15‐3480‐bk In re: Lehman Brothers Holdings Inc.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 6th day of October, two thousand sixteen.

PRESENT: DENNY CHIN, SUSAN L. CARNEY, Circuit Judges, KATHERINE B. FORREST, District Judge.* ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐x IN RE: LEHMAN BROTHERS HOLDINGS INC., Debtor. ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐x 344 INDIVIDUALS, Identified in the Notices of Appearance of Bankruptcy Court ECF Dkt. Nos. 8234, 8905 and 9459, Plaintiffs‐Appellants,

v. 15‐3480‐bk

* Judge Katherine B. Forrest, of the United States District Court for the Southern

District of New York, sitting by designation. JAMES W. GIDDENS, as Trustee for the SIPA Liquidation of Lehman Brothers Inc., Defendant‐Appellee. ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐x

FOR PLAINTIFFS‐APPELLANTS: RICHARD J.J. SCAROLA, Alexander Zubatov, Scarola Malone & Zubatov LLP, New York, New York.

FOR DEFENDANT‐APPELLEE: JAMES C. FITZPATRICK, James B. Kobak, Jr., Marlena C. Frantzides, Karen M. Chau, Hughes Hubbard & Reed LLP, New York, New York.

Appeal from the United States District Court for the Southern District of

New York (Ramos, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.

Plaintiffs‐appellants (ʺplaintiffsʺ) appeal the district courtʹs September 30,

2015 judgment affirming the order of the United States Bankruptcy Court for the

Southern District of New York (Chapman, B.J.) entered August 11, 2014 denying

plaintiffsʹ motion to compel arbitration. The district court explained its reasoning in an

opinion and order entered September 30, 2015. We assume the partiesʹ familiarity with

the underlying facts, the procedural history of the case, and the issues on appeal.

This case arises out of the Securities Investor Protection Act (ʺSIPAʺ)

liquidation proceeding of Lehman Brothers, Inc. (ʺLBIʺ), the largest liquidation

proceeding in U.S. history. Plaintiffs, former employees of LBIʹs predecessor Shearson

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Lehman Brothers, Inc. (ʺShearsonʺ), seek deferred compensation pursuant to employee

compensation plan agreements (the ʺAgreementsʺ) that they each signed with Shearson

in 1985. Plaintiffs filed proofs of claims in the LBI liquidation proceeding. Defendant‐

appellee James W. Giddens, the SIPA trustee, sought to enforce the provision of the

Agreements that provides that each former employeeʹs benefits would be subordinated

to certain of LBIʹs other obligations.

On April 1, 2014, the bankruptcy court converted the trusteeʹs objections

into an adversary proceeding. On June 6, 2014, plaintiffs moved to stay the adversary

proceeding and to compel arbitration, arguing that, pursuant to an arbitration clause in

the Agreements, their level of priority should be decided by FINRA arbitrators, not by

the bankruptcy court. On July 30, 2014, the bankruptcy court heard argument and

denied the motion to compel arbitration, ruling from the bench. Plaintiffs appealed to

the district court, the district court affirmed, and this appeal followed.

In deciding whether to compel arbitration in a bankruptcy context, courts

apply a two‐part test. First, the court must determine whether the proceeding at issue is

core or non‐core. MBNA Am. Bank, N.A. v. Hill,

(2d Cir. 2006). If the

proceeding is non‐core, generally the bankruptcy court must stay the proceedings in

favor of arbitration, as non‐core proceedings usually do not warrant overriding the

presumption in favor of arbitration. In re U.S. Lines, Inc.,

, 640 (2d Cir.

1999); see also In re Crysen/Montenay Energy Co.,

, 165‐66 (2d Cir. 2000).

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Second, if the proceedings are core, a court must consider whether enforcing the

arbitration provisions would seriously jeopardize ʺany underlying purpose of the

Bankruptcy Code.ʺ In re U.S. Lines, 197 F.3d at 640 (quoting Hays and Co. v. Merrill

Lynch, Pierce, Fenner & Smith, Inc.,

(3d Cir. 1989)). This two‐part test

presents mixed questions of law and fact, and on review, we accept the bankruptcy

courtʹs factual findings unless they are clearly erroneous and review its conclusions of

law de novo. MBNA Am. Bank,

.

If arbitration would severely conflict with the text, history, or purposes of

the Bankruptcy Code, the bankruptcy court has discretion to compel or to stay the

arbitration. We review its exercise of that choice for abuse of discretion. ʺWhere the

bankruptcy court has properly considered the conflicting policies [of the Federal

Arbitration Act and the Bankruptcy Code] in accordance with law, we acknowledge its

exercise of discretion and show due deference to its determination that arbitration will

seriously jeopardize a particular core bankruptcy proceeding.ʺ In re U.S. Lines, 197 F.3d

at 641.

Here, the bankruptcy court held (1) the proceeding was a core proceeding,

and (2) compelling arbitration of the subordination claim would jeopardize the

objectives of the Bankruptcy Code. Based on our independent review of the record and

the relevant case law, we conclude that the bankruptcy court did not abuse its

discretion in denying plaintiffsʹ motion to compel arbitration. See In re Stoltz,

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80, 87 (2d Cir. 2002) (ʺThe rulings of a district court acting as an appellate court in a

bankruptcy case are subject to plenary review.ʺ).

First, the bankruptcy court correctly concluded that, in this SIPA

liquidation, the dispute over where plaintiffsʹ claims fall in the priority scheme of

distributions is a core proceeding. See In re U.S. Lines, Inc., 197 F.3d at 637 (core

bankruptcy proceedings may include ʺ[f]ixing the order of priority of creditor claims

against a debtorʺ (internal quotation marks omitted)). Additionally, the bankruptcy

court correctly concluded that the dispute involving the enforcement of a contractual

subordination agreement is core, especially where the parties dispute whether the

subordination provision may only be applied by the former entity, Shearson, and not

LBI, and whether they are the same entity. See

(b)(2)(A) (ʺCore

proceedings include, but are not limited to . . . matters concerning the administration of

the estate.ʺ).

Second, the bankruptcy court did not abuse its discretion in concluding

that, in this case, compelling arbitration would jeopardize the objectives of the

Bankruptcy Code. The bankruptcy court reasonably determined that ʺCongress simply

could not have intended to turn over the determination of the relative priority of claims

against the estate and the equitable distribution of the estateʹs assets in the largest SIPA

liquidation in U.S. history [to] the financial industry regulatory authority to be decided

under the rules of the New York Stock Exchange.ʺ App. at 1196. The bankruptcy court

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considered the conflicting policies of the Federal Arbitration Act and the Bankruptcy

Code, made a particularized inquiry into the nature of the claims and the facts of LBIʹs

bankruptcy, and found that an underlying purpose of the Bankruptcy Code would be

jeopardized by enforcing an arbitration clause in this case. See MBNA Am. Bank,

. While the bankruptcy court did not use the phrase ʺseriously jeopardizedʺ

in its conclusions, it did set forth the proper standard earlier in its ruling. Moreover,

based on our review of the record, we conclude that arbitration would have ʺseriously

jeopardize[d]ʺ the objectives of the Bankruptcy Code. The bankruptcy court therefore

had discretion over whether to permit arbitration of subordination claim.

Accordingly, we must give due deference to the bankruptcy courtʹs

decision to stay arbitration unless appellants show that it constituted an abuse of

discretion. Given the bankruptcy courtʹs careful analysis of the impact of arbitrating the

subordination claim on the bankruptcy proceeding in this case, appellants have not

overcome that deferential standard. We therefore agree with the district court that the

bankruptcy court did not abuse its discretion in denying the motion to compel

arbitration.

We have considered all of plaintiffsʹ arguments and find them to be

without merit. Accordingly, we AFFIRM the judgment of the district court.

FOR THE COURT: Catherine OʹHagan Wolfe, Clerk

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