United States District Court, D. Maryland
In re TMST, INC. (f/k/a/THORNBURG MORTGAGE, INC.), et al., Debtors. JOEL I. SHER in his capacity as Chapter 11 Trustee for TMST, INC., et al., Plaintiff, JPMORGAN CHASE FUNDING INC., et al., Defendants. Adversary Proceeding Case No. 11-00340 (NVA), No. 09-17787 (NVA)
JAMES K. BREDAR, District Judge.
The matter now pending before the Court is rooted in an ongoing Chapter 11 bankruptcy action in the United States Bankruptcy Court for the District of Maryland ("the bankruptcy proceeding"). The bankruptcy proceeding was initiated in 2009 by TMST, Inc. f/k/a Thornburg Mortgage, Inc. ("TMST"), TMST Acquisition Subsidiary, Inc. f/k/a Thornburg Acquisition Subsidiary, Inc. ("TAS"), TMST Home Loans, Inc. f/k/a Thornburg Mortgage Home Loans, Inc. ("TMHL"), and TMST Hedging Strategies, Inc. f/k/a Thornburg Mortgage Hedging Strategies, Inc. ("TMHS, " and collectively the "Debtors"). See Chapter 11 Voluntary Petition, In re TMST, Inc., Case No. 09-17787-DK (Bankr. D. Md. May 1, 2009), ECF No. 1. Joel I. Sher is the courtappointed Chapter 11 Trustee (the "Trustee") for the Debtors' jointly administered estates. In 2011, the Trustee commenced this proceeding ("the adversarial proceeding"), asserting thirtyone claims against JPMorgan Chase Funding Inc., Citigroup Global Markets Limited, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Credit Suisse International, RBS Securities Inc., Greenwich Capital Derivatives, Inc., Royal Bank of Scotland plc, and UBS AG (collectively, the "Defendants"). See Original Complaint, In re TMST, Inc., Case No. 11-00340-DK (Bankr. D. Md. Apr. 30, 2011), ECF No. 1. The adversarial proceeding was automatically referred to the bankruptcy court, pursuant to Local Rule 402. Now pending before the Court is Defendants' motion to withdraw the reference to the Bankruptcy Court. (ECF No. 1.) The issues have been briefed (ECF Nos. 1, 2 and 3) and no hearing is required, Local Rule 105.6. For the reasons explained below, Defendants' motion to withdraw the reference will be DENIED.
I. Background 
The Debtors had been involved in the once profitable business of investing in mortgagebacked securities ("MBS"). See Amended Complaint ¶¶ 19-34, In re TMST, Inc., Case No. 11-00340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15. They "financed the acquisition of MBS primarily through financing agreements with investment banking and securities firms such as the Defendants, " and pledged MBS to the Defendants as collateral. Id. ¶ 20. In February 2008, the market value of MBS began to fall quickly, which lead the Defendants to make a series of "aggressive" margin calls. Id. ¶¶ 44-54. "Facing a deluge of margin calls and recognizing that current market conditions made it untenable for [the Debtors] to contest every margin call, [the Debtors] spent the second week of March 2008 engaging the Defendants in a strained attempt to restructure its debts with them." Id. ¶ 55. Through these negotiations, the Debtors and Defendants reached an agreement "to override and extend" the terms of the original financing agreements (the "Override Agreement"). Id. ¶¶ 55-56. In the ensuing year, the market for MBS continued to erode. The Debtors and Defendants amended the Override Agreement (the "AOA") "[t]o clarify their respective rights" (ECF No. 1-1 at 11-12), and later executed forbearance agreements (the "Forbearance Agreements") to give the Debtors "additional breathing room" ( Id. at 12). Both the AOA and the Forbearance Agreements included provisions releasing the Defendants from specified potential claims by the Debtors (the "First Release" and "Second Release"). ( Id. at 12.)
On May 1, 2009, fourteen months after the Override Agreement was executed, the Debtors filed for Chapter 11 bankruptcy. Chapter 11 Voluntary Petition, In re TMST, Inc., Case No. 09-17787-DK (Bankr. D. Md. May 1, 2009), ECF No. 1. Shortly thereafter, the bankruptcy court appointed Joel I. Sher as the Trustee to jointly administer the Debtors' estates. TMST, Case No. 09-17787-DK (Bankr. D. Md. Oct. 28, 2009), ECF No. 506. The Defendants filed proofs of claim in the underlying bankruptcy proceeding "in the aggregate amount of" approximately $2.6 billion. (ECF No. 2 ¶ 3.) Significantly, at the time the Debtors and Defendants signed the Override Agreement, the Defendants "represented that their aggregate... claims against the Debtors totaled" approximately $5.8 billion. ( Id. ¶ 2.) "It is the manner in which the Defendants reduced their alleged claims [from $5.8 billion to $2.6 billion] between the execution of the Override Agreement and the filing of their Proofs of Claim that is at the heart of this Adversary Proceeding." ( Id. ¶ 3.)
The Trustee commenced this adversarial proceeding on April 30, 2011 and the case was automatically referred to the bankruptcy court for this district. Original Complaint, TMST, Case No. 11-00340-DK (Bankr. D. Md. Apr. 30, 2011), ECF No. 1. The Trustee then amended his complaint on June 8, 2011. Amended Complaint, TMST, Case No. 11-00340-DK (Bankr. D. Md. June 8, 2011), ECF No. 15. This amended complaint included thirty-one separate counts, and generally sought "redress for the Defendants' conduct after the execution of the Override Agreement and the manner in which they systematically seized or obtained all of the Debtors' liquidity, MBS and other assets and applied the proceeds thereof to their respective claims." (ECF No. 2 ¶ 4.)
Before filing an answer to the amended complaint, the Defendants filed two consecutive motions: On September 12, 2011, the Defendants filed a joint motion to dismiss the amended complaint, Motion to Dismiss, TMST, Case No. 11-00340-DK (Bankr. D. Md. Sept. 12, 2011), ECF No. 32; and on October 26, 2011, the Defendants filed their first motion to withdraw the reference, First Motion to Withdraw the Reference, TMST, Case No. 11-00340-DK (Bankr. D. Md. Oct. 26, 2011), ECF No. 33.
On July 23, 2012, this Court denied the Defendants' first motion to withdraw the reference. Order, Joel I. Sher v. JP Morgan Chase Funding, Civ. No. L-12-157 (D. Md. July 23, 2012), ECF No. 8. The Court-presided over by Judge Legg-noted that "[a]t least 28 of the 31 counts in the Amended Complaint are properly within the core jurisdiction of the Bankruptcy Court." Id. On the remaining three counts,  the Court held that "[a]ssuming arguendo that the Bankruptcy Court lacks final adjudicatory authority under Stern, it may still submit proposed findings of fact and conclusions of law pursuant to the procedure set forth in 28 U.S.C. § 157(c)(1)." Id. Defendants' motion was denied, and the matter was returned to the Bankruptcy Court for further proceedings.
On September 25, 2014, the Bankruptcy Court entered an order granting in part and denying in part Defendants' motion to dismiss. See Sept. 25, 2014 Memorandum and Order, TMST, Case No. 11-00340-DK (Bankr. D. Md. Sept. 25, 2014), ECF Nos. 76 and 77. The Court dismissed twenty-two of the Trustee's thirty-one original counts. Id. The following nine counts are what remain of the Trustee's amended complaint: Counts 3, 7, 10, 16, 20, 27, 28 29, and 31. Id. On October 15, 2014, both the bankruptcy proceeding and the adversarial proceeding were reassigned from Judge Keir to Judge Alquist. See TMST, Case No. 09-17787-NVA (Bankr. D. Md. Oct. 15, 2014); TMST, Case No. 11-00340-NVA (Bankr. D. Md. Oct. 15, 2014).
The Defendants have now filed their second motion to withdraw the reference, on the theory that while "bankruptcy law claims and issues predominated in the case" when the first motion to withdraw was denied, the Trustee's complaint is now better suited for resolution in the district court in light of the Bankruptcy Court's order dismissing most of the Trustee's claims. (ECF No. 1-1 at 8.) Defendants' motion (ECF No. 1), the Trustee's response in opposition (ECF No. 2), and Defendants' reply (ECF No. 3) were all referred to this Court on January 9, 2015.
In general, "district courts shall have original and exclusive jurisdiction of all cases under title 11, " the Bankruptcy Code. 28 U.S.C. § 1334(a). District courts may, however, refer "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... to the bankruptcy judges for the district." Id. § 157(a). In the District of Maryland, all qualifying cases-including the instant action-are "deemed to be referred to the bankruptcy judges of this District." Local Rule 402. "The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d). The Defendants now move this Court to withdraw the reference to the bankruptcy court pursuant to § 157(d).
"The district court has broad discretion in deciding whether reference should be withdrawn for cause shown, " and "[i]t is the movant's burden to show cause...." In re Millennium Studios, Inc., 286 B.R. 300, 303 (D. Md. 2002) (internal quotation marks omitted). In assessing a motion to withdraw the reference, courts consider the following six factors: "(1) whether the matter at issue between the parties is core' within the meaning of Section 157(b)(2) of the Bankruptcy Code; (2) uniformity of bankruptcy administration; (3) forum shopping; (4) conservation of creditor and debtor resources; (5) expediency of the bankruptcy proceeding; (6) the likelihood of a jury trial." Albert v. Site Mgmt., Inc., 506 B.R. 453, 455 (D. Md. 2014). "The most important factor is whether the case presents a core or non-core proceeding, " and so the Court begins its analysis accordingly. Allen v. Nat'l City Mortg. Co., No. 2:04 CV 188, 2:05 MC 144, 2006 WL 3899997, at *2 (S.D. W.Va. July 13, 2006).
A. Core vs. Non-core Claims
By statute, bankruptcy judges are authorized to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11...." 28 U.S.C. § 157(b)(1) (emphasis added). The statute provides a non-exhaustive list of sixteen types of core claims. Id. § 157(b)(2). For statutorily non-core claims that are "otherwise related to a case under title 11, " a bankruptcy judge may still retain authority to hear the case, but "cannot finally resolve [the claims] and must instead submit proposed findings of fact and conclusions of law to the district court." Moses v. CashCall, Inc., 781 F.3d 63, 70 (4th Cir. 2015) (citing 28 U.S.C. § 157(c)(1)). Alternatively, "with the consent of all the parties to the proceeding, " a district court "may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments...." Id. § 157(c)(2).
In 2011, the Supreme Court identified a constitutional limit on a bankruptcy court's authority to issue final judgments. Stern v. Marshall, 131 S.Ct. 2594 (2011). Now, "even where the bankruptcy court possesses statutory power to enter a final judgment under Section 157 because the issue is core, ' Article III presents an independent bar to the bankruptcy court's adjudication of at least some cases." Albert, 506 B.R. at 457. Stated differently, claims must be both statutorily and constitutionally core for a bankruptcy court to possess final adjudicatory authority. A claim is not constitutionally core unless it "stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern, 131. S.Ct. at 2618. "[W]hen a bankruptcy court is faced with a claim that is statutorily core but constitutionally noncore-a so-called Stern claim'-it must treat the claim as if it ...