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Issue-Specific Withdrawal of the Reference

By Menachem O. Zelmanovitz and Rachel Jaffe Mauceri

Traditionally, defendants in actions brought by debtors or trustees have struggled to level the playing field and extricate themselves from the bankruptcy court, a forum often perceived as the plaintiff's “home court.” At one time, litigants hoped to utilize motions to withdraw the reference from the bankruptcy court pursuant to 28 U.S.C. ' 157(d), to enhance their prospects of a favorable resolution from a presumably friendlier judicial forum. However, more often than not, movants were disappointed by the district courts' natural reluctance to relieve the bankruptcy courts of their intended role and increase their own considerable workloads.

The Supreme Court's recent ruling in Stern v. Marshall has revitalized this litigation tactic and encouraged a veritable torrent of such motions. In In re Bernard L. Madoff Investment Securities LLC (Madoff) alone, a liquidation proceeding under the Securities Investor Protection Act currently pending before the Bankruptcy Court for the Southern District of New York, literally hundreds of such motions have been filed in the fraudulent transfer actions commenced by the trustee. District Judge Jed S. Rakoff has issued several orders withdrawing the reference, not with respect to the adversary proceedings in their entirety, and not even with respect to individual claims, but with respect to discrete issues underlying those claims (including the effect of Stern v. Marshall on the bankruptcy court's ability to hear and adjudicate avoidance claims).

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