Securities Investor Protection Corporation v. MF Global Inc.

1
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	NOT FOR PUBLICATION
In re:
MF GLOBAL INC.,
Debtor.
Case No. 11-2790 (MG) SIPA
MEMORANDUM OPINION AND ORDER DENYING MOTION OF
PRICEWATERHOUSECOOPERS LLP FOR STAY PENDING APPEAL
Pending before the Court is the motion of PricewaterhouseCoopers LLP (“PwC”)
for a stay pending appeal. (“Motion,” ECF Doc. # 3821) PwC has appealed to the
district court the Order approving the assignment of certain claims by the SIPA Trustee to
the Customer Representatives who are plaintiffs in class actions pending in the U.S.
District Court for the Southern District of New York. The SIPA Trustee filed an
Objection to the Motion (ECF Doc. # 4008) and the Customer Representatives filed a
Joinder in the objection (ECF Doc. # 4009).
For the reasons discussed below, PwC has failed to meet its burden of establishing
that it is entitled to a stay pending appeal pursuant to Rule 8005 of the Federal Rules of
Bankruptcy Procedure (the “Bankruptcy Rules”) and the motion is DENIED.
I. 	BACKGROUND
A full history of MF Global’s collapse has been set forth in this Court’s previous
opinions and need not be recounted here. The following background is limited to those
facts relevant to the motion at issue. On August 15, 2012, the Trustee for the SIPA
liquidation (the “SIPA Trustee”) of MF Global Inc. (“MFGI” or the “Debtor”) filed a
motion (the “Assignment Motion”) (ECF Doc. # 2906) seeking approval of a Continuing
Cooperation and Assignment Agreement (the “Agreement”) between the SIPA Trustee
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 1 of 8

2
and Kay P. Tee, LLC, Paradigm Global Fund I and certain additional parties, including
such Class Representatives as are appointed or as will be appointed by the District Court
(the “Customer Representatives”). The Customer Representatives are former customers
of MFGI who filed class actions against former directors and officers of MFGI in the
District Court (the “District Court Actions”) arising out of MFGI’s estimated $1.6 billion
shortfall of customer funds.
The Agreement assigned to the Customer Representatives the SIPA Trustee’s
potentially viable claims against the former directors and officers as well as potential
claims against PwC, MFGI’s former auditor (collectively, the “Assigned Claims”). PwC
filed a limited objection to the Assignment Motion (the “Limited Objection”) (ECF Doc.
# 3084), alleging that claims held by the SIPA Trustee against PwC were not assignable
because PwC’s engagement letter (the “Engagement Letter”) with the Debtors included
an anti-assignment provision. The relevant portion of the Engagement Letter provides
that the parties “will not . . . agree to assign or transfer . . . any rights, obligations, claims
or proceeds from claims against [PwC] arising under this engagement letter . . . .”
Engagement Letter, dated June 24, 2010 (ECF Doc. # 3082, Ex. 1 at 5). 	The SIPA
Trustee filed a reply to the Limited Objection (ECF Doc. # 3144) on September 4, 2012.
The Court held a hearing on the Assignment Motion on September 5, 2012. The
Court concluded that, other than with respect to claims against PwC, the assignment of
claims to the Customer Representatives reflected an appropriate exercise of business
judgment by the SIPA Trustee pursuant to section 363(b)(1) of the Bankruptcy Code.
See Transcript, Sept. 5, 2012, at 89-92 (ECF Doc. # 3266). The Court requested
additional briefing from the SIPA Trustee and PwC regarding the assignment of claims
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 2 of 8

3
against PwC, and each party submitted supplemental briefs (ECF Doc. ## 3282, 3283,
3348).
On October 2, 2012, this Court entered an opinion (the “Assignment Motion
Opinion”) (ECF Doc. # 3581), followed by an order (the “Assignment Order”) (ECF
Doc. # 3764), overruling PwC’s Limited Objection and granting the SIPA Trustee’s
motion to assign certain claims against PwC to the Customer Representatives. Upon a
close analysis of the Engagement Letter and applicable law, the Court found that the
Engagement Letter only precluded the SIPA Trustee from assigning breach of contract
claims against PwC that arose under the Engagement Letter; tort claims that arose
independent of any contractual obligation, such as the malpractice claims at issue, could
be assigned. See Assignment Motion Opinion at 17. PwC filed an appeal of this decision
with the District Court.
II. 	DISCUSSION
A. Legal Standard
The decision whether to grant a stay pending appeal from an order of a
bankruptcy court is within the court’s sound discretion. See In re Adelphia Commc’ns
Corp., 361 B.R. 337, 346 (S.D.N.Y. 2007). There are four factors courts consider in
making this determination:
(1) whether the movant will suffer irreparable injury absent a stay;
(2) whether the movant has demonstrated a substantial likelihood of success
on the merits;
(3) whether another party will suffer substantial injury if a stay is issued; and
(4) the public interests at stake.
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 3 of 8

4
See id. The movant must show satisfactory evidence on all four factors. See Rally Auto
Group, Inc. v. Gen. Motors LLC (In re Motors Liquidation Co.), 2010 U.S. Dist. LEXIS
118166, at *7 (S.D.N.Y. Oct. 29, 2010).
B. PwC Has Failed to Meet the Standard for a Stay Pending Appeal
1. 	PwC Will Not Suffer Irreparable Injury Absent a Stay
PwC has not met its burden of showing that it will suffer “actual and imminent”
irreparable harm if this Court does not stay enforcement of the Assignment Order.
Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 975 (2d Cir. 1989). In fact,
PwC is unable to show any true harm absent a stay.
As an initial matter, the SIPA Trustee would be entitled to bring the potential
malpractice claims against PwC if the Customer Representatives could not. As this Court
emphasized in its opinion overruling PwC’s Limited Objection, “PwC’s challenge to the
Agreement is an obvious attempt to nip-in-the-bud any effort to permit the Customer
Representatives to pursue the Assigned Claims as part of the pending class action.”
Assignment Motion Opinion at 12. Allowing the Customer Representatives to more
efficiently pursue potential claims against PwC would not cause PwC to suffer
irreparable injury; it would merely prevent the burden and expense of pursuing these
claims from falling on the SIPA Trustee and the MFGI Estate—PwC would incur the
costs of defending the actions either way.
PwC argues that absent a stay, section 363(m) of the Bankruptcy Code would
effectively moot PwC’s ability to pursue appellate relief from the assignment of any
malpractice claims, regardless of whether they are tort or contract claims.1 See Motion at
1 Section 363(m) provides: “The reversal or modification on appeal of an authorization under
subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 4 of 8

5
¶ 15. However, the Court specifically held that breach of contract claims based on the
Engagement Letter were not, and could not be, assigned to the Customer Representatives.
See Assignment Motion Opinion at 20-21. In any event, most courts have held that that
the risk that an appeal may become moot absent a stay, by itself, does not constitute
irreparable harm. See, e.g., In re Best Prods. Co., 177 B.R. 791, 808 (S.D.N.Y. 1995),
aff'd on other grounds, 68 F.3d 26 (2d Cir. 1995); In re Moreau, 135 B.R. 209, 215
(N.D.N.Y. 1992); In re Sunflower Racing, Inc., 223 B.R. 222, 225 (D. Kan. 1998); In re
203 N. LaSalle St. P’ship, 190 B.R. 595, 598 (N.D. Ill. 1995).
In In re Adelphia Commc’ns Corp., 361 B.R. 337 (S.D.N.Y. 2007), the court
acknowledged that it is the majority view that a risk of mootness, on its own, does not
constitute irreparable injury, but it held that the irreparable harm factor may be satisfied if
denying a stay pending appeal risked “mooting any appeal of significant claims of error.”
Id. at 347 (emphasis in original). Even applying this more lenient standard, PwC has
failed to establish that it is entitled to a stay pending appeal. 	The SIPA Trustee could
pursue the potential claims against PwC if they were not assigned to the Customer
Representatives, and a dispute about which party may pursue viable claims does not
constitute the type of “significant claim of error” referred to by the Adelphia court,
particularly where the dispute is an obvious delay tactic to prevent a lawsuit from
proceeding in the first place. See id. (ordering a stay of the confirmation order of a
chapter 11 plan where noteholders with claims valued at approximately $5 billion
objected to the plan and denying a stay would permit the plan to be substantially
lease under such authorization to an entity that purchased or leased such property in good faith, whether or
not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were
stayed pending appeal.” 11 U.S.C. § 363(m). The relevant claims were assigned pursuant to section
363(b)(1).
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 5 of 8

6
consummated, thus mooting the noteholders’ ability to appeal the confirmation order).
Moreover, if PwC prevails on appeal and the District Court finds that the SIPA Trustee’s
assignment of claims to the Customer Representatives was in error, PwC can move to
dismiss any actions filed against it by the Customer Representatives.2 Or, more likely,
the SIPA Trustee could simply move to be added as a plaintiff in the District Court
Actions and continue to pursue the claims without delaying the District Court Actions.
2. 	PwC Has Not Shown a Substantial Likelihood of Success on the Merits
PwC has similarly failed to meet its high burden of demonstrating a substantial
likelihood of success on the merits. “The ‘requisite showing’ of substantial possibility of
success is ‘inversely proportional to the amount of irreparable injury [plaintiff] will suffer
absent the stay.’” Adelphia, 361 B.R. at 349 (quoting Mohammed v. Reno, 309 F.3d 95,
101 (2d Cir. 2002)). PwC has failed to show it would suffer irreparable injury without a
stay and it therefore must “clearly establish” a substantial likelihood of success on the
merits. In re Taub, 470 B.R. 273, 278 (E.D.N.Y. 2012).
As set forth in detail in this Court’s opinion overruling PwC’s Limited Objection,
the Engagement Letter only prevents the assignment of potential claims against PwC that
“arise under” the Engagement Letter, such as breach of contract claims based on the
Engagement Letter. See Assignment Motion Opinion at 20-21. The claims assigned to
the Customer Representatives were based on PwC’s potential malpractice as MFGI’s
auditor. Professionals, such as auditors, who owe a fiduciary duty to act in accordance
with certain standards of practice may be subject to tort liability for violating that duty,
regardless of any contractual obligation between the parties. See Sommer v. Fed. Signal
2 The SIPA Trustee asserted alternative grounds in support of the motion to assign the claims
against PwC. The Court did not reach those arguments in approving the assignment. Those alternative
grounds would also have to be considered in the event of a reversal.
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 6 of 8

7
Corp., 79 N.Y.2d 540, 551-52 (N.Y. 1992) (“[I]t is policy, not the parties’ contract, that
gives rise to a duty of care.”). Accordingly, and as this Court previously held, the
Assigned Claims arose pursuant to the independent legal duty that PwC owed to MFGI,
meaning they did not “arise under” Engagement Letter, and the anti-assignment provision
therefore did not prevent the SIPA Trustee from assigning the claims.
PwC has not set forth any arguments showing that it is likely to prevail on appeal
other than those that were already considered and rejected by this Court. It has therefore
failed to “clearly establish” a likelihood of success on the merits.
3. 	The SIPA Trustee, Customer Representatives and the MFGI Estate
Will Suffer Substantial Injury If a Stay is Issued
As previously explained, the Agreement assigning claims to the Customer
Representatives provides many legal and practical benefits to the Estate:
[It] provides the claims to one set of plaintiffs in one proceeding
hopefully eliminating the whipsaw argument otherwise likely to be
made in separate proceedings that the claims belong exclusively to
the customers and cannot be asserted by the SIPA Trustee, or that
the claims belong exclusively to the SIPA Trustee and cannot be
asserted by the customers; narrows the risk of inconsistent results;
avoids the risk of a "double recovery," with different plaintiffs in
multiple cases recovering damages for the same injury; promotes a
complete resolution of all claims at one time through settlement or
judgment; and is more efficient and cost effective for plaintiffs and
defendants. The Agreement provides that the MFGI estate will not
have to bear any of the costs of prosecuting the Assigned Claims,
thereby reducing expenses of the estate, redounding to the benefit of
all creditors (including commodities customers).
Assignment Motion Opinion at 10-11.
Preventing the Customer Representatives from being able to pursue claims against
PwC pending the appeal would eviscerate the benefits and efficiencies created by
assigning claims to one party for prosecution in one venue. If the Customer
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 7 of 8

8
Representatives are not able to simultaneously investigate and prosecute the claims
against PwC with the remaining Assigned Claims, the time and cost of pursuing claims
against PwC will increase exponentially—the exact result the parties and this Court
sought to avoid by creating and enforcing the Agreement. The effect of a stay would
increase potential litigation costs and minimize the return to the Estate, causing
substantial injury – which could otherwise be avoided – to the SIPA Trustee, the
Customer Representatives, and, most importantly, the Estate.
4. 	The Public Interest Weighs Against Issuing a Stay
Lastly, it would not be in the public interest for this Court to issue a stay of
enforcement of the Assignment Motion pending PwC’s appeal. There is a strong public
interest in maximizing the return to creditors in a bankruptcy. See Toibb v. Radloff, 501
U.S. 157, 163 (1991). As discussed supra, allowing the Customer Representatives to
continue pursuing potential claims for the benefit of the Estate, including those against
PwC, in one venue and with shared resources, increases efficiencies and decreases
litigation costs, therefore maximizing the value of the Estate and the return to its
creditors.
III. 	CONCLUSION
For the reasons discussed above, PwC’s motion for a stay of enforcement of the
Assignment Order pending appeal is DENIED.
DATED: 	November 1, 2012
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
11-02790-mg Doc 4244 Filed 11/01/12 Entered 11/01/12 16:07:28 Main Document
Pg 8 of 8