UBS Securities LLC v. Dondero

Background

UBS Securities LLC and UBS AG London Branch removed a New York Supreme Court proceeding to federal court. The proceeding arose from UBS’s efforts to collect judgments entered in an earlier state-court action involving a securitization transaction and related collateralized debt and loan obligations. The earlier judgments included an award of $1,042,391,031.79 against Highland Special Opportunities Holding Company and Highland CDO Opportunity Master Fund, and additional amounts against other entities.

The removed pleading was a hybrid Special Turnover Petition. Its first two claims sought turnover relief under New York law based on alleged fraudulent or voidable transfers and alter-ego liability. Its other two claims asserted federal civil claims under the Racketeer Influenced and Corrupt Organizations Act, commonly called RICO. James Dondero removed the proceeding, asserting that the federal court had original jurisdiction over the RICO claims and supplemental jurisdiction over the state-law turnover claims.

The parties’ arguments

UBS asked the court to sever and remand the turnover claims to New York Supreme Court. UBS argued that the special nature of turnover proceedings placed those claims outside the federal court’s supplemental jurisdiction. Alternatively, UBS argued that the court should decline to exercise supplemental jurisdiction because of the complexity and history of the state proceedings and their relationship to the underlying action.

Dondero, Scott Ellington, and CLO Holdco opposed remand. They argued that the turnover claims arose from the same facts as the RICO claims and therefore fell within the court’s supplemental jurisdiction.

Supplemental jurisdiction

The court held that the turnover claims were within its supplemental jurisdiction because they and the RICO claims arose from a common set of operative facts. The RICO claims incorporated many of the facts underlying the turnover claims, and the claims were pleaded in the alternative. The court rejected UBS’s argument that labeling the claims as part of a state-law turnover proceeding made them unremovable.

Because the turnover claims were within supplemental jurisdiction, the court held that mandatory severance and remand under 28 U.S.C. § 1441(c) did not apply. The court distinguished an earlier decision involving a turnover petition with no federal claims, explaining that this case involved a hybrid petition containing federal RICO claims that supplied original federal-question jurisdiction.

Declining supplemental jurisdiction

Although the court had supplemental jurisdiction, it concluded that the state-law turnover claims substantially predominated over the federal RICO claims. The court emphasized that the turnover claims had to be resolved before the RICO claims could become ready for decision. It also found that judicial economy and convenience favored the New York Supreme Court, which had handled the underlying action for many years and had entered the judgments UBS was seeking to enforce.

The court further found that the state court was better positioned to address the complex, fact-intensive turnover proceeding, which involved numerous parties, extensive materials, a judgment involving approximately $1 billion, and potentially complex domestic and foreign-law issues. Fairness was neutral, while respect for the state court’s role and interest in enforcing its own judgment favored remand.

Disposition

The court granted UBS’s motion to remand the turnover claims. It directed the Clerk of Court to remand Claims I and II to New York Supreme Court for further proceedings. The court stayed the remaining federal RICO claims while the state turnover proceeding is pending and ordered the parties to provide status updates after a significant state-court event or six months after the opinion, whichever came first.

The opinion did not decide whether the alleged fraudulent transfers, alter-ego theory, or RICO violations were established. It decided only the jurisdictional and case-management issues addressed in the motion.