Zohar CDO 2003-1, Ltd. v. Patriarch Partners, LLC

Background

The Zohar Funds—Zohar CDO 2003-1, Ltd., Zohar II 2005-1, Ltd., and Zohar III, Ltd.—asked the court to transfer the case to the U.S. District Court for the District of Delaware for referral to the Delaware Bankruptcy Court, where Zohar III’s Chapter 11 bankruptcy proceedings were pending. MBIA Inc., MBIA Insurance Corporation, Credit Value Partners, LP, Halcyon Capital Management LP, Coöperatieve Rabobank U.A., and Varde Partners, Inc. joined the motion.

The Patriarch Parties—including Patriarch Partners, LLC, several Patriarch entities, Octaluna entities, Ark entities, and Lynn Tilton—opposed the transfer. The case involved competing allegations of wrongdoing. The Zohar Funds alleged that the Patriarch Parties conspired to enrich themselves by taking funds from the Zohar Funds and impairing their assets. Patriarch alleged that the Zohar Funds and MBIA had created a scheme to take control of portfolio companies from Patriarch and Tilton.

The Zohar Funds originally brought claims seeking a declaration about ownership of portfolio companies, damages, and relief under the Racketeer Influenced and Corrupt Organizations Act. In 2017, the court dismissed the Zohar Funds’ RICO claim for failure to state a claim and declined to exercise supplemental jurisdiction over the remaining claims. The Patriarch Parties’ counterclaims and third-party claims remained relevant to the transfer motion. Zohar III began its Chapter 11 bankruptcy in 2018. After a settlement agreement expired in 2019, Tilton filed an equitable-subordination complaint in the Delaware Bankruptcy Court, and the Zohar Funds then moved to transfer this case.

Legal standards and Section 1412

The Zohar Funds relied first on 28 U.S.C. § 1412, which permits transfer of a case or proceeding under Title 11 in the interest of justice or for the parties’ convenience. They alternatively relied on 28 U.S.C. § 1404(a), which permits transfer of a civil action for the convenience of the parties and witnesses and in the interest of justice.

The court held that the two statutes differ in important ways. Section 1412 requires only proof by a preponderance of the evidence, presumes that transfer to the district where the bankruptcy is pending may be appropriate, gives less weight to forum-selection clauses in core bankruptcy matters, and requires either convenience or the interests of justice. Section 1404(a), by contrast, requires the moving party to make a clear and convincing showing and requires consideration of both convenience and the interests of justice.

The court rejected the Zohar Funds’ argument that the case could be transferred under Section 1412 merely because it was related to the bankruptcy. The court distinguished bankruptcy jurisdiction, which can include proceedings that have a conceivable effect on a bankruptcy estate, from Section 1412, whose text is limited to a “case or proceeding under title 11.”

Whether the case arose under Title 11

The court used the distinction between core and non-core bankruptcy proceedings. A core proceeding generally involves rights created by bankruptcy law or a matter that could exist only in bankruptcy. A non-core proceeding does not depend on bankruptcy law and could proceed in a court without bankruptcy jurisdiction.

The court concluded that the Patriarch Parties’ contract and tort claims were not core proceedings. The contracts and the disputes predated Zohar III’s bankruptcy, and the claims did not arise from the Bankruptcy Code. The court acknowledged similarities between this case and the Delaware bankruptcy litigation, including overlapping allegations and factual themes, but held that those similarities did not make the claims bankruptcy claims. It also noted that several parties to this case were not parties to the bankruptcy.

The court rejected the argument that the claims became core merely because they could affect the bankruptcy estate, the ownership of portfolio companies, creditor priorities, or the liquidation of assets. Any damages could be accounted for by the Bankruptcy Court when determining creditor priorities, and the court could stay claims if necessary to avoid conflicting rulings. The court also observed that some claims appeared facially derivative, but stated that the Patriarch Parties had not properly asserted those claims; that defect could independently support dismissal.

Because the action did not arise under Title 11, the court held that transfer under Section 1412 was unavailable and analyzed the motion under Section 1404(a).

Section 1404(a) analysis

The court found that the case could have been brought in Delaware. It concluded that Delaware could exercise personal jurisdiction over Tilton because she was the sole director or managing member of numerous Delaware entities involved in the case and had used those positions to cause investments. The court also found venue proper because a substantial part of the property at issue was located in Delaware, including portfolio companies involved in the ownership claims.

The court then considered the transfer factors:

- Choice of forum: This factor cautioned against transfer. Although the Zohar Funds originally chose New York and later sought transfer, the agreements included non-exclusive forum-selection clauses consenting to jurisdiction and venue in New York. Many parties and much of the relevant conduct were also connected to New York. - Witness convenience: The Zohar Funds did not identify inconvenience to witnesses, and the pleadings indicated that many relevant witnesses were in New York. The court treated this factor as neutral because many parties were also involved in the Delaware bankruptcy. - Party convenience: This factor weighed against transfer. Not all parties were involved in the bankruptcy, the claims were at most related to the bankruptcy rather than core proceedings, and most parties had principal places of business in New York. - Location of operative facts: This factor weighed against transfer. Apart from the bankruptcy and the incorporation of some entities in Delaware, the court found that events giving rise to the claims occurred in New York. - Documents, compulsory process, governing law, trial efficiency, and justice: The parties did not meaningfully address the location of documents. No witness was shown to be unwilling to testify voluntarily. The court found that a Delaware court could apply New York law, but concluded that trial efficiency and the interests of justice did not favor transfer because the New York court had already reviewed the pleadings and decided motions in the case.

Disposition

The court held that the Zohar Funds did not meet the clear-and-convincing-evidence standard required for transfer under Section 1404(a). Senior Judge William H. Pauley III denied the Zohar Funds’ motion to transfer the case and directed the Clerk of Court to terminate the motions pending at ECF Nos. 151 and 154.