08/19/2011 – Defendant’s Memorandum of Law Concerning the Bankruptcy Courts Jurisdiction to Hear and Determine this Adversary Proceeding filed in the Coudert Brothers LLP Adversary Proceedings by Orrick Herrington & Sutcliffe LLP before U.S. Bankruptcy Judge Robert D. Drain in the Southern District of New York (Manhattan) filed by Holland & Knight LLP attorneys H. Barry Vasios and Barbra R. Parlin.

This memorandum is Defendant’s submission in response to the June 27, 2011 request from U.S. Bankruptcy Judge Robert D. Drain that the parties submit additional briefing on certain jurisdictional issues raised by the Supreme Court’s decision in Stern v. Marshall. Defendant provides a concise, three part formulation of the inquiry that a bankruptcy court must perform under Stern v. Marshall. Additionally, the Defendant addresses the impact of Stern in the context of the existing general order of reference. The Defendant concludes that Judge Drain is not authorized to finally determine any of the Plaintiff’s claims against Defendant. Registered users click here to see a copy of this brief.

The Plaintiff Plan Administrator asserted 10 claims for damages against Defendant, including: claims to avoid and recover alleged fraudulent transfers under NY state and federal law; claims for “unfinished business” of the debtor pursuant to New York partnership and common law; and claims under New York law for tortious interference, aiding and abetting a breach of fiduciary duty and unjust enrichment. Defendant characterizes all of these claims as arising out of or involving state law. Defendant notes that there can be no question that the claims do not implicate the claims administration process; Defendant did not file a proof of claim in the debtor’s bankruptcy.

Judge Drain’s request for additional briefing specifically directed the parties to consider whether “under the logic of [Stern] and the existing general order of reference I have jurisdiction albeit in the form of providing proposed findings of fact, or in this case, conclusions of law to the district court or whether I don’t even have that jurisdiction.” Honoring this direction, the Defendant provides a concise and cogent discussion of the historical underpinnings of the pre-Stern jurisdictional framework of the bankruptcy courts, starting with the 1982 Supreme Court decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. Just for this historical context the memorandum is well worth reading.

Two other portions of Defendant’s memorandum are especially, analytically significant. First, Defendant provides a reasoned, analytical framework for the application of Stern. Second, Defendant argues that Stern has blasted a gaping hole in the previously seamless treatment of core/non-core proceedings and the standing Order of Referral in the Southern District of New York. Both of these portions of Defendant’s memorandum follow.

d.         Stern v. Marshall II Applied Here

Stern v. Marshall II makes it clear that the core/non-core classification provided for in § 157 does not, by itself, determine a bankruptcy court’s authority to finally decide a matter in a bankruptcy case. Rather, the court first must inquire whether the matter at issue: (i) is within the narrow range of “public rights” that Congress can assign to an Article I court for final determination; (ii) is a private law claim the determination of which is so intertwined with consideration of the creditor’s proof of claim that a separate plenary suit would be meaningless; or (iii) is a private law claim that is independent of the claims adjudication process. Under this construct, if a matter falls within (i) or (ii), then the bankruptcy court is authorized to finally determine it. If the matter falls within (iii), then the bankruptcy court cannot “exercis[e] the essential attributes of judicial power that are reserved to Article III Courts.” Stern v. Marshall II, 131 S. Ct. at 2619. At most, the bankruptcy court can issue proposed findings of fact and conclusions of law, subject to final determination by the district court. Id. at 2620.

Applied here, this inquiry has only one conclusion: the Bankruptcy Court is not authorized to finally determine any of the Plan Administrator’s claims against Orrick. Orrick did not file a proof of claim in the underlying bankruptcy case, so there is no possibility that determination of the claims will implicate the claims adjudication process, and all of the claims save one arise out of state law. Even the section 548 fraudulent transfer claim involves, as a threshold matter, a purely state law issue, i.e., whether unfinished business can be recovered in this context. In any case, that claim (as well as any fraudulent transfer claim arising out of the Release) as well as the section 544 claims are private law matters under Stern v. Marshall II. 131 S. Ct. at 2614. See also Samson v. Blixseth, et al. (In re Blixseth), No. 10-00088, 2011 WL 3274042 (Bankr. D. Mont. Aug. 1, 2011) (trustee’s fraudulent conveyance claim is essentially a common law claim attempting to augment the estate and must be adjudicated by an Article III court). Indeed, the only relief that the Plan Administrator seeks here is to recover millions of dollars of damages to augment the estate. Viewed in this light, the claims at issue here are no different from those at issue in Stern v. Marshall II, and for the reasons articulated there, the Bankruptcy Court does not have constitutional authority to determine them.

*     *    *


The standing Order of Referral in effect in this district provides that “pursuant to Section 157(a) of the Bankruptcy Amendments and Federal Judgeship Act of 1984, any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 are referred to the bankruptcy judges for this district.” Gen. Order M 61. The Order thus tracks the language of § 157(a) and is made pursuant to that section, but does not provide specific instructions as to the bankruptcy judges’ authority to enter final orders in particular types of cases — those rules are set forth in the remaining subsections of § 157.

As discussed in detail above, Stern v. Marshall II renders the core/non-core jurisdictional classification set forth in § 157 unconstitutional as applied to this case. This creates a conundrum, as most, if not all, of the claims at issue here are private law matters that this Court does not have constitutional authority to finally determine, but nonetheless fall within one or more of the categories of “core” proceedings listed in § 157 as to which this Court is directed to enter final orders.

This Court can only act within its statutory authority. As the Samson Court explained, nothing in § 157 permits bankruptcy courts to render proposed findings of fact and conclusions of law with respect to claims that on their face constitute core proceedings but which the Bankruptcy Court does not have constitutional authority to finally determine. See Samson, 2011 WL 3274042 at *12. There also is no statutory authority for the parties to consent to the entry of a final determination in what is otherwise listed as a core proceeding, as the statute already assumes that the Bankruptcy Court will do so in such matters. Id. It is possible that Congress will amend § 157 to permit this Court to treat this matter similar to the way that “non core” matters were handled before Stern v. Marshall II rendered that distinction inapposite, but no such amendment currently exists. Orrick thus submits that the current Standing Order does not contemplate the issuance of proposed findings of fact and conclusions of law in this case, because to do so runs counter to the specific terms of § 157.