Harrison, Jr. v. Rabinovici et al

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
:
In re: 	: 	Chapter 11
:
JESUP & LAMONT, INC. and 	: 	Case No. 10 B 14133 (AJG)
JESUP & LAMONT SECURITIES 	: 	(Confirmed Cases)
CORPORATION, 	:
:
Debtors. 	:
__________________________________________:
:
MATTHEW C. HARRISON, JR., 	:
CONFIRMATION TRUSTEE 	:
OF THE JESUP LIQUIDATING TRUST, 	:
:
Plaintiff, 	:
v. 	: 	Adv. Pro. No. 12-01169 (ALG)
:
STEPHEN RABINOVICI and 	:
ALAN WEICHSELBAUM, 	:
:
Defendants. 	:
__________________________________________:
MEMORANDUM DECISION DENYING MOTION
TO DISMISS ADVERSARY PROCEEDING
A P P E A R A N C E S:
WILK AUSLANDER LLP
Counsel for Plaintiff
By: Stuart M. Riback, Esq.
Eric J. Snyder, Esq.
Zack H. Gross, Esq.
1515 Broadway
New York, New York 10036
LOWENSTEIN SANDLER PC
Counsel for the Defendants
By: Robert C. Boneberg, Esq.
David M. Banker, Esq.
1251 Avenue of the Americas
New York, New York 10020
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1 Article 5, entitled Means for Implementation of the Plan, provides in Section A-1 for the Establishment of
the Post Confirmation Trust.
2 The Plan defines “Causes of Action” to mean
all actions, causes of action, Claims, Chapter 5 Claims, liabilities, obligations, rights, suits,
including D&O Claims, debts, damages judgments, remedies, demands setoffs, defenses,
recoupment, crossclaims, counterclaims, third-party claims, indemnity claims, contribution claims
or any other claims that the Debtors or their Estates may hold or be entitled to assert, whether
disputed or undisputed, suspected or unsuspected, foreseen or unforeseen direct or indirect, choate
or inchoate, existing or hereafter arising, in law, equity or otherwise, based in whole or in part
upon any act or omission or other event occurring prior to the Petition Date or during the course of
the Chapter 11 Cases, through and including the Confirmation Date.
2
ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
Jesup & Lamont, Inc (“J&L”) and Jesup & Lamont Securities Corporation (“JLSC,” and
together with J&L, the “Debtors”), filed petitions pursuant to chapter 11 of title 11 of the United
States Code (the “Bankruptcy Code”) on July 30, 2010 and September 24, 2010, respectively.
On October 21, 2010, an Official Committee of Unsecured Creditors (the “Committee”) was
appointed by the United States Trustee. On September 15, 2011, the Committee filed a proposed
joint plan of reorganization for the Debtors and a disclosure statement, which was subsequently
amended. The Court entered an order, on October 6, 2011, confirming the Amended Plan of
Liquidation of the Official Committee of Unsecured Creditors (the “Plan”).
Articles V and VIII of the Plan provided for the establishment of a Post-Confirmation
Trust (the “Liquidating Trust”) to implement the Plan.1 A Post-Confirmation Trustee (the
“Trustee”) was appointed to be the “fiduciary responsible for implementing the applicable
provisions of the Plan and administering the Liquidating Trust in accordance with the Plan.”
Art. I-B(70). Pursuant to Article VIII-B of the Plan, the Debtors transferred all of their right,
title and interest in assets, including Causes of Action 2 remaining as of the effective date of the
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Plan, Art. I-B(15).
3 The Plan provided that “Remaining Assets means: (a) any Estate Assets that have not been divested or
abandoned by the Debtors as of the Effective Date; (b) Causes of Action, including Chapter 5 Claims and the D&O
Claims; and (c) Cash on hand.” Plan, Art. I-B(79). In addition, Effective Date is defined as “the day that is the first
Business Day after the Confirmation Date on which (a) no stay of the Confirmation Order is in effect; and (b) all
conditions specified in Article [X-B of the Plan] have been (i) satisfied; or (ii) waived pursuant to Article [X-C of
the Plan].” Plan, Art. I-B(39).
4 The Plan defines Beneficiaries as “Holders of Claims that are to be satisfied through post-Effective Date
distributions from the Post-Confirmation Trust as provided [in the Plan]. Plan, Art. I-B(10). In addition, the Plan
provided that a Holder is “an Entity holding a Claim or an Equity Interest,” Plan, Art. I-B(53), and a Claim is “any
claim against a Debtor as defined in section 101(5) of the Bankruptcy Code.” Plan, Art. I-B(18).
The Beneficiaries were treated as the grantors of the Liquidating Trust and “deemed owners of the Post-
Confirmation Trust Assets.” Plan, Art. VIII-B.
3
Plan to the Liquidating Trust.3 The beneficiaries of the Trust (the “Beneficiaries”) are the
holders of claims against the Debtors to be paid through distributions from the Liquidating
Trust.4 Article VIII-A of the Plan provided that the primary purpose of the Liquidating Trust
was to liquidate “assets with no objective to continue or engage in the conduct of a trade or
business, except to the extent reasonably necessary to, and consistent with, the liquidating
purpose of the [Liquidating] Trust.” The assets were to be held in the Liquidating Trust “for the
benefit of the Beneficiaries, subject to the Plan and the Post-Confirmation Trust Agreement.”
Plan, Art.VIII-B. The Plan further provided that upon the transfer of assets to the Liquidating
Trust, the Debtors would have no “reversionary or further interest in or with respect to the
[Liquidating Trust or its assets.]” Plan, Art. VIII-A & B.
The Adversary Proceeding
The Trustee filed a complaint (the “Complaint”) commencing this adversary proceeding
on March 14, 2012 against Stephen Rabinovici, J&L’s former chairman, and Alan
Weichselbaum, J&L’s former CEO and CFO, alleging that the Defendants breached their
fiduciary duties to J&L. J&L was a publicly traded holding company and its subsidiary, JLSC,
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was a brokerage and investment banking firm, regulated by the Financial Industry Regulatory
Authority (“FINRA”). Specifically, the Trustee alleges that the Defendants breached their
fiduciary duty by failing to make or properly apply certain trust fund tax and health care
payments, and that they engaged in improper intercompany transactions and inappropriate
bookkeeping and artificial accounting entries concealing from regulatory agencies overseeing the
securities firm that JLSC did not meet net capital requirements under Securities and Exchange
Commission rules necessary to continue in business.
In addition, the Complaint alleges, Defendants caused J&L to enter into a ruinous long-
term lease approximately three months before FINRA shut down JLSC. It further alleges that
the Defendants caused the Debtors to make preferential payments to creditors on whose debts
Defendants were liable as guarantors. Eventually, FINRA charged JLSC with being out of
compliance with the net-capital rules and, on June 18, 2010, required JLSC to cease conducting
new business and to wind down. The bankruptcy cases followed.
The Instant Motion
Defendants have moved to dismiss the adversary proceeding under Fed. R. Civ. P.
12(b)(1) for lack of subject matter jurisdiction, arguing that the Post-Confirmation Trust cannot
assert state law claims against two non-debtor individuals where, it is alleged, the Plan does not
specifically provide for retention of jurisdiction, the debtors and bankruptcy estates no longer
exist, and the adversary proceeding does not have a “close nexus” to the bankruptcy proceedings
and is merely a vehicle for increasing distributions to a sub-group of former creditors. The
Trustee responds that the claims at issue relate directly to the insolvency that led to this chapter
11 case, that a bankruptcy court retains post-confirmation jurisdiction over claims that a
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liquidating trust inherited from a debtor based on pre-petition facts, where the proceeds collected
from such claims will be distributed to the debtor’s creditors in accordance with a chapter 11
plan, and that even if a bankruptcy court’s jurisdiction narrows post-confirmation, the causes of
action have a “close nexus” with the bankruptcy plan and proceedings, and the Plan adequately
provided for the retention of jurisdiction by this Court.
Rule 12(b)(1) Motion to Dismiss
A case must be dismissed under Fed. R. Civ. P. 12(b)(1), incorporated into bankruptcy
practice by Fed. R. Bankr. P. 7012, when the court lacks subject matter jurisdiction over a
dispute because of the absence of a constitutional or statutory basis upon which to adjudicate it.
Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000). When challenging jurisdiction
under Rule 12(b)(1), evidence outside of the pleadings, including affidavits, may be considered.
Kamen v. American Tel. & Tel. Co., 791, F.2d 1006, 1011 (2d Cir. 1986). The party advocating
jurisdiction has the burden of proving its existence by a preponderance of the evidence.
Marakova, 201 F.3d at 113. Here, for the reasons stated below, the Trustee has met that burden.
Subject Matter Jurisdiction
A bankruptcy court’s jurisdiction “is grounded in, and limited by, statute.” Celotex Corp.
v. Edwards, 514 U.S. 300, 307 (1995). 28 U.S.C. § 1334 provides the statutory basis for
bankruptcy jurisdiction; pursuant to subsection (a), district courts “have original and exclusive
jurisdiction of all cases under title 11,” and pursuant to subsection (b), “have original but not
exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to
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5 Pursuant to 28 U.S.C. § 157(a), district courts may refer any such cases or proceedings “to the bankruptcy
judges for the district.” In this district, pursuant to an Amended Standing Order of Reference, M-431 (S.D.N.Y. Jan.
31, 2011) all bankruptcy cases and proceedings “are referred to the bankruptcy judges for this district.”
6 The majority of circuits apply the expansive Pacor standard; however, as noted by the court in Kirschner
v. Grant Thronton LLP (In re Refco, Inc. Secs. Litig.), 628 F. Supp.2d 432, 438 (S.D.N.Y. 2008), the Seventh Circuit
applies a more restrictive standard, requiring that a dispute “affect[ ] the amount of property for distribution [i.e., the
debtor’s estate] or the allocation of property among creditors (citing, In re FedPak Sys., Inc., 80 F.3d 207, 213-14
(7 th Cir. 1996).
6
cases under title 11.” 5 The parties acknowledge that this Court’s jurisdiction over the state law
causes of action at issue is premised upon “related to” jurisdiction.
The Second Circuit applies the broad standard for “related to” jurisdiction that was
initially formulated by the Third Circuit in In re Pacor, Inc., 743 F.2d 984 (3d Cir. 1984). See
Publicker Indus. Inc. v. United States (In re Cuyahoga Equip. Corp.), 980 F.2d 110, 114 (2d Cir.
1992) (other citations omitted). 6 Pacor holds that a proceeding is “related to” a bankruptcy case
if “the outcome of that proceeding could conceivably have any effect on the estate being
administered in bankruptcy.” 743 F.2d at 994 (emphasis in original). As such, it is not
necessary that the proceeding be against the debtor or its property. Id. Pacor further holds that
[a]n action is related to bankruptcy if the outcome could alter the debtor’s rights,
liabilities, options, or freedom of action (either positively or negatively) and
which in any way impacts upon the handling and administration of the bankrupt
estate.
743 F.2d at 994. This comprehensive “related to” jurisdictional grant was intended to allow
courts to “deal efficiently and expeditiously with all matters connected with the bankruptcy
estate.” Id., citing, H.Rep No. 598, 95th Cong., 2d Sess., 43-48.
Post-Confirmation Jurisdiction
Although the “related to” jurisdictional grant is very broad, Boston Regional Medical
Center, Inc. v. Reynolds (In re Boston Regional Medical Center, Inc.), 410 F.3d 100, 105 (1st Cir.
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2005), there is no question that there are limits. Celotex, 514 U.S. at 308. Defendants in their
motion rely on the principle that bankruptcy jurisdiction shrinks post-confirmation, citing In re
General Media, Inc., 335 B.R. 66, 73 (Bankr. S.D.N.Y. 2005). Defendants argue that the instant
adversary proceeding is merely a suit between non-debtors involving state law causes of action,
that there can be no effect on the Chapter 11 estate as there is no estate and the proceedings have
terminated, that there is no close nexus to the chapter 11 proceedings, and that the Plan did not
adequately provide for retention of bankruptcy “related to” jurisdiction.
Defendants’ contentions can be easily disposed of. From a general perspective, while the
jurisdiction of a bankruptcy court may shrink, it “does not disappear entirely.” Binder v. Price
Waterhouse & Co. (In re Resorts Int’l, Inc.), 372 F.3d 154, 165 (3d Cir. 2004); see also, Neilson
v. Straight-Out Promotions, LLC (In re Michael G. Tyson), No. 05-02210, 2007 WL 2379624 at
*3 (Bankr. S.D.N.Y. Aug. 17, 2007) (noting that “jurisdiction . . . after confirmation of a plan
may shrink, but it does not disappear”). Indeed, as the Resorts court noted, several statutory
provisions and rules are premised upon the continuation of bankruptcy jurisdiction post-
confirmation, including 11 U.S.C. § 1142, which authorizes the bankruptcy court to direct parties
to perform acts necessary to carry out the plan, and Fed. R. Bankr. P. 3020, authorizing the court
to enter orders necessary for the administration of the estate. 372 F.3d at 165. According to the
Resorts court, the “essential inquiry” in determining post-confirmation jurisdiction is whether
there is a “close nexus” to the bankruptcy plan or proceeding. Resorts, 372 F.3d at 167. See
also General Media, 335 B.R. at 73-74, which similarly held that the post-confirmation matter
must have a close nexus to the bankruptcy plan or proceeding.
In this case, the Post-Confirmation Trust was expressly established as the principal if not
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only “means for implementation of the Plan” (Art. V). The causes of action against the
Defendants were transferred by the Debtors from their Estates to the Liquidating Trust pursuant
to the Plan and the Litigation Trust Agreement. The implementation and execution of the Plan is
directly at issue as the Trustee is prosecuting the claims that were transferred pursuant to the
terms of the Plan.
The First Circuit in Boston Regional also noted that there is a strong federal policy
favoring an expeditious liquidation of corporate debtors and the prompt distribution of their
assets to creditors. 410 F.3d at 107. Consequently, the Boston Regional court concluded that
where a debtor, or a trustee acting on behalf of a debtor,
commences litigation designed to marshal the debtor’s assets for the benefit of its
creditors pursuant to a liquidating plan of reorganization, the compass of related
to jurisdiction persists undiminished after plan confirmation.
Id. at 107. Although sustaining post-confirmation jurisdiction on the more traditional “close
nexus” analysis of General Media and Resorts, the District Court in Refco found the Boston
Regional analysis “persuasive.” Refco, 628 F. Supp. at 442 (citing cases that also approvingly
cited the First Circuit’s approach); see also, Cross Media Mktg. Corp. v. CAB Mktg., Inc. (In re
Cross Media Mktg. Corp.), 367 B.R. 435, 444 (Bankr. S.D.N.Y. 2007), where the bankruptcy
court relied on the Boston Regional analysis, finding that post-petition bankruptcy jurisdiction
did not diminish in the context of a liquidating chapter 11 plan where the debtor commenced
litigation to collect assets for the benefit of creditors.
Defendants contend that all of the foregoing courts “overlooked” the decision of the
Supreme Court in Celotex v. Edwards because they failed to address the Supreme Court’s
admonition in Celotex that “bankruptcy courts have no jurisdiction over proceedings that have
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no effect on the debtor.” 1514 U.S. at 308 n. 6. The Defendants contend that because the
debtor-in-possession and its estate cease to exist after confirmation of a plan, there can be no
effect on the debtor or its estate as required by Celotex. Defendants’ argument has no merit.
Celotex did not address post-confirmation jurisdiction as it was decided in the context of a viable
debtor and an existing bankruptcy estate, and the Supreme Court did not use the word “estate” in
a narrow or limiting sense. Indeed, although not explicitly citing Celotex in the section of its
decision which addressed the issue of the absence of a debtor or estate, the Resorts court stated
At the most literal level, it is impossible for the bankruptcy debtor’s estate to be affected
by a post-confirmation dispute because the debtor’s estate ceases to exist once
confirmation has occurred.
Resorts, 372 F.3d at 165. The Resorts Court went on to note that all post-confirmation
jurisdiction would be barred courts applied the “effect on the bankruptcy estate” language
literally. Id.
The second prong of the General Media standard, which has also been frequently cited, is
that the reorganization plan provide for retention of the causes of action at issue. Here, the
causes of action against the Defendants are preserved in the Plan. The Plan provides that the
Debtors and Committee conveyed the Remaining Assets, which included “Causes of Action”, to
the Liquidating Trust. The term “Cause of Action” was broadly defined to include, among other
things, all causes of action, rights, suits or other claims that the Debtors or their Estates held or
were entitled to assert based on events occurring prior to the Petition Date up until Confirmation
of the Plan. The Trustee was charged with the responsibility of “implementing the applicable
provisions of the Plan and administering the Liquidating Trust in accordance with the Plan.”
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7 Further supporting the Trustee’s control over the Causes of Action, Article XI-E of the Plan provides that
the Trustee “shall have the exclusive right and authority to institute, prosecute, abandon, settle or compromise any
and all such claims, rights and Causes of Action.”
8 Article XI-E(2) of the Plan provides that claims or Causes of Action are reserved for further action by the
Liquidating Trust or Committee unless “expressly waived, abandoned, relinquished, released, compromised or
settled in the Plan” or any final order. (emphasis added). There was no express abandonment or any other type of
express release with respect to the Causes of Action at issue in this adversary proceeding.
10
(Art. I-B(7)).7 Further, Article XIII-8 of the Plan provided that post-confirmation, the
Bankruptcy Court retained jurisdiction to “decide or resolve any . . . adversary proceedings . . .
and any other Causes of Action that are pending as of the Confirmation Date or that may be
commenced in the future.” Since the Trustee commenced this litigation to marshal the debtor’s
assets for the benefit of the Beneficiaries, who were holders of claims against the Debtors’
Estates, the second prong set forth in General Media is satisfied.
The Defendants contend that more specificity was required to preserve the Causes of
Action against these particular Defendants. However, the Plan specifically provided that all
Causes of Action were preserved and transferred to the Liquidating Trust unless “expressly
waived, abandoned, relinquished, released, compromised or settled in the Plan.” 8 As these
Causes of Action were not expressly abandoned or otherwise relinquished or released, they were
adequately preserved under the terms of the Plan.
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Conclusion
The motion to dismiss under Fed. R. Civ. P. 12(b)(1) is denied. Counsel for the Trustee
is directed to settle an order consistent with this Memorandum of Decision on three days’ notice.
Dated: New York, New York
September 4, 2012
s/Allan L. Gropper
UNITED STATES BANKRUPTCY JUDGE
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