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You Say "EBIA," I Say "Bellingham," We All Say "Pottow"

posted by Bob Lawless

Credit Slips contributor John Pottow will be arguing the upcoming EBIA v. Arkison (née Bellingham) case in the U.S. Supreme Court. As briefly summarized in an earlier post, the question in the case has to do with federal bankruptcy court jurisdiction over a lawsuit within a bankruptcy case, namely a fraudulent transfer action.

We have a broad audience so I'll leave the description at that one sentence. If you are bankruptcy expert you should already know the case. If you are not, it would take about 70 pages of explication about the historical development of the bankruptcy system to understand the convoluted jurisdictional framework both Congress and the Supreme Court have bestowed on the bankruptcy courts. Fortunately, the 70-page brief for the respondent, written by Pottow with attorneys G. Eric Brunstad, Jr., and Kate M. O'Keeffe, is exactly such a tour de force explication. Indeed, even if you are a bankruptcy expert, the brief will be a great resource for you on the issues the case raises.

And, although it pains me ever to write such a phrase . . . Pottow is right.

Comments

All the parties in Executive Benefits argue the case as a “private rights” issue.

But when the debtor’s alter ego launches the debtor into bankruptcy haven’t the debtor and alter ego waived the “public rights” exception to Article III adjudication of bankruptcy issues.

I realize my theory accepts that a non Article III Court can determine if the alter ego is entitled to Article III protection but that is where the appeal lies - that the alter ego is not the alter ego, not that the alter ego deserves Article III protection.

"Bankruptcy judges perform their functions entirely within the confines of the judicial branch; they hear bankruptcy cases at the pleasure of Article III judges, who closely supervise their work and review all questions of fact and law"--this is false. District court enjoys and make sure that they oversee the bankruptcy proceeding as an appellate court, rather than "original" overseer. Further,the levers of participating in the bankruptcy proceeding on the original side, provided under 11 USC 157, is never used rather it is abhored. Policy and talks are numerous to justify; reality is that there is a blanket abandonment of bankruptcy business to these auxiliary judicial officers. Bankruptcy courts are independent courts with their own court rooms, local rules, chamber regs, law clerks etc. Cases are filed not in a district court. They go to a separate court USBC.

It's set for 14 January.

How about posting the other brief(s)?

Petitioner's Merits Brief can be found here:

http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs-v2/12-1200_pet.authcheckdam.pdf

There are several amicus briefs listed on the supreme court docket for the case.

I've been able to find them all (except the latest by Richard Aaron) by copying their names off the docket and pasting into Google to search.

The lack of comment on this most important bankruptcy case since Stern reflects “Fear & Loathing in Las Vegas (ie. the Bankruptcy Casino)”

As some judges observe, jurisdiction and authority is the most misunderstood concept in bankruptcy.

28 U.S.C. 157 divides bankruptcy jurisdiction (yes jurisdiction ) into private and public right issues.

Time to pause, - the Supreme Court in Executive Benefits will say that 28 U.S.C. 157(b)(2) is jurisdictional in that it defines “core proceedings” under 28 U.S.C. 1334.

28 U.S.C. 157(b)(5) may not be jurisdiction (as the Supreme Court said in Stern) but 157(b)(2) IS JURISDICTIONAL.

THERE IS NO “GAP” IN 28 U.S.C. 157!

Bankruptcy issues are either “public” or “private” - core or non-core.

Public issues are controlled by 28 U.S.C. 157(b).

If not public then private.

If private then 157(c) controls.

Ergo, unconstitutionally core issues are actually “private” issues to be adjudicated pursuant to 28 U.S.C. 157(c)

So now the question is whether the adjudication of a fraudulent conveyance action against the debtor’s alter-ego and successor is a private or public issue.

If fraudulent conveyance in this context implicates private rights then so does issuance of an anti-successor liability Injunctions extinguishing unsecured claims in conjunction with a 363(f) sale absent consent.

The next question is whether these precedents will be applied retroactively in a case challenging Bankruptcy Court adjudication of private rights?

Core, non-core is immaterial for jurisdictional purposes, for everything is core: lamentation of scholars and smile of bankruptcy auxiliary judicial officers assisting the district courts--for everything could be impacting the estate one way or the other. 28 USC 157 isn't or does not create, hence cannot be a source of jurisdiction. It is 1334 alone. However "public" or "private" alone is determinative and overriding...for that has a constitutional protection, bound by precedence. Fraudulent conveyance are private rights and just because debtor invokes, voluntary submit to an article I tribunal, it cannot morph it to a public right issue. Consent is material there and not the nature of the dispute. Precedents if couched in constitutional terms shall have unhindered retroactive application.

If you mean while on direct appeal a Supreme Court opinion settles all the issues in your pending appeal, then yes “Precedents if couched in constitutional terms shall have unhindered retroactive application.”

However, holding that a statute is unconstitutional does not necessarily nullify all the decisions reached under the statute before it was declared unconstitutional, else there would be thousands of motions to vacate bankruptcy court rulings deciding fraudulent conveyance actions against third parties reached prior to Stern v Marshall.

Bankruptcy Courts tenaciously apply the precedent reached in Chicot County Drainage District v Baxter State Bank, 308 U.S. 371 (1940), at 374, which was a bankruptcy case, establishing that:

These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified.

The trick is to satisfy an exception to res judicata.

My belief (argument) is that - If "the notion of 'consent' does not apply in bankruptcy proceedings as it might in other contexts." (see Stern v Marshall at 2615, n.8) then neither does the concept of finality or res judicata apply in bankruptcy as they do in an Article III proceeding because the definition of consent and finality are based on the same 28 U.S.C. §157 statute which has been applied unconstitutionally. As consent goes so goes finality and res judicata in the context of bankruptcy.

The "tour de force" has two typographical errors in it.

Improper and impossible is your suggestion, Mr. White. One cannot fasten constitutional challenges to small splinters like res judicata, which is a procedural aspect of a case. Constitutionality is a bigger element, it overrides all procedures. Res Judicata alone cannot compromise a constitutional question that raises its hood at any appellate level, especially if it entails serious issues of separation of power. Constitution is an overarching sweep of the entire legal landscape and is not a lamp post like claim preclusion. Claim preclusion, a judge made doctrine cannot supplant a constitution query or applicability. Res judicata might resolve two party dispute, constitution entails the entire nation and precarious balance of the tripartite government. When questions about the constitution is raised, it is not about two parties anymore, it is the challenge to entire framework and platform of adjudicatory process. And when Constitution informs, we listen and not skip over it and justify such skip with abstract principles. Court has zero tolerance when it is separation of power. For instance the court invocation of constitution text in Buckley Valeo case regarding Appointment Clause; Presentment Cluase and bicamerality in INS v. Chaddha case. And do not shy away from the judicial scepter handed down in Northern Pipeline.
Of course when parties complaint is that the bread did not have butter, it is not going to take them far. One can see if the challenge is to secure a settlement of a party dispute or it is a genuine questioning of the constitutionality of a provision. A good court can see difference when the crow pretends to be an eagle and or when the eagle is thrown to a crow's gamut--the latter is a constitutional crisis!

After reading all the briefs in Executive Benefits that are available for free on the Internet I have a few observations.

1. Executive Benefits' merits brief is an example of excellence and perfection. It may not be the winning position but it makes no factual mistakes whereas all the briefs in Respondent’s camp make several apparently intentional misstatements.

2. The amicus brief by Irving Picard will carry the day - at least his public rights argument will garner a Supreme Court majority. Forget implied consent, an alter-ego of the debtor consents to adjudication of the Government’s (trustee’s) issues against the debtor when the alter-ego/debtor petitioned for bankruptcy protection.

3. Two things disturb me about briefs by Respondent’s camp. They all claim Executive Benefits failed to timely oppose adjudication of the trustee’s complaint in the Bankruptcy Court. Hopefully you can’t win an argument in the Supreme Court making this kind of factual misrepresentation. Executive Benefit’s answer to the trustee’s complaint explicitly demanded a jury trial, not to be held in the Bankruptcy Court. If that is implied consent then who needs explicit consent. Secondly, maybe the courts are gaming the litigants instead of the other way around. 28 USC 157(b)(3) requires the Court, and not the litigants, to determine that a proceeding is core or non-core. If the Court gets the “core” determination wrong and the error is later determined to be an unconstitutional application of the statute in another case by the Supreme Court while the second case is on direct appeal then the precedent which determines the statute to be unconstitutional will be applied retroactively to direct appeals in the pipeline. What kind of unfair game is that?

Maybe 157(b)(3) needs to be amended such that all the active parties in a proceeding need to declare a proceeding is core and consent to a final decision by the Bankruptcy Court. A Rule requiring consent in non-core proceedings is not enough.

All this makes me wonder why Respondent’s camp argues to preserve the Bankruptcy Court’s jurisdiction and authority over non-core “private right” proceedings when the facts are that Executive Benefits is the alter-ego of the debtor and thus stood in the debtor’s shoes when the debtor petition for “public right” protection under an act of Congress to be adjudicated in an Article I Court.

My only explanation is the Stern v Marshall made everyone crazy and over-reactive.

Mr. Dahiya - if you can get admitted to the Supreme Court bar I would love you to look at my upcoming writ of certiorari because you argue my position. My Questions asked are:

1. Does the res judicata effect of a non-plan sale order issued in 2003, which claimed to transfer the debtor's assets free and clear of Petitioner’s unsecured proof of claim by enjoining that claim from collection against the third party buyer, require dismissal by the Bankruptcy Court of Petitioner’s complaint for successor liability and actual fraudulent conveyance filed in State Court in 2011 against the buyer of the debtor’s assets purchased at the bankruptcy sale conducted absent the buyer's good faith finding pursuant to 11 U.S.C. §363(m), adequate protection of Petitioner’s allowed unsecured proof of claim pursuant to 11 U.S.C. §363(e) & §361(3), Petitioner’’s consent pursuant to 11 U.S.C.§363(f)(2) or 28 U.S.C.§157(c)(2), or findings of fact and conclusions of law supporting the Bankruptcy Court's authority or jurisdiction to enjoin private right actions between third parties?

2. Should Petitioner’s private right lawsuit against the third party buyer at the 363 sale have been remanded to State Court after Petitioner’s timely request pursuant to 28 U.S.C. §1334(c)(2) & §1447(c), and in preservation of Petitioner’s Article III, First, Fifth, and Seventh Amendment rights, and in avoidance of violating the anti-Injunction Act at 28 U.S.C. §2283?

Mr. White, reading the brief of the respondent, I really feel that there are a few fallacies in their arguments. First, Schor like consent or imputed consent [as thrusted here] makes sense only if there are other viable alternatives for relief--none exist here. Schor was based, not only on consent, there was a choice--presence of another forum. Secondly, magistrate like analogy to bankruptcy is not proper--they are not auxiliary judicial officer in real auxiliary sense. Justice Brennan has debunked that theory. Bankruptcy judges are not supervised on a day to day basis, rather the district courts entertains appeal from their decisions. If the district court supervises them, as suggested forcefully by the respondent, then they might not be a proper appellate court for bankruptcy appeal. Statutory scheme and its practice clearly delineates bankruptcy judges are independent judge. Making them as units, 28 USC 151, does not sync well with 28 usc 158. Thirdly, denovo review by a district court does not satisfy article III requirements, for it is not a denovo trial [as in Crowell v. Benson], it is a "review." Appeals are not trials. Fourthly, structural issues concerns are not dependent on private conduct, it is an integral aspect of a judicial body and it is implicated by virtue of article III itself. Not anything and everything judicial should be an article III issue, but anything article III [private right issue before a federal tribunal] must belong to an article III. Precedence is very clear, it does not have to be Justice Story for all judicial business, however it cannot be Justice White for all article III functions. There is no doubt, that private right issues are inherently or core judicial and thus they cannot be delegated. Core functionality cannot be delegated. Section 157 has played havoc and it is highly improper to say that the district court can withdraw the reference on objections etc, whenever they want. The blanket transfer of judicial business, unindividuated referral of bankruptcy related matters to bankruptcy court finds a non-debtor in a bankruptcy fora and he cannot get out of that place at will. Guess what, one needs an excuse, 157 (d) demands an explanation, "sufficient cause." Whole bankruptcy jurisdiction as one sees now is a dragon with a tail in his mouth.
What surprise me is that there are references to Granfianciera but none to its central theme--Congress cannot assign matters of private rights to non-article III. That is a structural direction. Article III is not a only a test for what judiciary can do, it also checks on what others [legislature/executive] can do it.

Of all the arguments presented by Respondent’s camp the argument that Roell v Withrow, 538 U.S. 580 (2003) approved of implied consent to adjudication of private rights by a non-Article III jurist, when there is no provision for such consent in the statute, is the most dangerous expansion of unconstitutional power since issuance of FISA warrants and NSA surveillance.

I see the amicus brief by Professor Todd Brown argues that consent to adjudicate private rights in bankruptcy must be express.

I don’t understand how at the same time you can argue to affirm the 9th Circuit’s holding in Bellingham, which pivotes on implied consent.

And there is another fly in the ointment. De novo appellate review is not the same as a trial conducted de novo. For one thing, if the party did not consent to bankruptcy court adjudication, and the litigant enjoyed but was denied its Article III rights, then the bankruptcy court decision is not final pursuant to 28 USC 157 because the bankruptcy court’s decision violated constitutional rights.

As consent goes, so goes finality because they are based on the same statute.

But the remedy is not to remand to the unconstitutional Article I Court.

The remedy is to conduct the trial (not the appeal) de novo in the District Court.

That doesn’t happen if Bellingham is affirmed.

More importantly, if consent must be express, how is that fixed in future cases if Bellingham is affirmed?

Denovo review alone cannot cure the alleged unconstitutionality; for it is clear that in law, constitutionality must be met at all stages of proceeding. Thus advised Justice Brennan in Northern Pipeline:
"Our precedents make it clear that the constitutional requirements for the exercise of the judicial power must be met at all stages of adjudication, and not only on appeal, where the court is restricted to considerations of law, as well as the nature of the case as it has been shaped at the trial level."
Crowell, the mother of admin agencies, however never relinquished article III requirement, for it retained article III features by having a denovo trial and not a review. Further, how about the right of the litigant to have his matter heard before a properly constituted court, Glidden Co. v. Zdanok. Professor Bator had espoused that thinking of ultimate blessing by an article III on appeal. However his thesis was primarily premised in procedural due process concerns. Structural concerns go deeper. Further interesting fact is that justiciability requirements which are binding on article III courts are not binding on these legislative unit.

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