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KAPILA v. NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA et al

ATTENTION: It is possible that this information may no longer be current and therefore may be inaccurate. The index contains both open and closed cases and is not a complete list of cases in which an ACE Insurance Group company is involved. This information is provided to give interested persons an idea of the issues disputed in the indexed cases. For a full understanding of a case, one should read the rest of the court file, including the response. For the most up-to-date and complete information on a case, visit www.pacer.gov or contact the clerk of the relevant court.

Case Number: 
1:15-cv-20383 Search Pacer
ACE Group party(s): 
Opposing Party: 
Soneet R. Kapila
Court Type: 
Federal
US District Court: 
Southern District of Florida
Date Filed: 
Jan 30 2015

The Plaintiff, Chapter 7 Trustee Soneet Kapila of the estates of the Main Case Debtors,1 2
and pursuant to 28 U.S.C. § 157(d), and S.D. Fla. Local Bankruptcy Rule 9075-1, files this
1 The Debtors, which filed Chapter 11 voluntary petitions on June 9 and November 25, 2009, and
are being jointly administered under Main Bankruptcy Case No. 09-21481-BKC-AJC, consist of:
(i) Fontainebleau Las Vegas Holdings, LLC; (ii) Fontainebleau Las Vegas, LLC; (iii)
Fontainebleau Las Vegas Capital Corp.; (iv) Fontainebleau Las Vegas Retail Parent, LLC; (v)
Fontainebleau Las Vegas Retail Mezzanine, LLC; and (vi) Fontainebleau Las Vegas Retail, LLC
By Order dated April 20, 2010, the Bankruptcy Court converted the Debtors’ cases to Chapter 7
liquidations. Thereafter, Mr. Kapila was appointed Chapter 7 trustee of the estates of the
Emergency Motion for Immediate Withdrawal of the Reference of Adversary Proceeding [Adv.
ECF No. 1; Main Case ECF No. 4785] and Incorporated Memorandum of Law, and says:

I. Reason for Emergency as Required by Local Rule 9075-1

A. Reason for the Exigency

Emergency relief is requested by the Trustee because on December 30, 2014, Jeffrey
Soffer,2 filed his Emergency Motion To Lift The Automatic Stay, To The Extent Applicable, To
Allow Payment Of Costs And Proceeds Under Certain Director And Officer Liability Insurance
Policies (the “Stay Relief Motion”) [Main Case ECF No. 4779], The Stay Relief Motion seeks
authorization and permission from the Bankruptcy Court to allow and enable the director and
officer (the “D&O”) insurance carriers to pay, upon information and belief, an amount equal to
$93,000,000 to the Term Lenders (as defined in the Stay Relief Motion, and who are creditors of
the Debtors’ estates) pursuant to a purported settlement agreement. Because a ruling on the Stay
Relief Motion would serve to potentially adversely impact the Trustee’s appeal pending before
the District Court* 2 3 involving the Bankruptcy Court’s denial of an $83,300,000 settlement and bar
order, on December 31, 2014, the Trustee filed a motion to withdraw the reference of the Stay
Relief Motion, seeking to withdraw the reference of the Stay Relief Motion to the District Court
(the “Stay Relief Withdrawal Motion”) [D.C. Appeal ECF No. 26],4
Debtors, which appointment was approved by the Bankruptcy Court. As such, Kapila is the duly
appointed and acting Trustee.
2 Soffer is a former officer, director and/or control person of the Debtors with the majority
ownership interest in the failed $1.8 billion Fontainebleau Las Vegas project that the Debtors
were formed to develop, construct and/or ultimately operate.
3 Case No. l:14-mc-24520-KMW, Southern District of Florida (hereinafter, the “D.C. Appeal”).
4 The District Court has scheduled the hearing on the Trustee’s Stay Relief Withdrawal Motion
for January 8, 2015, at 11:00 a.m. The Bankruptcy Court’s hearing on the Stay Relief Motion is
scheduled for January 9, 2015, at 2:00 p.m.
On January 2, 2015, the Trustee filed his Adversary Complaint Objecting to Jeffrey
Soffer’s Stay Relief Motion and Counterclaim for Injunctive and Other Relief (the “Injunction
Complaint”) [Adv. ECF No. 1; Main Case ECF No. 4785], The Injunction Complaint, which
joins as defendants the Debtors’ former principals, the D&O Carriers and the Term Lenders,
objects to the Stay Relief Motion and seeks, among other relief, to enjoin the consummation of
the Term Lenders’ settlement based upon a multitude of legal authorities from federal Circuit
Courts and District Courts that enjoin actions of third parties that may adversely affect the
administration of bankruptcy estates, and thereby cause harm to such estates and their creditors.
Because the relief requested in the Injunction Complaint is directly related to the legal
and factual issues raised in the Stay Relief Motion, an emergency hearing is necessary and
appropriate to avoid direct, immediate and substantial harm to the bankruptcy estates of the
Debtors if the parties are not able to obtain an immediate resolution of the disputed issues that
are the subject matter of this Motion.

B. The Date by which the Movant Reasonably Believes Such Hearing Must be

held:
No later January 15, 2015, 2:00 p.m., which is the date and the time scheduled by the
Bankruptcy Court for the hearing on Soffer’s emergency Stay Relief Motion.
C. Certification of counsel:
Counsel for the Trustee certifies that that a bona fide effort to resolve the matter without
hearing prior to the filing of this Motion.

II. Facts Supporting Relief Requested

The D.C. Appeal filed on November 7, 2014 [Main Case ECF No. 4745], emanates from
the Bankruptcy Court’s October 24, 2014, order denying a settlement and litigation bar order (the
“Bar Order”) requested by the Trustee in connection with and as required by an $83,300,000
million settlement (the “Trustee Settlement”) of two adversary proceedings pending in the
Bankruptcy Court between the Trustee and multiple former D&Os of the Debtors (the “Settling
Defendants”). The Bar Order aspect of the Settlement sought a permanent injunction barring
certain state court litigation pending in Nevada between the Term Lenders and many of the same
Settling Defendants in the Trustee’s Adversary Proceedings.5
Before the appeal was docketed with the District Court, the Term Lenders opened a new
miscellaneous case number by filing a motion to dismiss the Trustee’s appeal based upon
purported mootness and other grounds, which motion was joined by two other objectors to the
Bar Order. [See D C. Appeal ECF Nos. 1, 8 & 9], With the filing of various responses and
replies of the parties [See ECF Nos. 17-25], as of December 31, 2014, the motions to dismiss
have been fully briefed and are awaiting action by the Court.6
5 It will be the Trustee’s position in the D C. Appeal that, in denying the Bar Order, the
Bankruptcy Court, contrary to controlling precedent in this Circuit, created and applied the
wrong standard for (a) determining whether the claims proposed to be barred were “truly
independent,” and (b) determining the basis on which litigation bar orders can be approved with
respect to non-bankruptcy claims in favor of settling defendants. Specifically, the Bankruptcy
Court incorrectly required the Trustee to prove that “unusual circumstances” existed in order to
justify the Bar Order. The Bankruptcy Court then required the Trustee to prove either that (i) the
Term Lenders’ claims in the Nevada proceeding were not “viable,” or (ii) the Settling
Defendants were either “insolvent” or of such “tiny means” that the Term Lenders would not
recover more in their Nevada litigation outside of bankruptcy than they would recover as
creditors within the bankruptcy proceedings as a result of the Trustee’s proposed Settlement.
Moreover, the Bankruptcy Court also applied the wrong standard when it erroneously concluded,
as a matter of law, that it could not enter the Bar Order against any party who was not receiving
any proceeds from the Settlement. Rather, the Bankruptcy Court concluded that it could only
approve the Bar Order if all parties affected by the Bar Order agreed to the Bar Order.
6 However, on January 2, 2015, the Term Lenders filed a motion for leave to file a sur-reply to
the Trustee’s cross motion for leave to appeal. [D.C. Appeal ECF No. 28], which the Trustee
intends to oppose.
As noted above, in response to the Stay Relief Motion, the Trustee has filed: (i) the Stay
Relief Withdrawal Motion and (ii) the Injunction Complaint7

III. Legal Argument and Citation to Authority

Pursuant to Article I, Section 8 of the United States Constitution, Congress enacted 28
U.S.C. § 1334. Section 1334 is the sole source of federal bankruptcy jurisdiction. Subsection (a)
of that provision grants to the district courts “original and exclusive jurisdiction of all cases
under title 11,” and subsection (b) grants to the district courts “original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under
title 11.” 28 U.S.C. § 1334(a) and (b). All bankruptcy jurisdiction is initially lodged in the
district courts. Under 28 U.S.C. § 157(a), each district court may refer to the bankruptcy court
“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.” Thus, the district court may refer to the bankruptcy court any
and all matters covered by 28 U.S.C. § 1334. This has been accomplished in every district in the
United States by standing orders of reference. In the Southern District of Florida, the standing
order of reference was issued through Administrative Order 2012-25 entered March 27, 2012
(the “Standing Order”), and refers to the bankruptcy court in this district any and all cases and
proceedings covered by federal bankruptcy jurisdiction.
Pursuant to 28 U.S.C. § 157(d): “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.” Although Congress has not provided a statutory definition of the word
“cause”, the Eleventh Circuit has determined that is not “an empty requirement.” In re In re
Parklane/Atlanta Joint Venture, 927 F.2d 532, 536 (11th Cir. 1991). Thus, when making a * 6
7 The Trustee shortly intends to file an emergency motion seeking injunctive relief in the
adversary proceeding that is the subject of the Injunction Complaint.
determination of whether sufficient cause exists, a district court should consider the advancement
of uniformity in bankruptcy administration, decreasing forum shopping and confusion,
promoting the economical use of the parties’ resources, and facilitating the bankruptcy process.
See Dionne v. Simmons (In re Simmons), 200 F.3d 738, 742 (11th Cir. 2000) (quoting Holland
Am. Ins. Co. v. Succession of Roy, 111 F.2d 992 (5th Cir. 1985)). Additional factors include: (1)
whether the claim is core or non-core; (2) efficient use of judicial resources; (3) a jury demand;
and (4) prevention of delay. See Hvide Marine Towing, Inc. v. Kimbrell (In re Hvide Marine
Towing, Inc.), 248 B.R. 841, 844 (M.D.Fla.2000); TPI Int'l Airways v. FAA (In re TPI Int'l
Airways), 222 B.R. 663, 668 (S.D.Ga.1998). While important, none of the aforementioned
factors should prevent a district court “from properly withdrawing reference either to ensure that
the judicial power of the United States is exercised by an Article III court or in order to fulfill its
supervisor function over the bankruptcy courts.” Parklcine/Atlanta Joint Venture, 927 F.2d 532,
at 538.
Sufficient cause exists to withdraw the reference of the Injunction Complaint adversary
proceeding, immediately and in its entirety for all purposes (including trial and all pretrial
matters), because the issues raised in this action are sufficiently related to the D C. Appeal and
the Stay Relief Motion to warrant such relief. Consistent with the Eleventh Circuit’s mandate,
ordering an immediate withdrawal of the reference will “ensure that the judicial power of the
United States is exercised by an Article III court” and “fulfill its supervisor function” over the
Bankruptcy Court in the main bankruptcy cases of the Debtors, and or an adversary proceeding
with a direct nexus to such cases.
The Stay Relief Motion, if granted, will cause substantial harm to assets of the estates -
the Trustee Actions - by allowing $93,000,000 of D&O insurance policy proceeds to be paid to 7
the Term Lenders to the detriment of the bankruptcy estate and its creditors. The Trustee
estimates, and the parties will not dispute, that if this requested payment is approved, no more
than $25,000,000 of the face of the policies will be available to satisfy the litigations claims of
the Trustee and other claimants. Meanwhile, the Trustee’s settlement that is the subject of the
D C. Appeal, would have authorized the Debtors’ estates to be paid $83,000,000 of D&O
insurance proceeds for the sole and exclusive benefit of the estates and ALL of their creditors,
and not just the Term Lenders to the exclusion of everyone else. Moreover, as argued by the
Trustee in the Stay Relief Withdrawal Motion with citation to multiple legal authorities, the
Bankruptcy Court has, at a minimum, highly questionable jurisdiction to hear and decide the
Stay Relief Motion. [D.C Appeal ECF No. 26 at pp. 6-8],
Because the legal and factual issues raised in the Injunction Complaint adversary
proceeding are directly related to those that are the subject of the Stay Relief Motion and the
D.C. Appeal, the reference of this adversary case should be withdrawn immediately and in its
entirety so that all such matters, including trial and pretrial, may be heard and decided by the
District Court. This result will promote judicial economy and, most importantly, avoid the
possibility of inconsistent results and decisions between the District Court and the Bankruptcy
Court.

IV. Conclusion

For the reasons stated above, this emergency motion for the withdrawal of the reference
of Injunction Complaint adversary proceeding should be granted, and the reference withdrawn
immediately and in its entirety as to all trial and pretrial matters.

The provided text is an excerpt from a document filed in this case. For a full understanding of the case, one should read the complete court file, including the response.

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