09/28/2011 – Recommendation of Bankruptcy Judge Regarding Motions To Withdraw The Reference filed in the Heller Ehrman LLP Adversary Proceedings by Arnold and Porter, LLP before U.S. Bankruptcy Judge Dennis Montali in the United States Bankruptcy Court for the Northern District of California.

U.S. Bankruptcy Judge Dennis Montali minces no words in his recommendation to the District Court against the motions of sixteen law firm defendants[FN1] to withdraw of the reference under Stern v. Marshall, 131 S.Ct. 2594 (2011).  The adversary proceedings were filed by the law firm Heller Ehrman LLP (“Heller”) as liquidating debtor.  Heller seeks avoidance of a California “Jewel Waiver” as an actual and fraudulent conveyance and recovery of the value of “unfinished business” taken to the defendant law firms by former Heller partners.  Judge Montali refuses find any applicability of Stern beyond its narrow holding.  He concludes that “given that Heller’s claims do arise from bankruptcy law (11 U.S.C. §§ 544(b) & 548) and would not exist but for the bankruptcy (unlike the counterclaims in Stern), … Stern may not limit [the bankruptcy court’s] power to enter a final judgment on [Heller’s claims].”Click following link to view opinion Heller Ehrman LLP v. Arnold and Porter, LLP (In re Heller Ehrman LLP), Adv. Proc. No. 10-03203 (Bankr. N.D. Cal. September 28, 2011)

The defendants each face a separate adversary proceeding for avoidance of actual and constructive fraudulent conveyances.   Heller seeks to avoid Heller’s pre-petition waiver of its rights under Jewel v. Boxer, 156 Cal. App. 3d 171 (1984) pursuant to 11 U.S.C. §§ 548 and 550, as well as under California Civil Code §§ 3439.04, 3439.05, 3439.07 via 11 U.S.C. § 544.  Heller seeks to recover profits received by the defendants with respect to “unfinished business” that, at the time of Heller’s dissolution, was taken to those firms by former Heller partners.

Judge Montali notes that based on Stern “some courts have concluded that they cannot hear fraudulent conveyance claims as core proceedings”.  He goes on to agree with these courts that an application of reasoning of the Supreme Court compels this conclusion:  ” the Supreme Court has previously concluded that fraudulent conveyance actions do not involve public rights. Granfinanciera [v. Nordberg], 492 U.S. 33 (1989). … If that reasoning had been the holding, I would agree that core fraudulent transfer actions might exceed my authority.”  However, Judge Montali declines to take the approach of other bankruptcy courts, which he believes “are focusing on the dicta of Stern, not its holding”.

The bottom line, though, is that the Supreme Court did not hold in Stern that bankruptcy judges lack authority to render final judgments on fraudulent transfer claims. In fact, it emphasized — repeatedly — that its holding was narrow and limited to Section 157(b)(2)(C) (counterclaims). Given these express limitations of the holding, I believe I am still bound by the Ninth Circuit’s holding in In re Mankin, 823 F.2d 1296 (9th Cir. 1987), that fraudulent transfer actions are core whether arising directly under section 548 of the Bankruptcy Code or from state law (but made available to a bankruptcy estate under section 544(b)) and that Section 157(b)(2)(H) (fraudulent transfers) does not violate Article III of the Constitution by authorizing bankruptcy judges to decide them.

Judge Montali also rejects any notion that a bankruptcy court can not submit proposed findings of fact and conclusions of law to the district court on matters found “unconstitutionally core”.  He specifically disagreed with the analysis of the Bankruptcy Court for the District of Montana in In re Blixseth, 2011 WL 3274042 (Bankr. D. Mont. Aug. 1, 2011)

The Blixseth court reasoned that the absence of provisions in title 28 permitting a bankruptcy court to enter proposed findings in matters designated prevented it from making such findings.  Assuming – as I do not – that fraudulent transfer actions can no longer constitutionally be tried by a non-Article III judges, title 28 does not prohibit the use of the proposed findings procedure. The absence of a provision is not a prohibition. Further, Stern approved exactly such a procedure. Similarly, the fact that Bankruptcy Rule 9033 only mentions non-core proceedings in no way prohibits following the same procedure in core matters. In re Emerald Casino, Inc., 2011 WL 3799643 at *1 and n.1 (Bankr. N.D. Ill. Aug. 26, 2011) (disagreeing with Blixseth and noting that if a matter is no longer covered by the statutory definition of core, they can still be non-core and fall fully within the definition of “related to” proceedings.)

FN1 Defendants in these adversary proceedings are Arnold & Porter, LLP; Davis Wright Tremaine LLP; Foley & Lardner LLP; Goodwin Procter, LLP; Hogan Lovells; Jones Day; Orrick, Herrington & Sutcliffe LLP; Patton Boggs LLP; Pillsbury Winthrop Shaw Pittman LLP; Proskauer Rose, LLP; Sheppard Mullin Richter & Hampton LLP; Summit Law Group PLLC; Wilmer Cutler Pickering Hale and Dorr LLP; Winston & Strawn LLP; Cooley Godward LLP; and Hafetz Necheles & Rocco.