SVB Financial Group v. UBS Securities LLC

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

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In re: : NOT FOR PUBLICATION

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SVB FINANCIAL GROUP, : Chapter 11

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Debtor. : Case No. 23-10367 (MG)

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SVB FINANCIAL GROUP, :

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Plaintiff, :

: Adv. Pro. No. 23-1091 (MG)

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v. :

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UBS SECURITIES LLC,

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Defendant. :

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MEMORANDUM OPINION ENJOINING CERTAIN

PENDING ARBITRATION PROCEEDINGS COMMENCED BY UBS SECURITIES LLC

A P P E A R A N C E S:

JENNER & BLOCK LLP

Proposed Counsel to the Debtor

353 N. Clark Street

Chicago, Illinois 60654

By: Vincent E. Lazar, Esq.

Landon S. Raiford, Esq.

1155 Avenue of the Americas

New York, NY 10036

By: Marc B. Hankin, Esq.

Carl N. Wedoff, Esq.

HUGHES HUBBARD & REED LLP

Counsel to UBS Securities LLC

One Battery Park Plaza

New York, NY 10004

By: William R. Maguire, Esq.

Carl W. Mills, Esq.

AKIN GUMP STRAUSS HAUER & FELD LLP

Proposed Counsel to the Official Committee

of Unsecured Creditors of SVB Financial Group

One Bryant Park

New York, NY 10036-6745

By: Ira S. Dizengoff, Esq.

David M. Zensky, Esq.

Joseph L. Sorkin, Esq.

Brad M. Kahn, Esq.

2001 K Street NW

Washington, DC 20006

By: James R. Savin, Esq.

MARTIN GLENN

UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is the motion (the “Motion,” ECF Doc. # 8) of SVB Financial

Group, debtor and debtor-in-possession (“SVB Financial” or “Debtor” or “Plaintiff”), for an

order enjoining the continuation of the following two arbitrations for a period of 120 days

(without prejudice to the Debtor seeking an extension): UBS Securities LLC v. SVB Leerink LLC,

et al., FINRA Dispute Resolution No. 21- 02142 (the “New York Arbitration”), and UBS

Securities LLC v. Jason Auerbach, et al., FINRA Dispute Resolution No. 22-00363 (the

“California Arbitration,” and together with the New York Arbitration, the “Arbitrations”). In

support of the Motion, the Debtor relies upon the Declaration of William C. Kosturos (the

“Kosturos Declaration”) attached to the Motion as Exhibit B and the Declaration of Steven P.

Heineman (the “Heineman Declaration” or “Heineman Decl.”) attached to the Motion as Exhibit

C. Both declarations were admitted into evidence during the hearing.

UBS Securities, LLC (“UBS”) filed opposition papers (the “Opposition,” ECF Doc. # 14)

as well as an affidavit of Carl W. Mills (the “Mills Decl.,” or “Mills Declaration,” ECF Doc. #

15). UBS, however, did not move the Mills Declaration into evidence, so the Mills Declaration

and its attached exhibits are not in the record. The Official Committee of Unsecured Creditors

(the “Committee”) filed a response in support of the Motion (the “Committee Response,” ECF

Doc. # 18) as well as a motion to intervene (the “Motion to Intervene,” ECF Doc. # 16).

The Court held a hearing on April 12, 2023 to consider the Motion and the Motion to

Intervene. During the hearing, Mr. Heineman was made available for, and was cross examined

by, UBS’s counsel. At the hearing the Court also granted the Committee’s Motion to Intervene.

For the reasons discussed below, the Court GRANTS the Motion and ENJOINS the

Arbitrations for 120 days.

I. BACKGROUND

A. The Chapter 11 Case

The Debtor is a holding company whose business is conducted through its subsidiaries

and affiliates. (Motion ¶ 2.) Prior to March 10, 2023, the Debtor owned and operated Silicon

Valley Bank, a state-chartered bank. (Id. ¶ 14.) On March 10, 2023, the California banking

authorities closed Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation

as receiver (“FDIC-R”). (Id.) On March 17, 2023 (the “Petition Date”), the Debtor filed a

voluntary petition for relief under chapter 11 of the Bankruptcy Code. (ECF Doc. # 1.)

A. SVB Securities

SVB Securities is an SEC registered broker-dealer providing investment banking services

across the healthcare and technology sectors. (Motion ¶ 16.) SVB Securities focuses on the

following product and service offerings: capital raising, M&A advisory, structured finance,

equity research, and sales and trading. (Kosturos Decl. ¶ 10.) SVB Securities is a wholly-owned

indirect subsidiary of the Debtor. (Id.)

Following the FDIC-R’s takeover of Silicon Valley Bank, the Debtor now derives the

majority of its value (according to the Debtor’s latest annual 10-K, approximately $523 million

or 89% of the Debtor’s total revenue from SVB Securities’ contracts with customers, after

deducting the revenues derived from Silicon Valley Bank and SVB Private businesses, which are

no longer associated with the Debtor). (Id.)

B. The Arbitrations

On August 17, 2021, UBS filed a Statement of Claim with FINRA Dispute Resolution in

New York against SVB Securities (formerly known as SVB Leerink LLC) and fifteen individual

respondents who at that time were investment bankers employed by SVB Securities.1

(Heineman Decl. ¶ 4.) On February 17, 2022, UBS filed the California Arbitration—a related

arbitration proceeding against some of the same individuals. (Id.) Together, the Arbitrations

involve claims against SVB Securities and the fifteen individuals (the “Individual Respondents”)

related to the same fundamental dispute. (Id.)

The Arbitrations arise out of the Individual Respondents’ resignations from UBS in May

2021, and their hiring by SVB Securities in July and August 2021. (Id. ¶ 5.) UBS claims,

among other things, that the Individual Respondents violated contractual and fiduciary duties to

UBS and that SVB Securities aided and abetted these purported breaches. (Id.)

UBS did not commence the New York Arbitration until three months after the Individual

Respondents gave notice of their resignations and after each Individual Respondent had started

working at SVB Securities. (Id. ¶ 6.) UBS did not move for a preliminary or temporary

injunction in court, and it is seeking only money damages. (Id. ¶6.) Specifically, UBS seeks

substantial compensatory damages for its alleged “lost profits” over a four-year period beginning

after the Individual Respondents resigned from UBS through May 2025. (Id.) SVB Securities

rejects UBS’s legal arguments, factual predicates, and damages analysis. (Id.)

The Arbitrations have been actively litigated since UBS filed the first case in August

2021. (Id. ¶ 7.) The parties collectively produced a total of approximately 32,000 documents,

and various third parties produced hundreds of additional documents. (Id.) Affirmative expert

reports were served in February and rebuttal expert reports were due April 6, 2023. (Id.) The

parties have litigated motions to compel brought by both sides, and a motion to compel by UBS

1 At the hearing there was some lack of clarity whether these fifteen individuals have officially separated

from the company. The Court finds based on the testimony of Mr. Heineman that regardless of these individuals’

technical employment status, they are playing no role in the Debtor’s restructuring and thus that their participation in

the Arbitration in and of itself does not divert any resources away from the Debtor’s restructuring.

seeking to require SVB Securities to produce additional documents is currently pending before

the New York Arbitration Panel. (Id.) Numerous additional third-party subpoenas for

documents and trial testimony are outstanding. (Id.) The deadline to serve pre-trial briefs,

witness lists, and exhibit lists is April 25, 2023, in the New York Arbitration and May 30, 2023

in the California Arbitration. The evidentiary hearings in the New York Arbitration are

scheduled for May 15–19, 2023; May 22–26, 2023; and July 24–28, 2023. (Id.) The California

Arbitration evidentiary hearings are scheduled for June 19–23, 2023 the New York Arbitration

are scheduled for May 15–19, 2023; May 22–26, 2023; and July 24–28, 2023. (Id.) The

California Arbitration evidentiary hearings are scheduled for June 19–23, 2023. (Id.)

On March 13, 2023, SVB Financial announced that it had appointed a restructuring

committee of its board of directors to explore strategic alternatives for several of its remaining

businesses, including SVB Securities. (Id. ¶ 9.) On March 15, 2023, SVB Securities and the

Individual Respondents asked the New York FINRA Arbitration Panel (the “New York

Arbitration Panel”) to order a 120-day postponement of the New York hearing in light of these

extraordinary developments. (Id. ¶ 10.) UBS opposed the postponement request. (Id.)

Two days later, on March 17, 2023, SVB Financial filed for chapter 11 bankruptcy

protection in this Court. (Id. ¶11.) In its press release announcing the chapter 11 filing, SVB

Financial stated that it “intends to use the court-supervised process to evaluate strategic

alternatives for . . . SVB Securities,” and is actively marketing SVB Securities for sale and

exploring alternatives for a standalone reorganization. (Id.)

On March 27, 2023, the New York Arbitration Panel denied SVB Securities’

postponement request without providing any rationale for its decision.2 (Id. ¶ 12.) In the same

order, the New York Panel also reiterated the case schedule of fifteen trial days for the New

York Arbitration beginning on May 15, 2023 (May 15–19, 2023, May 22–26, 2023, and July 24–

28, 2023). (Id.) UBS has advised SVB Securities in communications to counsel that it will

demand testimony from the most senior members of SVB Securities in the early days of the May

hearing, including the firm’s Chief Executive Officer (the “CEO”) and the Chief Administrative

Officer (the “CAO”). (Id.) Other key witnesses in the Arbitrations are likely to include, among

others, SVB Securities’ Head of Human Resources and its Co-Heads of Investment Banking.

Given that UBS has asserted related claims against SVB Securities and 15 individual bankers,

SVB Securities avers that it expects that more than 25 defense witnesses will testify at each of

the New York and California Arbitrations. (Id.)

Though counsel for UBS did not move the underlying emails into the record, testimony at

the hearing indicated that, on March 31, 2023, two weeks after the Debtor filed for bankruptcy

and following FINRA’s denial of the request to postpone the Arbitrations, in response to a

question via email about whether the SVB Securities’ CEO and CAO—Mr. Leerink and Mr.

Gentile—would be available to testify at the Arbitrations, counsel for the Debtor stated that they

“anticipate[d] no issues with UBS’s plan to call” those two witnesses during the upcoming May

hearing dates. (Opposition ¶ 5.) Mr. Heineman testified in essence that SVB Securities’ position

was that if the Arbitrations went forward, the witnesses would be available, as required, but that

it was always SVB Securities’ position that they needed a postponement of the Arbitrations.

2 The Individual Respondents in the California Arbitration also sought postponement of that arbitration but

withdrew the request after the New York Arbitration Panel denied SVB Securities’ request to postpone the New

York Arbitration.

If the trials proceed, SVB Securities’ general counsel states he will be personally

involved in the task of preparing many of the senior witnesses. (Id. ¶ 12.) Although SVB

Securities is not a respondent in the California arbitration, SVB Securities’ general counsel avers

that SVB Securities must play the same integral role in the preparation for, and defense of, the

California Arbitration, including through the testimony of its senior executives. (Id.)

SVB Securities’ general counsel avers that SVB Securities’ senior management is

currently required to focus entirely on shepherding SVB Securities through the complex

ramifications of the failure of Silicon Valley Bank, the Debtor’s chapter 11 proceeding, and

facilitating strategic alternatives for SVB Securities. (Id. ¶ 13.) With the first arbitration

scheduled to begin in just under six weeks, SVB Securities’ general counsel avers that they are

now in the most critical and intense stage of trial preparation. (Id. ¶ 14.) He avers that he is the

only member of the small SVB Securities Legal Department with litigation expertise and has

been actively involved in all aspects of the Arbitrations since the New York Arbitration was filed

in August 2021, including managing outside counsel, making strategic and tactical decisions,

reviewing and revising pleadings and motions, assisting with discovery, participating in witness

interviews and other pre-hearing work. (Id.) But since the Silicon Valley Bank crisis began,

however, Mr. Heineman states he has been unable to devote adequate time to supporting

preparation for the hearings because of his responsibilities related to crisis management and the

sale process. (Id.) At the hearing, UBS argued that SVB Securities had several outside firms

who were handling the Arbitration such that the burden on Mr. Heineman should not be

overwhelming.

C. The UBS Opposition

UBS’s Opposition argues that the Court should not enjoin the Arbitrations. First, it

argues that the Court lacks subject matter jurisdiction to issue the requested injunction.

(Opposition ¶¶ 30–36.) Next, UBS argues that that the Debtor has not established grounds for

imposing an injunction given that only two employees of SVB Securities, and not any employees

of the Debtor, would have to testify in the Arbitrations. (Id. ¶ 41.) UBS notes that the burden

from these witnesses’ participation in the hearing is not significant as evidenced by the fact that,

on March 31, 2023, SVB Securities indicated that it “anticipates no issues with UBS’s plan to

call [the SVB Securities employees] during the rough windows outlined in your email below.”

(Id. ¶ 27.) It further argues that that there is no harm to the Debtor because all the cases the

Debtor cites involved the possibility that the litigation might divert the attention of the Debtor’s

employees, not the non-debtor, such that they are distinguishable. (Id. ¶ 44.) Finally, UBS

argues that the public interest weighs in favor of denying the injunction because federal courts

are encouraged to favor arbitration. (Id. ¶ 55.)

D. The Indemnification of Individual Respondents

At the conclusion of the hearing counsel for the Debtor claimed that the Individual

Respondents in the Arbitrations were entitled to indemnification by SVB Securities. The Court

directed the Debtor to file certain offer letters and an operating agreement (the “Indemnification

Documents”) containing such indemnification provisions. The Debtor filed the Indemnification

Documents at ECF Doc. # 19. UBS’s counsel stated that he is familiar with these documents and

has no objection to them being admitted in evidence. Redacted copies of the letters and

operating agreement, including only the indemnification provisions, are admitted in evidence.

The Indemnification Documents include (1) eight offer letters (the “Offer Letters”) for

the Individual Respondents which contain indemnification provisions and (2) an operating

agreement (the “Operating Agreement”) dated as of December 13, 2013 between Leerink Swann

LLC (now SVB Securities) and its members, which also contains an indemnification provision.

The Offer Letters provide indemnity for “reasonable attorneys’ fees . . . costs, expenses, awards,

settlements and damages incurred by [the employee] . . . based on claims by your current

employer arising out of and relating to your transition from your current employer to the

Company.” (See, e.g., Indemnification Documents at 11 (page 9 of the Offer Letter of Jason

Auerbach).) The Operating Agreement provides that any interest holder or member of SVB

Securities who is sued because of the fact that he or she serves as an officer, director, or manager

of SVB Securities shall be indemnified by SVB Securities “to the fullest extent permitted by

law.” (Indemnification Documents at 75.)

E. The Committee Response

The Committee’s Response states that the Committee supports the injunction given the

importance of SVB Securities and its investment banking business to the Debtor’s restructuring

efforts. (Committee Response ¶ 2.) The Committee states that delaying the Arbitrations by 120

days will cause minor inconvenience to UBS while providing much needed breathing room for

the Debtor and SVB Securities to determine the optimal path to maximizing value for the benefit

of the Debtor’s unsecured creditors. (Id. ¶ 3.)

II. LEGAL STANDARD

A. Application of the Automatic Stay to Non-Debtors

Section 362(a) operates as an automatic stay applicable to all entities of, inter alia, “the

commencement or continuation . . . of a judicial, administrative, or other action or proceeding . .

. to recover a claim against the debtor that arose before the commencement of the case under this

title.” 11 U.S.C. § 362(a)(1). The automatic stay is “one of the fundamental debtor protections

provided by the bankruptcy laws.” Midlantic Nat’l Bank v. New Jersey Dep’t of Evntl. Prot.,

474 U.S. 494, 503 (1986); see also In re Heating Oil Partners, LP, 422 F. App’x 15, 17 (2d Cir.

2011). It provides the debtor with a “breathing spell” from creditors, which, in combination with

other provisions of the Bankruptcy Code, is essential to a debtor’s ability to achieve its

bankruptcy objectives. See, e.g., In re Ionosphere Clubs, Inc., 922 F.2d 984, 989 (2d Cir. 1990)

(citations omitted).

Although section 362(a) operates primarily as a shield for the debtor, courts can, and do,

extend its protection to non-debtors in various circumstances, including where an action against

the non-debtor will have an immediate adverse economic consequence for the debtor’s estate.

See Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282, 287 (2d Cir. 2003) (extending automatic stay to

wholly-owned subsidiary of debtor); In re R&G Fin. Corp., 441 B.R. 401, 409–10, 415 (Bankr.

D.P.R. 2010) (extending automatic stay to enjoin FINRA arbitration against a wholly-owned

subsidiary of debtor); In re Neuman, 128 B.R. 333, 336-37 (S.D.N.Y. 1991) (finding that lawsuit

against debtor’s majority-owned direct and indirect non-debtor subsidiaries violated the

automatic stay).

B. Preliminary Injunctions

The mechanism by which the Court can extend the protections of the automatic stay to

non-debtors is section 105(a) of the Bankruptcy Code. See 11 U.S.C. § 105(a). Section 105(a)

authorizes this Court to “issue any order, process, or judgment that is necessary or appropriate to

carry out the provisions of this title” and provides this Court with broad, equitable powers to

“assure the orderly conduct of the reorganization proceedings.” Id.; Garrity v. Leffler (In re

Neuman), 71 B.R. 567, 571 (S.D.N.Y. 1987) (citing In re Baldwin-United Corp. Litig., 765 F.2d

343, 348 (2d Cir. 1985)). “Section 105(a) is to be ‘construed liberally to enjoin suits that might

impede the reorganization process’—or, as here, the process of liquidation.” In re Bernard L.

Madoff Inv. Sec., LLC, 512 F. App'x 18, 20 (2d Cir. 2013) (quoting MacArthur Co. v. Johns-

Manville Corp., 837 F.2d 89, 93 (2d Cir. 1988)). A section 105 injunction is also a proper

vehicle by which to stay a FINRA arbitration against a nondebtor subsidiary. See, e.g., In re

R&G Fin. Corp., 441 B.R. at 411–12.

To determine whether to enjoin actions against non-debtors under section 105(a), courts

look to the requirements of Federal Rule of Civil Procedure 65:

(1) whether there is a likelihood of successful reorganization, (2) whether

there is an imminent irreparable harm to the estate in the absence of an

injunction, although a limited exception permits an injunction to issue

whether the action to be enjoined is one that threatens the reorganization

process if the threat is not imminent, (3) the balance of the comparative

harms to the debtor, and to the debtor's reorganization, against that to the

would-be-enjoined party.

In re Purdue Pharms. L.P., 619 B.R. 38, 58 (S.D.N.Y. 2020); accord Soundview Elite Ltd., 543

B.R. 78, 118-19 (Bankr. S.D.N.Y. 2016); Lyondell Chem. Co., 402 B.R. 571, 588-89 (Bankr.

S.D.N.Y. 2009).

“In evaluating these factors, the court takes a flexible approach and no one factor is

determinative.” In re Calpine Corp., 365 B.R. 401, 409 (S.D.N.Y. 2007) (quotation omitted).

III. DISCUSSION

The Court finds that a preliminary injunction imposing a 120 day stay of the Arbitrations

is proper. As an initial matter, the Court has jurisdiction to stay the Arbitrations. Next, the court

finds that the automatic stay by its terms does not apply to the Arbitrations. Nevertheless,

because each of the four elements enumerated in Federal Rule of Civil Procedure 65 are met the

Debtor has established grounds for extending the protection of the automatic stay to enjoin the

Arbitrations.

A. The Court has Jurisdiction to Stay the Arbitrations

Section 1334(b) of title 28 of the United States Code identifies three types of proceedings

over which this Court has jurisdiction—(1) those “arising under title 11,” (2) those “arising in” a

case under title 11, and (3) those “related to” a case under title 11. 11 U.S.C. § 1334.

Proceedings “arise under” title 11 when the cause of action or “claims clearly invoke substantive

rights created by bankruptcy law.” In re Housecraft Indus. USA, Inc., 310 F.3d 64, 70–71 (2d

Cir. 2002). Proceedings “arise in” a bankruptcy case if they “are not based on any right

expressly created by title 11, but nevertheless, would have no existence outside of the

bankruptcy.” Baker v. Simpson, 613 F.3d 346, 351 (2d Cir. 2010). “A bankruptcy court has

‘related to’ jurisdiction over every case where ‘the action’s outcome might have any conceivable

effect on the bankrupt estate.’” In re Purdue Pharms. L.P., 619 B.R. 38, 48–49 (S.D.N.Y. 2020)

(quoting SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 339–40 (2d Cir. 2018)).

“An action is related to bankruptcy if the outcome could alter the debtor's rights,

liabilities, options, or freedom of action (either positively or negatively) and which in any way

impacts upon the handling and administration of the bankrupt estate.” SPV, 882 F.3d at 340

(quoting Celotex Corp. v. Edwards, 514 U.S. 300, 308 n.6 (1995)). “[T]he touchstone for

bankruptcy jurisdiction remains whether its outcome might have any conceivable effect on the

bankruptcy estate,” i.e., whether one possible result of the suit “will be the removal of assets

from the bankruptcy estate.” In re Quigley Co., Inc., 676 F.3d 45, 57 (2d Cir. 2012).

Here, the Court has multiple sources of jurisdiction to stay the Arbitration. First, the

Court has “arising under” jurisdiction to determine that section 362(a) of the Bankruptcy Code

prohibits the continuation of the Arbitrations. See, e.g., In re Roman Catholic Diocese of

Syracuse, New York, 628 B.R. 571, 577 (Bankr. N.D.N.Y. 2021). UBS argues that the Court

does not have “arising under” jurisdiction because the claims seeking to be stayed are not created

by the Bankruptcy Code. (Opposition ¶ 31.) But Courts have held just the opposite. For

example, in In re Brier Creek Corp. Ctr. Assocs. Ltd., 486 B.R. 681, 685 (Bankr. E.D.N.C.

2013), the Court found that it had “arising under” jurisdiction because the Debtor requested an

order confirming that the stay under 362(a)(1), which was a creature of the Bankruptcy Code,

applied to stay arbitrations. Here, similarly, the Debtor seeks the extension of the automatic stay

to a non-debtor, which confers “arising under” jurisdiction.

But even assuming for the sake of argument that the Court did not have “arising under”

jurisdiction, the Court also has “arises in” and “related to” jurisdiction over the request for a

preliminary injunction under section 105(a) because the Arbitrations’ continued prosecution risks

direct and substantial negative impact on the Debtor’s estate. See, e.g., In re Lyondell Chemical

Co., 402 B.R. at 586–87 (finding that “arising under”, “arising in”, and “related to” jurisdiction

existed over debtor’s request for injunction under sections 105(a) and 362(a) “to protect existing

property of the estate, and to protect the estate’s ability to reorganize”).

UBS concedes that “related to” jurisdiction is broad but argues that the Second Circuit

limits “related to” jurisdiction to a situation where the third party claims directly affect the res of

the bankruptcy estate. (Opposition ¶ 33 (citing Johns-Manville Corp. v. Chubb Indemnity Ins.

Co. (In re Johns-Manville Corp.), 517 F.3d 52, 66 (2d Cir. 2008)).) UBS thus argues that

because the Debtor does not argue that the FINRA arbitrations will result in removal of assets

from the Debtor’s estate, such as through liability for attorney’s fees, there is no “related to

jurisdiction.” Not so. The test in the Second Circuit remains whether the litigation “has any

conceivable effect” on the bankrupt estate. In re Lyondell Chem. Co., 402 B.R. 571, 586–87

(internal citation omitted). Here, the Debtor easily clears that hurdle by providing testimony that

being diverted from their reorganization efforts could affect their ability to maximize the value of

the estate. (Heineman Decl. ¶ 15.)

John Manville Corp., which UBS cites, is not to the contrary. (Opposition ¶ 33.) In John

Manville Corp. the Court held that “it was inappropriate for the bankruptcy court to enjoin

claims brought against a third-party non-debtor solely on the basis of that third-party’s financial

contribution to a debtor’s estate” and commented that enjoining third-party non-debtor claims

should be limited to claims that “directly affect the res of the bankruptcy estate.” 517 F.3d 52 at

66 (emphasis added). But here, the Debtor is not asking to enjoin the claims solely because of

SVB Securities’ contribution to the estate, it is asking for an injunction because the distraction of

its personnel could affect the success of its reorganization. Further, one of the cases UBS cites in

support of its position that a direct effect on property is required to confer “related to

jurisdiction” is In re Quigley Co., Inc., 676 F.3d 45, 57 (2d Cir. 2012), which held that “while we

have treated whether a suit seeks to impose derivative liability as a helpful way to assess whether

it has the potential to affect the bankruptcy res, the touchstone for bankruptcy jurisdiction

remains “whether its outcome might have any ‘conceivable effect’ on the bankruptcy estate.”

Thus, the Second Circuit has affirmed that notwithstanding related inquiries regarding the

potential effect on bankruptcy res, the “conceivable effect” test remains the controlling inquiry

for jurisdiction. Id.

During the hearing, counsel for UBS argued that In re Purdue Pharms. L.P., 619 B.R. 38

(S.D.N.Y. 2020) supported its position that the law in the Second Circuit only confers

jurisdiction on a bankruptcy court over a non-debtor if there is a direct financial effect on estate

res. Not so. Purdue held that “the touchstone for bankruptcy jurisdiction remains whether its

outcome might have any conceivable effect on the bankruptcy estate” and noted that one such

“conceivable effect” is the possibility that the suit to be enjoined would lead to the “removal of

assets from the bankruptcy estate.” 619 B.R. 49. Again, one way, but not the only way, to meet

the “conceivable effects” test is to show that assets are likely to be removed from the estate. See

id. (noting that “‘related to jurisdiction’ . . . offers broad protection to both debtors and third

parties” and that there is “no requirement that an action must both directly affect the estate and

be derivative of the debtor’s rights and liabilities for bankruptcy jurisdiction over the action to

exist”) (internal citations and quotations omitted) (emphasis in original).

In any event, even if the Second Circuit did require that the Debtor show a direct effect

on the res of the estate from the action to be enjoined, the Debtor meets that threshold as well.

Though the Court does not have detailed information about the claims at issue in the

Arbitrations, based on the record before it, the Court concludes that the broad indemnification

provisions contained in the Indemnification Documents are highly likely to require SVB

Securities to indemnify the Individual Respondents. The indemnity obligation in the Offer

Letters covers “claims by your current employer arising out of and relating to your transition

from your current employer to the Company.” (See, e.g., Indemnification Documents at 11

(page 9 of the Offer Letter of Jason Auerbach).) Mr. Heineman testified that SVB Securities has

already advanced several million dollars as indemnification for defense costs for the Individual

Respondents. Here, the claims at issue relate to liability in connection with the Individual

Respondent’s transition from UBS to SVB Securities and thus clearly fall within the purview of

the indemnity clause. (See Motion ¶ 20.) Given that SVB Securities is a wholly-owned Debtor

subsidiary (through an intermediate wholly-owned company) that is responsible for the majority

of the Debtor’s value, these indemnity obligations will undoubtedly directly affect res of the

estate.

B. The Automatic Stay by it Terms Does Not Apply to the Arbitrations

It is well-established that stays pursuant to § 362(a) are limited to debtors and do not

encompass related non-debtor entities who are defendants in lawsuits. See Tchrs. Ins. & Annuity

Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986). Here, because SVB Securities, and not

the Debtor, is a defendant in the New York Arbitration, and neither the Debtor nor SVB

Securities is a defendant in the California Arbitration, the automatic stay does not apply to the

Arbitrations. Nevertheless, as discussed below, where certain conditions are met, courts will

extend the protections of the automatic stay to non-debtors.

C. The Requirements for Granting a Preliminary Injunction Are Met Such that the

Court Should Expend the Protections of the Automatic Stay

To determine whether to extend the protection of the automatic stay to enjoin actions

against non-debtors under section 105(a) of the Bankruptcy Code courts look to the requirements

of Federal Rule of Civil Procedure 65 (“FRCP 65”). In re Purdue Pharms. L.P., 619 B.R. at 45.

Here, the Court finds that an analysis of FRCP 65 indicates that extending the automatic stay to

enjoin the Arbitrations is proper.

1. The Debtor’s Chapter 11 Case is Reasonably Likely to Succeed

The first prong of the preliminary injunction standard in the bankruptcy context considers

whether there is a reasonable likelihood of a successful resolution to the chapter 11 case. See In

re Lyondell Chem. Co., 402 B.R. at 589; In re W.R. Grace & Co., 386 B.R. 17, 33 (Bankr. D.

Del. 2008); In re Calpine, 365 B.R. at 410. A chapter 11 case “may be considered likely to

succeed so long as the prospects of reorganization remain viable and if the Debtors are

substantially more likely to reorganize with the injunction in place.” In re Purdue Pharms. L.P.,

619 B.R. 38, 59 (S.D.N.Y. 2020) (internal citations and quotation marks omitted). When a

debtor seeks a preliminary injunction at the outset of its chapter 11 case, courts afford the debtor

the benefit of the doubt so long as the case is generally on track, “[e]specially since emergency

requests to protect an estate’s ability to reorganize often come up in a chapter 11 case’s earliest

stages, [and] there is no way to predict what will ultimately happen in a large chapter 11 case as

new issues arise.” In re Lyondell Chem. Co., 402 B.R. at 589.

Here, recognizing that this case is in its infancy, the Debtor has established a reasonable

likelihood of successful reorganization. The Debtor states that it is presently evaluating strategic

alternatives for its remaining businesses and assets, including various standalone reorganization

and sale options. (Motion ¶ 37.) While this case certainly has unique challenges given the

complexities of the FDIC’s involvement, the Court has no reason at this point to conclude that

these challenges are insurmountable to a reorganization. See In re Lyondell Chem. Co., 402 B.R.

at 590 (stating, “while if there are reasons to conclude that the debtor(s) could not reorganize,

that plainly should affect debtors’ ability to invoke this factor, where debtors are proceeding ‘on

track’ and have met the challenges they have faced so far, that is sufficient”). UBS does not

appear to contest that the Debtor meets this factor and notes only that the factor is “neutral.”

(Opposition ¶ 53.)

2. The Debtor Will Suffer Irreparable Harm Unless the Arbitrations are Enjoined

Courts have explained that in a chapter 11 case, the “irreparable harm” requirement is

satisfied where “the action sought to be enjoined would embarrass, burden, delay or otherwise

impede the reorganization proceeding, or if a stay is necessary to preserve or protect the debtor’s

estate and reorganization prospects.” In re Alert Holdings, Inc., 148 B.R. 194, 200 (Bankr.

S.D.N.Y. 1992); In re Calpine, 365 B.R. at 409 (observing that an injunction is appropriate not

only where irreparable harm is threatened to the estate but also “where the action to be enjoined

is one that threatens the reorganization process”) (internal quotation omitted).

Here, the Debtor has established that allowing the Arbitrations to continue as scheduled

would materially jeopardize the Debtor’s estate and restructuring prospects. The Debtor has

provided case law for the proposition that where, as here, the Debtor’s personnel would be

required to divert their attention away from the reorganization to a pending litigation against a

non-debtor, the irreparable harm prong is met. (See Motion ¶ 38 (citing In re Calpine Corp., 365

B.R. at 410 (S.D.N.Y. 2007) (affirming bankruptcy court’s finding that a “significant burden and

distraction of key employees from its restructuring effort” constituted irreparable harm)); Motion

¶ 42 (citing In re R&G Fin. Corp., 441 B.R. at 411 (enjoining FINRA arbitration against debtor’s

subsidiary where its “limited managerial resources would be diverted in assisting towards the

preparation for such proceedings, meaning that its automatic stay protections under Section

362(a)(1) would in essence be violated”)).)

The Debtor has provided evidence through the Heineman and Kosturos Declarations that

the Arbitrations would divert attention away from the Debtor’s restructuring. Specifically, the

Heineman Declaration, from SVB Securities’ general counsel, attests that with the trial set to

begin in under six weeks SVB Securities is now in the most critical and time intense stage of trial

preparation. (Heineman Decl. ¶ 14.) Heineman further attests SVB Securities’ senior

management is currently focused on exploring strategic alternatives for SVB Securities as part of

the Debtor’s chapter 11 proceeding. (Id. ¶ 13.) At the hearing, Heineman testified that he is the

only member of the four-person legal department with litigation experience and that he will be

tasked with preparing the 25 defense witnesses for the Arbitrations, which will divert his

attention form the restructuring process. (Id. ¶ 12.) He attested that the CEO, CAO, and other

members of senior management will testify and will thus have to divert their attention from the

sale and restructuring process to prepare for their testimony for the Arbitrations. (Id. ¶ 14.) This

evidence establishes that if the New York and California Arbitrations were to move forward, key

company personnel would be diverted from the restructuring effort, causing irreparable harm to

the Debtor. See In re R&G Fin. Corp., 441 B.R. at 411.

Further, the Debtor has also provided evidence that SVB Securities, and by extension the

attention of its employees, is particularly vital to the Debtor’s reorganization success. The

Debtor is a holding company which now derives the majority (according to the Debtor’s latest

annual 10-K, approximately $523 million or 89% of the Debtor’s total revenue from contracts

with customers after deducting the revenues derived from Silicon Valley Bank and SVB Private

businesses, which are no longer associated with the Debtor) of its remaining revenues from its

indirect wholly-owned subsidiary, SVB Securities. (Kosturos Decl. ¶ 10.) As a result, Kosturos,

the Debtor’s chief restructuring advisor, attests that as the Debtor’s single largest source of

revenue, the success of this Chapter 11 Case is closely tied to the performance of SVB Securities

and the value that can be realized from SVB Securities through a sale or reorganization. (Id. ¶

11.) Accordingly, the Debtor has further shown that, given the importance of maximizing the

value of SVB Securities to the Debtor’s restructuring process, diverting the attention of SVB

Securities’ key employees could cause irreparable harm to the Debtor’s restructuring efforts.

Haw. Structural Ironworkers Pension Tr. Fund v. Calpine Corp., No. 06-CV-5358, 2006 WL

3755175, at *5 (S.D.N.Y. Dec. 20, 2006) (affirming the injunction of actions against a non-

debtor where “the logistical stress on [the debtor] from attempting to simultaneously undertake a

massive reorganization while monitoring and producing documents in the [s]tate [c]ourt [a]ction

threatened to irreparably impair the company’s reorganization process”).

UBS’s primary argument that the Debtor will not be harmed by the Arbitrations going

forward is that the two SVB employees who would testify are employees of the non-debtor, SVB

Securities, and not of the Debtor. (Motion ¶¶ 42–45.) It argues that UBS has “found no case”

where the court has enjoined a proceeding against a non-debtor in order to shield the non-

debtor’s employees from testifying at trial.3 (Opposition ¶ 4.) They also argue that the one

employee of the Debtor who would testify, the former CEO Greg Becker, was fired so would

plainly not be involved in the reorganization. (Opposition ¶ 42.) As an initial matter, as of the

petition date, the Debtor had no employees.4 (See In re SVB Financial Group, Case No. 23-

10367, Declaration of William C. Kosturos in Support of the Debtor’s Chapter 11 Petition and

First Day Pleadings, ECF Doc. # 21, at 22 (“As of the petition date . . . the Debtor believes it did

not directly employ any individual”). Accordingly, it is not as if the Debtor has a suite of its own

employees who are unaffected by the pending litigation against non-debtors on whom it can rely.

By UBS’s logic, as a matter of law, the Debtor could never receive a stay against a non-debtor

due to the burden on its staff because such request would always involve non-debtor employees.

Thus, the fact that the case law the Debtor relies on involves the harm of the distraction to

Debtor employees, rather than non-debtor employees, is not as UBS contends, fatal to the

Debtor’s argument.

R&G Financial Group, 441 B.R. 401, a case where the Court stayed a FINRA arbitration

against a non-debtor, is illustrative. UBS cites that case for the proposition that only the

distraction of employees of the Debtor and not of non-debtor employees can be grounds for a

3 Debtor’s counsel stated at the hearing that while UBS has only asked for the testimony of two SVB

Securities’ employees, the company expects that it would need to call other senior company employees to testify as

part of the defense case if the Arbitrations go forward.

4 At the hearing, bankruptcy counsel for the Debtors indicated that the Debtor has begun to hire a few

employees, but that most of the staff it relies on come from non-debtor affiliates.

stay. (Opposition ¶ 43.) But in R&G Financial Group the Court stayed the action against a non-

debtor because litigation against the non-debtor subsidiary, a defunct entity without employees

or assets, would divert the Debtor’s “limited managerial resources towards preparation for such

proceedings.” Id. In essence, what R&G Financial Group recognized is that where one of two

related companies lacks employees or resources and one of the companies is in bankruptcy, the

Court looks at the whole picture between the two entities to determine whether the restructuring

efforts will be harmed. See id. Nowhere in the R&G decision does the Court indicate that the

fact that the fact that the employees diverted from restructuring efforts were those of the Debtors

was necessary or even central to its conclusions.

UBS is right that part of the reason that the Court stayed the action in R&G was that in

addition to the diversion of employees from the restructuring effort “the debtor would be

responsible in providing . . . the legal costs of RCICs defense.” (Opposition ¶ 43 (citing 441

B.R. at 441).) But as noted above, the Indemnification Documents establish that the Debtor’s

wholly owned subsidiary has already indemnified the Individual Respondents (and will do so in

the future), so R&G Financial Group is directly on point. (See Indemnification Documents.)

UBS’s remaining arguments that the Debtor will not be harmed are similarly unavailing.

The Court disagrees with UBS that the presence of outside counsel means that SVB Securities’

general counsel need not be involved in the Arbitrations. Mr. Heineman testified that he is the

client contact responsible for handling the Arbitrations, including making strategic and tactical

decisions, reviewing, and revising pleadings and motions, assisting with discovery, participating

in witness interviews and other pre-hearing work. (Heineman Decl. ¶ 14.) Even with robust

outside counsel, the Court concludes that the Arbitrations will require a significant investment of

Mr. Heineman’s time. The Court also is also unconvinced that curtailing the length of the

witnesses’ testimony, as UBS suggests, would significantly mitigate the burden on SVB

Securities’ staff. (Motion ¶ 21.) Given SVB Securities’ indemnification obligations it is

important that it be able to prepare and put on fulsome testimony of its defense witnesses, even if

UBS would limit its questioning of the witnesses.

Nor does the fact that counsel for SVB Securities indicated it anticipated “no issues” with

the testimony of SVB senior executives alter the Court’s conclusion. (Opposition ¶ 27.) SVB

has put forth significant evidence that preparing for the Arbitration would distract key employees

from the important efforts to maximize the value of the estate. (See, e.g., Heineman Decl. ¶¶ 13–

15.) The Court finds that the efforts to monetize SVB Securities accelerated quickly in the early

days of April, putting an increased burden on SVB Securities staff. Notwithstanding what was

going on in late March, the looming Arbitration is currently putting a significant burden on SVB

Securities’ staff given their responsibilities in the restructuring.

While the foregoing analysis applies in full force to the New York Arbitration, both UBS

and the Debtor provide fairly cursory analysis about the harm of the California Arbitration going

forward. UBS notes that SVB Securities is not a party to the California Arbitration, such that the

harm to the reorganization is far more speculative. (Opposition ¶ 51.) UBS argues that any

harm assumes that Mr. Leerink and Mr. Gentile would testify in the June hearing, which they

seem to argue is not certain. (Opposition ¶ 51.) The Debtor argues that “while SVB Securities is

not a respondent in the California arbitration, it must play the same integral role in the

preparation for, and defense of the California Arbitration as in the New York Arbitration.”

(Motion ¶ 40.) SVB Securities is already indemnifying the Individual Respondents’ counsel in

the New York and California Arbitrations, and Mr. Heineman is involved in preparing the

defense in both cases.

3. The Balance of Harms Weighs in Favor of Enjoining the Arbitrations

The harm facing the Debtor is that, in the absence of a stay, key personnel would have

their attention diverted from the restructuring to the Arbitrations. The corresponding prejudice to

UBS if the Court granted the stay is minimal. The Debtor is not seeking to permanently bypass

the arbitration forum or force UBS to litigate its claims through the bankruptcy process.

Granting the requested relief means that UBS, at worst, will wait a few months to prosecute its

claim for money damages in the Arbitrations. That de minimis inconvenience does not outweigh

the potential harm to the Debtor—namely, impairing and interfering with its ongoing

restructuring efforts. See, e.g., R&G Fin. Corp., 441 B.R. at 411–12 (finding balance of harms

favored enjoining FINRA arbitration against debtor’s subsidiary where the “preliminary

injunction will not invalidate the alleged rights of the FINRA claimants but it will simply delay

the enforcement of those rights.”).

The Debtor argues that UBS’s own actions demonstrate that the Arbitrations are not time

sensitive. The Court agrees. First, UBS waited three full months after the Individual

Respondents resigned and had started working at SVB Securities to bring the New York

Arbitration. (Motion ¶ 44.) The Arbitrations have been pending since August 2021 and

February 2022, respectively. (Id.) UBS seeks monetary damages only and has not moved for an

injunction or a temporary restraining order.

Accordingly, other than the minimal prejudice of having to wait longer to prosecute its

damages claims, UBS has not identified any irreparable harm to it that would flow from the stay

of the Arbitration. In its Opposition, UBS argues that it will be harmed because the New York

Arbitration has already been delayed and some witnesses are no longer available, such as the

Debtor’s former CEO. (Opposition ¶ 54). UBS argues that further delay will further erode its

ability to present its case as witnesses scatter and memories fade.” (Id.) As an initial matter,

there is no evidence the Debtor’s former CEO if in fact unavailable. All UBS has established is

that he is no longer under the Debtor’s control. Beyond that, UBS identifies no specific

witnesses who will no longer be available if the Arbitrations are delayed. UBS’s vague

argument that “memories fade” with delays is not compelling, especially when compared with

the specific harm to the Debtor’s reorganization that moving forward with the Arbitrations

presents. (Id.)

4. Enjoining the Arbitrations Will Serve the Public Interest

Finally, enjoining the Arbitrations will serve the public interest. “In the bankruptcy

context, the relevant public interest is the interest in successful reorganizations, since

reorganizations preserve value for creditors and ultimately the public.” In re Caesars Ent.

Operating Co., Inc., 561 B.R. 441, 453 (Bankr. N.D. Ill. 2016); accord Calpine Corp., 2006 WL

3755175, at *5 (explaining that this prong “requires a balancing of the public interest in

successful bankruptcy reorganizations with other competing societal interests”). For the reasons

discussed above, staying the Arbitrations will serve the public interest by maximizing the

Debtor’s opportunity for a value-maximizing strategic transaction. See R&G Fin. Corp., 441

B.R. at 412 (“[T]he public interest is best protected if the Debtor continues to work in their

reorganization rather than having to face immediate adverse economic consequences stemming

from legal fees in the arbitration proceedings and the syphoning off of its limited managerial

resources in such proceedings.”).

The Court agrees with the Debtor that the public interest does not necessitate any special

deference to FINRA or the arbitration process. As the U.S. Supreme Court recently made clear,

“a court may not devise novel rules to favor arbitration over litigation.” See, e.g., Morgan v.

Sundance, Inc., 142 S. Ct. 1708, 1713 (2022). The Second Circuit has also recognized that “[i]n

the bankruptcy setting, congressional intent to permit a bankruptcy court to enjoin arbitration is

sufficiently clear to override even international arbitration agreements.” In re U.S. Lines, Inc.,

197 F.3d 631, 639 (2d. Cir. 1999). Here, the Debtor is not asking the Court to override an

arbitration agreement in favor or resolution of the issues in the bankruptcy court, it is simply

asking for a 120 day stay of the Arbitrations. This request is thus well within the mainstream of

what the Second Circuit has deemed within the public interest.

IV. CONCLUSION

For the reasons discussed above, the Court GRANTS the Motion and ENJOINS the

Arbitrations for 120 days. During the period of the stay, the parties shall work together in good

faith to obtain rescheduled dates for the Arbitrations. Within seven (7) days from the date of this

Order, counsel for the Debtor, the Committee, and UBS shall confer and submit any further order

required to grant the relief requested in the Motion consistent with the terms of this

Memorandum Opinion and Order.

IT IS SO ORDERED.

Dated: April 14, 2023

New York, New York

Martin Glenn

_____ ____________

MARTIN GLENN

Chief United States Bankruptcy Judge