankruptcy court’s equitable jurisdiction under the Supreme Court precedent discussed
above depends on the continuing effect that the adversary proceeding will have on the
claims allowance process, and the adversary proceeding will no longer have a practical
effect on the claims allowance process because the defendant-creditor essentially
consents to disallowance of his claim by seeking to withdraw it, there is no basis to
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exercise equitable jurisdiction. Second, in deciding whether to grant a motion to
withdraw the claim, a trial court must consider whether the non-moving party will
suffer legal prejudice. Moses v. CashCall, Inc., 781 F.3d 63, 89 (4th Cir. 2015) (“In
general, withdrawal should be granted unless the party opposing the motion can
demonstrate that it would be legally prejudiced by the withdrawal.”) (quoting Sempra
Energy Trading Corp. v. Covanta Union, Inc. (In re Ogden N.Y. Servs., Inc.), 312 B.R.
729, 732 (S.D.N.Y. 2004)). The non-moving party does not suffer legal prejudice by
being required to try the case before a jury rather than in the bankruptcy court. Ogden
N.Y. Servs., 312 B.R. at 733; In re 20/20 Sport, 200 B.R. at 980 (“[L]egal prejudice is
not visited upon [defendants] because they might have to try their case to a jury rather
than to the court.”) (quoting Hoffmann v. Alside, Inc., 596 F.2d 822, 823 (8th Cir.
1979)). In the absence of any other claim of legal prejudice, the bankruptcy court would
arguably abuse its discretion by refusing to grant the withdrawal motion, especially
where, as here, the withdrawal is with prejudice.
Second, the application of the time-of-filing rule is consistent with the pre-
merger rule that a court’s equitable jurisdiction was determined at the time of filing.
Am. Life Ins. Co. v. Stewart, 300 U.S. 203, 215 (1937) (“[T]he settled rule is that
equitable jurisdiction existing at the filing of a bill is not destroyed because an adequate
legal remedy may have become available thereafter.”).
Third, the application of the time-of-filing rule is consistent with the Supreme
Court’s analysis in Stern v. Marshall. There, the respondent (“Pierce”) filed a proof of
claim based on defamation in the petitioner’s (“Vickie”) bankruptcy case, and Vickie
filed a counterclaim alleging tortious interference with a gift she expected from her late
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husband, Pierce’s father. 564 U.S. at 470. The bankruptcy court entered a $425 million
judgment against Pierce on Vickie’s counterclaim. Id. at 470-71.
The question before the Supreme Court was whether the bankruptcy court had
the authority to enter the judgment. Vickie argued, among other things, that the
bankruptcy court had the authority to enter a final judgment on her state law
counterclaim under Katchen and Langenkamp because Pierce had filed a proof of claim.
Id. at 495. Notably, the bankruptcy court had expunged Pierce’s proof of claim almost a
year before it entered the judgment. Id. at 497.
The Supreme Court did not, however, reject Vickie’s argument on the basis that
the disallowance of Pierce’s claim severed her counterclaim from the claims allowance
process. Instead, it examined the relationship between Pierce’s expunged claim and
Vickie’s counterclaim. The Court concluded that “there was never any reason to believe
that the process of adjudicating Pierce’s proof of claim would necessarily resolve Vickie’s
counterclaim,” id. at 497; accord id. at 498, and “[f]rom the outset, it was clear that”
even if the bankruptcy court ruled in Vickie’s favor on her tortious interference claim, it
could not enter judgment in her favor without first resolving certain issues of Texas law.
Id. at 498. In the end, Vickie failed to show that her tortious interference counterclaim
stemmed from the bankruptcy itself or that its relationship to Pierce’s defamation claim
was such that the determination of her counterclaim would have affected the claims
allowance process or the restructuring of the debtor-creditor relationship. Accordingly,
the bankruptcy court lacked the Constitutional authority to enter the judgment. Id. at
499.
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In contrast to Stern v. Marshall, “from the outset it was clear” that a ruling in the
Trustee’s favor avoiding as fraudulent the transfers to the Defendants would result in
the disallowance of the Defendants’ Claims under 11 U.S.C. § 502(d). The Court invited
the Defendants to withdraw their claims with prejudice because there was no reason to
“somehow force[] them to continue with litigation to establish their rights to payment . .
. when they no longer assert any rights to payment.” In re Acad., Inc., 289 B.R. at 234.
However, the withdrawal of their claims did not negate the submission to the Court’s
jurisdiction by virtue of their filing the statements of claim which were met with the
Trustee’s adversary proceeding.
Finally, I find meritless the Defendants’ contention that this adversary
proceeding did not implicate the claims allowance process because the Complaint and
the Amended Complaint did not request disallowance and alleged that the Objections
would be resolved in a separate proceeding in accordance with the Claims Procedure
Order. (See Defendants Memo ¶¶ 17-19.) “In Langenkamp, the Supreme Court held
that if a creditor who has filed such a claim is met with an adversary proceeding, the
resolution of which affects the equitable restructuring of debtor-creditor or creditor-
creditor relations, then the creditor loses its right to a jury trial even with regard to
traditional legal claims.” CBI Holding, 529 F.3d at 466 (emphasis added). Here, the
Defendants’ Claims were “met” with the Trustee’s fraudulent transfer claims. Although
the Complaint did not include a disallowance claim, the avoidance of the Two-Year
Transfers would mandate the disallowance of the Defendants’ Claims under Bankruptcy
Code § 502(d). While a fraudulent transfer claim and section 502(d) disallowance
objection are often joined in the same adversary proceeding, there is no requirement
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that they must be joined in one adversary proceeding. Instead, the equitable
jurisdiction inquiry asks whether the resolution of the Trustee’s claims would “affect”
the claims allowance process, and here, it did at the time the Trustee filed his adversary
proceeding. Moreover, the separation of the adversary proceeding from the claim
objection was purely procedural and was based on the Claims Procedure Order which
contemplated a separate proceeding to resolve the Trustee’s objections to customer
claims. The Trustee adhered to that procedure in this instance, but the adversary
proceeding still affected the claims allowance process for the reasons stated.
Accordingly, the Court concludes that it acquired equitable jurisdiction over the
Trustee’s fraudulent transfer claims because the Trustee commenced this adversary
proceeding after the Defendants filed their claims (and after they objected to the
Trustee’s Determinations), the avoidance of the transfers to the Defendants would result
in the disallowance of their claims, and the withdrawal of the Defendants’ Claims did
not strip the Court of its equitable jurisdiction that attached at the time-of-filing. The
Court has considered the Defendants’ remaining arguments and concludes that they
lack merit.
So ordered.
Dated: 	New York, New York
January 18, 2019
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Court
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