Early Termination Provision Does Not Apply to Estate Property

In another twist on the evolving interpretation of BAPCPA, a court in Texas has ruled that failure to extend the automatic stay in a subsequent filing does not affect property of the estate that is not claimed by the debtor as exempt.   In re Scott-Hood, No. 11-53580 (Bankr. W.D. Tex. 6/15/12), which can be found here.

In the Scott-Hood case, the Debtor had one prior chapter 13 case dismissed and then filed a new chapter 13 proceeding.   However, the Debtor did not request an extension of the automatic stay pursuant to section 362(c)(3).     JP Morgan Chase Bank filed a Motion for Order Confirming Termination of Automatic Stay which was granted.   The Debtor then filed a motion for reconsideration arguing that section 362(c)(3) was limited to property of the Debtor, not property of the estate.    The Court ultimately agreed.

According to section 362(c)(3)(A), failure to request extension of the stay in a subsequent case means that:

(T)he stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30^th day after the filing of the later case.

Because the Debtor did not file a motion to extend the automatic stay, it was necessary for the court to determine what the consequence under section 362(c)(3)(A) was.    The Court noted that there was a split in the cases as to whether the stay terminated as to all property or just the debtor’s property.    The Court noted that this was important in the San Antonio Division of the Western District of Texas because the Standing Order for Chapter 13 cases provides that upon confirmation, property does not revest in the Debtor.   The Court noted:

Thus, in the San Antonio Division of the Western District of Texas, where property of the bankruptcy estate encompasses all property of the debtor as of filing, plus all property acquired post-petition and earnings from services performed post-petition, (citation omitted), an early termination of the stay under section 362(c)(3)(A) could be meaningless.   

 Opinion, p. 3.

After an analysis of the statutory text and legislative history, the Court concluded that the statute meant exactly what it said:  “with respect to the debtor” was limited to the debtor’s property, not the estate’s property.

The result reached by the foregoing textual analysis may be less than optimal.   The fact that the scope of relief is less robust than creditors who lobbied for this legislation might have hoped for, however, is not reason to conclude that the statute is “truly absurd.”    It has meaning.   It just doesn’t have the meaning that the creditor wants it to have.   So it often is with statutes.  They fail to deliver on the expectations of those who zealously worked for their passage.    By the same token, however, the statute does deliver more relief, in this court’s view, than the majority view says it delivers.   That too is but another consequence of the way the statute is written and how it intersects with the rest of the Bankruptcy Code.   The court’s job is not to select the optimal policy outcome but to discover the intent of the drafters of the legislation to the extent that can be done with the interpretive tools available. . . . 

After reviewing both the plain language of the statute itself, as well as its narrow context within section 362 and its broader context within the Bankruptcy Code, the court concludes that section 362(c)(3)(A) terminates the stay only with respect to the debtor individually, with respect to the debtor’s exempt property that stands as collateral for a debt of the debtor, and with respect to certain leases.   It does not terminate with respect to property of the estate.

Opinion, pp. 7-8. 

This result will provide a lot of relief to chapter 7 trustees and some relief to less than diligent debtor’s attorneys.   For chapter 7 trustees, who may not see a case until 30 days after it is filed, it means that they do not lose control over non-exempt assets that are subject to a lien but may have equity.   

For debtor’s lawyers who may not be aware of this new provision (it is not even seven years old so far) or who fail to catch a prior case, the benefit may be less dramatic.   Debtors typically file chapter 13 to protect their exempt property, such as homes and cars.     Under Judge Clark’s ruling, exempt property of the debtor is still subject to early termination of the stay.   However, there is an interesting quirk here.   All property of the debtor, including exempt property, initially enters the estate.   It is only when an exemption becomes final that the property leaves the estate.   Consider this scenario:   a debtor files a subsequent case and claims his truck as exempt.   However, he does not file a motion to extent the stay.   At the conclusion of 30 days, the stay terminates.   However, the truck is still property of the estate.    The property will not leave the estate until 30 days after the first meeting of creditors at the earliest.    If the debtor’s attorney realizes his mistake during the period between 30 days after the petition date and the date that exemptions become final, he can simply amend his exemptions to delete the exemption.   In that instance, the property remains property of the estate and the early termination clause never takes effect.

Bankruptcy Court Denies Recognition to Non-Debtor Releases Contained in Mexican "Concurso"

In a major decision interpreting chapter 15 of the Bankruptcy Code, Judge Harlin Hale has denied recognition of the provisions of the “Concurso” order obtained by Vitro, SAB in Mexico which would have released the liability of its non-bankrupt U.S. subsidiaries.    The Court carefully avoided any rulings which would have cast aspersions upon the Mexican legal proceedings while finding that U.S. law would not recognize the specific provision.  In re Vitro, SAB, No. 11-33335 (Bankr. N.D. Tex. 6/13/12).   The opinion can be found here.   

What Happened

Vitro S.A.B. de C.V. is a holding company formed in Mexico in 1909.   It operates its business through a network of subsidiaries.   It is the largest manufacturer of glass containers and flat glass in Mexico and its name is Latin for glass.   Vitro borrowed approximately $1.225 billion in unsecured notes which were guaranteed by virtually all of its subsidiaries.   Vitro also agreed to repay approximately $2.0 billion to its subsidiaries under circumstances which raised questions from its third party creditors.

When the global recession hit in 2008, Vitro could not pay its debts.   In November and December  2010, proceedings were filed in four different jurisdictions seeking to address the Vitro debts.

1.                  On November 17, 2010, some of Vitro’s American creditors filed involuntary petitions against fifteen of Vitro’s American subsidiaries in the Bankruptcy Court for the Northern District of Texas.   Ultimately, four of the debtors consented to relief and an additional two debtors filed voluntary petitions.  

2.                  On December 2 and 9. 2010, Vitro’s American creditors filed suit against Vitro and 49 of its subsidiaries in state court in New York.

3.         On December 13, 2010, Vitro filed a a voluntary judicial reorganization proceeding under the Ley de Concursos Mercantiles (the “Mexican Business Reorganization Act”) in the Federal District Court for Civil and Labor Matters for the State of Nuevo León, the United States of Mexico, seeking approval of a pre-packaged, “concurso” restructuring plan.

4.                  On December 14, 2010, Vitro filed a chapter 15 proceeding in the Bankruptcy Court for the Southern District of New York.  

While these filings set up the multinational squabble, this was only the beginning.   In Mexico, the pre-pack was rejected based on a finding that the subsidiaries were not entitled to vote.   The initial chapter 15 petition in New York was withdrawn after this filing.   On appeal, the Mexican court reversed and allowed the subsidiaries to vote.  A new chapter 15 proceeding was filed in New York.   However, the New York chapter 15 proceeding was transferred to the Bankruptcy Court for the Northern District of Texas.   The Bankruptcy Court for the Northern District of Texas granted a preliminary injunction against proceedings against the Vitro parent but not the subsidiaries.    The American creditors sought an order prohibiting the American subsidiaries from voting upon the Mexican concurso but were rebuffed. 

 The Mexican concurso was ultimately approved based upon the votes of the subsidiaries.    The concurso provided that the guarantees of the subsidiaries could not be enforced.   Thus, the subsidiaries were able to vote in favor of a plan which released their guarantees.    This set the stage for the Mexican representative of Vitro to seek an order from the Bankruptcy Court for the Northern District of Texas recognizing the concurso and enforcing the order to release the subsidiaries from their guarantees.

            To summarize:

1.      Vitro borrowed over a billion dollars guaranteed by its subsidiaries.

2.      Vitro filed a pre-packaged bankruptcy plan in Mexico.

3.      Vitro’s pre-pack was approved based on the votes of its subsidiaries.

4.      The Mexican plan released the subsidiaries from liability.

5.      The Bankruptcy Court for the Northern District of Texas was asked to recognize the order from the Mexican Court.

 

The Comity Question

This left the Bankruptcy Court with a difficult question:   should it enforce the Mexican concurso as a matter of comity or was there a countervailing rule under American law?   Fortunately for the court, chapter 15 provides some guidance.    Under section 1507(b), an American bankruptcy court may provide “additional assistance” to a foreign debtor, but only if five conditions are met, including that  American creditors are treated fairly and the distribution scheme is substantially the same as provided under title 11.    Additionally, section 1506 allows the Bankruptcy Court to decline to enforce the order of a foreign court if it would be manifestly contrary to the public policy of the United States.”   

Whether to recognize a foreign court order under section 1507(b) is largely a matter of comity.   While comity and comedy sound very similar they have strikingly different meanings.   According to Judge Hale:

Comity should be the Court’s primary consideration when applying § 1507(b). (citation omitted).  Comity has been defined as the “recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protections of its laws.” (citation omitted). Granting comity to judgments in foreign bankruptcy proceedings is appropriate as long as U.S. parties are provided the same fundamental protections that litigants in the United States would receive.

. . .  “The principle of comity has never meant categorical deference to foreign proceedings. It is implicit in the concept that deference should be withheld where appropriate to avoid the violation of the laws, public policies, or rights of the citizens of the United States.”  (citations omitted).  

 Opinion, pp. 7-8.

In ruling upon the parties’ contentions, the Court divided its ruling into objections it rejected, objections it sustained and issues it did not reach.

The Court rejected the argument that it should not enforce the Mexican order because of corruption in Mexico.   While the creditors’ expert presented evidence of corruption in Mexico in general, it did not connect this to the specific case.   Additionally, the objecting creditors’ expert on Mexican law testified that in forty years’ practice, he had never bribed a judge.   While the Court’s conclusion appears to be sound, as well as avoiding offense to America’s neighbor to the south, the implicit suggestion that corruption should be proved by bringing testimony from a witness who has personally participated in corruption is a bit unsettling.

The Court also dismissed a number of arguments based on fairness and compliance of Mexican law on the basis that these were issues best left to the Mexican court system.  

However, in the end, the Court concluded that American law would not allow a plan of reorganization which granted wholesale releases to non-debtor parties.    The Court stated:

Generally speaking, the policy of the United States is against discharge of claims for entities other than a debtor in an insolvency proceeding, absent extraordinary circumstances not present in this case. Such policy was expressed by Congress in Bankruptcy Code Section 524, and in numerous cases in this circuit. (citations omitted). This protection of third party claims is described both in terms of jurisdiction and also as a policy. (citations omitted).

The Fifth Circuit has largely foreclosed non-consensual non-debtor releases and permanent injunctions outside of the context of mass tort claims being channeled toward a specific pool of assets.  (citations omitted).

Opinion, p. 25.   The Court ultimately concluded that the guarantor release provision of the concurso was contrary to American law and should not be enforced.    While the Court’s conclusion may be sound, it is curious that the Court did not discuss case law out of the Northern District of Texas allowing a plan to enjoin pursuit of claims against a non-party who contributes property necessary to the success of a plan which was approved by the creditors and will pay unsecured creditors 100% of the amount of their claims.  In re Bernard Steinhard Pianos USA, Inc., 292 B.R. 109 (Bankr. N.D. Tex. 2002); In re Seatco, Inc., 257 B.R. 469 (Bankr. N.D. Tex. 2001).    Perhaps the Court felt that those cases were too far different from those of Vitro.   However, an acknowledgement of what would constitute “extraordinary circumstances” would have been welcome.    

The bottom line here is that comity is a good thing, but not when it means an end run around American law as applied to American creditors of an American subsidiary of a foreign company.

The Fifth Circuit has approved a direct appeal and has temporarily stayed enforcement of the decision.

                       

Stern v. Marshall: The Texas Cases

This is a paper that I did for the Austin Bar Association summarizing the Texas cases applying Stern v. Marshall to date.   Please note that where the holding is indented, I am directly quoting the opinion.   I also used the following key for highlighting certain decisions:

*--If you only read a few cases, read these ones.

#--Cases where the Court found that Bankruptcy Judge lacked authority to enter a final order. 

Fifth Circuit Court of Appeals:

Technical Automation Services Corp. v. Liberty Surplus Insurance Corporation, 673 F.3d 399 (5^th Cir. 3/5/12)(E. Grady Jolly)

Facts:              Magistrate Judge granted summary judgment on an insurance coverage dispute.   Fifth Circuit sua sponte requested briefing on whether Stern v. Marshall affected the Magistrate Judge’s ability to enter a final judgment.

Holding:          Stern v. Marshall did not overrule prior precedent on constitutionality of U.S. Magistrate’s authority to enter a final judgment.

U.S. District Courts:

Feuerbacher v. Moser, 2012 U.S. Dist. LEXIS 44396 (E.D. Tex. 3/29/12)(Marcia A. Crone)

Facts:  Trustee sued debtor’s husband under TUFTA to recover fraudulent transfers.    Bankruptcy Court ruled in favor of Trustee.   On appeal, husband raised a Stern issue.

Holding:

           

Application of the aforementioned rationales to the case at bar reveals that Stern does not preclude the bankruptcy court from issuing a final judgment on claims where, as here, the Trustee seeks to recover fraudulent transfers.  

Mahanna v. Bynum, 465 B.R. 436 (W.D. Tex. 11/28/11)(Sam Sparks)

           

Facts:  Debtors filed chapter 13 bankruptcy.   Court directed debtors to convert to chapter 7 or chapter 11.   Debtors converted to chapter 11.   After debtors failed to comply with obligations of debtors-in-possession, U.S. Trustee filed Motion to Dismiss or Convert.    Debtors requested conversion.   Court dismissed the case over debtors’ objection.   Debtors appealed.

           

Holding:   Court rejected argument that Bankruptcy Court lacked authority to enter a final order on motion to dismiss or convert.

 

Stern did not destroy all finality in bankruptcy courts, it simply held § 157(b)(2)(C) was unconstitutional to the extent it swept counterclaims not arising in or under Title 11 into the category of "core" proceedings.

Bushman v. Moore, 2011 U.S. Dist. LEXIS 154776 (S.D. Tex. 9/14/11)(Vanessa D. Gilmore)

           

Facts:  Bankruptcy Court entered judgment finding debt to be non-dischargeable and finding that property was not homestead.

           

Holding:  Debtors argued that Stern v. Marshall prevented Bankruptcy Court from entering final judgment.  

Here, in contrast to Stern v. Marshall, the Bankruptcy Court was not ruling on a state law counterclaim, but on a determination as to the dischargeability of particular debts under 28 U.S.C. § 157(b)(2)(I). These types of claims remain under the bankruptcy judge's core proceedings jurisdiction following Stern v. Marshall.

           

#In re AIH Acquisitions, LLC, 2011 U.S. Dist. LEXIS 101190 (N.D. Tex. 9/7/11)(John McBryde)

Facts:  Individuals filed plea in intervention in adversary proceeding involving Textron.   Bankruptcy Court dismissed claims with prejudice for failure to plead with specificity under Rule 9(b)).

Holding:          Bankruptcy Court lacked authority to enter a final order on claims.    Claims asserted in plea in intervention were state law claims similar to the counterclaim in Stern v. Marshall.   The District Court reversed the dismissal order and withdrew the reference.

Bankruptcy Courts:

Burchik v. Butler, Adv. No. 11-1220 (Bankr. W.D. Tex. 5/10/12)(Craig A. Gargotta)(oral ruling)

            Facts:  Chapter 7 Debtor brought suit against former counsel for malpractice.

            Holding:          In announcing oral ruling, Court noted that absent consent, it would not have had authority to enter a final ruling under Stern.   Because parties expressly consented, Court could enter a final order.

In re Ruth, 2012 Bankr. LEXIS 1857 (Bankr. S.D. Tex. 4/26/12)(Jeff Bohm)

           

Facts:  Debtors filed adversary proceeding against creditor seeking to deny claim and recover sanctions for abuse of the proof of claim process and for vexatious litigation.

           

Holding:  Court had authority to enter a final order on counterclaim to proof of claim because counterclaim arose out of Bankruptcy Code and Bankruptcy Rules.  Additionally, it was necessary to resolve the dispute to determine the claim.

In re Bechuck, 2012 Bankr. LEXIS 1459 (Bankr. S.D. Tex. 4/4/12)(Jeff Bohm)

           

Facts:  Trustee filed an application to employ special counsel.

           

Holding:   Because Court denied application to employ special counsel, authority to enter a final order was not implicated.    However, Bankruptcy Court would nevertheless have authority because employment of counsel is governed by Bankruptcy Code and Bankruptcy Rules.

In re Laughlin, 2012 Bankr. LEXIS 1268 (Bankr. S.D. Tex. 3/23/12)(Jeff Bohm)

           

Facts:  Creditor filed complaint to determine dischargeability of debt.

           

Holding:         

This suit is therefore based on an express bankruptcy statute; indeed, the requested relief is unique to the Code and could never be obtained under state law. For these reasons alone, this Court concludes that Stern is inapposite, and therefore it has constitutional authority to enter a final judgment in this dispute.

In re Thalmann, 2012 Bankr. LEXIS 1066 (Bankr. S.D. Tex. 3/13/12)(Jeff Bohm)

           

Facts:  Creditor moved to dismiss case as having been filed in bad faith and Debtor objected to proof of claim filed by State Court Receiver.

           

Holding:         

State law has no equivalent to (sections 1307(c) and 1325(a)(3) and (a)(7)); they are purely a creature of the Bankruptcy Code. Accordingly, because the resolution of this dispute is based on express bankruptcy statutes, not state law, Stern is inapplicable, and this Court has the constitutional authority to enter a final judgment on the Motion pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Carlew, 2012 Bankr. LEXIS 1006 (Bankr. S.D. Tex. 3/9/12)(Jeff Bohm)

           

Facts:  Chapter 7 trustee objected to debtor’s exemptions.

           

Holding:         

In the dispute at bar, the Chapter 7 Trustee has objected to the Debtor's exemption of the Insurance Proceeds pursuant to Section 522(l) and Fed. Bankr. R. 4003(b). State law has no equivalent to this statute and rule; therefore, the facts in this case  are distinguishable from those in Stern, which involved solely state law. Granted, the resolution of the dispute at bar does hinge on Texas state law regarding homestead exemption. But, unlike Stern, where the resolution of the debtor's counterclaim did not necessarily adjudicate the creditor's claim, here, the resolution will certainly determine whether the Debtor has a claim to the Insurance Proceeds. If he does--i.e. if these proceeds are exempt--there will necessarily be less funds available for distribution for creditors. If the Debtor does not have a claim to the Insurance Proceeds--i.e. the proceeds are not exempt--then the Trustee will have more funds to distribute the proceeds to pay creditors. For these reasons, the dispute at bar is sufficiently distinguishable from the dispute in Stern for this Court to sign a final order.

In re Frazer, 466 B.R. 107 (Bankr. S.D. Tex. 107 (Bankr. S.D. Tex. 3/5/12)(Jeff Bohm)

            Facts:  Debtors filed adversary proceeding to strip lien of homeowners association from their homestead.

            Holding:  While validity of lien depends on state law, determination of dispute is necessary to resolve claim and therefore Court has authority to enter a final order.

In re Crescent Resources, LLC, 2012 Bankr. LEXIS 843 (Bankr. W.D. Tex. 3/2/12)(Craig A. Gargotta)

            Facts:  Plan Trustee filed a Complaint to Avoid and  Recover Improper “Bonus” Payments.    Defendants filed a Motion to Dismiss.    Court granted motion in part and denied in part.    Specifically, Court ruled that plan of reorganization did not adequately preserve causes of action under 11 U.S.C. §544 under state fraudulent conveyance law.  Trustee requested that Court certify a direct appeal to the Fifth Circuit Court of Appeals.   One issue that the Trust requested the Court to certify was whether the Court had authority to enter a final order dismissing the claims with prejudice.

            Holding:          Court disagreed that case was “squarely within the category of state law proceedings” implicated by Stern.    Although case involved a fraudulent transfer action brought under state law by virtue of strong arm powers under section 544, Court’s ruling was based upon interpretation of the Plan.    Furthermore, order was interlocutory and therefore was not a “final” order governed by Stern.

*In re American Housing Foundation, 2012 Bankr. LEXIS 449 (Bankr. N.D. Tex. 2/10/12)(Robert Jones)

            Facts:  Trustee brought actions under 11 U.S.C. §§544, 547 and 548.   96 defendants in 20 adversary proceedings filed motions to dismiss based on Stern v. Marshall.   Motions were filed under Rule 7012(b)(1) based on lack of subject matter jurisdiction.

            Holding:          Court assumed that it did not have authority to enter final orders in proceedings because defendants did not file claims and causes of action did not fit within public rights doctrine.    Court considered whether it could hear cases and issue proposed findings of fact and conclusions of law to the U.S. District Court.  “(I)t makes little sense to suggest that a bankruptcy judge has authority to hear a matter and issue proposed findings of fact and conclusions of law on "related to" matters but does not have authority to do the same with respect to "core" matters.”   Court concluded that it could enter non-binding findings of fact and conclusions of law.    Case contains a very thoughtful and extensive discussion of Stern.  

In re Franceschini, 2012 Bankr. LEXIS 156 (Bankr. S.D. Tex. 1/12/12)(Marvin Isgur)

           Facts:  Creditor brought action to determine dischargeability under 11 U.S.C. §523(a)(6).

            Holding:         

The right to a discharge is established by the Bankruptcy Code and is central to the public bankruptcy scheme.   (citations omitted).   Determinations of whether a debtor meets the conditions for a discharge are integral to the bankruptcy scheme, and bankruptcy courts have the authority to make such determinations pursuant to its in rem jurisdiction. (citation omitted).”   Court had authority to enter final order on determination of dischargeability.

In re Hereford Biofuels, LP, 2012 Bankr. LEXIS 22 (Bankr. N.D. Tex. 1/3/12)(Stacey C.G. Jernigan)

            Facts:  Non-debtor brought action against another non-debtor over interpretation of section 363 order.

      Holding:  

       

While the Adversary Proceeding has arisen in a post-confirmation context, and is between two non-debtor parties, the disputes herein ultimately concern: (a) the interpretation and enforcement of a prior sale order of the bankruptcy court, under section 363 of the Bankruptcy Code (and the asset purchase agreement that the bankruptcy court approved); and (b) the definition of what was or was not property of the bankruptcy estate in the underlying bankruptcy case, pursuant to section 541 of the Bankruptcy Code. In fact, the asset purchase agreement, the bankruptcy court sale order, and what was "property of the estate," are undoubtedly at the crux of the parties' disputes. The only place that one would find a bankruptcy court sale order and these post-sale issues is in the context of a bankruptcy case. Thus, the court determines that this is a core "arising  in" proceeding, pursuant to 28 U.S.C. §§ 157(b)(2)(A), (O) & 1334(b). It is a proceeding in which the bankruptcy court may enter final orders.

In re Hill, 2011 Bankr. LEXIS 5186 (Bankr. S.D. Tex. 12/30/11)(Jeff Bohm)

            Facts:  Chapter 13 trustee filed objection to exemptions and motion to modify confirmed plan.

            Holding:          Because proceeding arose under Bankruptcy Code and Rules, Court could enter a final order.   Public rights doctrine applied as well.

 

*In re Apex Long Term Acute Care-Katy, LP, 465 B.R. 452 (Bankr. S.D. Tex. 12/28/11)(Marvin Isgur)

            Facts:  Trustee brought four preference suits.   Trustee compromised three of the cases and sought to dismiss them with prejudice.  Trustee sought a default judgment on the fourth case. 

            Holding:  Court raised issue of its ability to enter the orders sua sponte.   Because dismissal with prejudice and default judgment constitute final orders, Court had to examine its authority.   After extensive analysis, Court concluded that it could enter final orders in cases where defendants filed claims because preference action was part of the claims adjudication process.    As to defendants who did not file claims, Court could enter final orders based on the public rights doctrine.”   Thia is a very scholarly opinion and should be the "go to" opinion for defending the ability of the bankruptcy court to enter final orders in a preference case.

 

In re Carroll, 464 B.R. 293 (Bankr. N.D. Tex. 12/13/11)(Barbara J. Houser)

            Facts:  Debtor filed for chapter 13 relief.   Creditor sought to liquidate claims and have them declared to be nondischargeable.    Debtor argued that court did not have jurisdiction.

            Holding:          Court had authority to enter final orders.   Stern clarifies “bankruptcy courts’ constitutional power, not their subject matter jurisdiction.”   “(T)here can be little doubt that this Court, as an Article I tribunal, has the Constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case. Determining the scope of the debtor's discharge is a fundamental part of the bankruptcy process.”   Because Stern left intact Court’s ability to adjudicate a creditor’s claim, Court may liquidate amount of non-dischargeable debt.

*#In re Soporex, Inc., 463 B.R. 344 (Bankr. N.D. Tex. 11/28/11)(Barbara J. Houser)

            Facts:  Trustee filed complaint against officers and directors for breach of fiduciary duty and objections to claim.   Defendants filed motion to dismiss which did not raise a Stern issue.

            Holding:          Court raised Stern issue sua sponte.   Court concluded that it could not enter a final order on trustee’s counterclaims against insiders filing claims.    Court ruled that it could issue proposed findings and conclusions to the district court on statutory core proceedings where it lacked constitutional authority to enter a final order.   In dicta, Court noted whether parties could “remove the constitutional impediment identified by Stern by consent is unclear.”

Many are debating the breadth of the Supreme Court's decision in Stern. The arguments are interesting and, in some instances, mind-numbing. For today, I leave those arguments to others because I believe that the issue before me can be more simply, and practically, decided. It would be incredibly ironic for this Court to lack constitutional authority to finally determine the Trustee's breach of fiduciary duty and corporate waste claims against Smith and Sabolik (when they actually inserted themselves into Inc.'s bankruptcy case by filing a proof of claim) as the Supreme Court has clearly held in Stern, but to have constitutional authority to finally determine the Trustee's breach of fiduciary duty claims (arising from substantially the same acts or failures to act) against Linehan, the Outside Directors, and Letson, who chose not to involve themselves in the Debtors' bankruptcy cases at all until they were forced to do so by the Trustee's decision to sue them here. As a practical matter, this Court concludes that such a result is irreconcilable with the Supreme Court's analysis in Stern. If this Court lacks constitutional authority to finally determine  one set of breach of fiduciary duty claims against two former officers of certain of the Debtors, surely it lacks constitutional authority to finally determine substantially identical sets of breach of fiduciary duty claims against other former officers and/or directors of certain of the Debtors.

            As a result, the Court submitted proposed findings of fact and conclusions of law with regard to the motions to dismiss.

In re Whitley, 2011 Bankr. LEXIS 4545 (Bankr. S.D. Tex. 11/21/11)(Jeff Bohm)

            Facts:  Court issued order to show cause regarding compensation of attorney in chapter 13 proceedings.

            Holding:         

The dispute at bar is not a counterclaim of the Debtor, nor does it arise out of state law; therefore, Stern does not apply. This suit arises out of alleged violations of the disclosure requirements imposed by an express Bankruptcy Code provision--i.e. § 329. Moreover, the Trustee also seeks relief based upon another express Bankruptcy Code provision--i.e. § 330, which allows the Court to award or deny compensation to attorneys that represent the debtor and the debtor's estate. State law has no equivalent to these statutes; they are purely creatures of the Bankruptcy Code. Accordingly, the resolution of this dispute is not based on state common law, Stern does not apply, and this Court has the constitutional authority to enter a final judgment in this dispute pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Chao, 2011 Bankr. LEXIS 4543 (Bankr. S.D. Tex. 11/21/11)(Jeff Bohm)

            Facts:  Court issued Memorandum Opinion Regarding Sua Sponte Conversion of Case from Chapter 11 to Chapter 7.

            Holding:          Court found that it had authority to enter a final order converting the case from chapter 11 to chapter 7.

#In re Special Value Continuation Partners, LP,  2011 Bankr. LEXIS 4475 (Bankr. S.D. Tex. 11/15/11)(Marvin Isgur)

            Facts:  Lenders filed a state court action against officers and directors alleging that they provided misleading financial projections and made misrepresentations to obtain financing for company which filed bankruptcy.   Defendants removed case and requested that venue be transferred to Delaware.   Plaintiffs moved to abstain and remand.

            Holding:          One factor that court considered in denying motion to transfer venue and granting motions to abstain and remand was that court could not enter a final order under Stern.   “These are state law causes of action by nondebtors against nondebtors. The causes of action neither derive from nor depend upon any agency regulatory scheme.”

In re Noram Resources, Inc., 2011 Bankr. LEXIS 4268 (Bankr. S.D. Tex. 11/7/11)(Marvin Isgur)

            Facts:  Chapter 7 trustee brought suit against officers and directors asserting that they had breached their fiduciary duties under Canadian law.    Directors moved to dismiss.

      Holding:         

“After Stern, the Court's authority over state-law matters (or, in this case, foreign-law matters) is particularly questionable.”   However, Court still had authority to enter interlocutory orders, such as ruling on a motion to dismiss.

#In re Yazoo Pipeline Co., LP, 459 B.R. 636 (Bankr. S.D. Tex. 10/14/11)(Marvin Isgur)

            Facts:  Trustee filed suit to recover damages for misconduct occurring while debtor was in chapter 11.   Trustee filed motion for leave to file second amended complaint.

            Holding:         

Although the claims in this proceeding involve  conduct that took place within the context of a bankruptcy case, bankruptcy law does not alter the state-law character of the claims. The claims would not necessarily be resolved through the claims adjudication process or through the resolution of any other essential bankruptcy matter. This Court does not have authority to enter a final judgment in this matter. On this Court's Recommendation, the District Court has ordered that the reference will be withdrawn after all pretrial matters are concluded.

In re The Heritage Organization, LLC, 459 B.R. 911 (Bankr. N.D. Tex. 10/3/11)(Barbara J. Houser)

            Facts:  Several years after an adverse judgment, defendants moved to vacate the judgment under Rule 60(b)(4) based on the Stern decision.

            Holding:          Judgment is not void for want of jurisdiction unless nor arguable basis for jurisdiction existed in the first place.   Court had statutory jurisdiction.   Because Stern case was not decided for two years after judgment, court “declines to conclude that it lacked any arguable basis for jurisdiction.”

#In re Heights Melrose Group, LLC, 2011 Bankr. LEXIS 153073 (Bankr. S.D. Tex. 9/29/11)(Marvin Isgur)

            Facts:  Debtor filed suit to determine that defendants did not have a claim to certain condominiums.    Defendants claimed that foreclosure sale at which debtor purchased properties was invalid.   Both parties moved for summary judgment.

            Holding:          Court could not enter final orders on parties’ state law claims.   As a result, Court submitted proposed findings and conclusions to the District Court.

*In re Bigler, LP, 458 B.R. 345 (Bankr. S.D. Tex. 8/19/11)(Jeff Bohm)

            Facts:  Bank brought declaratory judgment complaint against other creditors to determine extent, priority and validity of liens.

            Holding:

The broader applicability of the Supreme Court's decision  remains unclear. Other types of disputes frequently decided by bankruptcy courts may now also require final adjudication by Article III courts. A bankruptcy court's authority over matters involving state law causes of action is particularly questionable. Indeed, just as the debtor's counterclaim in Stern was based entirely upon state law, the law governing the dispute in this adversary proceeding is based entirely upon state law. Accordingly, at first blush, it would appear that the undersigned Article I judge does not have the constitutional authority to enter a final judgment in this adversary proceeding. However, for the reasons set forth below, this Court concludes that it does have such authority.

This Court may exercise authority over matters integral to the bankruptcy scheme under the "public rights" exception articulated in Stern. Under Thomas v. Union Carbide Agric. Prods. Co., a right closely integrated into a public regulatory scheme may be resolved by a non-Article III judge.  (citation omitted). The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including "the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a 'fresh start' by releasing him, her, or it from further liability for old debts." (citation omitted).

Here, this suit concerns a dispute that must be resolved in order to determine the appropriate distribution among the Debtors' creditors. The determination of lien priority on assets that were once property of the bankruptcy estate are part of the "public rights" exception, as it involves the exercise of the Bankruptcy Court's in rem jurisdiction over the estate. (citation omitted).

Hence, resolution of the lawsuit pending in this Court arises from an express provision of the Plan, the very purpose of which is to distribute cash to the prevailing party or parties--thereby accomplishing the very objective of the public right known as the bankruptcy process  (i.e. paying claims of creditors). (citation omitted). Therefore, not only does this lawsuit involve a right integral to the bankruptcy scheme--the determination of lien priority--but it also involves a right created by the Bankruptcy Code--distribution of property of the estate to creditors pursuant to the Plan. Accordingly, this dispute falls within the undersigned judge's constitutional authority to enter a final judgment.

In re Ritz, 459 B.R. 623 (Bankr. S.D. Tex. 8/4/11)(Jeff Bohm)

            Facts:  Creditor of a corporation asserted that debtor drained corporation of funds.   Creditor asserted claim against the debtor and sought determination of nondischargeability.

            Holding:          Court could enter a final order under the public rights doctrine.

In re Okwonna-Felix, 2011 Bankr. LEXIS 3028 (Bankr. S.D. Tex. 8/3/11)(Jeff Bohm)

            Facts:  Debtor sought approval of compromise of claims against insurance companies.

            Holding:         

Accordingly, because the resolution of the Motion is not based on state common law, but entirely on federal bankruptcy law (both the Rule and the case law instructing how to apply the Rule), the holding in Stern is inapplicable, and this Court has the constitutional authority to enter a final order in this contested matter pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Muhs, 2011 Bankr. LEXIS 3032 (Bankr. S.D. Tex. 8/2/11)(Marvin Isgur)

              Facts:  Creditor filed complaint to determine dischargeability.

            Holding:         

When a bankruptcy court determines the extent of a creditor's nondischargeable claim, the court simply decides that a particular creditor is entitled to something more than the creditor would otherwise get out of the bankruptcy bargain.  Such determinations are inextricably tied to the bankruptcy scheme and involve the adjudication of rights created by the Bankruptcy Code. This case therefore falls within the Bankruptcy Court's authority, and the Bankruptcy Court's judgment is final.

*In re Turner, 462 B.R. 214 (Bankr. S.D. Tex. 7/11/11)(Jeff Bohm)

            Facts:  Chapter 13 debtors filed Complaint for Turnover and Damages against Bank that froze account.

            Holding:          Complaint for turnover was based on automatic stay and not upon state law.

  

The automatic stay is one of the most important--if not the most important--features of the Bankruptcy Code, and it is integral to the public bankruptcy scheme. Its purpose is to enjoin all creditors from taking action against the debtor and the estate so that the debtor may have some breathing room to propose and obtain confirmation of a plan of reorganization which will pay creditors.  (citation omitted). A debtor has a fiduciary duty to his creditors to take the action necessary to pay their claims. (citation omitted). Given the central role of the automatic stay in the bankruptcy scheme, the broad effect of the automatic stay, and the fiduciary duty imposed upon debtors, this Court concludes that enforcement of the automatic stay fits within the "public rights" exception. The automatic stay protects not just one person or entity, but rather protects all of those persons and entities affected by the filing of a bankruptcy petition. (citation omitted). The debtor and the estate benefit because the stay is an injunction that enjoins creditors from unilaterally attempting to collect their respective claims against the estate. (citation omitted). Each of the creditors benefits because no other creditor may unilaterally take action against the estate--which means that the debtor has time to deliberately and carefully file a plan and then obtain confirmation so that all claims can be paid. (citation omitted). Stated differently, the 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. Without the enforcement of the automatic stay, reorganization of consumer debtors and business debtors throughout the country would be impossible and would undermine the public policy of allowing honest debtors to obtain a fresh start. Accordingly, because the undersigned judge concludes that the dispute at bar involves a "public right," the undersigned judge concludes that he has the constitutional authority to sign a final judgment in this adversary proceeding.

This is the first Texas opinion that I could find applying Stern v. Marshall.   Since this opinion, Judge Bohm has included a discussion of Stern v. Marshall in virtually every opinion he has written.