Marc Kirschner, as Trustee of the Refco Litigation v. Bennett et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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:
In re: 	: 	Chapter 11
:
REFCO INC., et al., 	: 	Case No. 05-60006 (RDD)
:
Debtors. 	: 	(Jointly Administered)
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:
MARC S. KIRSCHNER, 	:
As Trustee of the Refco Litigation Trust, 	:
:
Plaintiff, 	:
:
- against- 	:Adv.Pro.No.07-3060 (RDD)
:
JOHN D. AGOGLIA, PHILLIP R. BENNETT, 	:
THE TRUSTEE(S) OF THE PHILLIP R. 	:
BENNETT THREE YEAR ANNUITY TRUST, 	:
EDWIN L. COX, SUKHMEET “MICKEY” 	:
DHILLON, THE TRUSTEE(S) OF THE JASDEEP :
DHILLON TRUSTEE MSD FAMILY TRUST, 	:
THOMAS H. DITTMER, THE TRUSTEE(S) OF 	:
THE DITTMER TRUST, STEPHEN GRADY, 	:
TONE N. GRANT, ERIC LIPOFF, SANTO 	:
MAGGIO, PETER McCARTHY, JOSEPH 	:
MURPHY, FRANK MUTTERER, WILLIAM 	:
SEXTON, WILLARD SPARKS, ROBERT 	:
TROSTEN, MEMPHIS HOLDINGS LLC, MLC 	:
FIRST CAYMAN LTD., REFCO GROUP 	:
HOLDINGS INC., and JOHN DOES 1 THROUGH :
10, 	:
:
Defendants. 	:
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Appearances:
MILBANK, TWEED, HADLEY & McCLOY LLP, by Andrew M. Leblanc, for
Mark S. Kirschner, as Trustee of the Refco Litigation Trust
BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C., by
Sam Blair, and DECHERT LLP, by Gary J. Mennitt, for Memphis Holdings, LLC
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MEMORANDUM OF DECISION ON MEMPHIS
HOLDINGS LLC’S MOTION TO DISMISS
Robert D. Drain, United States Bankruptcy Judge
In this adversary proceeding, the plaintiff, as trustee of the Refco Litigation Trust (the
“Trustee”) under the confirmed chapter 11 plan of Refco Inc. and its affiliated debtors,
including the alleged transferor under the Trustee’s complaint, Refco Group Ltd., LLC
(“RGL”), has sought to avoid and recover various alleged fraudulent transfers, as well as
related 	relief 	on 	unjust 	enrichment 	and, 	against 	certain 	defendants, 	equitable
subordination grounds. The Trustee has prevailed against, settled with or dismissed his
claims against most of the defendants. This Memorandum of Decision addresses the
motion of one of the three remaining defendants, Memphis Holdings LLC (“MH”) to
dismiss the Trustee’s claims against it under Fed. R. Civ. P. 12(b)(6) as incorporated by
Fed. R. Bankr. P. 7012.
The Trustee has confirmed that his claims against MH are now limited to claims for
constructive fraudulent transfer and unjust enrichment; he has also confirmed that the
amount at issue has been reduced to $4 million. At the same status conference, MH has
confirmed that it will rest on its original motion to dismiss and the pleadings filed to date.
For the reasons set forth below, MH’s motion to dismiss is granted.
Jurisdiction
Jurisdiction over this proceeding derives from 28 U.S.C. § 1334(b) because the
Trustee’s avoidance claims under 11 U.S.C. § 544(b) specifically arise under the
Bankruptcy Code and the Trustee’s unjust enrichment claim (to the extent that it does not
also arise under section 544 of the Bankruptcy Code) is related to these chapter 11 cases
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for purposes of 28 U.S.C. § 1334(b) in that it would augment the estate if successful.
Such jurisdiction has continued after the confirmation of the Refco debtors’ chapter 11
plan: 	the liquidating chapter 11 plan specifically reserved jurisdiction over litigation
claims such as those asserted in this adversary proceeding, having provided for the
creation of the Refco Litigation Trust to pursue such claims; and the adversary
proceeding has a close nexus to the plan and the chapter 11 cases because it affects the
implementation and execution of the chapter 11 plan and the litigation trust agreement
incorporated in it. 	Rahl v. Bande, 316 B.R. 127, 133-34 (S.D.N.Y. 2004); Penthouse
Media Group v. Guccione (In re Gen. Media, Inc.), 335 B.R. 66, 73-74 (Bankr. S.D.N.Y.
2005). 	See also Newby v. Enron Corp. (In re Enron Corp Sec.), 535 F.3d 325, 335-36
(5th Cir. 2008). 	If the Trustee is successful, the claims asserted in his complaint
constitute significant assets for distribution to creditors.
This Court’s jurisdiction over the adversary proceeding derives from 28 U.S.C. §
157(a), which states that each district court, having been conferred with jurisdiction under
28 U.S.C. § 1334(b), may provide that “all cases under title 11 and any or all proceedings
arising under title 11 or arising in or related to a case under title 11 shall be referred to the
bankruptcy judges for the district,” and the Order of Acting Chief Judge Robert J. Ward,
dated July 10, 1984 (the “Standing Order of Reference”), which so provides.1
1 The Standing Order of Reference states in its entirety, “Pursuant to Section 157(a) of the Bankruptcy
Amendments and Federal Judgeship Act of 1984, any or all cases under title 11 and any or all proceedings
arising under title 11 or arising in or related to a case under title 11 are referred to the bankruptcy judges for
this district.”
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This is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and (O). 	Accordingly,
under 28 U.S.C. § 157(b)(1), this Court has the power to hear and determine this
proceeding by final order and judgment.
The Supreme Court’s decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), however,
which held that a different subsection of the Judicial Code, 28 U.S.C. § 157(b)(2)(C),
unconstitutionally conferred on the bankruptcy courts, as courts established under Article
I not Article III of the Constitution, the power to issue final judgments, id. at 2601, raises
two issues with respect to the Court’s power to decide this proceeding. 	The first is
whether this proceeding to determine, avoid and recover a fraudulent transfer and a
related 	unjust 	enrichment 	claim, 	covered 	by 	28 	U.S.C. 	§ 	157(b)(2)(H) 	and 	(O),
respectively, so resembles the state law tortious interference counterclaim covered by 28
U.S.C. § 157(b)(2)(C) at issue in Stern, 131 S. Ct. at 2601, 2608, as to preclude this
Court’s ability to issue a final judgment. Note that this is not a question about the Court’s
subject matter jurisdiction; litigants and at least one court2 contending to the contrary
misread Stern and ignore the expansive nature of the bankruptcy courts’ subject matter
jurisdiction.3
The second question, however, does raise an issue of subject matter jurisdiction: 	if
the Court lacks the constitutional power to issue a final judgment in this proceeding, does
it have statutory or other authority to submit proposed findings of fact and conclusions of
law to the district court under the Judicial Code, Fed. R. Bankr. P. 9033 or the Standing
Order of Reference? 	This question arises because 28 U.S.C. § 157(b)(2) states that
2 Sitka Enters. v. Segarra-Miranda, 2011 U.S. Dist. LEXIS 90243, at *7-8 (D. P.R. Aug. 10, 2011).
3 See, e.g., Marshall v. Marshall, 547 U.S. 293 (2006); Cent. Va. Cmty. College v. Katz, 546 U.S. 356
(2006); Celotex v. Edwards, 514 U.S. 300 (1995).
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“bankruptcy judges may hear and determine … all core proceedings arising under title
11, or arising in a case under title 11, referred under subsection (a) of this section, and
may enter appropriate orders and judgments, subject to review under section 158 of this
title,” and 28 U.S.C. § 157(c)(1) states that “[a] bankruptcy judge may hear a proceeding
that is not a core proceeding but that is otherwise related to a case under title 11, [in
which case] the bankruptcy judge shall submit proposed findings of fact and conclusions
of law to the district court, and any final order or judgment shall be entered by the district
judge after considering the bankruptcy judge’s proposed findings and conclusions and
after reviewing de novo those matters to which any party has timely and specifically
objected,” but Stern can be said to have created a new type of proceeding: a core
proceeding in which the bankruptcy judge is constitutionally precluded from entering a
final order or judgment. 	This, in turn, raises the issue whether there is a gap in the
statutory scheme preventing the Court’s submission of proposed conclusions of law to the
district court if a matter falls into the new “core but precluded” category. See also Fed.
R. Bankr. P. 9033(a), which -- understandably, because Congress did not anticipate
Stern’s new category of unconstitutional core proceedings -- provides only for the
bankruptcy judge’s filing of proposed findings of fact and conclusions of law “[i]n non-
core proceedings heard pursuant to 28 U.S.C. § 157(c)(1).”
Given the procedural stage of this proceeding, the answer to the first question is not
particularly meaningful. First, the denial of MH’s motion to dismiss in whole or in part,
would be only an interlocutory order, and thus could not in any event be subject to
Stern’s prohibition of this Court’s entry of final judgments (subject, though, to rights
under Fed. R. Bankr. P. 7054(a), incorporating Fed. R. Civ. P. 54(b)). 	Moreover, an
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order and judgment granting MH’s motion to dismiss, like an order granting summary
judgment, would contain no factual findings and would be subject to the same de novo
standard of review on appeal as proposed conclusions of law and a recommendation to
the district court. See Retired Partners of Coudert Brothers Trust v. Baker & McKenzie
LLP, (In re Coudert Bros. LLP), 2011 U.S. Dist. LEXIS 110425, at *36-37 (S.D.N.Y.
Sept. 22, 2011). The second question, however, bears on the Court’s jurisdiction to enter
any order on MH’s motion, as well as potentially on the future conduct of this
proceeding, including possible motions to withdraw the reference.4 Therefore, the Court
sets forth below its reasons for concluding that Stern does not preclude the Court’s
issuance of a final judgment on the Trustee’s complaint and that, in any event, the Court
has the power to submit proposed conclusions of law and a recommendation to the
district court on MH’s motion to dismiss, if the district court so wishes to treat the
Court’s ruling.
Reasonable people may differ over whether Stern’s prohibition on the bankruptcy
court’s issuance of a final judgment extends to fraudulent transfer claims, at least where,
as here, the defendant has not filed a proof of claim in the case and, therefore, the
holdings of Katchen v. Landy, 382 U.S. 323 (1966), and Langencamp v. Culp, 498 U.S.
42 (1990), which Stern found to comport with its holding, 131 S. Ct. at 2616-2617, would
not apply. Compare Paloian v. American Express Co. (In re Canopy Fin. Inc.), 2011 U.S.
Dist. LEXIS 99804, at *7-8 (N.D. Ill. Sept. 1, 2011), and Hagan v. Freedom Fid. Mgmt.
4 See Kelley v. JPMorgan Chase & Co., 2011 U.S. Dist. LEXIS 107427, at *18-24 (D. Minn. Sept. 21,
2011). 	Cf. Walker, Truesdell, Roth & Assocs. v. The Blackstone Group (In re Extended Stay, Inc.), 11
Civ. 5394 (SAS) (S.D.N.Y. Nov. 10, 2011); Field v. Lindell (In re The Mortgage Store, Inc.), 2011 U.S.
Dist. LEXIS 123506, at * 19-20 (D. Haw. Oct. 5, 2011) (determining not to withdraw the reference even if
Stern applied to fraudulent transfer proceeding because “[w]ithdrawal of the reference at this stage would
result in this court losing the benefit of the bankruptcy court’s experience in both the law and the facts,
resulting in an inefficient allocation of judicial resources”).
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(In re Fife), 2011 Bankr. Lexis 3544, at *1 (Bankr. W.D. Mich. Aug. 22, 2011), adopted
by, judgment entered by, 2011 U.S. Dist. LEXIS 106446 (D. W.D. Mich. Sept 20, 2011),
and Samson v. Blixseth (In re Blixseth), 2011 Bankr. LEXIS 2953, at *33-34 (Bankr. D.
Mont. Aug. 1, 2011) (holding that under Stern bankruptcy court lacks power to issue a
final judgment on fraudulent transfer claim), with Heller Ehrman LLP v. Arnold &
Porter, LLP (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 3764, at *16-24 (Bankr.
N.D. Cal. Sept. 28, 2011), and In re Safety Harbor Resort & Spa, 2011 Bankr. LEXIS
3238, at *30, *35-36 (Bankr. M.D. Fla. Aug. 30, 2011), and Miller v. Greenwich Capital
Fin. Prods. (In re Am. Bus. Fin. Servs., Inc.), 2011 Bankr. LEXIS 2806, at *8-9 (Bankr.
D. Del. July 28, 2011) (holding that bankruptcy court has power after Stern to issue a
final judgment on fraudulent transfer claim); see also Springer v. Prosser (In re
Innovative Commun. Corp.), 2011 Bankr. LEXIS 3040, at *13-14 (Bankr. D. V.I. Aug. 5,
2011) (bankruptcy court has power to issue final judgment in avoidance proceeding under
11 U.S.C. §§ 548 and 549, but might not under 11 U.S.C. § 544).
This confusion stems in large measure from the various rationales stated by the
majority for its holding in Stern. Indeed, as noted by Justice Scalia’s concurring opinion,
there are
at least seven different reasons given in the Court’s opinion for
concluding that an Article III judge was required to adjudicate this law-
suit: that it was one “under state common law” which was “not a matter
that can be pursued only by grace of the other branches,” ante, at 27; that
it was “not ‘completely dependent upon’ adjudication of a claim created
by federal law,” ibid.; that “Pierce did not truly consent to resolution of
Vickie’s claim in the bankruptcy court proceedings,” ibid.; that “the
asserted authority to decide Vickie’s claim is not limited to a ‘particularized
area of the law,’” ante, at 28; that “there was never any reason to believe
that the process of adjudicating Pierce’s proof of claim would necessarily
resolve Vickie’s counterclaim,” ante, at 32; that the trustee was not
“asserting a right to recovery created by federal bankruptcy law,” ante, at
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33; and that the Bankruptcy Judge “ha[d] the power to enter ‘appropriate
orders and judgments’ -- including final judgments -- subject to review
only if a party chooses to appeal,” ante, at 35.
Id. at 2621. 	To that list might be added Justice Scalia’s possible willingness to defer to
Congress’ intent in 28 U.S.C. § 157(b) where there is “a firmly established historical
practice to the contrary” requiring proceedings in bankruptcy to be decided by Article III
judges, id., apparently because such an established historical practice may justify finding
a certain type of decision-making to be within the traditional scope of “the restructuring
of debtor-creditor relations” in which the Stern majority suggested bankruptcy courts
might -- although not necessarily would -- be able to issue final orders and judgments.
Id. at 2614 n.7.
Clearly several of these rationales argue that Stern does not preclude the bankruptcy
court from issuing a final judgment on a fraudulent transfer claim. 	Unlike the state law
tortious interference claim in Stern, the Trustee’s fraudulent transfer claim here “flow[s]
from a federal statutory scheme,” and is “completely dependent upon adjudication of a
claim created by federal law.” 	Id. at 2614. 	That is, not only is the Trustee’s fraudulent
transfer cause of action expressly provided by the Bankruptcy Code, 11 U.S.C. § 544, but
also Congress placed that section, as well as the other statutory avoidance powers under
11 U.S.C. §§ 547, 548, 549 and 553, within a unique statutory framework, such as the
safe harbor of 11 U.S.C. § 546(e), the recovery and preservation provisions of 11 U.S.C.
§§ 550 and 551 and the “pay or face claim disallowance” rule of 11 U.S.C. § 502(d). In
addition, the adjudication of fraudulent transfer claims in a bankruptcy context is a
“particularized area of the law,” id. at 2615, because of the place such litigation often
takes in the overall case and the familiarity of bankruptcy courts not only with the
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Bankruptcy Code’s fraudulent transfer scheme but also with how such cases are
developed, paid for, litigated and resolved in the multi-party bankruptcy context, which
differs significantly from the two-party state law setting. 	Thus several sections of the
Bankruptcy Code as well as case law govern the trustee or debtor in possession’s unique
role in investigating, funding, commencing, litigating and settling fraudulent transfer
claims for the benefit of the estate, other parties’ limited standing to do so in the trustee’s
place, and, ultimately, the power of the bankruptcy judge to manage the process in the
context of the overall bankruptcy case, for example, where such litigation may be best
resolved by the negotiation and confirmation of a chapter 11 plan. 	See 11 U.S.C. §§
704(a) and 1106(a)(1) (duties of a trustee); 1103(c) (role of official committee); 1104(c)
and 	1106(b) 	(appointment 	and 	role 	of 	examiner); 	330 	and 	503(b)(3) 	and 	(4)
(compensation); 502(d), 541(a)(3) and (4) and 550 and 551 (remedial provisions); and
Fed. Bankr. R. 2004 and 9019 (covering investigation and settlement, respectively). See
In re STN Ent., 779 F.2d 901 (2d Cir. 1985) (standing to sue); Smart World Techs., LLC
v. Juno Online Servs. (In re Smart World Techs., LLC), 423 F.3d 166, 176-79 (2d Cir.
2005) (standing to settle); Picard v. Taylor (In re Park South Sec., LLC), 326 B.R. 505,
513 (Bankr. S.D.N.Y. 2005) (“Wagoner Rule” does not apply to statutory causes of
action created by the Bankruptcy Code, such as fraudulent transfer claims under 11
U.S.C. §§ 544 and 548).
In addition, the pursuit of avoidance claims 	has been “a core aspect of the
administration of bankrupt estates since the 18th century,” Cent. Va. Cmty. College v.
Katz, 546 U.S. 356, 369-70 (2006), tied to, if not solely based on, the bankruptcy courts’
“principally in rem jurisdiction.” 	Id. (addressing preference avoidance litigation); see
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also French v. Liebmann (In re French), 440 F.3d 145, 151 (4th Cir. 2006), cert. denied
549 U.S. 815 (2006); Diaz-Barba v. Kismet Acquisition, LLC, 2010 U.S. Dist. LEXIS
50320, at *16-17 (S.D. Cal. May 20, 2010) (addressing fraudulent transfer litigation).5
As stated by Justice White in his dissenting opinion in Northern Pipeline Constr. Co. v.
Marathon Pipe Line Co., 458 U.S. 50, 96 (1982), “The routine in ordinary bankruptcy
cases now, as it was before 1978, is to stay actions against the bankrupt, collect the
bankrupt’s assets, require creditors to file claims or be forever barred, allow or disallow
claims that are filed, adjudicate preferences and fraudulent transfers, and make pro rata
distributions to creditors, who will be barred by the discharge from taking further actions
against the bankrupt.” (Emphasis added.) Justice White made that point in criticizing the
Marathon plurality for invalidating all of the jurisdictional basis for the 1978 Bankruptcy
Code rather than, at most, the provision of 28 U.S.C. § 1471 that gave bankruptcy courts
the power to decide affirmative prepetition state law contract claims, a non-traditional,
element of bankruptcy jurisdiction. Id.
Since the enactment of the Bankruptcy Code, the management and determination of
statutory avoidance claims has been a primary function of the bankruptcy courts. 	Such
claims often play a prominent role in bankruptcy cases, either because of their sheer
numbers or because of the effect that the potential avoidance of a transfer, lien or
5 It is true that fraudulent transfer litigation, like preference litigation, which was treated under the
Bankruptcy Act as a matter of bankruptcy “plenary jurisdiction,” could be adjudicated by bankruptcy
referees to final judgment only on the parties’ consent. See 2A, 4, 6 Collier on Bankruptcy ¶¶ 23.08, 23.09,
23.15, 38.08-.09, 67.44[4] (14th ed. 1988). Nevertheless, this was based on statutory jurisdiction rather than
constitutional power. See Weidhorn v. Levy, 253 U.S. 268, 273 (1920) (holding that, while “the practice is
not uniform,” as a matter of statutory construction and the general order of reference a referee lacked
statutory power to decide preference claim); see also MacDonald v. Plymouth County Trust Co., 286 U.S.
263, 268 (1932) (referee has statutory power to decide preference claim by the parties’ consent to a
summary trial).
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obligation may have on creditors’ recoveries.6 This is particularly so in cases where
most, if not all, of the debtor’s estate was transferred to third parties pre-bankruptcy, such
as the many Ponzi-scheme driven cases of recent years, requiring a coordinated response
overseen by one judge on behalf of a host of creditor-victims. 	The ability to manage
efficiently the investigation and litigation of such claims, and their possible global
settlement, decreases if handled on a piecemeal basis by different judges, no matter how
talented.
Significantly, the Emergency Rule drafted and issued by the Administrative Office of
the United States Courts shortly after Marathon recognized the bankruptcy courts’ power
to issue final judgments in preference and fraudulent transfer proceedings. 	Emergency
Rule § (d)(3)(A). Moreover, the courts of appeal, including the Second Circuit, that were
asked to address the issue affirmed the constitutionality of this provision of the
Emergency Rule. In re Committee of Unsecured Creditors of F S Commc. Corp v. Hyatt
Greenville Corp., 760 F.2d 1194, 1199 (11th Cir. 1985) (preference claims); John E.
Burns Drilling Co. v. Central Bank of Denver, 739 F.2d 1489, 1493-94 (10th Cir. 1984)
(fraudulent transfer and preference claims); In re Kaiser, 722 F.2d 1574 (2d Cir. 1983)
(fraudulent transfer claims). As stated by the Kaiser court,
What appellant ignores, however, is that this action was brought as a result
of his fraudulent transfer in light of the bankruptcy laws. 	This action is
inextricably tied to the creation of the estate in bankruptcy for the benefit
of [the debtor’s] creditors; there would be no cause of action without the
federal bankruptcy statutes to authorize it. 	In other words, federal law
provides the right upon which the remedy of the constructive trust here is
based. 	In contrast, the action in Marathon was independent of the
bankruptcy laws. . . . 	The present action is not a “traditional” action to
6 Statutory avoidance claims under the Bankruptcy Code may not be the meat and potatoes of bankruptcy
practice, but they are at least the salad and dessert, in marked contrast with the peculiar tortious interference
claim in Stern.
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impose a constructive trust upon real estate. 	It has no life of its own in
either state or federal common law or statute independent of the federal
bankruptcy law.
Id. at 1582 (emphasis in the original).
This approach also continued on a widespread basis after the 1984 enactment of the
Federal Judgeship Act of 1984 (“BAFJA”), which set forth the core/non-core structure
presently 	governing 	bankruptcy 	court 	jurisdiction. 	As 	a 	general 	matter, 	“[s]ince
BAFJA’s enactment in 1984 both the Supreme Court and this Court have concluded that
the Marathon holding was a narrow one and have broadly construed the jurisdictional
grant of BAFJA.” Universal Oil Ltd. v. AllFirst Bank (In re Millenium Seacarriers Inc.),
419 F.3d 83, 99 (2d Cir. 2005) (Sotomayor, J) (bankruptcy court has power to decide
validity of maritime lien); see also In re Arnold Print Works, Inc., 815 F.2d 165, 169-71
(1st Cir. 1987) (Breyer, J) (bankruptcy court has power to decide dispute over breach of
postpetition contract). 	In so holding, both Millenium Seacarriers, 419 F.3d at 99, and
Arnold Print Works, 815 F.2d at 166, recognized that the Supreme Court had since taken
a narrow view of Marathon in Thomas v. Union Carbide Agricultural Products Co., 473
U.S. 568, 584 (1985) (“The Court’s holding in [Marathon] establishes only that Congress
may not vest in a non-Article III Court the power to adjudicate, render final judgment,
and issue binding orders in a traditional contract action arising under state law, without
consent of the litigants, and subject only to ordinary appellate review.”). 	See also
Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 839, 848-53 (1986).
More specifically, courts almost uniformly sustained the constitutionality of BAFJA’s
grant of power to the bankruptcy courts to decide preference and fraudulent transfer
claims as part of their core jurisdiction. 	See, e.g., Duck v. Munn (In re Mankin), 823
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F.2d 1296 (9th Cir. 1987), cert. denied, 485 U.S. 1006 (1988) (fraudulent transfer claim);
Addison v. O’Leary 68 B.R. 487, 490-91 (E.D. Va. 1986) (fraudulent transfer claim); In
re Outlet Dep’t Stores, Inc., 82 B.R. 694, 696-97 (Bankr. S.D.N.Y. 1988) (preference
claim). 	But see Slutsky v. Byrd (In re Byrd) 51 B.R. 645, 648-49 (Bankr. S.D. Ohio
1985) (holding that bankruptcy court lacked power to issue final judgment on fraudulent
transfer 	claim 	under 	11 	U.S.C. 	§ 	544). 	The 	Ninth 	Circuit’s 	discussion 	of 	the
constitutional issue in Mankin relies heavily on Marathon’s recognition that “Congress
has greater discretion in prescribing the manner in which rights of its own creation are
determined.” 	Mankin, 823 F.2d at 1305, citing Marathon, 458 U.S. at 81-82. 	As
distinguished from the prepetition contract claim in Marathon, the Ninth Circuit found
that
[h]ere it is clear that Congress conferred the right on the trustee to set
aside [fraudulent] conveyances which could be set aside under state law
for the purpose of restructuring debtor-creditor relations pursuant to the
federal bankruptcy power. While the rule of decision is supplied by state
law, the concern in applying the rule is to effectuate the policy of federal
bankruptcy law. . . . 	Congress has found, and we agree, that this
proceeding falls within the core of federal bankruptcy power.
Mankin, 823 F.2d at 1309.
After Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), however, in which the
Supreme Court saw fit to use the public right/private right analysis of Marathon to help it
determine the entitlement under the Seventh Amendment of a defendant in a fraudulent
transfer proceeding to a jury trial, the bankruptcy courts’ power to issue final judgments
in avoidance proceedings was left more open to doubt. At least where the defendant had
not filed a proof of claim, Granfinanciera concluded, in the Seventh Amendment context,
that fraudulent conveyance actions were “more accurately characterized as a private
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rather than a public right as we have used those terms in our Article III decisions,” id. at
55, being “quintessentially suits at common law that more nearly resemble state law
contract claims brought by a bankruptcy corporation to augment the bankruptcy estate
than they do creditors’ hierarchically ordered claims to a pro rata share of the bankruptcy
res.” Id. at 56. Thereafter, at least two courts questioned the bankruptcy courts’ power to
issue a final judgment in a fraudulent transfer proceeding. McFarland v. Leyh (In re
Texas General Petroleum Corp.), 52 F.3d 1330, 1336-37 (5 th Cir. 1995) (“Whether an
Article III Court is necessary involves the same inquiry as whether a litigant has a
Seventh Amendment right to a jury trial.” 	Defendant had, however, consented to
bankruptcy court’s adjudication of the claim, so the issue was moot); Zahn v. Yucaipa
Capital Fund (In re Almac’s), 202 B.R. 648, 658-59 (D. R.I. 1996) (reference withdrawn
in part because of conclusion that bankruptcy court could not issue a final judgment); see
also In re Davis, 899 F.2d 1136, 1140 n.9 (11th Cir. 1990), cert. denied sub nom Gower v.
Farmers Home Admin. 498 U.S. 981 (1990) (listing contrasting cases).
On the other hand, by far the majority of courts after Granfinanciera continued to
hold that bankruptcy courts had the power to issue final judgments in fraudulent transfer
proceedings as core matters.7 See, e.g., Turner v. Davis, Gillenwater & Lynch (In re
Investment Bankers), 4 F.3d 1556, 1561 (10 th Cir. 1993), cert. denied 510 U.S. 1114
(1994); Hillsborough Holdings Corp. v. Celotex Corp., 123 B.R. 1018, 1022 (M.D. Fla.
1990). 	Numerous opinions distinguished between the right to a jury trial, at issue in
Granfinanciera, 	and 	the 	power 	of 	a 	bankruptcy 	court 	to 	issue 	a 	final 	order
7 Moreover, thousands of courts and litigants simply continued to assume that the bankruptcy
courts had the constitutional as well as the statutory power to issue final judgments in fraudulent transfer
proceedings.
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notwithstanding its Article I status, finding that the jury trial issue implicated in
Granfinanciera did not restrict the bankruptcy courts’ power to decide motions to dismiss
and summary judgment motions on fraudulent transfer claims on a final basis. See, e.g.,
Glinka v. Abraham & Rose Co., 1994 U.S. Dist. LEXIS 21328, at *20-25 (D. Vt. June 2,
1994); Stein v. Miller, 158 B.R. 876, 880 (S.D. Fla. 1993); City Fire Equip. Co. v. Ansul
Fire Protection Wormald U.S., Inc., 125 B.R. 645, 649 (N.D. Ala. 1989) (en banc);
Reitmeyer v. Meinen (In re Meinen), 232 B.R. 827, 833 (Bankr. W.D. Pa. 1999).
Of course, though, the majority in Stern applied the logic of Granfinanciera’s Seventh
Amendment decision to the Article III question before it: “Vickie’s counterclaim -- like
the fraudulent conveyance claim at issue in Granfinanciera -- does not fall within any of
the varied formulations of the public rights exception in this Court’s cases,” Stern, 131 S.
Ct. at 2614, thus suggesting that the majority in Stern would have concluded, if asked,
that a bankruptcy judge lacks the power to issue a final order or judgment on a fraudulent
transfer claim. 	Nevertheless, the other express rationales for the majority’s decision in
Stern, summarized by Justice Scalia as quoted above, argue differently. 	They are, as
noted above, entirely consistent with the role of fraudulent transfer and other statutory
avoidance claims under the Bankruptcy Code, with the Emergency Rule, and with the
clear majority of holdings after Marathon and Granfinanciera that bankruptcy courts have
the constitutional power to issue final judgments on statutory avoidance claims. 	It is,
therefore, appropriate to read those alternative rationales (perhaps best highlighted by the
majority having distinguished Katchen and Lankgencamp based on the fact that in those
cases “the trustee bringing the preference action was asserting a right of recovery created
by federal bankruptcy law,” Stern, 131 S. Ct. at 2618) not to “arouse the suspicion that
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something is seriously amiss with [the Supreme Court’s] jurisprudence in this area,” id. at
2621 (Scalia, J. concurring), but, rather, to confirm that the majority in Stern took pains
to keep its rationale within the context of the more narrow parameters established by
Thomas v. Union Carbide and Schor, especially regarding the recognition of Article I
authorities’ power to decide congressionally created rights.
In this regard it is significant that Chief Justice Roberts characterized Stern as
resolving only a “narrow” question, id. at 2620, concluding that “Congress, in one
isolated 	respect, 	exceeded 	[Article 	III’s] 	limitation 	[on 	Congress’ 	power] 	in 	the
Bankruptcy 	Act 	of 	1984” 	such 	that 	“[t]he 	Bankruptcy 	Court 	below 	lacked 	the
constitutional authority to enter a final judgment on a state law counterclaim that is not
resolved in the process of ruling on a creditor’s proof of claim.” Id. That language is not
materially different from Thomas’s summary of Marathon. See 473 U.S. at 584. Indeed,
“Stern is replete with language emphasizing that the ruling should be limited to the
unique circumstances of that case. . . .” In re Salander O’Reilly Galleries, 2011 Bankr.
LEXIS 2688, at *18-22 (Bankr. S.D.N.Y. July 18, 2011) (listing instances of limiting
language in Stern).
Moreover, the Supreme Court has consistently acknowledged the complexity of its
holdings on the Article I/Article III issue, most recently by Justices Scalia and Breyer in
Stern itself. 	Stern, 131 S. Ct. at 2621 (Scalia, J. concurring), and 2622 (Breyer, J.
dissenting). 	See also Marathon, 458 U.S. at 93 (White, J. dissenting) (describing the
Article I/Article III jurisprudence as “one of the most confusing and controversial areas
of constitutional law”); Elizabeth Gibson, Jury Trials and Core Proceedings: The
Bankruptcy Judge’s Uncertain Authority, 65 AM. BANKR. L. J. 143, 174 (Winter 1991)
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(discussing the procession of Marathon, Thomas, Schor and Granfinanciera: 	“How a
majority of the Court could have embraced these opposing views of Article III within the
span of less than a decade is difficult to understand. Even more troubling is the fact that
the Court’s analysis appears to remain in a state of flux.”).
This is ultimately so because it is clear from the Supreme Court cases, including the
majority opinion in Stern, that non-Article III tribunals are clearly permitted substantial
decision-making authority. See 131 S. Ct. at 2614-18.8 As stated in Thomas:
An absolute construction of Article III is not possible in this area of
frequently arcane distinctions and confusing precedents. . . . Instead, the
Court has long recognized that Congress is not barred from acting
pursuant to its powers under Article I to vest decision making authority in
tribunals that lack the attributes of Article III courts.
473 U.S. at 583 (citations omitted). As further recognized in Schor:
Although our precedents in this area do not admit of easy synthesis, they
do establish that the resolution of claims such as Schor’s cannot turn on
conclusory 	reference 	to 	the 	language 	of 	Article 	III. 	Rather, 	the
constitutionality 	of 	a 	given 	congressional 	delegation 	of 	adjudicative
function to a non-Article III body must be assessed by reference to the
purposes underlying the requirements of Article III. This inquiry, in turn,
is guided by the principle that practical attention to substance rather than
doctrinaire reliance on formal categories should inform application of
Article III.
478 U.S. at 847 (quotations and citations omitted). 	Drawing the appropriate line
therefore is sometimes necessarily difficult but not impossible. 	Given the repeated and
emphatic limiting language in Stern, the Emergency Rule and the case law discussed
8 One of the clearest examples of this, of course, is the power, recognized by Stern as well as decisions
going back over a hundred years, of bankruptcy judges (and referees under the Bankruptcy Act) to decide
complex issues of non-bankruptcy law in numerous contexts involving claims against and property of the
estate. See Stern, 131 S. Ct. 2594; Ohio v. Kovacs, 469 U.S. 274 (1985); Butner v. United States, 440 U.S.
48, 55 (1979).
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above -- including Millenium Seacarriers, 419 F.3d at 83, and Kaiser, 722 F.2d at 1582,
which are fundamentally consistent with Stern and thus should be controlling -- and the
role 	of 	fraudulent 	transfer 	claims 	under 	the 	Bankruptcy 	Code, 	including 	their
management and resolution ultimately by the bankruptcy courts in the context of
Congress’ bankruptcy scheme, 9 Article III of the Constitution does not prohibit the
bankruptcy courts’ determination of fraudulent transfer claims under 11 U.S.C. §§ 544
and 548 by final judgment.
Even if the Court did not have that power, it does have the power to submit to the
district court proposed conclusions of law and a recommendation to grant MH’s motion,
notwithstanding that, understandably, the Judicial Code and Bankruptcy Rules do not
specifically 	contemplate 	bankruptcy 	courts 	issuing 	proposed 	findings 	of 	fact 	and
conclusions of law in core matters where the particular provision of 28 U.S.C. §
157(b)(2) is found to violate Article III of the Constitution. Stern did not find Congress’
grant of jurisdiction to the bankruptcy courts through 28 U.S.C. § 157(a) and the
Standing Order of Reference unconstitutional; it found a specific provision of 28 U.S.C. §
157(b)(2) unconstitutional to the extent that it gives bankruptcy courts the power to enter
a final judgment on a type of matter required to be decided by an Article III court. See
9 In that context, and consistent with Justice Breyer’s observations in Stern, albeit in dissent, 131 S. Ct. at
2626-7, it seems rather far-fetched that the fact that the Second Circuit appointed this Court for a 14 year
term, renewable by the Second Circuit, and that the Court’s salary and benefits are tied only by statute to
the district courts’ salary and benefits would raise such profound separation-of-powers and liberty
questions as to overturn Congress’ post-Marathon intent and ample precedent, although perhaps this point
is better addressed by an Article III court free from any imputation of bias. See Linda L. Coco, “Stigma,
Prestige and the Cultural Context of Debt: A Critical Analysis of the Bankruptcy Judge’s Non-Article III
Status,” 16 Mich. J. Race & L. 181, 231-32 (2011). It would appear that a more direct affront to Article III
would be the imposition by Congress of such restraints on the bankruptcy courts that their workload was
imposed on the district courts.
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131 S. Ct. at 2620. 	In so doing, Stern strongly suggested that the counterclaim should
instead be treated as a “related to” matter under 28 U.S.C. § 157(c):
…[T]he current bankruptcy system . . . requires the district court to review
de novo and enter final judgment on any matters that are “related to” the
bankruptcy proceedings, and permits the district court to withdraw from
the bankruptcy court any referred case, proceeding or part thereof.
[Respondent] has not argued that the bankruptcy courts are barred from
hearing all counterclaims or proposing findings of fact and conclusions of
law on these matters, but rather that it must be the district court that finally
decides them. We do not think the removal of counterclaims such as
[Petitioner’s] from core bankruptcy jurisdiction meaningfully changes the
division of labor in the current statute. . . .
Id. (citations and quotations omitted). In other words, Stern “removed” the offending
counterclaim from core jurisdiction, and, therefore, under 28 U.S.C. § 157(a) and the
general orders of reference, which refer “any all proceedings arising under title 11 or
arising in or related to a case under title 11 . . . to the bankruptcy judges for the district,”
the dispute would devolve into non-core, “related to” jurisdiction covered by 28 U.S.C. §
157(c). See Id.; see also Field v. Lindel (In re The Mortgage Store, Inc.), 2011 U.S. Dist.
LEXIS 123506, at *18 (D. Haw. Oct. 5, 2011); see also Paoloian v. Am. Express Co. (In
re Canopy Fin., Inc.), 2011 U.S. Dist. LEXIS 99804 (N.D. Ill. Sept. 1, 2011); see also
Hagan v. Freedom Fid. Mgmt. (In re Fife), 2011 U.S. Dist. LEXIS 106446, at *1-2 (W.D.
Mich. Sept. 20, 2011). 	But see Samson v. Blixeth (In re Blixeth), 2011 Bankr. LEXIS
2953, at *28-36 (Bankr. D. Mt. Aug. 1, 2011).
Such 	a 	result 	clearly 	comports 	with 	the 	directive 	that 	when 	addressing 	the
consequences of holding a statute unconstitutional courts must impose a remedy that best
corresponds to what Congress would have intended if it had known about such holding.
See United States v. Booker, 543 U.S. 220, 246 (2004) (citing Denver Area Ed.
Telecommunications Consortium, Inc. v. FCC, 518 U.S. 727, 767 (1996)). Here, it would
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be absurd to conclude that the bankruptcy courts are deprived of jurisdiction over matters
designated by Congress as core when, for Article III reasons, Congress gave jurisdiction
to bankruptcy courts to issue proposed findings of fact and conclusions of law in non-
core matters. 	See, e.g., In re Mortgage Store, Inc., 2011 U.S. Dist. LEXIS 123506, at
*14-17; see also In re Coudert Bros. LLP, 2011 U.S. Dist. LEXIS 110425, at *40
(deeming bankruptcy court judgment granting a motion to dismiss to be proposed
conclusions of law and recommendation by stating, “Stern suggests that the usual
division of labor should not be much upset.”); Gecker v. Flynn (In re Emerald Casino,
Inc.), 2011 Bankr. LEXIS 3324, at 6-7* n.1 (Bankr. N.D. Ill. Aug. 26, 2011) (“Even if
the 	Supreme 	Court 	had 	not 	already 	directed 	a 	more 	reasonable 	remedy 	for 	the
constitutional violation it found in Stern, the perverse effect of the remedy suggested by
defendants’ argument would require that it be rejected.”). 	Therefore, if on review it is
found that this Court did not have the power to issue a final order granting MH’s motion,
the Court has the jurisdiction to have deemed this decision and its order to be proposed
conclusions of law and a recommendation.
Background
Although much of the Trustee’s complaint does not relate to his claims against MH, a
brief summary is in order. 10 Immediately before its chapter 11 filing, Refco Inc. was a
Delaware public company that through its subsidiaries provided brokerage, execution and
clearing services for exchange-traded derivatives and prime brokerage services in the
fixed income and foreign exchange markets. 	Complaint, ¶ 18. 	The October 17, 2005
10 Of course, for purposes of MH’s motion to dismiss, the Court accepts the complaint’s factual
averments as true and draws all inferences in the Trustee’s favor. LaFaro v. New York Cardiothoracic Grp.,
PLLC, 570 F.3d 471, 475 (2d Cir. 2009).
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chapter 11 filings and eventual liquidation of Refco Inc. and a number of its wholly
owned subsidiaries (the “Refco Debtors”) followed a crisis of customer confidence
precipitated by the October 10, 2005 disclosure of an apparent financial fraud involving
Refco’s President and CEO, Phillip R. Bennett and Bennett’s arrest the next day. Id., ¶¶
56-58.
The complaint is “based on the [subsequent] investigation of the Trustee and his
counsel and a review of, among other things, (a) the filings of Refco Inc. with the [SEC];
(b) certain of the Debtors’ books and records and other Refco Debtor documents; (c)
documents produced in response to subpoenas issued pursuant to Rule 2004 of the
Federal Rules of Bankruptcy Procedure in [these chapter 11 cases]; (d) the final report of
the court-appointed independent examiner (the ‘Examiner’) in the Bankruptcy Cases, and
interviews of persons conducted in connection with the preparation of that Report; (e) the
superseding Indictment in U.S. v. Phillip R. Bennett, et al., Case No. 05 Cr. 1192 (NRB)
(S.D.N.Y. Jan. 16, 2007); (f) interviews with certain employees and former employees of
Refco; and (g) other relevant public documents.” Complaint, ¶¶ 2-3.
In light of that information, the Trustee alleges that Bennett “with the aid and
assistance of various co-conspirators, including former Refco owners (Tone Grant and
Thomas Dittmer), former Refco executives (Santo Maggio and Robert Trosten), and
others (hereinafter the ‘Bennett Co-Conspirators’)” perpetrated a massive fraud for more
than eight years before the chapter 11 filings. Id., ¶ 1. MH is not specifically identified
in the complaint as a “Bennett Co-Conspirator,” however, and, although the complaint
alleges, upon information and belief, that “each of the Defendants had knowledge of one
or more aspects of the fraudulent scheme described above, or alternatively, such
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Defendant consciously avoided knowledge of the massive fraudulent scheme perpetrated
by the Bennett Co-Conspirators” id., ¶ 86, the Trustee has since withdrawn his intentional
fraudulent transfer claim against MH and made it clear that he does not allege that MH
had knowledge of or put on blinders with respect to the Bennett Co-Conspirators’
fraudulent scheme. Indeed, unlike the other defendants, MH is not even alleged to have
been an insider of the Refco Debtors.
The 	Bennett 	Co-Conspirators’ 	fraudulent 	scheme 	was 	fairly 	simple, 	but 	its
consequences were massive, resulting in at least hundreds of millions of dollars of losses
for the Refco Debtors and, because the Refco Debtors proved to be insolvent, their
creditors. The Bennett Co-Conspirators hid hundreds of millions of dollars of direct and
indirect trading losses and operating expenses from the Refco Debtors’ customers,
creditors and potential investors “within and behind a number of fraudulently engineered
financial 	transactions.” 	Id., 	¶¶ 	3-4, 	59. 	These 	surreptitious 	devices 	included 	(a)
improperly booking as receivables uncollectible customer debts that should have been
written-off, id.,¶ 63, (b) assigning other uncollectible customer debts and proprietary
trading losses to a parent holding company, Refco Group Holdings, Inc. (“RGHI”) and
treating the receivable from RGHI to Refco Debtors and interest thereon as income when
RGHI lacked the ability to pay this “debt,” id., ¶¶ 64-68, 72-73, and (c) hiding operating
expenses properly charged to Refco Debtors by shifting such expenses to RGHI, with
another increase in the already uncollectible RGHI receivable. Id., ¶¶ 69-71.
Further, to avoid disclosing the RGHI receivable in Refco’s financial statements as a
related-party 	obligation, 	the 	Bennett 	Co-Conspirators 	implemented 	“a 	series 	of
transactions at the end of each fiscal year (and also, starting in 2004, at the end of fiscal
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quarters) that were designed to temporarily reduce the RGHI Receivable and replace it on
Refco’s books with a receivable purportedly owed to Refco by unrelated third parties (the
‘Round-Trip Loans’).” 	Id., ¶ 75. 	This practice, which started “as early as February
1998,” id., ¶ 76, involved a Refco entity extending a “loan” to an unrelated third party,
the third party then “loaning” the same amount to RGHI at a somewhat higher interest
rate than the rate on its “loan” from the Refco entity, and RGHI then purporting to pay
down the RHGI receivable with the proceeds. Then, “[a] few days after the close of the
reporting period, the parties would unwind the entire transaction” with the exception of
the third party’s fee (the spread between the interest on its “loan” from Refco and its
“loan” to RGHI). 	Id., ¶ 76-78. 	“There were approximately 30 Round-Trip Loans from
1998 through 2005” that “caused the RGHI Receivable to be underestimated by hundreds
of millions of dollars at each relevant reporting period.” Id., ¶ 79.
So much for the general fraud at Refco; how, though, does that fraud pertain to the
transfer to MH that the complaint seeks to avoid and recover? 	The Trustee alleges that
the ultimate purpose of the fraud was “to allow the Bennett Co-Conspirators, and those
persons and entities acting in concert or participation with them, to enrich themselves by
stripping hundreds of millions of dollars of assets” from Refco based upon Refco’s
inflated, fictitious value. Id., ¶ 4. 	The largest improper payout designed by the Bennett
Co-Conspirators stemmed from an August 2004 leveraged buyout in which a third party,
Thomas H. Lee Partners L.P. and co-investors purchased a controlling interest in Refco,
Inc. (the “LBO”) resulting in the transfer of approximately $260.1 million to Bennett Co-
Conspirators, as broadly defined. 	Id., ¶¶ 54, 60, 108, 225 (the “Insider LBO-Related
Transfers”).
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It is here that MH comes in, because it received a payment at the time of the LBO,
from RGL. Id., ¶ 161. The payment was on account of MH’s rights under a Stock
Purchase Agreement entered into three and a half years before, on January 2, 2001 (the
“SPA”), pursuant to which MH sold its 15.3% interest in an indirect subsidiary of RGL
(“Old Refco”) to RGL, id., ¶¶ 33, 156-158, 161, a Delaware corporation and a Delaware
limited liability company, respectively. Id., ¶ 17. More specifically, under the SPA, MH
received the right to a future, post-closing payment from RGL upon the occurrence of
certain conditions. Id., ¶ 158.
The parties have provided the Court with a copy of the SPA referred to in the
complaint. 	SPA paragraph 1 states that the purchase price was $50 million, see SPA ¶
1(a), plus a “Contingent Purchase Price” in two components: $13 million, see SPA ¶ 1(b),
and a variable component determined by a formula. 	See SPA ¶ 1(c). The complaint
accurately summarizes the trigger for the first component of the Contingent Purchase
Price, a “Change in Control,” of RGL: “(i) the consolidation, sale or merger of RGL; (ii)
the liquidation or dissolution of RGL; (iii) Bennett and [Tone] Grant cease to beneficially
own more than 50% of the equity of RGL or have less than 50% of the voting power to
elect RGL’s Board; or (iv) an initial public offering closing in which 20% of the shares of
RGL or 	[Old Refco] are sold.” Complaint, ¶ 158. 	The second component of the
Contingent 	Purchase 	Price 	is 	triggered 	under 	the 	SPA 	“[i]n 	the 	event 	of 	the
consummation of the sale, lease, exchange, or other transfer (in one transaction or a series
of transactions of all, or substantially all, of the equity securities or asset [sic] of Refco
prior to December 31, 2004 where the consideration for such transaction is $900 million
or more.” 	See SPA, ¶ 1(c). Upon that occurrence, the SPA provides that MH shall be
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paid according to the following formula: P (payment) = E (amount of consideration paid
in the subject transaction in excess of $900 million) x R (.014). 	Id. The Trustee has
confirmed that he is attacking only the $4 million payment resulting from such formula
(the “MH LBO-Payment”).
He does this on two grounds. 	First, he alleges that the MH LBO-Payment was
lacking in fair consideration, Complaint, ¶ 238, and made when RGL was insolvent or
had unreasonably small capital, id., ¶ 189-190, 239, and, therefore, that the MH LBO-
Payment may be avoided and recovered as a constructive fraudulent transfer under 11
U.S.C. § 544(b), incorporating the constructive fraudulent transfer provisions of the New
York Debtor-Creditor Law, N.Y. D R & C R. L. § 270 et seq. (McKinney 2011) (“NY
DCL”). Complaint, ¶¶ 237-40. Second, the Trustee alleges, based on the same facts, that
MH was unjustly enriched by the MH LBO-Related Transfer. Id., ¶¶ 328-32.
Discussion
Standard for Dismissal under Rule 12(b)(6)
When considering a motion to dismiss under FED. R. CIV. P. 12(b)(6), the Court must
assess the legal feasibility of the complaint, not weigh the evidence that might be offered
in its support. 	Koppel v. 4987 Corp., 167 F.3d 125, 133 (2d Cir. 1999). 	The Court’s
consideration “is limited to facts stated on the face of the complaint and in the documents
appended to the complaint or incorporated in the complaint by reference, as well as to
matters of which judicial notice may be taken.” Hertz Corp. v. City of New York, 1 F.3d
121, 125 (2d Cir. 1993) (citing Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d
Cir. 1991)); see also DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010)
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(“Where a document is not incorporated by reference, the court may nevertheless
consider it where the complaint relies heavily upon its terms and effect….”).
The Court accepts the complaint’s factual allegations as true, even if they are doubtful
in fact, and must draw all reasonable inferences in favor of the plaintiff, Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 321-23 (2007); Levy v. Southbrook Int’l
Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001), cert. denied, 535 U.S. 1054 (2002); however,
if a complaint’s allegations are clearly contradicted by documents incorporated into the
pleadings by reference, the Court need not accept them. Labajo v. Best Buy Stores, L.P.,
478 F. Supp.2d 523, 528 (S.D.N.Y. 2007).
Moreover, the Court is “not bound to accept as true a legal conclusion couched as a
factual allegation.” Papasan v. Allain, 478 U.S. 265, 286 (1986). Instead, the complaint
must state more than “labels and conclusions, and a formulaic recitation of the elements
of a cause of action will not do.” 	Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555
(2007). 	Thus, while the Supreme Court has confirmed, in light of the notice-pleading
standard of FED. R. CIV. P. 8(a), that a complaint does not need detailed factual
allegations to survive a motion under Rule 12(b)(6), Erickson v. Pardus, 551 U.S. 89, 93
(2007); Twombly, 550 U.S. at 555, its “[f]actual allegations must be enough to raise a
right to relief above the speculative level.” 	Twombly, 550 U.S. at 555.11 If the claim
would not otherwise be plausible on its face, therefore, the complaint must allege
sufficient additional facts to “nudge [the] claim across the line from conceivable to
plausible;” id., at 570; otherwise, the defendant should not be subjected to the burdens of
11 The Trustee’s constructive fraudulent transfer claim under section 544(b) of the Bankruptcy Code is
subject only to the notice pleading requirements of F ED. R. CIV. P. 8(a), not the heightened pleading
standard of F ED. R. CIV. P. 9(b). Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs. Ltd.), 337
B.R. 791, 801-2 (Bankr. S.D. N.Y. 2005).
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continued discovery and the worry of overhanging litigation. Id., at 556. Applying this
plausibility standard is “a context-specific task that requires the reviewing court to draw
on its judicial experience and common sense.” Ashcroft v. Iqbal, 128 S. Ct. 1937, 1950
(2009). 	“Plausibility thus depends on a host of considerations: 	the full factual picture
presented by the complaint, the particular cause of action and its elements, and the
existence of alternative explanations so obvious that they render plaintiff’s inferences
unreasonable.” L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430 (2d Cir. 2011).
The Trustee’s Fraudulent Transfer Claim
A necessary element of the Trustee’s constructive fraudulent transfer claim under NY
DCL §§ 273-275 is that the debtor did not receive fair consideration for the transfer. As
stated by the Second Circuit,
[A] conveyance by a debtor is deemed constructively fraudulent [that is,
avoidable regardless of the transferor’s intent] if it is made without ‘fair
consideration,’ and (inter alia) if one of the following conditions is met:
(i) the transferor is insolvent or will be rendered insolvent by the transfer
in question, DCL § 273; (ii) the transferor is engaged in or is about to
engage 	in 	a 	business 	transaction 	for 	which 	its 	remaining 	property
constitutes unreasonably small capital, DCL § 274; or (iii) the transferor
believes that it will incur debt beyond its ability to pay, DCL § 275.
Sharp Int’l Corp. v. State Street Bank and Trust Co. (In re Sharp Int’l Corp.), 403 F.3d
43, 53-54 (2d Cir. 2005). 	See also Am. Inv. Bank v. Marine Midland Bank, 595
N.Y.S.2d 537, 538, 191 A.D.2d 690 (2d Dep’t 1993) (“The burden of proving both
insolvency 	and 	the 	lack 	of 	fair 	consideration 	is 	upon 	the 	party 	challenging 	the
conveyance.”).
NY DCL § 272 provides that “[f]air consideration is given for property . . . [w]hen in
exchange for such property . . . as a fair equivalent therefor, and in good faith, property is
conveyed or an antecedent debt is satisfied.” The Sharp Court stated that
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The fair consideration test is profitably analyzed as follows: 	(1) . . . the
recipient of the debtor’s property[] must either (a) convey property in
exchange or (b) discharge an antecedent debt in exchange; and (2) such
exchange must be the ‘fair equivalent’ of the property received; and (3)
such exchange must be ‘in good faith.’
403 F.3d at 53-54 (quoting HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1058-59 (2d Cir.
1995)).
Because the $4 million MH LBO-Related Transfer was made to satisfy RGL’s
antecedent obligation under the SPA, it clearly meets the first prong of the “fair
consideration test of NY DCL § 272. 	“’Good faith’ in a constructive fraudulent
conveyance claim is the good faith of the transferee,” Sharp Int’l, 403 F.3d at 54 n.4,
which the Trustee’s complaint does not allege was lacking here. 	There is no dispute,
either, that the $4 million transferred to MH was the amount derived by the formula in
the PSA; therefore, the complaint does not allege a transfer for less than the “fair
equivalent” of RGL’s obligation under SPA ¶ 1(c).
The Second Circuit in Sharp also made it clear that the mere existence of an
underlying fraud on creditors (in this case, the “Bennett Co-Conspirator” fraud) does not
transform into 	a 	constructive 	fraudulent 	transfer 	a 	payment 	in satisfaction 	of 	an
antecedent debt that enabled the fraudsters to further such fraud. Id. at 54-55. This was
so even though the transferee in Sharp, unlike MH, knew or had reason know that the
debtor was defrauding other creditors: “[A] lack of good faith ‘does not ordinarily refer
to the transferee’s knowledge of the source of the debtor’s monies which the debtor
obtained at the expense of other creditors.’” Id., at 55 (quoting Boston Trading Grp., Inc.
v. Burnazos, 835 F.2d 1504, 1512 (1st Cir. 1987)). 	See also Balabar-Strauss v. Sixty-
Five Brokers (In re Churchill Mtg. Inv. Corp.), 256 B.R. 664, 681 (Bankr. S.D.N.Y.
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2000), (where broker lacked knowledge of Ponzi scheme, “[t]he fact that the debtor’s
enterprise as a totality is operated at a loss, or in a manner that is fraudulent, does not
render actually or constructively fraudulent a particular transaction which in and of itself
is not fraudulent in any respect.”), aff’d, 264 B.R. 303, 308 (S.D.N.Y. 2001). Rather, at
least for non-insiders such as the lender in Sharp and MH, “New York fraudulent
conveyance law . . . is primarily concerned with transactions that shield company assets
from creditors.” 	Sharp Int’l, 403 F.3d at 55-56. 	Therefore, because the $4 million MH
LBO-Related Transfer satisfied an equivalent amount of antecedent debt and was
received in good faith by MH, it was made with fair consideration, and a necessary
element of the Trustee’s constructive fraudulent transfer claim fails on its face. 	See id.;
see also Ultramar Energy, Ltd. v. Chase Manhattan Bank, N.A., 191 A.D.2d 86, 90-91,
599 N.Y.S.2d 816 (1st Dep’t 1993).
The Trustee’s argument to the contrary, based on his contention that the MH LBO-
Related Transfer was on account of an “equity like” interest that should be seen as junior
to RGI’s creditors’ unpaid claims, is unavailing. First, the $4 million payment under the
SPA was not tied to or conditioned upon any return to Refco’s shareholders; it did not
depend on Refco’s shareholders necessarily receiving anything. 	Instead, the contingent
payment was triggered by “the transfer . . . of all, or substantially all, of the equity
securities or asset [sic] of Refco prior to December 31, 2004 where the consideration for
such transaction is $900 million or more.” 	SPA ¶ 1(c). 	The complaint does not allege
that the $900 million threshold was necessarily the point where Refco’s debts would be
repaid and shareholders would start to receive a distribution. 	It was, instead only a
bargained for condition to a previously deferred payment under SPA ¶ 1(c) becoming
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fixed. 	Moreover, it was a variable over which MH, which had sold its equity in Old
Refco three-and-a-half years before, had no control, as it had no control over RGI. 	It
therefore lacks the hallmarks of an equity investment as opposed to an antecedent debt
obligation. 	See Racusin v. American Wagering, Inc. (In re American Wagering, Inc.),
493 F.3d 1067, 1070-73 (9th Cir. 2006); Waters v. Jos. A. Bank Clothiers, Inc., 1995
U.S. Dist. LEXIS 7358, at *14-15 (D. Md. 1995); Official Committee of Unsec. Creds. v.
Am. Capital Fin. Servs. Inc. (In re Mobile Tool Int’l, Inc.), 306 B.R. 778, 782 (Bankr. D.
Del. 2004); In re Motels of Am., Inc., 146 B.R. 542, 543-44 (Bankr. D. Del. 1992).
It is true that a line of New York cases involving the avoidance of deferred or
installment payments under stock repurchase agreement notes runs counter to the
foregoing authorities; however, those cases are not based on the NY DCL but, rather, on
New York Business Corporation Law § 513(a)’s treatment of unlawful distributions to
shareholders.12 They construe NY BCL § 513(a) to invalidate any installment payment
made at the time the corporation was insolvent, even if, at the time the parties entered
into the repurchase or redemption agreement, the corporation was solvent. See, e.g., Gold
v. Lippman (In re Flying Mailmen Serv. Inc.), 539 F.2d 866, 869 (2d Cir. 1976);
Scherling v. Ehrenkranz (In re Eljay Jrs., Inc.), 123 B.R. 961, 969 (S.D.N.Y. 1991); In re
Dino & Artie’s Automotive Transmission Co., 68 B.R. 264, 269 (Bankr. S.D.N.Y. 1986);
Nakano v. Nakano McGlone Nightingale Advertising, Inc., 84 Misc.2d 905, 377
N.Y.S.2d 996, 1000 (N.Y. Cty. 1975). However, Old Refco was a Delaware corporation,
governed by Delaware’s General Corporation Law, which recognizes the validity of
12 “A corporation, subject to any restrictions contained in its certificate of incorporation may purchase its
own shares, or redeem its redeemable shares, out of surplus except when currently the corporation is
insolvent or would thereby be made insolvent.” N.Y. BUS . CORP . L. § 513(a) (McKinney’s 2011).
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installment payments under a stock repurchase agreement as long as the corporation was
solvent at the time the parties incurred the obligation even if, when the installment
payment was made, the corporation was insolvent,13 see Libco Corp. v. Leigh (In re
Reliable Mfg. Corp.), 703 F.2d 996, 1002 (7th Cir. 1983) (construing Delaware law); In
re Motels of Am., 146 B.R. at 544; see generally, Dennis F. Dunne, Stock Repurchase
Agreements in Bankruptcy: A Tale of State Law Rights Discarded, 12 BANK. DEV. J. 355,
362 (1996), and the Trustee’s complaint does not allege that Old Refco was insolvent
when the Stock Purchase Agreement was entered into. Moreover, the MH LBO-Related
Transfer did not even come from the corporation in which MH owned shares, Old Refco;
the $4 million came from Old Refco’s indirect parent, RGI.
Accordingly, the Trustee’s fraudulent transfer claim should be dismissed.
The Trustee’s Unjust Enrichment Claim
The Trustee’s unjust enrichment claim also should be dismissed. First, the MH LBO-
Related Transfer was made pursuant to the SPA, and New York law precludes recovery
under unjust enrichment or other quasi contract theories when the subject matter of the
dispute is governed by a valid and enforceable contract. 	Beth Isr. Med. Ctr. v. Horizon
Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 587 (2d Cir. 2006) (quoting Clark-
Fitzpatrick, Inc. v. Long Island R.R. Co., 70 N.Y.2d 382, 388 (1987)); Goldman v.
Metro. Life Ins. Co., 5 N.Y.3d 561, 572 (2005). 	Second, as discussed above, RGI’s
obligation under SPA ¶ 1(c) was lawful and not subject to recharacterization as equity;
thus, there was nothing inequitable about RGI’s paying it. 	See City of Syracuse v.
13 “Nothing in this subsection shall invalidate or otherwise affect a note, debenture or other obligation of a
corporation given it as consideration for its acquisition by purchase, redemption or exchange of its shares of
stock if at the time such note, debenture or obligation was delivered by the corporation its capital was not
then impaired or did not thereby become impaired.” 8 DEL. CODE § 160(a)(1) (2011).
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R.A.C. Holding, Inc., 258 A.D.2d 905, 906, 685 N.Y.S2d 381 (4th Dep’t 1999) (the
“essence” of an unjust enrichment claim “is that one party has received money or a
benefit at the expense of another”); see also Beth Isr. Med. Ctr., 448 F.3d at 586 (“To
prevail on a claim for unjust enrichment in New York a plaintiff must establish (1) that
the defendant benefitted; (2) at the plaintiff’s expense; and (3) that equity and good
conscience require restitution.”) 	Because the MH LBO-Related Transfer was made for
fair consideration, it cannot be said to have been made at the expense of RGI or its
creditors.
Conclusion
For the foregoing reasons, MH’s motion to dismiss should be granted in full and
judgment will be entered dismissing the Trustee’s claims against MH. MH shall submit
an order and judgment in accordance with this Memorandum of Decision, which shall
state that it is a final judgment, provided that if an appellate court concludes otherwise it
shall constitute this Court’s conclusions of law and recommendation.
Dated: White Plains, New York
November 30, 2011
/s/Robert D. Drain
United States Bankruptcy Judge
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