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Stern v. Marshall: Th Anna The A Nicole Ni l Smith S ith Bankruptcy p y Story y Brought to you by Winston & Strawn’s Restructuring and Insolvency Practice Group.
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Today’ss eLunch Presenters Today eLunch Presenters
Daniel J. McGuire
Carey D. Schreiber
Restructuring and Insolvency Chicago
Restructuring and Insolvency New York
dmcguire@winston com
[email protected]
cschreiber@winston com
[email protected]
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I Factual Background I.
Vickie Lynn Marshall, a/k/a Anna Nicole Smith, at age 26, was y , / / , g , married for 14 months to J. Howard Marshall II, an 89‐year‐ old billionaire.
Epic legal battle between Vickie and her eldest stepson, 56‐year‐old Epic legal battle between Vickie and her eldest stepson 56 year old E. Pierce Marshall, began shortly before J. Howard’s death in 1995:
Lasted more than 15 years; Ended up at the Supreme Court twice; and Ended up at the Supreme Court twice; and Amount awarded to Vickie ranged from a high of $474 million to finally nothing.
JJ. Howard died on August 4, 1995; Pierce died on June 20, 2006; Howard died on August 4 1995; Pierce died on June 20 2006; Vickie died on February 8, 2007.
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I Factual Background I.
A classic quote by Chief Justice Roberts: A classic quote by Chief Justice Roberts: This “suit has, in course of time, become so complicated, that ... no two ... lawyers can talk about it for five minutes, without coming to a total disagreement as to all the ih i l di ll h premises. Innumerable children have been born into the cause: innumerable young people have married into it;” and, sadly, the original parties “have died out of it.” A “long procession of [judges] has come in and gone out” during that time, and still the suit “drags its weary length before the , g y g Court.” Stern v. Marshall, 131 S. Ct. 2594, 2600 (2011)(quoting "Bleak House" by Charles Dickens)
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I Factual Background I.
The Legal Battle – g The J. Howard Estate
Texas Probate Court – In a battle over J. Howard Marshall’s estate, his wife Vickie asserted that E. Pierce Marshall, eldest son of J. Howard, fraudulently induced J. Howard to sign a living trust that did not include her.
During the pendency of the probate proceeding, Vickie filed for bankruptcy in the Central District of California.
The probate proceeding was not stayed by the commencement of the bankruptcy case.
In 2001, after a five‐and‐a‐half month jury trial, the Texas Probate Court found that Pierce did not owe Vickie anything.
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I Factual Background I.
The Legal Battle – g Vickie’s Bankruptcy p y
Bankruptcy Court – In 1996, while the Texas Probate Court proceeding was pending, Vickie filed for Chapter 11 bankruptcy p protection in the United States Bankruptcy Court for the Central p y District of California.
Pierce filed a proof of claim alleging that Vickie had defamed him. Vickie answered and filed a counterclaim alleging that Pierce had tortiously interfered with J. Howard’s intent to give her part of his estate. In 2000, the Bankruptcy Court held that both Vickie’s objection to Pierce’s claim and her counterclaim qualified as “core proceedings” under 28 U S C § 157, giving the court authority to hear and enter a final under 28 U.S.C. 157 giving the court authority to hear and enter a final judgment on those claims. The Bankruptcy Court awarded Vickie $474 million in compensatory and punitive damages. p g
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I. Factual Background I. Factual Background
District Court – Pierce appealed the Bankruptcy Court’s pp p y judgment to the United States District Court for the Central District of California, arguing that issue preclusion and claim preclusion mandated that the Texas Probate Court’ss ruling preclusion mandated that the Texas Probate Court ruling applied to the bankruptcy proceedings.
Held that the probate exception, which excludes probate and certain probate‐related matters from the federal courts, did not reach b l d f h f d l did h Vickie’s counterclaim.
finding that the counterclaim was “non‐core,” treated the Bankruptcy Court decision as proposed rather than final and undertook de novo review decision as proposed rather than final and undertook de novo review.
Reduced the Bankruptcy Court’s damages to award Vickie approximately $88 million in compensatory and punitive damages.
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I Factual Background I.
Ninth Circuit (first appearance, 2004) ( pp , )
Reversed the District Court
Held the probate exception to federal jurisdiction applied, and Determined that Pierce did not owe Vickie anything in light of the Determined that Pierce did not owe Vickie anything in light of the Texas probate trial.
Supreme Court (first appearance, 2006)
Reversed the Ninth Circuit
Held the probate exception did not apply, and Remanded the case to the Ninth Circuit for further proceedings to Remanded the case to the Ninth Circuit for further proceedings to address: i. whether Vickie’s claim was “core,” and ii ii. Pierce’ss arguments concerning claim and issue preclusion. Pierce arguments concerning claim and issue preclusion
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I Factual Background I.
Ninth Circuit (on remand, 2010) ( , )
Again reversed the District Court’s decision
finding that Vickie’s counterclaim was not a core proceeding and the Bankruptcy Court accordingly lacked jurisdiction to issue a final the Bankruptcy Court accordingly lacked jurisdiction to issue a final order.
Supreme Court (second appearance, June 23, 2011)
Affirmed...albeit based on different reasoning.
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II. Stern v. Marshall: Overview of Majority Decision
Core vs. Non‐Core Co e s o Co e Constitutionality of 28 U.S.C. § 157(b)(2)(C)
Constitutional Limits on Jurisdiction Public Rights Exception Adjunct Status Consent to Jurisdiction Effect on the system
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II. Stern v. Marshall: Majority Decision, Core vs. Non-Core
Core vs. Non‐Core: The Court first examined whether Vickie’s counterclaim qualified as a core or q non‐core issue under § 157(b)(2)(C) and held that the counterclaim was a “core” proceeding.
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II. Stern v. Marshall: Majority Decision, Core vs. Non-Core
In 1984, Congress passed the Bankruptcy Amendments and Federal Judgeship Act, changing the landscape of bankruptcy jurisdiction.
The amendments came after the decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).
The Court held bankruptcy courts could only adjudicate state law matters that were intimately intertwined with the debt restructuring.
Post‐Marathon, Congress provided a clarification of bankruptcy courts’ jurisdiction. jurisdiction.
Section 157 of Title 28 of the United States Code made a distinction between so‐ called “core” and “non‐core” proceedings. Bankruptcy judges could only issue final rulings in proceedings that dealt with “ “core” proceedings. ” di
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II. Stern v. Marshall: Majority Decision, Core vs. Non-Core
Section 157(b)(2) provides a non‐exhaustive list of examples of core issues: A. B.
matters concerning the administration of the estate; allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under Chapters 11, 12, or 13 of Title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under Title 11; C C. counterclaims by the estate against persons filing claims against the estate; counterclaims by the estate against persons filing claims against the estate; D. orders in respect to obtaining credit; E. orders to turn over property of the estate; F. proceedings to determine, avoid, or recover preferences; G. motions to terminate, annul, or modify the automatic stay; H proceedings to determine, avoid, or recover fraudulent conveyances; H. proceedings to determine avoid or recover fraudulent conveyances; I. determinations as to the dischargeability of particular debts; J. objections to discharges; K. determinations of the validity, extent, or priority of liens; L. confirmations of plans; M. orders approving the use or lease of property, including the use of cash collateral; M d i th l f t i l di th f h ll t l N. orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate; O. other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor‐creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and P P. recognition of foreign proceedings and other matters under Chapter 15 of Title 11 recognition of foreign proceedings and other matters under Chapter 15 of Title 11.
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II. Stern v. Marshall: Majority Decision, Core vs. Non-Core
Non core proceedings are proceedings that involve a Non‐core proceedings are proceedings that involve a matter that “relates to” a bankruptcy case, but that does not “arise under” bankruptcy laws. p y
“The terms ‘non‐core’ and ‘related’ are synonymous.” Stern, 131 S. Ct. at 2605 (quoting Collier on Bankruptcy).
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II. Stern v. Marshall: Majority Decision, Core vs. Non-Core
The Case
Both the District Court and the Ninth Circuit decisions had held Vickie’s counterclaim did not meet the criteria for a core proceeding. The Court expressly disagreed, holding that the counterclaim was The Court expressly disagreed, holding that the counterclaim was core. The Court found the express inclusion of counterclaims within the list of core proceedings in section 157(b)(2)(C) qualified all list of core proceedings in section 157(b)(2)(C) qualified all counterclaims brought in bankruptcy court as “core” proceedings. The Bankruptcy Court therefore had statutory authority to issue a final judgment on Vickie’ss counterclaim. final judgment on Vickie counterclaim.
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II. Stern v. Marshall: Majority Decision, Constitutionality
Constitutionalityy
The Court found that section 157(b)(2)(C) unconstitutionally exceeded the limitations imposed by Article III of the Constitution. The Court analyzed several issues in reaching this conclusion:
Constitutional Limits on the Jurisdiction of Article I Judges The “Public Rights” Exception Bankruptcy Courts as Adjuncts of District Courts Bankruptcy Courts as Adjuncts of District Courts Whether Filing a Proof of Claim Results in Consent to Bankruptcy Jurisdiction The Potential Effect on the Judicial System The Potential Effect on the Judicial System
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II. Stern v. Marshall: Majority Decision, Constitutionality, Jurisdiction
Constitutional Limits on Jurisdiction
Article III of the Constitution:
Article III of the U.S. Constitution mandates that “[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the , p , Congress may from time to time ordain and establish.” Federal judges are appointed pursuant to Article III of the U.S. Constitution. The Court noted that Article III “both defines the power and protects the independence of the judicial branch ” Stern, 131 S. Ct. at 2608. independence of the judicial branch. Stern 131 S Ct at 2608
Article I of the Constitution
Article I of the U.S. Constitution provides Congress with the power to “establish . . . uniform Laws on the subject of Bankruptcies throughout the United States ” uniform Laws on the subject of Bankruptcies throughout the United States.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Jurisdiction
Bankruptcy judges are appointed pursuant to Article I of the U.S. Constitution
Bankruptcy courts, as non‐Article III courts, are prohibited from issuing final decisions on common law matters.
SSection 157(b)(2)(C) provides that “counterclaims by the estate against i 157(b)(2)(C) id h “ l i b h i persons filing claims against the estate” are “core” proceedings
A claimant by filing a proof of claim in a bankruptcy essentially waives his right to an Article III forum for all counterclaims brought by the estate Article III forum for all counterclaims brought by the estate.
These counterclaims could, as in Stern, implicate state law matters Since section 157(b)(2)(C) provides that all counterclaims are core, regardless of the state law implications; this provides bankruptcy courts jurisdiction over common law matters which constitutionally are beyond the scope of y y p an Article I court.
Consequently, the Court found that designating all counterclaims as “core” under section 157 “exceeded that limitation in the Bankruptcy Act of 1984.”
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II. Stern v. Marshall: Majority Decision, Constitutionality, Jurisdiction
The Court relied heavily on the precedent set in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982)
Holding the Constitution forbids bankruptcy courts from exercising judicial power over state law matters not directly and necessarily involving a bankruptcy case’s restructuring of debtor‐creditor relations restructuring of debtor‐creditor relations.
The Court found that “Vickie’s claim [was] a state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor’ss proof of claim in bankruptcy. on the creditor proof of claim in bankruptcy.” Stern, 131 S. Ct. at 2611. Stern, 131 S. Ct. at 2611.
Therefore, the Bankruptcy Court could not issue a final ruling in connection with the counterclaim.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Public Rights
Public Rights Exception g p
The Court next considered and rejected the application of the “public rights” exception to Vickie’s counterclaim.
“Public Public rights, rights,” as detailed in the Marathon decision, are rights which as detailed in the Marathon decision, are rights which Congress could constitutionally assign to “legislative” courts to resolve.
In general, the “public rights” exception arises when Congress selects a quasi‐judicial method of resolving matters that could be conclusively determined b the E ec ti e and Legislati e Branches determined by the Executive and Legislative Branches.
If the public rights exception were to apply, bankruptcy judges would have the authority to adjudicate such matters based on that standard alone. alone
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II. Stern v. Marshall: Majority Decision, Constitutionality, Public Rights
The Court recognized that a public rights dispute may arise between two individuals; however, “what makes a right ‘public’ rather than private is that the right is integrally related to particular federal government action.” Stern, 131 S.Ct. at 2613. The Court cited to Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989):
Rejecting a bankruptcy trustee’s argument that a fraudulent conveyance action filed on behalf of a bankruptcy estate against a non‐creditor in a b k t bankruptcy proceeding fell within the “public rights” exception. di f ll ithi th “ bli i ht ” ti Finding that, “[i]f a statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government then it must be belongs to nor exists against the Federal Government, then it must be adjudicated by an Article III court.” Id. at 54‐55.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Public Rights
The public rights exception has been limited to “cases in which the claim at issue derived from a federal regulatory scheme [such as the bankruptcy code], or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority.” Stern, 131 S. Ct. at 2613. h h ’ h ”
Vickie’s counterclaim was not a “matter that could be pursued only by grace of the other branches,” and did not flow from any federal statutory scheme. Id at 2614 Id. at 2614. The bankruptcy court’s power to decide Vickie’s counterclaim was not limited to a particularized area of the law. Notably, the Stern Court, in footnote 7, made a point to state that it was not Notably, the Stern Court, in footnote 7, made a point to state that it was not offering a position as to whether the “restructuring of debtor‐creditor relations” is a public right.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Adjunct Status
Adjunct Status: j
The Court next rejected Vickie’s argument that bankruptcy courts under the 1984 Act were “adjuncts” of Article III courts.
An adjunct of an Article III court only makes An adjunct of an Article III court only makes “specialized, specialized, narrowly narrowly confined factual determinations regarding a particularized area of law.” Stern, 131 S. Ct. at 2618 n. 6. The Court found that bankruptcy courts exercise powers too broad to be considered a “mere adjunct of anyone.” Id. at 2611. Thus, as the bankruptcy court is clearly not an adjunct by issuing final orders on a counterclaim that involved matters of common law, the Bankruptcy Court was exercising judicial power that could not be Bankruptcy Court was exercising judicial power that could not be delegated to it.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Consent to Jurisdiction
Consent to Jurisdiction
The Court next considered and rejected that Pierce had consented to the jurisdiction of the Bankruptcy Court because he filed a proof of claim in the bankruptcy proceeding. p yp g
The Court held that filing a proof of claim does not result in consent to bankruptcy court jurisdiction over any and all counterclaims. The Court distinguished its prior decisions in Katchen v. Landy, 382 U.S. 323 (1966) and Langenkamp v. Culp, 498 U.S. 42 (1990), which held that a creditor who filed a proof of claim could be sued to recover a preference.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Consent to Jurisdiction
Katchen permitted a bankruptcy referee (similar to a bankruptcy court today) to exercise “summary jurisdiction” over a voidable preference claim brought by the bankruptcy trustee against a creditor who had filed a proof of claim in the bankruptcy proceeding.
The Court concluded that bankruptcy jurisdiction was appropriate, because it was not possible for the referee to rule on the creditor's proof of claim without first resolving the voidable preference issue.
LLangenkamp k h ld th t held that a preferential transfer claim can be heard in f ti l t f l i b h di bankruptcy when the allegedly favored creditor has filed a claim, because then “the ensuing preference action by the trustee become[s] integral to the restructuring of the debtor‐creditor relationship ” Langenkamp, 498 the restructuring of the debtor‐creditor relationship. Langenkamp 498 U.S. at 44.
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II. Stern v. Marshall: Majority Decision, Constitutionality, Consent to Jurisdiction
In contrast, the Court in Stern stated: “[T]here was never any reason to believe that the process of adjudicating Pierce’s proof of claim would necessarily resolve Vickie’s counterclaim.” Stern, 131 S. Ct. at 2617.
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II. Stern v. Marshall: Majority Decision, Effect on the System
Effect on the system y
The Court stated:
It did not believe that the restrictions placed on a bankruptcy judge’s ability to adjudicate counterclaims would create significant delays and impose costs on the bankruptcy process. Nothing in its decision limited a bankruptcy court’s ability to continue to hear counterclaims and propose to the district court findings of fact and conclusions of law in such matters.
Therefore, the Court did “not think [that] the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute.” Stern, 131 S. Ct. at 2620
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II. Stern v. Marshall: Dissent
The Dissent:
Justice Breyer dissented, arguing that the Court should have taken a more pragmatic approach.
Counterclaims such as Vickie Counterclaims such as Vickie’ss are frequently brought in bankruptcy are frequently brought in bankruptcy court. Separation of issues and the resulting involvement of separate courts could potentially lead to a complete slowdown of the bankruptcy process.
Illustrating this point, Justice Breyer opined: “a constitutionally required game of jurisdictional ping‐pong between courts would lead to inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy.” Stern, 131 S. Ct. at 2630.
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III. Potential ote t a Co Consequences: seque ces O Overview e e
Legal and procedural effects Legal and procedural effects
Examination of the status of other provisions of the Bankruptcy Code Unknown limits to the public rights exception Ambiguity of consent Ambiguity of consent Abstention Retroactive application Procedural slowdown Narrow application of Stern (limited effect)
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III. Potential Consequences q
Status of other sections of the Bankruptcy Code:
The constitutionality of other sections of the Bankruptcy Code could be called into question. Bankruptcy courts and district courts will have to consider the constitutionality of all “core” proceedings.
28 U.S.C. § 157: Uncertainty of all “Core” Findings
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Although the Stern decision was specific to the constitutionality of section 157(b)(2)(C), it opens the door to examination of and applicability to other subsections of Section 157(b)(2) subsections of Section 157(b)(2). » For example, it could be argued as unconstitutional for bankruptcy judges to issue final rulings on matters of state fraudulent conveyance law.
28 U.S.C. § 157(e): Jury Trials » Bankruptcy judges may conduct a jury trial in “core” bankruptcy k d d l “ ”b k proceedings where a right to a jury applies and all parties have consented. » Stern appears to limit this to proceedings that are constitutionally “core” rather than merely statutorily “core,” regardless of consent.
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III. Potential Consequences q
28 U.S.C. § 157(c)(1) and (2): There may be constraints on the ability of bankruptcy courts to hear “core,” yet unconstitutional issues.
District courts have original jurisdiction over bankruptcy matters; however, there is a standing order to automatically refer those matters to bankruptcy courts. District courts can refer both core and non‐core issues to the bankruptcy court. There is a difference regarding the standard of review by the district court in core and non‐ core matters.
In core matters, the district court gives deference to the bankruptcy court’s decision. In non‐core matters, the district court reviews the bankruptcy court’s findings de novo.
This process is now a multistep process inviting challenges and uncertainty into a previously h l h ll d l streamlined process. Further, it is unclear how proceedings which are core, yet unconstitutional, will fit into the statutory framework.
28 U S C § 157(c) (1) A bankruptcy judge may hear a 28 U.S.C. 157( ) (1) A b k j d h 28 U S C § 157(c)(2) Notwithstanding the provisions of 28 U.S.C. 157( )(2) N ih di h ii f proceeding that is not a core proceeding but that is paragraph (1) of this subsection, the district court, with the otherwise related to a case under Title 11. In such consent of all the parties to the proceeding, may refer a proceeding, the bankruptcy judge shall submit proposed proceeding related to a case under Title 11 to a bankruptcy findings of fact and conclusions of law to the district court, judge to hear and determine and to enter appropriate orders and any final order or judgment shall be entered by the and any final order or judgment shall be entered by the and judgments subject to review under section 158 of this and judgments, subject to review under section 158 of this district judge after considering the bankruptcy judge’s title. proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and ©specifically objected. 2011 Winston & Strawn LLP 33
III. Potential Consequences q
Samson v. Blixseth (In Re Blixseth), No. 10–00088, 2011 WL 3274042 *12 (Bankr. D. Mont. A 1 2011) fi di b k Aug. 1, 2011), finding bankruptcy courts may not issue advisory decisions subject to de novo i d i d ii bj d review by the district courts for proceedings it cannot constitutionally hear
Unlike in non‐core proceedings, a bankruptcy court has no statutory authority to render findings of fact and conclusions of law for core proceedings that it may not constitutionally hear. While 28 U.S.C. hl § 157(c)(1) allows a bankruptcy judge to render findings and conclusions in “a ( )( ) ll b k d d f d d l “ proceeding that is not a core proceeding but that is otherwise related to a case under title 11,” no other code provision allows bankruptcy judges to do the same in core proceedings. Similarly, no provision allows parties to consent to a bankruptcy court making final decisions in core proceedings as 28 U S C § 157(c)(2) allows parties to consent for non proceedings as 28 U.S.C. 157(c)(2) allows parties to consent for non‐core core proceedings. proceedings The code provides only that “Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.” 28 U.S.C. § 157(b)(1). Since this Court may not constitutionally hear the fraudulent conveyance claim as a core proceeding, and this Court does not have statutory authority to hear it as a non‐core proceeding, it may in no case hear the claim.
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III. Potential Consequences q
Limits to the public rights exception? p g p
The Court did not define the role of the public rights exception in bankruptcy jurisdiction, conspicuously failing to address whether the restructuring of debtor‐creditor relations is in fact a public right. g p g Application of the public rights exception:
In Turner v. First Community Credit Union, No. 10–03300, 2011 WL 2708907 (Bankr. S.D. Tex. July 11, 2011), Judge Bohm y g considered the effect of the Stern decision on the applicability of the public rights exception and found that for matters related to the automatic stay, the public rights exception was applicable. [T]he existence of, and the benefits provided by, the automatic stay do not constitute a private right of any one specific person or entity, but rather comprise a public right that inures to the benefit of all those persons involved in a bankruptcy. those persons involved in a bankruptcy. Turner, 2011 WL 2708907 at *5.
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III. Potential Consequences q
Ambiguity of Consent: g y
The ambiguity regarding consent and the determination of “core” leaves uncertainty as to the finality of a bankruptcy court’s ruling
In re BearingPoint, Inc., In re BearingPoint, Inc., No. 09 No. 09–1069, 1069, 2011 WL 2709295 (Bankr. S.D.N.Y., 2011 WL 2709295 (Bankr. S.D.N.Y., July 11, 2011), Judge Gerber recognizing that the Stern decision created uncertainty as to the ability of parties to consent to jurisdiction abstained from ruling, stating: [I]t's fair to assume that it will now be argued, that consent, no matter how uncoerced and unequivocal, will never again be sufficient for bankruptcy judges ever to issue final judgments on non‐core non core matters. That huge uncertainty presages litigation over matters That huge uncertainty presages litigation over that issue with the potential to tie up this case, and countless others, in knots. It also would at least seemingly invite litigants to consent, see how they like the outcome, and then, if they lose, say h ld their consents were invalid. BearingPoint, 2011 WL 2709295 at *7. © 2011 Winston & Strawn LLP 36
III. Potential Consequences q
Abstention:
The majority in the Stern decision wrote with confidence about the ability of a bankruptcy judge to review the merits of a counterclaim and refer that decision to the district court f l i d f h d ii h di i for a final decision
Bankruptcy judges may still be able to issue proposed findings of fact and conclusions of law. l i fl However, because they cannot issue final rulings on state law issues, bankruptcy judges may:
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seek to avoid hearing the issues altogether g g suggest to the parties it would be better for the matter to be heard in a court of unquestioned jurisdiction rather than have the matter decided and later challenged.
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III. Potential Consequences q
In re BearingPoint, Inc., No. 09–1069, 2011 WL 2709295 ( (Bankr. S.D.N.Y., July 11, 2011), Judge Gerber abstained from k l ) d b b df issuing an opinion and allowed the trustee to pursue the BearingPoint lawsuit in a Virginia state court based on the g g limitations set on bankruptcy judges’ jurisdiction by the Stern Court.
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III. Potential Consequences q
Judge Gerber stated he was concerned that the question of g q his ability to adjudicate such matter would “tie up this case, and countless others, in knots,” and he opined: I fear, fear the additional litigation resulting from my inability to fully rule will have its own Bleak House implications, not unlike the Bleak House litigation referred to by the Stern v. Marshall court itself . . . Subject matter jurisdiction isn isn’tt the problem; the problem is the Bleak House direction this case would take if prosecuted here while parties have the opportunity to complicate it interminably while jousting over myy abilityy to issue final orders. BearingPoint, 2011 WL 2709295 at *1.
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III. Potential Consequences q
Judge Gerber noted that he might not be in the best position g g p to decide on certain issues: [It has been] argue[d] that there would be efficiencies, and/or other benefits from my hearing the case on the merits, benefits, merits based on the notion that I learned a lot about “the surrounding issues” during the course of the Chapter 11 case. I disagree, and find as a fact, or mixed question of fact and law,, to the contrary. q y First,, of course,, if it will have to be an Article III district judge making the findings, or a jury, my knowledge of facts with respect to this controversy, even if properly obtained and used, would be of little or no value. I will not be the trier of fact, at least in any way that is dispositive. Id. at *4.
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III. Potential Consequences q
Retroactive Application?: Retroactive Application?:
Stern clarified the jurisdictional power of bankruptcy courts
Parties may now seek to call into question past rulings arguing that the court lacked subject matter jurisdiction and the decision should be void (or potentially be reviewed de novo).
Procedural Slowdown:
An increase in jurisdictional litigation Potential for the bankruptcy courts to sever matters that previously Potential for the bankruptcy courts to sever matters that previously would have been decided as part of the bankruptcy proceedings Potential increase in layer of work for district courts due to an increase in the cases that require de novo review. increase in the cases that require de novo review
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III. Potential Consequences q
Narrow interpretation of Stern Narrow interpretation of Stern
Compulsory Counterclaims:
There was some overlap between Vickie’s counterclaim and Pierce’ss defamation claim that led the courts below to conclude Pierce defamation claim that led the courts below to conclude that the counterclaim was compulsory.
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Many counterclaims, particularly compulsory counterclaims, will have a closer relation to the underlying claim such that core jurisdiction for the Bankruptcy Court may be constitutional. i i l
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III. Potential Consequences q
In re Salander O’Reilly Galleries, No. 07–30005, 2011 WL 2837494, (Bankr. S.D.N.Y July 18, 2011), Judge Morris held that Stern was circumscribed, reaching only to state law counterclaims that would not be finally resolved in the process of allowing or disallowing a claim. Stern is replete with language emphasizing that the ruling should be limited to the unique circumstances of that case, and the ruling does not remove from the bankruptcy court its jurisdiction over matters di directly l related l d to the h estate that h can be b finally fi ll decided d id d in i connection i with restructuring debtor and creditor relations. . . . Salander, 2011 WL 2837494 at *6.
In Salander, Judge Morris denied a request from a party, who filed a claim in the bankruptcy proceeding challenging the inclusion of a work of art in the bankruptcy estate, for relief from the automatic stay based on a contract choice of law clause requiring arbitration.
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IV. General Advice
Consent:
Non‐debtors must consider if by filing a proof of claim, a counterclaim will be filed and Non debtors must consider if by filing a proof of claim a counterclaim will be filed and factor in the cost of litigating that claim both:
Effect on the Plan:
Provisions of plans containing grants of exclusive broad post‐confirmation jurisdiction to the bankruptcy court may no longer be enforceable p y y g .
For litigation related to whether the claim should be heard in the bankruptcy court or in state or federal court, and F liti ti For litigation of that claim in state or federal court. f th t l i i t t f d l t
Delay confirmation of a plan. Leverage by creditors to increase settlement. Courts may have to determine which parties voted on a plan of confirmation to determine whether there was consent to jurisdiction. whether there was consent to jurisdiction.
Litigation Strategy:
Parties attempting to remove a case from bankruptcy court could seek to employ similar arguments any time an issue borders on state law. P ti Parties could, as Judge Gerber suggests, give consent and then challenge the constitutionality of the ld J d G b t i t d th h ll th tit ti lit f th jurisdiction if they do not like the outcome.
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Questions?
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Thank You.
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Contact Information Contact Information
Daniel J. McGuire
Carey Ca ey D. Sc Schreiber e be
Restructuring and Insolvency Chicago (312) 558-6154
[email protected]
Restructuring and Insolvency New York (212) 294-3547
[email protected]
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