Opinion ID: 2780845
Heading Depth: 1
Heading Rank: 5

Heading: bankruptcy court’s authority

Text: The Zeltser Group argues that the district court erred in denying its motion to withdraw reference of the Alleged Debtors’ Fisher Island and Little Rest cases because the bankruptcy court lacked constitutional authority under Stern to enter final judgment on the ownership issue, which is who owned the Alleged Debtors and who was entitled to represent them. The Zeltser Group contends that an objection to a bankruptcy court’s constitutional authority under Stern’s interpretation of 28 U.S.C. § 157 cannot be waived, and that its voluntary pre-Stern participation in pretrial proceedings did not constitute either express or implied consent to a non-jury trial before the bankruptcy court. Furthermore, the Zeltser Group contends that the district court erred in concluding that the bankruptcy court was necessarily required to resolve the ownership issue to rule on the merits of the creditors’ claims. As to Mutual Benefits specifically, the Zeltser Group argues that Stern deprived the bankruptcy court of the constitutional authority to enter a final judgment on the non-core issue of Mutual Benefits’ ownership, as opposed to a factual finding made to determine the interlocutory issue of who was authorized to retain counsel for Mutual Benefits. 36 Case: 12-15595 Date Filed: 02/20/2015 Page: 37 of 57 B. Bankruptcy Court’s Statutory Authority under § 157 Section 157 of the Judicial Code divides all matters that may be referred to the bankruptcy court into two categories: (1) core proceedings (those that “aris[e] under title 11” or “aris[e] in a case under title 11”) and (2) non-core proceedings (those that are not core but are “otherwise related to a case under title 11”). 28 U.S.C. § 157(b)(1) , (3). Section 157(b)(2) sets forth a non-exhaustive list of sixteen types of core proceedings, including, in relevant part, “matters concerning the administration of the estate” and “other proceedings affecting . . . the adjustment of the debtor-creditor . . . relationship.” Id. § 157(b)(2)(A), (O). The manner in which a bankruptcy court may act depends on the type of proceeding. In all core proceedings, bankruptcy courts have the authority to hear and enter final judgments. Id. § 157(b)(1). In non-core proceedings, a bankruptcy court may only submit proposed findings of fact and conclusions of law to the district court, which then may enter final judgment after de novo review. Id. § 157(c)(1). However, even in non-core proceedings, the parties may consent to entry of final judgment by the bankruptcy court. Id. § 157(c)(2). C. Stern v. Marshall On June 23, 2011, the Supreme Court issued its decision in Stern v. Marshall, which involved a voluntary bankruptcy proceeding. A creditor filed a defamation claim in the debtor’s voluntary bankruptcy proceeding, and the debtor 37 Case: 12-15595 Date Filed: 02/20/2015 Page: 38 of 57 filed a state law counterclaim for tortious interference against the creditor. The bankruptcy court determined the tortious interference counterclaim to be a core proceeding under the plain language of § 157(b)(2)(C), which lists “counterclaims by the estate against persons filing claims against the estate” as one of the sixteen named types of core proceedings. The bankruptcy court then entered final judgment in the debtor’s favor on both the creditor’s defamation claim and the debtor’s tortious interference counterclaim. See Stern, 564 U.S. at __, 131 S. Ct. at 2601-02. The Supreme Court determined that, while the bankruptcy court had statutory authority under § 157(b) to enter final judgment on the counterclaim, it violated Article III of the Constitution for Congress to confer that statutory authority onto the bankruptcy court. See id. at __, __, 131 S. Ct. at 2601, 2620. The debtor’s tortious-interference counterclaim was the type of common law cause of action that, in the federal system, is traditionally resolved by Article III courts. Id. at __, 131 S. Ct. at 2616. The Supreme Court reasoned that “Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Id. at __, 131 S. Ct. at 2618; see also Katchen v. Landy, 382 U.S. 323, 329-330, 332-334, 86 S. Ct. 467, 472-73, 474-75 (1966) (holding that a bankruptcy 38 Case: 12-15595 Date Filed: 02/20/2015 Page: 39 of 57 referee could exercise what was known as “summary jurisdiction” over a voidablepreference claim brought by a bankruptcy trustee against a creditor who had filed a proof of claim in the bankruptcy proceeding because the referee could not rule on the creditor’s proof of claim without first resolving the voidable-preference issue); Langenkamp v. Culp, 498 U.S. 42, 44-45, 111 S. Ct. 330, 331 (1990) (holding that a bankruptcy court could decide a preferential-transfer claim when the creditor filed a claim because then “the ensuing preference action by the trustee become[s] integral to the restructuring of the debtor-creditor relationship”). The Supreme Court ultimately held that the bankruptcy court “lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” Stern, 564 U.S. at __, 131 S. Ct. at 2620.10 10 The Supreme Court’s decision in Stern was based in part on its prior decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., where the Supreme Court held that a bankruptcy court lacked constitutional authority to finally adjudicate a state-law contract claim against a non-creditor because the claim did not implicate what would become known as the “public rights” doctrine. 458 U.S. 50, 63-87, 102 S. Ct. 2858, 2867-2880 (1982) (opinion of Brennan, J., joined by Marshall, Blackmun, and Stevens, JJ.); id. at 91, 102 S. Ct. at 2882 (Rehnquist, J., concurring, joined by O’Connor, J.). This “public rights” doctrine was described by the plurality in Northern Pipeline, which recognized that there was a category of cases involving “public rights” that Congress could constitutionally assign to “legislative” courts for resolution. The plurality stated that the “public rights” exception extended “only to matters arising between” individuals and the government “in connection with the performance of the constitutional functions of the executive or legislative departments . . . that historically could have been determined exclusively by those” branches. Id. at 67-68, 102 S. Ct. at 2869 (quotation marks omitted); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 36, 49-64, 109 S. Ct. 2782, 2787, 2794-2802 (1989) (concluding that the particular fraudulent-conveyance claims at issue did not involve “public rights”). 39 Case: 12-15595 Date Filed: 02/20/2015 Page: 40 of 57 Importantly, in Stern, the Supreme Court rejected the creditor’s argument that the bankruptcy court lacked jurisdiction to adjudicate his defamation claim against the debtor. Id. at __, 131 S. Ct. at 2606-08. Because the allocation of authority between the bankruptcy court and the district court in § 157 “does not implicate questions of subject matter jurisdiction,” a party may consent to the bankruptcy court’s exercise of its statutory authority. See id. at __, 131 S. Ct. at 2607-08 (noting that the creditor “repeatedly stated to the Bankruptcy Court that he was happy to litigate there,” and declining to “consider his claim to the contrary, now that he is sad”). D. Analysis: Bankruptcy Court Was Authorized to Decide Ownership Issue As the Zeltser Group conceded before the district court, the ownership issue is a core matter that clearly “arises under” or “arises in a case under” chapter 11. Resolution of the threshold ownership issue was critical to the administration of the Alleged Debtors’ estates and directly affected the debtor-creditor relationship. See 28 U.S.C. § 157(b)(2)(A), (O). The bankruptcy court necessarily had to determine who actually owned the Alleged Debtors in order to adjudicate the After Northern Pipeline, “Congress revised the statutes governing bankruptcy jurisdiction” and “permitted the newly constituted bankruptcy courts to enter final judgments only in ‘core’ proceedings.” Stern, 564 U.S. at __, 131 S. Ct. at 2610. “With respect to such ‘core’ matters, however, the bankruptcy courts under the 1984 Act exercise the same powers they wielded under the Bankruptcy Act of 1978 (1978 Act), 92 Stat. 2549.” Id. 40 Case: 12-15595 Date Filed: 02/20/2015 Page: 41 of 57 validity of the alleged $32 million debt, because the answer determined whether the Petitioning Creditors’ claims would be admitted or contested. See Stern, 564 U.S. at __, 131 S. Ct. at 2616 (noting the Court’s prior holding that “summary adjudication [of a preference issue] in bankruptcy was appropriate, because it was not possible for the referee to rule on the creditor’s proof of claim without first resolving the voidable preference issue”). 11 Even assuming arguendo that the ownership issue was a non-core matter, the Zeltser Group expressly consented to the bankruptcy court’s final adjudication of the ownership issue and waived any argument to the contrary. 12 See 28 U.S.C. § 157(c)(2); Stern, 564 U.S. at __, 131 S. Ct. at 2607-08. On several occasions during March 2011 to November 2011, the Zeltser Group made representations to the bankruptcy court, voluntarily participated in discovery, and appeared at hearing before the bankruptcy court—all indicating its willingness, in fact desire, for the bankruptcy court to decide the 11 Our finding that the ownership issue is “core” is consistent with holdings of courts in other circuits. Several courts have held that “control of a debtor-in-possession goes to the very heart of the administration of the debtor’s estate, [and] it necessarily follows that the bankruptcy court may properly determine where such control resides.” See Bank of Am., NT&SA v. Nickele, No. CIV.A. 98-1501, 1998 WL 181827, at  (E.D. Pa. Apr. 16, 1998); SCK Corp. v. Rosenblum (In re SCK Corp.), 54 B.R. 165, 169 (Bankr. D.N.J. 1984) (same); see also In re Louis J. Pearlman Enterprises, Inc., 398 B.R. 59, 64 (Bankr. M.D. Fla. 2008) (describing ownership of the alleged debtors as “core”). 12 Because the ownership issue here does not implicate the Article III concern identified in Stern, we do not reach the issue of whether a party may consent to the bankruptcy court’s adjudication of a Stern claim. See Exec. Bens. Ins. Agency v. Arkison, 573 U.S. __, __, 134 S. Ct. 2165, 2175 (2014) (expressly declining to decide whether a party can consent to trial of a Stern claim in the bankruptcy court). However, we do note in passing that both District Court Judges Huck and Williams conducted de novo review, and thus Article III concerns were mitigated here in any event. 41 Case: 12-15595 Date Filed: 02/20/2015 Page: 42 of 57 ownership issue. The Zeltser Group was even happy to litigate in the bankruptcy court without objection for five months following the June 23, 2011 decision in Stern. The Zeltser Group also filed a motion for partial summary judgment in its favor on the ownership issue from the bankruptcy court but then a short time later inexplicably contested the bankruptcy court’s authority to decide it. Furthermore, we agree with the district court that the narrow holding in Stern—which concerned the bankruptcy court’s lack of constitutional authority to hear certain state common law counterclaims not necessarily resolved in the claims allowance process—is wholly inapplicable here. To be sure, in many respects, the ownership issue resembles the tortious-interference claim in Stern. Zeltser’s ownership claim is a state-law claim that does not involve “public rights” or stem from a federal statutory scheme. See Stern, 564 U.S. at __, 131 S. Ct. at 2614-15. It does not involve a particularized area of law. See id. at __, 131 S. Ct. at 2615. And unlike the preference actions in Katchen and Langenkamp (where the rights of recovery were created by federal bankruptcy law), ownership is not determined by bankruptcy law. However, unlike the tortious interference claim in Stern, the ownership issue was “necessarily resolve[d]” by the bankruptcy court through the process of adjudicating the creditors’ claims. See id. at __, 131 S. Ct. at 2616-17. The ownership issue does not simply have “some bearing” on the bankruptcy proceedings. See id. at __, 131 S. Ct. at 2618. Rather, for the reasons explained 42 Case: 12-15595 Date Filed: 02/20/2015 Page: 43 of 57 above, the bankruptcy court could not undertake the bankruptcy proceedings without first determining who owned the Alleged Debtors, and thus who represented them, and ultimately whether the bankruptcy was contested or uncontested. See Katchen, 382 U.S. at 329-30, 86 S. Ct. at 472-73 (affirming the bankruptcy court’s authority because the referee could not rule on the creditor’s proof of claim without first resolving the voidable preference issue). Determining who represented the Alleged Debtors, and thus whether the proceedings were contested or uncontested, was a threshold issue in this case.13 And although the relevant parties did not file a proof of claim, Zeltser invoked the aid of the bankruptcy court by asking it to adjudicate the ownership issue. As a result, it must abide by the consequences of that decision. Cf. Stern, 564 U.S. __, 131 S. Ct. 2594. Thus, the bankruptcy court had both statutory and constitutional authority to enter final judgment on the ownership issue. For all of these reasons, we conclude that the district court did not err in denying withdrawal of reference. 13 Even if ownership is not generally a core issue, the facts of this case make it core. As both district courts concluded: “Resolution of the ownership issue is deeply embedded—indeed, it is the primary issue—in the resolution of the creditors’ proofs of claim.” The bankruptcy court had to address the ownership dispute before it could adjudicate the underlying debt. If Imedinvest was the proper owner (and therefore the Zeltser Group represented the Alleged Debtors), the bankruptcy proceedings would be uncontested. If the Valmore Trust and Triangle were the proper owners (and the Redmond Group was the appropriate representative), the proceedings would be contested. Determining who represented the Alleged Debtors was, in this case, a core issue. 43 Case: 12-15595 Date Filed: 02/20/2015 Page: 44 of 57 VI. FISHER ISLAND AND LITTLE REST—SUMMARY JUDGMENT A. Arguments on Appeal The Zeltser Group alleges many procedural errors in the bankruptcy court’s January 20, 2012 summary judgment order in favor of the Redmond Group. First, the Zeltser Group argues that it lacked notice before the January 20, 2012 summary judgment order because the bankruptcy court’s preliminary December 29, 2011 denial of the Zeltser Group’s motion for partial summary judgment only expressly named Miselva (not successor trustee SP Trustees) and Fisher Limited/Grosvenor (not their subsidiaries), and thus the bankruptcy court materially departed from that order when its summary judgment order ruled as to the ownership of Fisher Island and Little Rest. The Zeltser Group claims that it was unaware that the bankruptcy court would rule on the ownership of alleged debtors Fisher Island and Little Rest, thinking the bankruptcy court would limit its summary judgment order to the ownership of Fisher Limited and Grosvenor, their parent companies. Second, the Zeltser Group argues that the bankruptcy court did not comply with Rule 7056(f), which requires notice and an opportunity to respond before summary judgment may be granted sua sponte, by limiting its response to the existing record. Third, the Zeltser Group argues that the bankruptcy court improperly relied on the Examiner’s report, which constituted inadmissible 44 Case: 12-15595 Date Filed: 02/20/2015 Page: 45 of 57 hearsay. These three claims of alleged procedural error are meritless and warrant no further discussion. The laundry list of objections does not end here. The Zeltser Group also argues that the bankruptcy court erred in allowing the ownership issue to proceed (1) as a contested matter raised in the Redmond Group’s motion to strike the Zeltser Group’s answers, instead of as an adversary proceeding, with its attendant procedural protections (i.e., the filing and service of a complaint and summons on all parties); and (2) without requiring joinder, under Federal Rule of Civil Procedure 19, of all “indispensable” parties having ownership interests in Fisher Island and Little Rest, including but not limited to the Valmore Trust, SP Trustees, Badri’s widow, and Imedinvest. Substantively, the Zeltser Group contends that material issues of disputed fact as to the ownership of Fisher Island and Little Rest precluded the entry of summary judgment. Specifically, the Zeltser Group argues that there were genuine disputes regarding the validity of the Valmore Trust, whether the JWL transfers were completed, and the applicability of the Gibraltar judgment to the bankruptcy proceedings.
As an initial matter, we note that the Zeltser Group raised its adversaryproceeding and mandatory-joinder arguments for the first time in its unsuccessful 45 Case: 12-15595 Date Filed: 02/20/2015 Page: 46 of 57 November 30, 2011 motion for clarification/reconsideration of the agreed June 7, 2011 Schedule Order. Prior to filing that motion, the Zeltser Group itself characterized the ownership issue as a “contested matter” in the Schedule Order (as well as in its motion for partial summary judgment). The Zeltser Group proceeded to litigate according to the Schedule Order for nearly six months without objection. Only after the issuance of the unfavorable Examiner’s report on November 18, 2011, did the Zeltser Group suddenly decide that the ownership issue could not proceed as the parties had agreed. We are inclined to hold that the Zeltser Group forfeited its belated adversary-proceeding and mandatory-joinder arguments by failing to raise them before the bankruptcy court in any sort of timely manner. See United States v. Olano, 507 U.S. 725, 731, 113 S. Ct. 1770, 1776 (1993) (“No procedural principle is more familiar” than that a right may be forfeited “by the failure to make timely assertion of the right before a tribunal having jurisdiction to determine it.” (quotation omitted)). To quote the Supreme Court in Stern, the Zeltser Group “repeatedly stated to the Bankruptcy Court that [it] was happy to litigate there.” 564 U.S. at __, 131 S. Ct. at 2608. We will not consider its arguments to the contrary, “now that [it] is sad.” Id. In any event, the Zeltser Group’s arguments fail on the merits, as discussed below. 46 Case: 12-15595 Date Filed: 02/20/2015 Page: 47 of 57
The Federal Rules of Bankruptcy Procedure distinguish between adversary proceedings and contested matters. Adversary proceedings under Rule 7001 incorporate much of the Federal Rules of Civil Procedure. See Fed. R. Bankr. P. 7001 advisory committee’s note. Rule 7001 lists ten types of matters which must be brought as adversary proceedings, including “proceeding[s] to determine the validity, priority, or extent of a lien or other interest in property . . . .” Fed. R. Bankr. P. 7001(2). In contrast, contested matters are subject to less elaborate procedures specified in Rule 9014. “In a contested matter not otherwise governed by these rules, relief shall be requested by motion, and reasonable notice and opportunity for hearing shall be afforded the party against whom relief is sought.” Fed. R. Bankr. P. 9014(a). Contrary to the Zeltser Group’s argument, the bankruptcy court’s determination of the ownership issue was not a “proceeding to determine the validity . . . [of an] interest in property” under Rule 7001(2), and thus an adversary proceeding was not required. The validity of the $32 million debt alleged by the Petitioning Creditors, the only property interest at stake here, has not yet been adjudicated. The bankruptcy court resolved the threshold issue of ownership for purposes of determining who was authorized to represent the Alleged Debtors with respect to that debt. Furthermore, the bankruptcy court afforded the parties with 47 Case: 12-15595 Date Filed: 02/20/2015 Page: 48 of 57 essentially the same procedural protections applicable in adversary proceedings, providing the Zeltser Group with more than adequate “notice and opportunity for hearing.” See Fed. R. Bankr. P. 9014(a). Accordingly, the bankruptcy court did not err in allowing the ownership issue to proceed as a contested matter.
The mandatory joinder requirements in Rule 19, made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7019, do not apply to contested matters such as these. See Fed. R. Bankr. P. 1018; Fed. R. Civ. P. 19 (setting forth a two-step test to determine whether a party is necessary and indispensable to an action). Even if Rule 19 did apply here, the Zeltser Group did not meet its burden of proving that the parties not joined were both necessary and indispensable to the proceeding. The Zeltser Group’s appellate brief fails to articulate a single nonconclusory reason for why the bankruptcy court could not grant complete relief among the existing parties without joining the over a dozen non-parties identified by the Zeltser Group, or why the absence of these non-parties impeded their ability to protect their interests or subjected an existing party to a substantial risk of inconsistent obligations. See Fed. R. Civ. P. 19(a)(1). In fact, the Zeltser Group, purportedly on behalf of the Alleged Debtors, admitted to the alleged debt at the 48 Case: 12-15595 Date Filed: 02/20/2015 Page: 49 of 57 outset of the proceedings, indicating that they believed the involuntary petitions could be adjudicated without any additional parties.
Under Rule 56, as incorporated by Federal Rule of Bankruptcy Procedure 7056, a court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The court may, after giving notice and a reasonable time to respond, grant summary judgment for a nonmovant or consider summary judgment on its own after identifying for the parties material facts that may not be genuinely in dispute. Fed. R. Civ. P. 56(f). A court may sua sponte grant summary judgment “so long as the losing party was on notice that [it] had to come forward with all of [its] evidence.” Celotex Corp. v. Catrett, 477 U.S. 317, 326, 106 S. Ct. 2548, 2554 (1986). “A party asserting that a fact . . . is genuinely disputed must support the assertion by . . . citing to particular parts of materials in the record . . . or . . . showing that the materials cited do not establish the absence or presence of a genuine dispute.” Fed. R. Civ. P. 56(c). Here, the record demonstrates no genuine issue of material fact as to the ownership of Fisher Island and Little Rest. We are not persuaded by the Zeltser Group’s unsubstantiated arguments to the contrary, particularly given the Zeltser Group’s total failure to raise any purported factual dispute in response to the 49 Case: 12-15595 Date Filed: 02/20/2015 Page: 50 of 57 bankruptcy court’s December 29, 2011 invitation to submit briefing. The Zeltser Group may not refuse to raise disputed issues before the bankruptcy court then later claim on appeal that disputed issues precluded summary judgment. Thus, the bankruptcy court correctly granted summary judgment sua sponte in favor of the Redmond Group.