Court: District Court, S.D. New York; June 26, 2012; Federal District Court
Defendants in the adversary proceeding initiated by the Madison Bentley Associates, LLC Litigation Trust against Bentley Manhattan Inc., Manhattan Motorcars Inc., and Brian Miller sought to withdraw the reference to the Bankruptcy Court, invoking section 157(d) of Title 28, United States Code, and citing the Supreme Court's decision in Stern v. Marshall as a basis for requiring adjudication by an Article III court. The motion was denied.
The background reveals that in March 2000, MMC Madison LLC leased a property at 437 Madison Avenue for ten years and subsequently assigned the lease to Madison Bentley Associates, LLC (the Debtor) for a nominal fee. The Debtor, formed solely for holding the lease and having no assets or employees, transferred its valuable leasehold interest to Bentley Manhattan Inc. without consideration. Manhattan Motorcars Inc. and Brian Miller, who owns both corporate defendants and the Debtor, were also implicated. After the Debtor vacated the premises in September 2003, Madison Avenue Leasehold, LLC sued for lease defaults, winning over one million dollars in damages by June 2009. The Debtor filed for Chapter 7 bankruptcy in September 2009, listing Madison Avenue Leasehold, LLC as its only creditor. Trustee Gregory Messer initiated an adversary proceeding in August 2010, asserting claims of alter ego liability and fraudulent conveyance. Following extensive discovery, summary judgment motions were set for oral argument on May 31, 2012.
The legal standard for permissive withdrawal from the Bankruptcy Court indicates that the district court may withdraw cases for cause shown, considering factors such as whether the claims are core or non-core, efficiency, prevention of forum shopping, and the uniformity of bankruptcy law administration, with the core status of the claim being a significant consideration.
The Supreme Court's decision in Stern v. Marshall raised critical questions regarding the authority of bankruptcy courts to issue final judgments on state law counterclaims. The Court determined that bankruptcy courts lack the constitutional authority to enter final judgments on such counterclaims, even if classified as "core" claims under section 157(b)(2)(C). This ruling was influenced by the earlier case of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., which established that only certain cases involving "public rights" could be constitutionally assigned to legislative courts for resolution. Public rights are defined as rights created by federal law, claims intrinsically linked to those rights, or matters historically determined exclusively by the Executive and Legislative Branches. The Stern Court emphasized that a right's designation as public or private is tied to its relationship with federal government action.
Additionally, the Court's decision in Stern considered factors beyond the private nature of the counterclaim, notably the lack of true consent from the defendant for bankruptcy court adjudication and the independence of the proof of claim from the counterclaim resolution. The ruling has sparked considerable debate on its implications for other core proceedings, with the Second Circuit and other courts adopting a narrow interpretation of Stern's holding. Courts are now expected to evaluate motions to withdraw reference to bankruptcy court by considering whether claims involve public or private rights, whether they can be resolved through a creditor's proof of claim, and whether there is consent for adjudication by a non-Article III tribunal, while still recognizing the significance of the core/non-core distinction.
Fraudulent conveyance claims are compared to tortious interference counterclaims, with the court asserting that, similar to Granfinanciera v. Nordberg, they do not fall under the public rights exception, as they resemble state law contract claims aimed at augmenting a bankruptcy estate. Consequently, Congress cannot constitutionally assign these claims to a non-Article III court. Since the Second Circuit has not addressed fraudulent conveyance withdrawal claims post-Stern, many bankruptcy courts have chosen not to follow the dicta from Stern, though most in the district conclude that such claims involve private rights, disallowing bankruptcy judges from issuing final judgments on them if against parties who have not asserted a claim against the estate.
Regarding alter ego liability claims, Stern did not provide specific guidance, and neither party references any relevant case law since the Stern decision.
Consent under section 157(c)(2) of Title 28 allows bankruptcy courts to adjudicate non-core claims if both parties agree, a principle that remains valid post-Stern. However, implied consent is insufficient, and courts should not easily infer consent based on a litigant's actions, especially if withdrawal occurs before trial activities commence. The court in Development Specialists, Inc. v. Akin Gump Strauss Hauer, Feld LLP found no consent when defendants sought withdrawal after discovery, emphasizing that timeliness in withdrawal requests is crucial.
Defendants' claims that bankruptcy courts are barred from issuing reports and recommendations after Stern are incorrect. Congress granted bankruptcy courts the authority to issue recommendations on non-core matters related to bankruptcy proceedings, which persists despite the limitations imposed by Stern. This interpretation aligns with the court's statement that its decision would not significantly alter the existing statutory framework.
The analysis of withdrawal from bankruptcy court post-Stern considers several factors beyond whether a claim is core, such as efficiency, uniformity in bankruptcy law, jury trial requests, and prevention of forum shopping. These factors remain critical after Stern, but the Second Circuit has not clarified their application in this context. In *In re Lyondell*, the court ruled that even without final adjudicatory authority, withdrawal from the bankruptcy court would be inefficient due to the bankruptcy court's expertise. The court did not address forum shopping and uniformity, deeming inefficiency as the primary concern. Other cases in the district have affirmed this stance against withdrawal, except for *DSI*, where the court found that in private rights matters, other factors favored withdrawal, particularly due to a jury trial request. In that instance, the claims were closely related, and the bankruptcy court had no additional familiarity with the facts compared to the district court, thus not impacting uniformity in bankruptcy law since only state law was involved.
The claims in question are deemed "core" under section 157 of Title 28, with defendants acknowledging this. However, the distinction between core and non-core claims does not conclude the analysis post-Stern. Specifically, bankruptcy courts in this district lack authority to issue final judgments on fraudulent conveyance claims against parties that have not filed claims against the estate. The current case reflects this principle, as the claims aim solely to enhance the bankrupt estate. The plaintiff's argument distinguishing this case from *DSI* due to the involvement of a "sham" entity lacks legal support and misinterprets the relationship between fraudulent conveyance and alter ego liability. Ultimately, the court concludes that the Bankruptcy Court cannot issue a final judgment on the fraudulent conveyance claims, but it can still provide a report and recommendation.
The Bankruptcy Court lacks final adjudicatory authority over the alter ego liability claim because it is derivative of fraudulent conveyance claims and does not necessitate resolution independent of those claims. The defendants argue that the plaintiff's complaint is essentially a breach of contract claim but no party is seeking adjudication of the contract itself. The alter ego claim was filed against a party not submitting a claim against the estate, aligning with the principles established in Stern.
Defendants did not consent to adjudication in the Bankruptcy Court, as they filed for withdrawal after discovery and prior to trial, which is consistent with timely motions in prior cases. Although the plaintiff contends that defendants delayed their motion unreasonably, the defendants’ actions since the Stern decision do not indicate a waiver of their rights or justify the sanctions sought by the plaintiff.
The balance of the Orion factors favors retention of the case in the Bankruptcy Court. Judicial economy is better served there, as the court is already familiar with the case facts and has provided previous rulings. Further, withdrawal would not facilitate uniform administration of bankruptcy law since the claims are grounded in state common law. Neither party has requested a jury trial, and the defendants deny any intent to forum-shop. Overall, despite the Bankruptcy Court's limitations on final judgment authority, the Orion factors support continuing proceedings there.
Defendants' motion is denied, and the case is ordered to be closed by the Clerk of the Court. References are made to various exhibits supporting the defendants' arguments, including lease and assignment agreements, affidavits, and memoranda from both sides. The excerpt cites significant case law, including *Stern v. Marshall* and others, to address jurisdictional issues related to bankruptcy court authority. The excerpt emphasizes that the present case does not fall within the scope of the *Stern* decision, which limited certain judicial powers under the Bankruptcy Act of 1984. It highlights that core and non-core claims remain relevant in determining bankruptcy court jurisdiction, referencing additional cases that further clarify these points. Overall, the legal framework confirms the court's decision to retain jurisdiction over the matter at hand.
Supplemental briefs are requested to clarify whether the Stern decision prohibits bankruptcy courts from issuing final, binding judgments on fraudulent conveyance actions. The excerpt references Heller Ehrman LLP v. Arnold Porter, where it is noted that the Supreme Court did not rule that bankruptcy judges lack such authority. It argues that fraudulent transfer claims are private rights, supported by precedents including Granfinanciera and Lyondell, indicating that such claims against individuals who have not filed against the bankruptcy estate are private matters aimed at augmenting the estate. The assertion is made that reclassifying fraudulent conveyance claims as 'public rights' contradicts Stern’s previous conclusions. Various cases are cited, some supporting the notion that bankruptcy courts can conduct proceedings and issue reports, while others, like Ortiz v. Aurora Health Care, argue against the ability to treat bankruptcy court rulings as reports in core cases due to the lack of final adjudicatory authority. The document emphasizes the importance of these distinctions in the context of bankruptcy law and the authority of bankruptcy courts.
The referenced cases establish that a bankruptcy judge's familiarity with a proceeding justifies not withdrawing the reference at the pre-trial stage, promoting judicial economy and efficiency. Specifically, In re Wedtech Corp. emphasizes that maintaining the reference avoids unnecessary waste of judicial resources. The trustee is identified as the appropriate party to assert claims against the debtor's alter ego or others misusing the debtor’s assets, categorizing such claims as core proceedings. The argument that having a single creditor transforms the matter into a private dispute is refuted, with the assertion that this reasoning would incorrectly classify all single-creditor adversary proceedings as private disputes. Various references to case law and docket sheets support these points, underscoring the court's stance on the trustee’s role and the nature of the claims involved.
