Financial Institutions Win Appeal to Federal District Court of Novel Chapter 15 Jurisdictional Issues Presented in Fairfield Madoff-Related Suits

On Monday, September 19, Chief U.S. District Judge Loretta Preska granted leave to appeal and as a matter of first impression held that the Bankruptcy Court did not have “core” jurisdiction to adjudicate 41 lawsuits, claiming over $3 billion in redemption payments, brought by liquidators of the Fairfield Madoff feeder funds in a Chapter 15 Case against over two hundred defendants including seventeen financial institutions represented by Cleary Gottlieb. The Bankruptcy Court had denied defendants’ motion to remand a) all of the cases for lack of subject matter jurisdiction or on the basis of abstention and b) four of the cases on the basis of untimely removals.

Following extensive oral argument, the District Court granted Cleary Gottlieb’s motion for leave to appeal and reversed the Bankruptcy Court’s decision. Judge Preska remanded to state court four cases (two of which involved Cleary Gottlieb clients) on the basis of untimely removal and the rest of the cases to the Bankruptcy Court to make certain factual findings as a predicate for a mandatory abstention determination that would return those cases to the state forum where they were commenced. The District Court agreed with defendants’ arguments that (i) the Bankruptcy Court lacked “core” jurisdiction to decide these cases both as a statutory and constitutional matter, (ii) the Bankruptcy Court misapplied the mandatory abstention standard and (iii) the Bankruptcy Court improperly extended the removal period for certain of the cases after the removal period had expired.