Court Opinion

ID: 950142
Source: CourtListenerOpinion
Date Created: 2013-06-28 17:43:02.626204+00
Date Added: 2024-06-11T09:09:07.934131
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN THE MATTER OF: J. HOWARD              No. 09-55573
MARSHALL, III and ILENE O.
MARSHALL,                                   D.C. No.
                           Debtors,      8:03-cv-01354-
                                              DOC
ELAINE T. MARSHALL, as Successor
Trustee of the BETTYE B. MARSHALL
Living Trust, Trustee of the J.            OPINION
HOWARD MARSHALL, II Marital
Trust Number Two, and Trustee of
the E. PIERCE MARSHALL Family
Trust Created Under BETTYE B.
MARSHALL Living Trust Indenture
Dated October 30, 1990,
                            Appellant,

                  v.

J. HOWARD MARSHALL, III and
ILENE O. MARSHALL,
                       Appellees.

      Appeal from the United States District Court
         for the Central District of California
       David O. Carter, District Judge, Presiding

                Argued and Submitted
        October 11, 2012—Pasadena, California
2                IN THE MATTER OF: MARSHALL

                        Filed June 28, 2013

     Before: David M. Ebel,* Kim McLane Wardlaw, and
            Jacqueline H. Nguyen, Circuit Judges.

                    Opinion by Judge Nguyen

                           SUMMARY**

                            Bankruptcy

    The panel affirmed the district court’s affirmance of
bankruptcy court decisions arising from the dispute over the
estate of J. Howard Marshall, II, who left nearly all of his
assets to his son, E. Pierce Marshall, but excluded his wife,
Vickie Lynn Marshall, also known as Anna Nicole Smith,
and his other son, J. Howard Marshall, III, from receiving any
part of his fortune.

    The panel held that non-random assignment of the
Chapter 11 case of Howard III and his wife Ilene (Debtors) to
Bankruptcy Judge Bufford, who presided over Vickie’s
Chapter 11 case, was within the court’s discretion and in the
interests of efficiency. The panel held that Judge Bufford did
not abuse his discretion in denying the motion of Pierce’s
widow, Elaine T. Marshall, for recusal.

 *
   The Honorable David M. Ebel, Senior Circuit Judge for the U.S. Court
of Appeals for the Tenth Circuit, sitting by designation.

  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
              IN THE MATTER OF: MARSHALL                     3

    For the reasons outlined in the second amended opinion
of the bankruptcy court filed on October 9, 2003, the panel
concluded that the district court correctly affirmed the
bankruptcy court’s confirmation of the Debtors’ Chapter 11
Plan and denial of Elaine’s motion to dismiss with respect to
the constitutional issues raised in the motion.

    The panel held that the “Best Interests of Creditors” test
in 11 U.S.C. § 1129(a)(7)(A) did not apply to Pierce or his
Texas fraud judgment against Howard III, where Pierce never
filed a proof of claim in the Debtors’ Chapter 11 proceedings,
and the deadline for doing so had passed by the time the
bankruptcy court confirmed the Plan.

    The panel held that the bankruptcy court’s finding that the
Debtors’ Plan was proposed in good faith was not clearly
erroneous, and that the confirmation of the Plan was not an
abuse of discretion. The panel likewise held that the
bankruptcy court’s finding that the Debtors’ Chapter 11
petition was filed in good faith was not clearly erroneous, and
that the bankruptcy court did not abuse its discretion in
denying Elaine’s motion to dismiss.

                         COUNSEL

G. Eric Brunstad, Jr. (argued), Matthew Joseph Delude, and
Collin O’Connor Udell, Dechert LLP, Hartford, Connecticut;
Jeffrey W. Chambers, Ware, Snow, Fogel & Jackson, LLP,
Houston, Texas, for Appellant.
4             IN THE MATTER OF: MARSHALL

David L. Neale (argued) and Michelle Sharoni Grimberg,
Levene, Neale, Bender, Yoo & Brill LLP, Los Angeles,
California; Anne Wells, Futter-Wells, PC, Santa Monica,
California, for Appellees.

                         OPINION

NGUYEN, Circuit Judge:

    This case marks the third time we have been asked to
intervene in the infamous feud over the estate of the late
Texas oil magnate and billionaire J. Howard Marshall, II (“J.
Howard”). J. Howard died in 1995, leaving nearly all his
assets to his son, E. Pierce Marshall (“Pierce”), but excluding
his young wife, Vickie Lynn Marshall, also known as Anna
Nicole Smith (“Vickie”), and his other son, J. Howard
Marshall, III (“Howard”), from receiving any part of his
fortune. The ensuing controversy, pitting wife against son
and brothers against each other, has defied resolution for
nearly two decades, and has survived almost all of its original
players.

    After J. Howard died, Vickie and Howard each
unsuccessfully challenged his will in Texas probate court. In
addition to losing the will contest, Howard suffered a multi-
million dollar judgment after Pierce successfully
counterclaimed against him on the basis of fraud. Following
this loss, Howard and his wife, Ilene, filed for Chapter 11
bankruptcy in the Central District of California. Their case
was assigned to United States Bankruptcy Judge Samuel
                 IN THE MATTER OF: MARSHALL                             5

Bufford, who had previously presided over Vickie’s Chapter
11 bankruptcy case.1

    Pierce moved for random reassignment or recusal of
Judge Bufford, objected to Howard and Ilene’s proposed
Chapter 11 Plan, and moved to dismiss the bankruptcy action.
Judge Bufford published three separate opinions: (1) denying
Pierce’s motion for reassignment or recusal; (2) confirming
the Plan and denying Pierce’s motion to dismiss with respect
to his constitutional arguments; and (3) confirming the Plan
and denying Pierce’s motion to dismiss with respect to his
statutory arguments. Pierce appealed to the district court,
which affirmed the bankruptcy court’s decisions in all
respects on March 18, 2009.

    Appellant Elaine T. Marshall (“Elaine”),2 Pierce’s widow,
now appeals the district court’s decision, contending that the
district court erred in affirming the bankruptcy court’s orders
because: (1) there was no basis for non-random assignment
of the case to Judge Bufford, and alternatively, Judge Bufford
should have recused himself on account of apparent bias; (2)
Howard and Ilene’s Chapter 11 petition and proposed Plan

   1
     Vickie filed for bankruptcy protection in the Central District of
California while her probate claims were still pending in the Texas court.
Pierce filed a proof of claim, and Vickie successfully counterclaimed
against him for tortious interference with an expectancy. Vickie’s case
was extensively litigated, including twice before the Supreme Court, and
is not now before us. W e nevertheless discuss certain aspects of her
bankruptcy case to the extent they are relevant to this appeal.

  2
    Pierce died in 2006. Elaine appears in her capacity as Successor
Trustee of the Bettye B. M arshall Living Trust, Trustee of the J. Howard
Marshall, II Marital Trust Number Two, and Successor Trustee of the E.
Pierce Marshall Family Trust Created Under the B ettye B. Marshall
Living Trust Indenture Dated October 30, 1990 (collectively “the Trusts”).
6                 IN THE MATTER OF: MARSHALL

were unconstitutional; and (3) Howard and Ilene’s Chapter 11
petition and proposed Plan were filed in bad faith. We have
jurisdiction pursuant to 28 U.S.C. § 158(d), and we affirm.

                             BACKGROUND

                                     I.

              THE VICKIE LYNN MARSHALL CASE

    In the Texas probate court, Vickie claimed that she was
entitled to a portion of J. Howard’s estate, and that Pierce had
tortiously interfered with her expectancy of a gift from her
husband. While the probate case was pending, she filed for
bankruptcy in California, and the matter was assigned to
Judge Bufford. Pierce filed a proof of claim, arguing that he
held a defamation claim against Vickie that was not subject
to her bankruptcy discharge. Vickie counterclaimed,
contending, as she had in probate court, that Pierce tortiously
interfered with her expectancy of a gift from J. Howard.
Judge Bufford dismissed Pierce’s proof of claim against
Vickie, and proceeded to consider Vickie’s counterclaim
against Pierce.       Over the course of the bankruptcy
proceedings, Judge Bufford determined that Pierce had
engaged in various discovery abuses and issued both
monetary and non-monetary sanctions against him.3

   In September 1998, Pierce moved to withdraw the case
from bankruptcy court. District Judge William D. Keller

 3
   Specifically, Judge Bufford found that Pierce (a) destroyed documents;
(b) failed to respond to discovery requests; (c) failed to produce a privilege
log and documents in camera; and (d) failed to produce documents held
by J. Howard’s attorneys.
                 IN THE MATTER OF: MARSHALL                             7

withdrew the bankruptcy reference in part4 in October 1998,
after which Judge Bufford stated his intent to submit a
memorandum to “assist [Judge Keller] in his review of the
matter.” On February 1, 1999, Judge Keller stayed Judge
Bufford’s prior sanctions orders. The next day, Judge
Bufford declared the stay invalid and issued terminating
sanctions against Pierce on Vickie’s tortious interference
counterclaim as a result of Pierce’s purported discovery
abuses. On March 9, 1999, Judge Keller vacated and
remanded Judge Bufford’s initial sanctions order, citing a
lack of evidence. Then, after acknowledging receipt of Judge
Bufford’s memorandum, Judge Keller vacated his order
withdrawing the bankruptcy reference.5 On May 20, 1999,
Judge Bufford entered a final sanctions order, once again
deeming many of Vickie’s allegations established as a
sanction against Pierce.

    Judge Bufford then held a five-day hearing on Vickie’s
counterclaim. On the first day, Judge Bufford conducted an
unusual press conference of sorts on the record, where he
responded to reporters’ questions, noted that the case was
related to the Texas probate litigation, and explained the
procedures by which reporters could obtain public records or
court filings. Approximately eleven months later, Judge

  4
    Judge Keller’s October 21, 1998 minute order granted Pierce’s motion
to withdraw with respect to Pierce’s defamation claim and Vickie’s
counterclaim. Vickie’s Chapter 11 petition, Pierce’s proof of claim, and
aspects of Pierce’s defamation claim that pertained to dischargeability of
debt, as well as all pending discovery matters were to remain before the
bankruptcy court. The minute order also indicated that “[a]ll discovery
matters which the bankruptcy judge determines are necessary to the ‘core’
bankruptcy proceedings . . . shall proceed before the bankruptcy court.”

 5
     The contents of the memorandum remain undisclosed.
8                IN THE MATTER OF: MARSHALL

Bufford entered judgment in Vickie’s favor and against
Pierce in the amount of $449,000,000, with an additional
punitive damages award of $25,000,000. See Marshall v.
Marshall (In re Marshall), 257 B.R. 35, 39, 40 (Bankr. C.D.
Cal. 2000).6 Judge Bufford acknowledged that the damages
were “mainly based” on facts that were presumed to be true
by virtue of his final sanctions order.7

    Several months later, the Texas probate court rendered
judgment in favor of Pierce in the probate case, ordering
Vickie to pay Pierce’s attorneys’ fees in the amount of
$541,000. The Probate Court later modified its order to
specify that the fee award arose solely out of conduct that
occurred after Vickie’s bankruptcy discharge. However,
Judge Bufford overturned the probate court’s fee award,
finding that it violated Vickie’s bankruptcy discharge and was
barred by judicial estoppel. The district court affirmed Judge
Bufford’s decision, but we reversed and remanded, finding
that the attorneys’ fees award did not violate Vickie’s
bankruptcy discharge, as it was based solely on conduct that
occurred after the discharge. Marshall v. Marshall (In re
Marshall), 119 F. App’x 136 (9th Cir. 2004).

    6
    The Supreme Court ultimately held that the bankruptcy court lacked
constitutional authority to enter a final judgment on Vickie’s common law
tort counterclaim. Stern v. Marshall, 131 S. Ct. 2594, 2601 (2011).

        7
      Judge Bufford sua sponte withdrew the final sanctions order on
January 18, 2000. However, his October 6, 2000, decision on Vickie’s
tortious interference counterclaim identified a number of factual findings
the court deemed established as discovery sanctions against Pierce.
                  IN THE MATTER OF: MARSHALL                              9

                                    II.

             THE J. HOWARD MARSHALL III CASE

    Howard also challenged J. Howard’s estate plan, arguing
that, inter alia, Pierce had exerted undue influence over their
father for years, the estate plan had been formulated under
duress, and the will was invalid and unenforceable. In his
capacity as trustee of the Trusts, Pierce filed a fraud
counterclaim against Howard.8 After a lengthy trial, the jury
found in favor of Pierce, and the probate court entered a
Second Modified Final Judgment against Howard (“the Fraud
Judgment”) on December 7, 2001. At the time Howard and
Ilene filed their bankruptcy petition, the Fraud Judgment
exceeded twelve million dollars.9

   Howard filed an appeal in the Texas courts, and on
January 31, 2002, moved to stay execution of the Fraud
Judgment, or in the alternative, to lower the amount of
security for a supersedeas bond. As part of that motion,
Howard submitted a sworn affidavit attesting to a total net
worth of $22,413,220. Elaine contends that the parties
engaged in numerous efforts to negotiate a potential

  8
     Howard claimed that J. Howard had orally promised to divide his
estate equally between his two sons after Howard agreed to sell back to J.
Howard voting shares of Koch Industries. In his fraud counterclaim,
Pierce argued that J. Howard had disinherited Howard in 1980, that no
such oral promise was ever made, and that Howard purposely sold his
shares back to J. Howard in order to later concoct the claim that the sale
was consideration for his father’s oral promise to divide his estate equally
between his sons.

  9
    The probate court’s modified Fraud Judgment reflects a substantial
reduction from the jury’s original $34 million judgment against Howard.
10             IN THE MATTER OF: MARSHALL

settlement, which eventually resulted in an agreement to stay
enforcement in return for a $10.4 million bond, but that
Howard ultimately reneged on the agreement when he was
unable to finance the bond. Pierce moved to enforce the
Fraud Judgment, and at a July 18, 2002, hearing, the probate
court suggested that Howard voluntarily move assets to Texas
to satisfy the judgment. The probate court scheduled another
hearing for July 25, 2002 to consider whether it would order
Howard to transfer assets to Texas.

    On July 23, 2002, Howard and Ilene (collectively, “the
Debtors”) filed a Chapter 11 bankruptcy petition in the
Central District of California. In connection with the petition,
they filed a Statement of Related Cases and an addendum
noting that Vickie’s bankruptcy case involved a similar
factual background and many of the same principal parties as
their case. The Clerk assigned Howard and Ilene’s case to
Judge Bufford.

                              III.

     E. PIERCE MARSHALL ’S MOTION FOR RECUSAL AND
                    REASSIGNMENT

    Several months later, Pierce moved for random
reassignment of the case, or alternatively, recusal of Judge
Bufford, pursuant to 28 U.S.C. § 455(a) and the Due Process
Clause. Judge Bufford denied Pierce’s motion at an October
29, 2002 hearing. He subsequently issued an Order to Show
Cause (“OSC”) why the motion should not be denied on the
basis of standing because Pierce had not filed a proof of claim
in Howard and Ilene’s case. After a hearing on the OSC,
Judge Bufford issued a March 27, 2003 amended written
opinion in which he assumed that Pierce had standing
                 IN THE MATTER OF: MARSHALL                            11

(because the time for filing a proof of claim had not elapsed)
and again denied the recusal motion. Pierce never filed a
proof of claim in the Debtors’ bankruptcy case.10

                                   IV.

   PIERCE’S OBJECTION TO THE CHAPTER 11 PLAN AND
                 MOTION TO DISMISS

    The Debtors’ initial plan of reorganization listed total
assets of $8,391,904, personal property valued at $6,084,922,
and identified the Texas Fraud Judgment as a disputed
unsecured debt. Howard and Ilene filed an amended plan of
reorganization on April 16, 2003 (“the Plan”). This time, the
Plan provided for full payment of all debts except the Fraud
Judgment, which the Plan proposed should nevertheless be
discharged.

    Pierce objected to the Debtors’ proposed Plan on the
grounds that it was unconstitutional and proposed in bad
faith. Pierce argued that Howard and Ilene had initiated
bankruptcy proceedings for the sole purpose of avoiding
enforcement of the Fraud Judgment, that the Debtors
misrepresented the value of assets and liabilities in their
amended plan, and that Howard and Ilene were solvent and
could easily satisfy their financial obligations without resort
to bankruptcy. Citing similar concerns, Pierce also moved to
dismiss the Debtors’ Chapter 11 petition on the grounds of
unconstitutionality and bad faith.

 10
    Elaine admits that Pierce deliberately refrained from filing a proof of
claim in the Debtors’ case to avoid potential counterclaims such as those
brought against him in Vickie’s case.
12               IN THE MATTER OF: MARSHALL

    Howard and Ilene argued that they had filed their suit and
proposed their Plan in good faith, based not only on their
inability to pay the Fraud Judgment, but also on the threat of
future litigation with Pierce and others which they claimed
could cost them upwards of $100 million.

   On August 26, 2003, Judge Bufford issued a written
opinion confirming the Debtors’ Plan and denying Pierce’s
motion to dismiss on bad faith grounds. Then, on October 9,
2003, he issued a second amended opinion rejecting Pierce’s
constitutional challenge. Pierce appealed all three of Judge
Bufford’s decisions to the district court, Judge David O.
Carter, presiding, which affirmed on March 18, 2009.11 This
appeal followed.

                             DISCUSSION

    We review de novo a district court’s decision on appeal
from a bankruptcy court. Greene v. Savage (In re Greene),
583 F.3d 614, 618 (9th Cir. 2009). As to the decision of the
bankruptcy court, we apply the same standard of review
applied by the district court. Id. However, we review the
bankruptcy court decision independently and without
deference to the district court’s decision. Strand v. Neary (In
re Strand), 375 F.3d 854, 857 (9th Cir. 2004).

 11
    Judge Carter denied Pierce’s request for a stay without bond pending
appeal of the bankruptcy opinions. However, we granted a stay pending
decision of the district court and also pending resolution of Vickie’s case
in the Supreme Court (Stern v. Marshall, 131 S. Ct. 2594 (2011)).
Although both decisions have now been rendered, consummation of the
Plan remains stayed pursuant to the district court’s July 27, 2012 Order.
See Order Granting Appellant’s Motion for Stay at 4, In re Marshall, 8:03-
cv-01354-DOC, Docket no. 127 (C.D. Cal. July 27, 2012), ECF No. 127.
               IN THE MATTER OF: MARSHALL                    13

                               I.

        MOTION FOR REASSIGNMENT OR RECUSAL

    We first address Elaine’s contention that the district court
erred in affirming the bankruptcy court’s denial of her Motion
for Reassignment or Recusal. We review the denial of a
§ 455(a) motion for recusal for abuse of discretion. United
States v. Wilkerson, 208 F.3d 794, 797 (9th Cir. 2000). “A
bankruptcy court abuses its discretion if it applies the law
incorrectly or if it rests its decision on a clearly erroneous
finding of material fact.” Brotby v. Brotby (In re Brotby),
303 B.R. 177, 184 (B.A.P. 9th Cir. 2003). “We examine the
bankruptcy court’s conclusions of law de novo and its factual
findings for clear error.” BCE W., L.P. v. Smith (In re BCE
W., L.P.), 319 F.3d 1166, 1170 (9th Cir. 2003).

    “Clear error exists only when the reviewing court is left
with a definite and firm conviction that a mistake has been
committed.” In re Brotby, 303 B.R. at 184. “If two views of
the evidence are possible, the trial judge’s choice between
them cannot be clearly erroneous.” Lehtinen v. Lehtinen (In
re Lehtinen), 332 B.R. 404, 411 (B.A.P. 9th Cir. 2005). De
novo review applies to Elaine’s claim that Judge Bufford’s
partiality violated due process. See In re Victoria Station
Inc., 875 F.2d 1380, 1382 (9th Cir. 1989).

                              A.

                       REASSIGNMENT

   Pursuant to 28 U.S.C. § 137, cases are to be assigned
among judges in the manner prescribed by local rules and
general orders of the court. In the Central District of
14                IN THE MATTER OF: MARSHALL

California, General Order 08-05 § 1.2 (2008), which applies
equally to bankruptcy courts, directs the Clerk to assign cases
to judges in the district randomly.12 Gen. Order 08-05 § 1.2
(“The assignment of civil cases shall be completely at random
through the Automated Case Assignment System (ACAS).”).
However, where cases are related, the Clerk is directed to
assign the new case to the same judge who presided over the
prior case.13 Gen. Order 08-05 § 5.2 (2008); Bankr. C.D. Cal.

  12
    At the time the Debtors filed their bankruptcy petition, the operative
provision was General Order 224 § 1.2 (1993). The terms of that
provision have been consolidated and superseded several times, but now
exist in substantially the same form within General Order 08-05 § 1.2
(2008).

 13
    In bankruptcy cases, the parties must file a 1015-2 statement of related
cases. Under Local Bankruptcy Rule 1015-2(a) (formerly, Rule 1015-2(1))
cases are deemed “related” if the earlier case was filed or pending before
the new petition was filed and the debtors:

         (1) Are the same;

         (2) Are spouses, former spouses, domestic partners, or
             former domestic partners;

         (3) Are “affiliates,” as defined in 11 U.S.C. § 101(2),
             except that 11 U.S.C. § 101(2)(B) shall not apply;

         (4) Are general partners in the same partnership;

         (5) Are a partnership and one or more of its general
         partners;

         (6) Are partnerships that share one or more common
         general partners; or

         (7) Have, or within 180 days of the commencement of
         either of the related cases had, an interest in property
                 IN THE MATTER OF: MARSHALL                          15

Gen. Order 11-01 (2011) (formerly, Gen. Order 99-02
(1999)).

     Elaine contends that assignment of the Debtors’
bankruptcy case to Judge Bufford was improper because the
two cases were not related, notwithstanding the Debtors’
listing of the Vickie case in their 1015-2 Statement of Related
Cases. The Debtors concede, and we agree, that the Debtors’
bankruptcy case is not technically related to Vickie’s case
under Local Bankruptcy Rule 1015-2(a).14 However, the
court has “broad discretion” to interpret the requirements of
its General Orders. United States v. DeLuca, 692 F.2d 1277,
1281 (9th Cir. 1982) (“Because general orders and local rules
not only implement due process and other statutory rights but
also promote efficiency, we permit the district court broad
discretion in determining their requirements.”); United States
v. Torbert, 496 F.2d 154, 157 (9th Cir. 1974) (noting that a
general order requiring random reassignment when a case is
returned to the clerk after a judge is disqualified “is a
housekeeping rule for the internal operation of the district
court which has a large measure of discretion in interpreting
and applying it” (internal quotation marks omitted)). While
not technically “related,” the Debtors’ and Vickie’s
bankruptcy cases involved convoluted facts and issues, many
of which had also been heavily litigated in the Texas probate
court. Assignment of the case to Judge Bufford was within
the court’s discretion and was in the interests of efficiency.

         that was or is included in the property of another estate
         under 11 U.S.C. § 541(a), § 1115, § 1207, a n d / o r
         § 1306.

   14
      In fact, the Debtors explained that the cases were not technically
related in the very Statement of Related Cases at issue here.
16             IN THE MATTER OF: MARSHALL

    Moreover, judges are vested with “inherent” authority to
transfer cases among themselves “for the expeditious
administration of justice.” United States v. Stone, 411 F.2d
597, 598 (5th Cir. 1969) (per curiam); see also Badea v. Cox,
931 F.2d 573, 575 (9th Cir. 1991) (“District court judges have
broad discretion regarding the assignment or reassignment of
cases.” (internal quotation marks omitted)). Had the
Debtors’case been randomly assigned, it is likely that the
assigned judge would have transferred the case to Judge
Bufford, given his superior knowledge of the complex factual
and procedural history of the parties’ dispute in the Texas
probate court.

    Finally, a party has no due process right to random case
assignment or to ensure the selection or avoidance of any
particular judge absent a showing of bias or partiality in the
proceedings. See Cruz v. Abbate, 812 F.2d 571, 574 (9th Cir.
1987) (explaining that “a [party] has no right to any particular
procedure for the selection of the judge[,]” so long as the
decision is made “in a manner free from bias or the desire to
influence the outcome of the proceedings”); Torbert,
496 F.2d at 157 (holding that non-random assignment of a
case did not violate due process, particularly because there
was no showing of actual prejudice resulting from the
procedural irregularity). As discussed infra Section I.B.,
Elaine has not established actual or apparent bias on the part
of Judge Bufford, and was therefore not prejudiced by the
non-random assignment.
              IN THE MATTER OF: MARSHALL                    17

                              B.

                          RECUSAL

    Elaine contends that Judge Bufford should have recused
himself from the Debtors’ bankruptcy case pursuant to
28 U.S.C. § 455. Section 455(a) requires recusal when “a
reasonable person with knowledge of all the facts would
conclude that the judge’s impartiality might reasonably be
questioned.” F.J. Hanshaw Enters., Inc., v. Emerald River
Dev., Inc., 244 F.3d 1128, 1144 (9th Cir. 2001).

    First, Elaine argues that Judge Bufford failed to apply the
correct legal standard in denying recusal. During a hearing
on the recusal motion, Judge Bufford stated that the
“[a]ppearance of impropriety is not a basis for recusal.” This
was undeniably a misstatement of the law. See Liljeberg v.
Health Servs. Acquisition Corp., 486 U.S. 847, 860 (1988)
(“The goal of section 455(a) is to avoid even the appearance
of partiality.” (quoting Health Servs. Acquisition Corp. v.
Liljeberg, 796 F.3d 796, 802 (5th Cir. 1986))). Proof of
actual bias is not required under § 455(a). Instead, bias
should “be evaluated on an objective basis, so that what
matters is not the reality of bias or prejudice but its
appearance.” Liteky v. United States, 510 U.S. 540, 548
(1994). “It is well established that the recusal inquiry must
be made from the perspective of a reasonable observer who
is informed of all surrounding facts and circumstances.”
Cheney v. U.S. Dist. Ct., 541 U.S. 913, 924 (2004) (emphasis
and internal quotation marks omitted).

    Nevertheless, Judge Bufford articulated the correct
standard in his subsequent written opinion and specified that
his denial of recusal was based “on the grounds stated in the
18            IN THE MATTER OF: MARSHALL

court’s decision of this date.” Thus, we find that Judge
Bufford ultimately applied the correct legal standard. The
salient inquiry, then, is whether Judge Bufford abused his
discretion in concluding that his conduct in the Vickie case
did not give rise to an appearance of bias against Pierce that
warranted his recusal from the Debtors’ proceedings.

    Elaine contends that Judge Bufford’s impartiality may be
reasonably questioned in light of his handling of Vickie’s
case. Specifically, she claims that Judge Bufford’s rulings
demonstrated partiality towards Vickie, that his issuance of
severe discovery sanctions and “critical” statements against
Pierce and Pierce’s attorney throughout the proceedings
indicated prejudice against Pierce, and that his
communications with the press and the district court evinced
an uncommon interest in the case.

    As a preliminary matter, we note that Elaine’s examples
of bias emanate exclusively from Judge Bufford’s rulings and
conduct during Vickie’s case. Insofar as Elaine points to
Judge Bufford’s judicial rulings as evidence of bias, such
“rulings alone almost never constitute a valid basis for a bias
or partiality motion.” Liteky, 510 U.S. at 555. “Almost
invariably, they are proper grounds for appeal, not for
recusal.” Id. Moreover, “the judge’s conduct during the
proceedings should not, except in the ‘rarest of
circumstances’ form the sole basis for recusal under
§ 455(a).” United States v. Holland, 519 F.3d 909, 913–14
(9th Cir. 2008) (quoting Liteky, 510 U.S. at 555).
“[O]pinions formed by the judge on the basis of facts
introduced or events occurring in the course of the current
proceedings, or of prior proceedings, do not constitute a basis
for a bias or partiality motion unless they display a deep-
seated favoritism or antagonism that would make fair
                  IN THE MATTER OF: MARSHALL                             19

judgment impossible.” Liteky, 510 U.S. at 555. We find that
Judge Bufford’s conduct in Vickie’s case does not satisfy this
standard.

    For example, Elaine contends that Judge Bufford
advocated for Vickie by ruling in her favor on arguments
neither raised nor briefed by the parties. While Judge
Bufford may have erred in basing certain rulings on
arguments not raised by the parties and without giving the
parties an opportunity to respond, doing so several times in
the course of lengthy and complicated litigation does not
reasonably give rise to an inference that he is advocating for
one side or another. Further, Elaine’s argument suffers from
the fact that neither Vickie nor Pierce were parties to Howard
and Ilene’s bankruptcy case.15 Thus, Judge Bufford’s
purported partiality toward Vickie (or antagonism towards
Pierce), even if true, does not reasonably give rise to an
appearance of bias in Howard and Ilene’s case.

    Elaine also argues that, after initially denying Pierce’s
recusal motion, Judge Bufford instigated an improper sua
sponte investigation to find additional grounds for denying
the motion. Judge Bufford issued an OSC why the motion
should not be denied for lack of standing, in light of Pierce’s
failure to file a proof of claim. We find nothing unusual or
improper in the bankruptcy court’s effort to determine

  15
     As a practical matter, Judge Bufford’s purported bias against Pierce
would not spill over into Howard and Ilene’s bankruptcy case unless and
until Pierce injected himself into the case by filing a proof of claim, which
he had not done by the time Judge Bufford ruled on the recusal motion.
This is true notwithstanding the fact that the time in which to file a proof
of claim had not yet elapsed. Section 455(a) cannot reasonably be read to
require recusal based on speculation that a particular party might
subsequently enter in the case.
20            IN THE MATTER OF: MARSHALL

whether a party has standing to litigate; in fact, such
determination is required. See B.C. v. Plumas Unified Sch.
Dist., 192 F.3d 1260, 1264 (9th Cir. 1999) (“[F]ederal courts
are required sua sponte to examine jurisdictional issues such
as standing.”).

     As further evidence of bias, Elaine points to Judge
Bufford’s decisions declaring the district court’s stay of his
initial discovery sanctions ineffective and reimposing
virtually the same sanctions in his Final Sanctions Order.
Presumably, Elaine is insinuating that Judge Bufford openly
defied the district court in order to ensure that Pierce would
remain subject to his virtually insurmountable terminating
sanctions. However, not only are judicial rulings rarely a
basis for recusal, Liteky, 510 U.S. at 555, these particular
rulings cannot reasonably be seen as contravening the district
court’s direction. The district court subsequently adopted
Judge Bufford’s Final Sanctions Order, notwithstanding its
similarity to the initial vacated order, and even increased the
damages award against Pierce. In re Marshall, 275 B.R. 5,
58 (C.D. Cal. 2002), rev’d on other grounds, 392 F.3d 1118
(9th Cir. 2004), rev’d and remanded, sub nom. Marshall v.
Marshall, 126 S. Ct. 1735 (2006), rev’d on remand, 600 F.3d
1037 (9th Cir. 2010), aff’d, sub nom. Stern v. Marshall,
131 S. Ct. 2594 (2011).

    With respect to the sanctions themselves, the district
court’s decision to increase Judge Bufford’s sanctions
significantly weakens Elaine’s contention that the heavy
sanctions create an appearance of bias on Judge Bufford’s
part. See Offutt v. United States, 348 U.S. 11, 15–16 (1954)
(holding that heavy sanctions, which were later reduced by a
higher court, constituted “compelling proof” of bias).
Moreover, a reasonable person could find, as the district court
                  IN THE MATTER OF: MARSHALL                            21

did, that Judge Bufford’s decision to sanction Pierce was
based on his perception of Pierce’s bad faith. See United
States v. Yagman, 796 F.2d 1165, 1181–82 (9th Cir. 1986)
(“When [a judge imposes sanctions], the judge will obviously
be dissatisfied with some aspect of the offending attorney’s
conduct[,]” but “[w]ithout more, this natural responsive
attitude does not provide reasonable grounds to question the
judge’s impartiality[.]”). Judge Bufford found that Pierce
committed numerous discovery abuses throughout the Vickie
case. His determination was affirmed by the district court,
and Pierce apparently elected not to raise the issue again on
appeal of that decision to this court.16 See In re Marshall,
392 F.3d 1118 (9th Cir. 2004). The record does not indicate
that Judge Bufford’s findings of sanctionable discovery abuse
were erroneous. Thus, neither the existence nor the scope of
the sanctions suggest that Judge Bufford harbored deep-
seated antagonism against Pierce.

    Similarly, Judge Bufford’s comments towards Pierce and
his attorney during Vickie’s case might also be reasonably
seen as the product of Judge Bufford’s frustration
with Pierce’s behavior throughout the litigation. See F.J.
Hanshaw Enters., Inc., 244 F.3d at 1144–45
(“[P]redispositions developed during the course of a trial will
[rarely] suffice.” (citing Liteky, 510 U.S. at 544–45)); United
States v. Conforte, 624 F.2d 869, 881 (9th Cir. 1980)

    16
        Although the Supreme Court ultimately determined that the
bankruptcy court did not have jurisdiction over Vickie’s counterclaims,
the propriety of the Final Sanctions Order was not ultimately decided in
either venue. See In re Marshall, 600 F.3d 1037, 1046 n.17 (9th Cir.
2010) (noting that the Court’s “discussion of these matters” would be
“limited” as “the parties agreed that there [were] no sanctions issues . . .
on appeal” and because “Pierce . . . [was] entitled to judgment in his favor
for other reasons . . .”).
22             IN THE MATTER OF: MARSHALL

(explaining that recusal under § 455(a) requires a finding of
“an animus more active and deep-rooted than an attitude of
disapproval toward certain persons because of their known
conduct”). For example, Judge Bufford referred to Pierce as
“a Defendant with extremely dirty hands,” told Pierce’s
counsel to bring certain documents to court or “bring [his]
toothbrush,” to bring his “checkbook” to a hearing, and that
he had “substantial experience with the way [Pierce’s] side
has handled cases.” These statements, while potentially
indicative of personal bias, are not serious enough to
overcome the high standard set forth in Liteky:

       [J]udicial remarks during the course of a trial
       that are critical or disapproving of, or even
       hostile to, counsel, the parties, or their cases,
       ordinarily do not support a bias or partiality
       challenge. They may do so if they reveal an
       opinion that derives from an extrajudicial
       source; and they will do so if they reveal such
       a high degree of favoritism or antagonism as
       to make fair judgment impossible.

510 U.S. at 555 (emphasis added).

    Elaine also contends that Judge Bufford’s
communications with the press gave rise to an appearance of
partiality. Judge Bufford primarily took questions from
reporters about the procedures for obtaining court documents
and records. These procedural comments, themselves, do not
indicate partiality and are not ethically proscribed. See Code
of Judicial Conduct Canon 3(A)(6) (“This proscription [on
judicial speech] does not extend to public statements made in
the course of the judge’s official duties, to the explanation of
court procedures, or to a scholarly presentation made for
               IN THE MATTER OF: MARSHALL                     23

purposes of legal education.”); see also United States v.
Microsoft Corp., 253 F.3d 34, 112 (D.C. Cir. 2001)
(distinguishing between “purely procedural matters,” which
the district judge may properly discuss in public, and the
judge’s “views on factual and legal matters at the heart of the
case,” upon which the judge may not publicly comment).

     However, the fact that Judge Bufford initiated the “press
conference” at all is highly unusual and of some concern. See
In re Boston’s Children First, 244 F.3d 164, 170 (1st Cir.
2001) (noting that, in highly publicized cases, “even
ambiguous comments may create the appearance of
impropriety” and “[i]n fact, the very rarity of such public
statements, and the ease with which they may be avoided,
make it more likely that a reasonable person will interpret
such statements as evidence of bias”); see also United States
v. Cooley, 1 F.3d 985, 995 (10th Cir. 1993) (holding that a
judge’s deliberate choice to express “strong views” on a
pending case in a media forum “conveyed an uncommon
interest . . . in the subject matter” and “created the appearance
that the judge had become an active participant in [the
litigation]”).

    Furthermore, in speaking with the press, Judge Bufford
mentioned the interplay between the Texas probate case and
Vickie’s bankruptcy case, explaining that there were some
overlapping issues that might be resolved in either venue.
Given that the bankruptcy court’s jurisdiction over Vickie’s
counterclaim was in dispute, such statements might be
viewed as commentary on the merits of the case. See In re
Boston’s Children First, 244 F.3d at 170 (concluding that a
judge’s comment that one case was more “complex” than
another could be seen as “a preview of a ruling on the merits
of petitioner’s motion for class certification” and called the
24            IN THE MATTER OF: MARSHALL

judge’s impartiality into question). While there is nothing
wrong with a court providing procedural information to the
press in a highly publicized case, an appearance of
impropriety may be created where a judge voluntarily takes
on that role, especially in open court during the course of the
proceedings.

    Still, notwithstanding our concerns, Judge Bufford’s
statements to the press are in and of themselves insufficient
to warrant recusal. The lion’s share of his comments dealt
with courtroom procedures and policies, which is
understandable given the strong media interest in Vickie’s
case. That several of his comments might be construed as a
vague reflection on a disputed jurisdictional issue does not,
alone, compel a finding of apparent bias.

    In addition, Elaine makes much of a private
communication Judge Bufford shared with Judge Keller
regarding Pierce’s motion to withdraw the bankruptcy
reference. She argues that, by sending Judge Keller a “secret
memorandum,” Judge Bufford injected himself into the case
under the guise of “assisting” Judge Keller’s decision on
whether to withdraw the reference, evincing an “uncommon
interest and degree of personal involvement” in Vickie’s case.
Cooley, 1 F.3d at 995. However, context matters, and the
record here does not support that conclusion.

    In October 1998, Judge Keller issued a minute order
withdrawing the bankruptcy reference in part. The minute
order indicated that the bankruptcy judge would determine
which discovery matters were necessary to “core” bankruptcy
proceedings and should therefore remain before the
bankruptcy court. At a January 1999 hearing, Howard and
Ilene’s counsel reminded Judge Bufford that the bankruptcy
               IN THE MATTER OF: MARSHALL                     25

court “was going to be coming out with an order with respect
to th[e] Court’s belief as to the jurisdictional responsibilities
. . . which Judge Keller[’s] . . . minute order indicated he was
awaiting.” Judge Bufford clarified that his response to Judge
Keller would “not take the form of an order[,]” but would be
“a memorandum to Judge Keller to assist in his review of the
matter.” Judge Bufford then noted that the memo would be
“an internal document not available to the parties.” After
receiving the memo, Judge Keller noted that “as far as the
memorandum that [Judge Bufford] shared with me, he does
have authority to try everything but the MPI case, as far as I
can tell.” Judge Keller acknowledged that he was “not as
deeply into it from a bankruptcy standpoint as [Judge Bufford
was],” and that Judge Bufford was the one who “kn[ew]
what[ was] going on.”

    Although we are not privy to the contents of Judge
Bufford’s communication, this context strongly suggests that
Judge Bufford’s memo dealt with legitimate jurisdictional
issues, and that Judge Bufford was merely responding to a
request made by Judge Keller. At any rate, the record does
not suggest that Judge Bufford was actively trying to retain
jurisdiction over Vickie’s case because of antagonism or
favoritism towards the parties, as opposed to, for example, his
understandable reticence to foist a complex case on the
district court unless it was necessary to do so.

    Elaine’s examples of bias are almost exclusively based on
Judge Bufford’s conduct during Vickie’s bankruptcy
proceedings. Taken together, Judge Bufford’s actions are not
indicative of a “deep-seated favoritism or antagonism that
would make fair judgment impossible.” Liteky, 510 U.S. at
555. As such, this case is not one of the “rarest of
circumstances” where judicial conduct in prior proceedings
26               IN THE MATTER OF: MARSHALL

should form the sole basis for recusal under § 455(a).
Holland, 519 F.3d at 914. Judge Bufford’s determination—
that under all of the circumstances a reasonable person would
not question his impartiality—does not reflect an incorrect
application of the law and is not based on clearly erroneous
factual findings. Therefore, we cannot say that Judge Bufford
abused his discretion in denying Elaine’s motion to recuse.17

                                  II.

                    CONSTITUTIONAL ISSUES

    For the reasons outlined in the second amended opinion
of the bankruptcy court filed on October 9, 2003, in the
Central District of California, we conclude that the district
court correctly affirmed the bankruptcy court’s confirmation
of Howard and Ilene’s Chapter 11 plan and denial of Elaine’s
motion to dismiss with respect to the constitutional issues
raised in the motion. See In re Marshall, 300 B.R. 507
(Bankr. C.D. Cal. 2003). Therefore, we adopt the bankruptcy
court’s opinion on Elaine’s constitutional claims, and affirm
the district court’s decision as to the issues addressed therein.
See Appendix A.

  17
     Furthermore, the record does not suggest that “the probability of
actual bias” on Judge Bufford’s part was “too high to be constitutionally
tolerable[,]” so as to mandate his recusal on due process grounds.
Withrow v. Larkin, 421 U.S. 35, 47 (1975).
              IN THE MATTER OF: MARSHALL                    27

                             III.

              NON -CONSTITUTIONAL ISSUES

    Elaine contends that the bankruptcy court erred in
confirming the Debtors’ Chapter 11 Plan because the Plan
does not satisfy the “Best Interests of Creditors” test and was
proposed in bad faith. Elaine also argues that the bankruptcy
case should have been dismissed because it was filed in bad
faith.

    We review the bankruptcy court’s decision to confirm the
Debtors’ Chapter 11 Plan for abuse of discretion. In re
Brotby, 303 B.R. at 184. The bankruptcy court’s ruling on a
motion to dismiss for bad faith is also subject to review for
abuse of discretion. Stolrow’s Inc. v. Stolrow’s Inc. (In re
Stolrow’s, Inc.), 84 B.R. 167, 170 (B.A.P. 9th Cir. 1988). In
both cases, “[t]he question of good faith is factual” and we
review for clear error. Id.; Marsch v. Marsch (In re Marsch),
36 F.3d 825, 828 (9th Cir. 1994) (per curiam).

                              A.

PLAN CONFIRMATION —BEST INTERESTS OF CREDITORS
                    TEST

    The so-called “Best Interest of Creditors” test requires
that:

       [w]ith respect to each impaired class of claims
       or interests—

       (A) each holder of a claim or interest of such
       class—
28            IN THE MATTER OF: MARSHALL

           (i) has accepted the plan; or

           (ii) will receive or retain under the plan on
       account of such claim or interest property of
       a value, as of the effective date of the plan,
       that is not less than the amount that such
       holder would so receive or retain if the debtor
       were liquidated under chapter 7 of this title on
       such date.

11 U.S.C. § 1129(a)(7)(A).

    Because the Plan purported to discharge the Texas Fraud
Judgment without any payment, Elaine contends that the Plan
failed to ensure that Pierce would receive at least as much as
he would have under Chapter 7 liquidation. However, Pierce
never filed a proof of claim in the Debtors’ Chapter 11
proceedings, and the deadline for doing so had passed by the
time the bankruptcy court confirmed the Debtors’ Chapter 11
Plan. Thus, § 1129(a)(7)(A) did not apply to Pierce or to the
Fraud Judgment.

    That Pierce would not have been foreclosed from filing a
proof of claim under Chapter 7 is of no moment. See
11 U.S.C. § 726(a)(2) (permitting late-filed claims in Chapter
7 cases). We will not extend the “Best Interests of Creditors”
test to individuals who are only hypothetically creditors,
simply because the statute invokes a hypothetical Chapter 7
liquidation as a point of reference. Were we to go that far, a
Chapter 11 Plan would not be confirmable unless it provided
for all individuals who could potentially be entitled to
distribution. Such a result would be untenable in practice and
would eviscerate the proof of claim filing deadline in Chapter
11.
               IN THE MATTER OF: MARSHALL                    29

                              B.

            PLAN CONFIRMATION —BAD FAITH

    Under 11 U.S.C. § 1129(a)(3), a bankruptcy plan must be
“proposed in good faith and not by any means forbidden by
law.” “A plan is proposed in good faith where it achieves a
result consistent with the objectives and purposes of the
Code.” Sylmar Plaza, L.P. v. Sylmar Plaza L.P. (In re Sylmar
Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir. 2002).

    Elaine argues that the Plan was not proposed in good faith
because the Debtors (1) were actually solvent; (2)
misrepresented the true value of their assets; and (3) filed the
petition with the primary purpose of avoiding payment of the
Texas Fraud Judgment.

     We agree that the Debtors’ claim of potentially costly
future litigation— including a $5 million Louisiana lawsuit in
which Howard was a named defendant and Pierce’s separate
threat of a $100 million lawsuit—was perhaps too speculative
to support a finding that they were “insolvent.” However,
“insolvency is not a prerequisite to a finding of good faith
under § 1129(a).” Id. at 1074–75. The bankruptcy court
reasonably concluded that the Debtors’ technical solvency did
not bespeak bad faith given that they faced the threat of future
litigation, not to mention their very concrete obligation to
satisfy the Texas Fraud Judgment, amounting to nearly $12
million.

    With regard to the Debtors’ purported misstatements on
their asset schedule, the chief example cited by Elaine was
the listing of the value of the Eleanor Stevens Gift Trust
Debenture as “contingent,” despite its prior valuation at
30               IN THE MATTER OF: MARSHALL

upwards of $6 million.18             However, the Debtors’
identification and description of the debenture and other stock
holdings were more than sufficient to put creditors on notice
of the assets so they could investigate further. See, e.g.,
Cusano v. Klein, 264 F.3d 936, 946–47 (9th Cir. 2001)
(holding that, while a debtors must “be as particular as is
reasonable under the circumstances[,]” there are “no bright-
line rules for how much itemization and specificity is
required,” and where the value of assets are unknown, “a
simple statement to that effect will suffice” (citations and
internal quotation marks omitted)); In re Weingarten, No. 05-
01091, 2013 WL 309076, at *12 (Bankr. C. D. Cal. Jan. 25,
2013) (“By listing the asset, even one with an unknown value,
[the debtor] has put parties on notice of these assets and they
can investigate further.”). Further, with regard to the
Debtors’ failure to list certain assets, the bankruptcy court did
not clearly err in finding that the omitted assets—200 shares
of stock, worth roughly $175–180 per share, and Citibank
accounts containing $186,458—were de minimis and
unproven, respectively.

    Finally, Elaine argues that the Plan was proposed in bad
faith because the Debtors’ primary purpose was to avoid
paying the Texas Fraud Judgment. However, the only reason
consummation of the Debtors’ Plan would frustrate Elaine’s

  18
     In addition, while the asset schedule stated the value of the Debtors’
stock holdings as “unknown,” Elaine points to Howard’s Probate Affidavit
which valued his stock holdings in the millions of dollars and a monthly
statement from his investment advisor indicating that Howard’s stock
holdings were worth $5,891,141.65. Elaine also claims that the amended
schedules improperly listed the “book value” of certain assets, rather than
market value and “inexplicably” valued various partnership interests at
just one hundred dollars each. According to Elaine, Howard and Ilene’s
assets actually exceeded their stated liabilities by at least $4,000,000.
               IN THE MATTER OF: MARSHALL                    31

attempt to collect on the Texas Fraud Judgment was because
Pierce never filed a proof of claim. Significantly, the Debtors
initially included the Fraud Judgment in their Plan, and
amended to provide for discharge of the judgment only after
Pierce failed to file a proof of claim. We find no reason to
conclude that the Debtors knew Pierce would not file a proof
of claim and we see nothing that prevented him from doing
so.

   In sum, the bankruptcy court’s finding that the Debtors’
Plan was proposed in good faith was not clearly erroneous
under all the circumstances. Therefore, confirmation of the
Debtors’ Plan was not an abuse of discretion.

                              C.

            MOTION TO DISMISS—BAD FAITH

     Under 11 U.S.C. § 1112(b), a Chapter 11 bankruptcy case
may be dismissed “for cause.” “Although section 1112(b)
does not explicitly require that cases be filed in ‘good faith,’
courts have overwhelmingly held that a lack of good faith in
filing a Chapter 11 petition establishes cause for dismissal.”
In re Marsch, 36 F.3d at 828. The good faith requirement
does not depend on a debtor’s subjective intent, but rather
“encompasses several, distinct equitable limitations that
courts have placed on Chapter 11 filings.” Id. Generally, a
plan is not filed in good faith if it represents an attempt “to
unreasonably deter and harass creditors” and to “achieve
objectives outside the legitimate scope of the bankruptcy
laws.” Id.

   The question of a debtor’s good faith “depends on an
amalgam of factors and not upon a specific fact.” Id.
32             IN THE MATTER OF: MARSHALL

(quoting Idaho Dep’t of Lands v. Arnold (In re Arnold),
806 F.2d 937, 939 (9th Cir. 1986)). “[T]he courts may
consider any factors which evidence ‘an intent to abuse the
judicial process and the purposes of the reorganization
provisions.’” Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Va.
(In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th
Cir. 1988) (quoting Albany Partners, Ltd. v. Westbrook (In re
Albany Partners, Ltd.), 749 F.2d 670, 674 (11th Cir. 1984)).
A “[d]ebtor bears the burden of proving that the petition was
filed in good faith.” Leavitt v. Soto (In re Leavitt), 209 B.R.
935, 940 (B.A.P. 9th Cir. 1997) (citing In re Powers, 135
B.R. 980, 997 (Bankr. C.D. Cal. 1991)).

    Elaine argues that the petition was filed in bad faith and
should have been dismissed. First, Elaine contends that the
timing of the filing, within days of the Texas court’s
suggestion that Howard transfer assets to satisfy the Fraud
Judgment, indicated bad faith. We agree that the timing of
Howard and Ilene’s filing may be an indication that the
Debtors initiated bankruptcy proceedings for the purpose of
avoiding or delaying payment of the judgment. See In re
Leavitt, 171 F.3d at 1225 (finding that the timing of debtor’s
bankruptcy petition, filed within two weeks of judgment,
demonstrated that the debtor’s primary motive was avoidance
of the judgment). However, because the Debtors specifically
included the Texas Fraud Judgment in their initial Plan, it
appears just as likely that they filed their petition in order to
“effect a speedy, efficient reorganization,” and not “to
unreasonably deter and harass creditors.” In re Marsch,
36 F.3d at 828.

    In addition, Elaine argues that the Debtors’ sole purpose
in filing the petition was to avoid filing a supersedeas bond
pending appeal of the Texas Fraud Judgment. In Marsch, we
              IN THE MATTER OF: MARSHALL                    33

held that a petition was correctly dismissed for bad faith
where it “was filed solely to delay collection of the judgment
and avoid posting an appeal bond, even though debtor had the
ability to satisfy the judgment with nonbusiness assets.” Id.
at 831; see also In re Boynton, 184 B.R. 580, 581 (Bankr.
S.D. Cal. 1995) (finding bad faith where petition was filed in
order to evade a tax judgment despite the fact that debtors had
“significant assets” and “may have been able” to post a
bond).

    Here, unlike in Marsch and Boynton, the record suggests
that Howard and Ilene’s liquid assets were probably
insufficient to satisfy the judgment or cover the cost of a
supersedeas bond. The bankruptcy court found that the Fraud
Judgment amounted to over $12 million plus interest, that the
“custom” in Texas was to set appeal bonds at 150% of the
judgment, and that Howard did not have sufficient liquid
assets to post a bond of that size. Although the record does
not invariably indicate that the Debtors could not finance a
supersedeas bond, we cannot say that the bankruptcy court’s
determination was clearly erroneous.              Moreover,
notwithstanding their ability to finance a bond, Howard and
Ilene’s inclusion of the Fraud Judgment in their initial Plan
suggests that they filed their bankruptcy petition for the
proper purpose of reorganization, not as a mere ploy to avoid
posting the bond.

    Finally, Elaine contends that the absence of other
unsecured creditors in the Plan shows that the Debtors filed
their petition in order to avoid having to obtain a supersedeas
bond or pay the Texas Fraud Judgment. See, e.g., Chinichian
v. Campalongo (In re Chinichian), 784 F.2d 1440, 1445 (9th
Cir. 1986); Little Creek Dev. Co. v. Common Wealth Mortg.
Corp. (In the Matter of Little Creek), 779 F.2d 1068, 1073
34                IN THE MATTER OF: MARSHALL

(5th Cir. 1986); In re Silberkraus, 253 B.R. 890, 904 (Bankr.
C.D. Cal. 2000). Indeed, Howard and Ilene paid off at least
$89,000 in unsecured debts the day before filing, and the
Texas Fraud Judgment made up roughly 82% of the Debtors’
total scheduled liabilities.

    However, notwithstanding their minimal unsecured debt,
the Debtors’ decision to file for bankruptcy does not indicate
bad faith in light of the size of the Texas Fraud Judgment and
the potential cost of obtaining a bond. As the bankruptcy
court noted, all debtors file for bankruptcy in order to delay
creditor action. Thus, although the Debtors’ main motivation
may have been to ameliorate the burden of the judgment,
given that the Plan proposed payment of the judgment, we
cannot say that they filed a Chapter 11 petition in order to
avoid paying it altogether, or to unduly deter or harass
creditors.19

    Moreover, we agree with the bankruptcy court that
“[p]erhaps the most compelling grounds for denying a motion
to dismiss grounded on bad faith is the determination that a
reorganization plan qualifies for confirmation.” This is
because “[a] debtor’s showing that a plan of reorganization is
ready for confirmation essentially refutes a contention that
the case is filed or prosecuted in bad faith.” Id. The
bankruptcy court properly considered the viability of the
Debtors’ proposed Plan as weighing heavily against
dismissal.

  19
    In support of her motion to dismiss based on bad faith filing, Elaine
also relies on the arguments that the Debtors were solvent and
misrepresented the value of their assets. W e reject these arguments for the
same reasons discussed supra section III.B.
              IN THE MATTER OF: MARSHALL                   35

    Viewing the amalgam of factors together, it is not
“obvious that [the Debtors are] attempting unreasonably to
deter and harass creditors[.]” In re Thirtieth Place, Inc., 30
B.R 503, 505 (9th Cir. B.A.P. 1983) (quoting Matter of
Levinsky, 23 B.R. 210, 218 (N.Y. Bankr. 1982)).
Accordingly, the bankruptcy court’s finding of good faith was
not clearly erroneous, and it did not abuse its discretion in
denying the motion to dismiss.

  For the foregoing reasons, the district court’s decision is
AFFIRMED.
APPENDIX A
                                       IN RE MARSHALL                                            507
                                Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

                                                       petition or to proceed to confirmation of
      In re J. Howard MARSHALL                         plan of reorganization.
              et ux., Debtors.
                                                       2. Bankruptcy O2222.1
           No. LA 02–30769–SB.
                                                            While Congress is not free to define
     United States Bankruptcy Court,                   contours of bankruptcy without any limita-
             C.D. California.                          tion, insolvency, whether in ‘‘balance
                                                       sheet’’ or in ‘‘liquidity’’ sense, is not pre-
                Oct. 9, 2003.                          requisite for the constitutional invocation
                                                       of    federal     bankruptcy      jurisdiction.
     Trustee of family trust filed his oppo-           U.S.C.A. Const. Art. 1, § 8, cl. 4.
sition to proposed Chapter 11 plan filed by            3. Bankruptcy O2022
his brother and his brother’s wife and
                                                            United States bankruptcy law is de-
moved to dismiss their bankruptcy case on
                                                       signed to provide relief from creditor pres-
ground that they were not insolvent, and
                                                       sures for debtors with cash flow difficul-
that Congress could not constitutionally
                                                       ties, even when they are clearly solvent
provide for reorganization by solvent debt-
                                                       under ‘‘balance sheet’’ test.
ors. Amending and superceding prior opin-
ion, the Bankruptcy Court, Samuel L. Buf-              4. Bankruptcy O2222.1
ford, J., held that: (1) bankruptcy law does
                                                            Congress has power under the Bank-
not require that debtor be insolvent, either
                                                       ruptcy Clause to determine that debtor
in ‘‘balance sheet’’ or in ‘‘liquidity’’ sense,
                                                       may invoke rights under the Bankruptcy
in order to file Chapter 11 petition or to
                                                       Code to adjust his obligations with credi-
proceed to confirmation; (2) Congress has
                                                       tors before debtor becomes insolvent un-
power under the Bankruptcy Clause to
                                                       der ‘‘balance sheet’’ test. U.S.C.A. Const.
determine that debtor may invoke rights
                                                       Art. 1, § 8, cl. 4; Bankr.Code, 11 U.S.C.A.
under the Bankruptcy Code to adjust his
                                                       § 101 et seq.
obligations before debtor becomes insol-
vent; and (3) allowing debtors who alleged-            5. Constitutional Law O277(1)
ly were not insolvent, in ‘‘balance sheet’’                Eminent Domain O81.1
sense, to file for Chapter 11 relief and to
                                                           Property rights enjoy at least a mea-
obtain confirmation of plan providing for
                                                       sure of protection in bankruptcy under the
discharge of their debts would not violate
                                                       Due Process and Just Compensation
Fifth Amendment economic substantive
                                                       Clauses of the Fifth Amendment.
due process rights of judgment creditor.
                                                       U.S.C.A. Const.Amend. 5.
     Plan confirmed; dismissal motion de-
nied.                                                  6. Bankruptcy O2015
                                                           While property rights enjoy at least a
                                                       measure of protection in bankruptcy, Con-
1. Bankruptcy O2223, 3548.1                            gress is not barred from passing laws that
    Bankruptcy law does not require that               impair obligation of contracts.
debtor be insolvent, either in ‘‘balance
sheet’’ sense of having liabilities that ex-           7. Bankruptcy O2015
ceed his assets or in ‘‘liquidity’’ sense of                Very essence of bankruptcy laws is
being unable to pay his debts as they                  modification or impairment of contractual
become due, in order to file a Chapter 11              obligations.
508                               300 BANKRUPTCY REPORTER

8. Bankruptcy O2013.1                                  Validity Called into Doubt
      Constitutional Law O306(4)                           Bankr.Code, 11 U.S.C.A. § 106(a).
      Protection of property rights in bank-           Limitation Recognized
ruptcy is measured, and Congress, acting                   Bankr.Code, 11 U.S.C.A. § 522(f).
in its bankruptcy power, may authorize
bankruptcy courts to affect such property
rights, as long as limitations of due process
are observed. U.S.C.A. Const. Art. 1, § 8,
cl. 4; U.S.C.A. Const.Amend. 5.
                                                         J. Howard Marshall, III, Ilene Marshall,
9. Bankruptcy O2223, 3549                              Pasadena.
      Constitutional Law O306(4)                          Bingham McCutchen, LLP, Julia Frost–
     Allowing Chapter 11 debtors who al-               Davies, Rheba Rutkowski, Andrew J. Gal-
legedly were not insolvent, in sense that              lo, Boston, MA.
their liabilities did not exceed their assets,           Bingham McCutchen, LLP, G. Eric
to file for Chapter 11 relief and to obtain            Brunstad, Jr., Hartford, CT.
confirmation of plan providing for dis-
charge of their debts would not violate the              Bingham McClutchen, LLP, Matthew A.
Fifth Amendment economic substantive                   Lesnick, Los Angeles.
due process rights of judgment creditor                 David L. Neale/Anne E. Wells, Levene
who had neither property nor contract                  Neale Bender Rankin et al., Los Angeles.
rights to assert against debtors, and who,
as result of his refusal to file proof of              SECOND AMENDED OPINION ON
claim, did not even have claim against                    PLAN CONFIRMATION AND MO-
estate, but only a Texas state court judg-                TION TO DISMISS (CONSTITU-
ment which was on appeal. U.S.C.A.                        TIONAL ISSUES)
Const.Amend. 5.
                                                         SAMUEL L. BUFFORD, Bankruptcy
10. Bankruptcy O2019                                   Judge.
     Congress validly exercised its bank-                           I.   Introduction
ruptcy powers under the Constitution to                  In this case Pierce Marshall, as trustee
authorize debtors who are solvent, wheth-              for three family trusts (collectively re-
er in ‘‘balance sheet’’ or in ‘‘liquidity’’            ferred to as ‘‘Pierce’’) opposes confirmation
sense, to file Chapter 11 cases and obtain             of the chapter 11 1 plan proposed by the
confirmation of reorganization plans.                  debtors, who are his brother J. Howard
U.S.C.A. Const. Art. 1, § 8, cl. 4.                    Marshall, III (‘‘Howard’’) and Howard’s
                                                       wife Ilene O. Marshall. Pierce also moves
                  West Codenotes                       to dismiss the case. Pierce supports both
                                                       of these positions with the argument that
Recognized as Unconstitutional                         this case falls outside the bankruptcy juris-
    Pub.L. No. 101-650, 101st Cong., 2d                diction of the federal courts under the
Sess. § 317(a) (1990).                                 Bankruptcy Clause of the United States

1.     Unless otherwise indicated, all chapter, sec-    and to the Federal Rules of Bankruptcy Pro-
     tion and rule references are to the Bankrupt-      cedure, Rules 1001–9036.
     cy Code, 11 U.S.C. §§ 101–1330 (West 2003)
                                        IN RE MARSHALL                                                 509
                                 Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

Constitution, because the debtors are sol-              father, J. Howard, and an interest in the
vent under a balance sheet test. Notably,               Eleanor P. Stevens Irrevocable Gift Trust
Pierce has declined to file a claim on be-              (which is described in detail in a full-page
half of the trusts (or on his own behalf) in            exhibit). In addition to the quantified
this case.                                              debts, the schedules list nonpriority debts
                                                        in unknown amounts owing to Wells Fargo
  The court finds that the balance sheet
                                                        Bank Texas, the City of Pasadena, a Dallas
test for insolvency was unknown in United
                                                        law firm and the Marshall Museum &
States bankruptcy law until 1898, when
                                                        Trust.
balance sheet insolvency first entered
United States bankruptcy law. Prior                       In addition to the $12 million judgment,
thereto, insolvency in the bankruptcy con-              Howard had been named as a defendant in
text always meant liquidity (or equity) in-             a $5 million lawsuit in Louisiana. Fur-
solvency.                                               thermore, Pierce’s lawyer also sent a letter
                                                        to Howard’s lawyer on May 20, 2002 pro-
  The court further holds that the Bank-                viding substantial detail for another claim
ruptcy Clause of the United States Consti-              against Howard exceeding $100 million.
tution does not require that a debtor in
                                                          The court set a claims bar date of No-
bankruptcy be insolvent under any test,
                                                        vember 15, 2002. Pierce declined to file a
and that the debtors in this case may
                                                        proof of claim in this case. Pierce has
constitutionally invoke remedies provided
                                                        moved to dismiss this case and has object-
under chapter 11.
                                                        ed to the confirmation of the debtors’
             II. Relevant Facts                         chapter 11 plan as amended.
  The relevant facts in this case are set                  Pierce makes both statutory and consti-
forth in the court’s recently issued opinion            tutional objections to the confirmation of
on the non-constitutional issues involved in            the chapter 11 plan proposed by debtors
the pending plan confirmation and motion                Howard and Ilene Marshall. The court
to dismiss. See In re Marshall, 298 B.R.                has previously found that the statutory
670 (Bankr.C.D.Cal.2003). The filing of                 requirements for confirmation are satis-
this bankruptcy case was precipitated in                fied, and that the case should not be dis-
part by a judgment in favor of Pierce and               missed on good faith grounds. See Mar-
against Howard in the Texas probate case                shall, 298 B.R. at 675-684.
of their father J. Howard Marshall II (‘‘J.                III. Constitutionality of a Chapter
Howard’’). The judgment, which was then                        11 Case for a Solvent Debtor
on appeal, was for $11 million plus costs
                                                           Pierce contends that the debtors’ assets
and interest at ten percent. By the filing
                                                        exceed their liabilities as of the date of
date of the bankruptcy petition, this debt
                                                        filing, and that in consequence they were
totaled more than $12 million.
                                                        solvent under a balance sheet test. The
   As amended, the debtors’ schedules                   court finds that determining the accuracy
show assets worth $13,138,311.38 and liqui-             of this contention would be very difficult
dated debts of $13,914,112.39. In addition              and very time consuming in this case.
to the valued assets, the schedules disclose            While for some purposes in bankruptcy it
interests in a revocable family trust, claims           is necessary to make such a determina-
made in the probate estate of Howard’s                  tion,2 in this case no such determination is

2.   See   § 546(c)   (reclamation);   § 547(b)(3)        (preferential    transfer);   § 548(a)(1)(B)(ii)(I)
510                          300 BANKRUPTCY REPORTER

necessary. For the purposes of the consti-        tions: the bankruptcy terrain clearly must
tutional analysis, the court assumes with-        have some boundaries. See, e.g., Conti-
out deciding that the debtors were solvent,       nental Illinois Nat’l Bank & Trust v. Chi-
in the balance sheet sense, when they filed       cago, Rock Island & Pac. Ry. Co., 294 U.S.
this case.                                        648, 669–70, 55 S. Ct. 595, 79 L. Ed. 1110
   [1] As a statutory matter, it is clear         (1935).
that the bankruptcy law does not require             The test, according to Pierce, is that the
that a bankruptcy debtor be insolvent, ei-        Constitution must require that a debtor in
ther in the balance sheet sense (more lia-        a bankruptcy case be insolvent under a
bilities than assets) or in the liquidity         balance sheet test. Insofar as the Bank-
sense (unable to pay the debtor’s debts as        ruptcy Code permits a bankruptcy filing
they come due), to file a chapter 11 case or      by a debtor who is balance sheet solvent,
proceed to the confirmation of a plan of          according to Pierce, the law falls outside
reorganization. The Ninth Circuit firmly          the powers granted by the Constitution to
rejected such a view in Sylmar Plaza              the federal government. In such a circum-
where it held, ‘‘insolvency is not a prereq-      stance, the Constitution, and not the law,
uisite to a finding of good faith under           must govern the case. See Marbury v.
§ 1129(a).’’ Platinum Capital, Inc. v. Syl-       Madison, 5 U.S. (1 Cranch) 137, 178, 2
mar Plaza, L.P. (In re Sylmar Plaza,              L.Ed. 60 (1803) (‘‘If then TTT the constitu-
L.P.), 314 F.3d 1070, 1074–75 (9th Cir.           tion is superior to any ordinary act of the
2002); accord, In re James Wilson Associ-         legislature; the constitution, and not such
ates, 965 F.2d 160, 170 (7th Cir.1992) (re-       ordinary act, must govern the case to
jecting bad faith challenge to confirma-          which they both apply.’’)
tion).
                                                     [2] The court finds that neither bal-
   Pierce concedes that insolvency is not a
                                                  ance sheet insolvency nor liquidity insol-
statutory requirement for filing a volun-
                                                  vency is required for the constitutional
tary bankruptcy case under chapter 11.
Instead, he argues that the Bankruptcy            invocation of federal bankruptcy jurisdic-
Clause of the United States Constitution          tion. The limits on the application of the
can only be invoked by a bankruptcy debt-         Bankruptcy Clause lie elsewhere, not in
or who is insolvent under a balance sheet         balance sheet insolvency.
test. Pierce argues that the constitutional          As a preliminary matter, it is necessary
grant of authority to Congress to enact           to distinguish the exercise of powers under
‘‘uniform Laws on the subject of Bankrupt-        the Bankruptcy Clause from the exercise
cies throughout the United States’’ 3 is lim-     of congressional powers under the Com-
ited to regulating the affairs of debtors         merce Clause. These two powers are
who are insolvent in this sense.                  closely related. See Railway Labor Exec-
  Pierce argues that there must be some           utives’ Ass’n v. Gibbons, 455 U.S. 457,
content to the Bankruptcy Clause in the           465–66, 102 S. Ct. 1169, 71 L. Ed. 2d 335
Constitution. In general terms, this court        (1982). However, the conditions for invok-
agrees. On this point Pierce is on solid          ing the Commerce Clause are different
ground. Congress is not free to define the        from those for invoking the Bankruptcy
contours of bankruptcy without any limita-        Clause, and each has its own limitations.

 (certain fraudulent transfers); § 553(a) (set-   3. U.S. CONST., art. 1, § 8, cl. 4.
 off).
                                       IN RE MARSHALL                                           511
                                Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

As the Supreme Court has explained,                    Congress has exceeded its Bankruptcy
‘‘[u]nlike the Commerce Clause, the Bank-              Powers and has deprived him of property
ruptcy Clause itself contains an affirmative           without due process of law.
limitation or restriction upon Congress’                       A.    Definition of Insolvency
power,’’ and ‘‘if we were to hold that Con-
gress had the power to enact nonuniform                    Before undertaking this analysis, we
bankruptcy laws pursuant to the Com-                   must first address what Pierce means by
merce Clause, we would eradicate from the              ‘‘insolvency,’’ because this term has two
Constitution a limitation on the power of              commonly used definitions in the bank-
Congress to enact bankruptcy laws.’’ Id.               ruptcy context.
at 468–69, 102 S. Ct. 1169.                               For the purposes of this argument,
  Setting aside the Commerce Clause, the               Pierce urges the court to adopt the balance
powers granted to Congress under the                   sheet    definition    of    solvency     in
Bankruptcy Clause are expanded by art. 1,              § 101(32)(A), which states in relevant part:
§ 8, cl. 18, which grants Congress the                    ‘‘insolvent’’ means TTT with reference to
power ‘‘To make all Laws which shall be                   an entity other than a partnership and a
necessary and proper for carrying into                    municipality, financial condition such
Execution the foregoing Powers TTTT’’                     that the sum of such entity’s debts is
See Wright v. Union Central Life Ins. Co.,                greater than all of such entity’s proper-
304 U.S. 502, 513, 58 S. Ct. 1025, 82 L.Ed.                ty, at a fair valuation, exclusive of—
1490 (1938). Theoretically, this provision
                                                          (i) property transferred, concealed, or
might be invoked to support the use of the
                                                          removed with intent to hinder, delay, or
Bankruptcy Clause in doubtful cases.
                                                          defraud such entity’s creditors; and
However, the Supreme Court has never in
fact utilized this approach to determine the              (ii) property that may be exempted
constitutionality of bankruptcy provisions.               from property of the estate TTTT
   The court assumes without deciding that             Section 101(32)(A) states the Bankruptcy
Congress was not exercising its Commerce               Code version of the balance sheet test for
Clause or its Necessary and Proper Clause              Insolvency.4 Under the non-bankruptcy
powers in determining the qualifications               version, a debtor is insolvent where its
for filing a bankruptcy case. Thus the                 liabilities exceed its assets as shown on its
court’s constitutional analysis in this case           balance sheet. See BLACK’S LAW DICTIO-
is confined to the Bankruptcy Clause.                  NARY 799 (7th ed.1999).

  To analyze Pierce’s argument, we exam-                  Section 101(32)(A) makes two modifica-
ine the understanding of the framers of                tions to the usual balance sheet insolvency
the Constitution at the time of its adoption,          test. First, the test requires the revision
the history of bankruptcy law in the Unit-             of balance sheet values to their ‘‘fair valua-
ed States and its predecessor English stat-            tion.’’ In contrast, a balance sheet pre-
utes, and applicable Supreme Court case                pared according to generally accepted ac-
law. We also examine Pierce’s argument                 counting principles provides asset values
that, insofar as the Bankruptcy Code per-              at historical cost less any applicable depre-
mits a solvent chapter 11 debtor to file a             ciation or amortization. The ‘‘fair valua-
case and proceed to plan confirmation,                 tion’’ standard requires an adjustment in

4.     The 1898 Act has a similar definition of          of the 1898 Act included exempt property in
     insolvency. See 1898 Act, § 1(19). Unlike           the calculation of insolvency.
     § 101(32)(A) of the Bankruptcy Code, § 1(19)
512                               300 BANKRUPTCY REPORTER

balance sheet values from historical cost to           these uses sheds any light on the constitu-
present market values.        Second, the              tional limits of the Bankruptcy Clause.
§ 101(32)(A) definition excludes property                The final use of ‘‘insolvency’’ in the
that would otherwise appear on a balance               Bankruptcy Code occurs in § 109(c)(3),
sheet, but that is exempt under § 522 (pro-            which requires a municipality to be insol-
viding exemptions for individual debtors).             vent as a condition of filing a bankruptcy
                                                       case. The meaning of ‘‘insolvency’’ in this
   The insolvency definition in § 101(32)(A)
                                                       provision is entirely different from the bal-
is designed to govern the handful of tech-             ance sheet test,5 and is governed by
nical uses of this term in the Bankruptcy              § 101(32)(C), which states that ‘‘insolvent’’
Code. In fact, ‘‘insolvent’’ is used only ten          means:
times in the entire statute, and in nine of              with reference to a municipality, finan-
those it is used to define narrowly drawn                cial condition such that the municipality
rights under particular statutory provi-                 is—
sions. See § 365 (trustee may assume an                  (i) generally not paying its debts as they
executory contract notwithstanding a de-                 become due unless such debts are the
fault relating to the debtor’s insolvency);              subject of a bona fide dispute; or
§ 525 (protecting a debtor against dis-                  (ii) unable to pay its debts as they be-
criminatory treatment during prepetition                 come due TTTT
insolvency); § 541 (forfeiture based on in-            This is known as the liquidity test for
solvency does not prevent prepetition                  insolvency (also known as the ‘‘equity’’ or
property from becoming property of the                 the ‘‘cash flow’’ test),6 and it is the most
estate); § 543 (court may consider inter-              commonly used definition in the bankrupt-
ests of equity holders of solvent debtor in            cy context.7 This liquidity definition of
determining whether to require a custodi-              insolvency is the only one that has ever
an to turn over property); § 545 (protect-             played a role in qualifying a person as a
ing a debtor from statutory liens predicat-            debtor under United States bankruptcy
ed upon insolvency); § 546 (authorizing                law.
certain reclamation rights to creditors who               [3] It is not uncommon for debtors to
have delivered certain goods to a debtor               be solvent under the balance sheet test,
while insolvent before the bankruptcy pe-              and yet to have severe financial problems.
tition was filed); § 547 (element of cause             This court frequently receives cases, filed
of action for preferential transfer); § 548            under both chapter 7 and chapter 11 and
(element of certain causes of action for               especially under chapter 13 (a reorganiza-
fraudulent transfers); § 553 (condition for            tion chapter for consumers), where the
prohibiting a creditor setoff). None of                debtor is clearly solvent under a balance

5.     Section 101(32)(B) also has a different defi-     such debts become due unless such debts are
     nition of insolvency for a partnership, which       the subject of a bona fide disputeTTTT’’
     is a modified version of the balance sheet test
                                                       7. There are other, more sophisticated mea-
     that takes into account the partners’ separate
                                                         sures of insolvency that are increasingly used
     assets.                                             in complex business transactions. See e.g.,
                                                         Michael J. Epstein, Director/Manager Liability
6.     This definition is also used in § 303(h)(1),      and How to Avoid Furthering Insolvency,
     which authorizes a court to order relief            NABTALK, Summer 2003, at 23, 24. These
     against an involuntary debtor if, ‘‘the debtor      measures of insolvency have not found their
     is generally not paying such debtor’s debts as      way into United States bankruptcy statutes.
                                         IN RE MARSHALL                                              513
                                  Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

sheet test, but has substantial cash flow                is in fact insolvent. This case is illustra-
problems.8 The United States bankruptcy                  tive—litigation over the debtors’ solvency
law is designed to provide relief from cred-             has consumed a large amount of time and
itor pressures for debtors with cash flow                effort, and a determination of the debtors’
difficulties, even where they are clearly                insolvency has not yet been made more
solvent under a balance sheet test.                      than a year after the filing.
   As to reorganizations under chapter 11,                  If a reorganization is held up pending a
there is substantial reason for Congress to              determination of balance sheet insolvency,
decide that a debtor should be eligible                  businesses will rarely be reorganized, and
before the debtor becomes insolvent under                at least some of the reorganization value
a balance sheet test. The prospects for                  (the value of a business as reorganized as
reorganizing a debtor in financial difficulty            opposed to its liquidation value) will inevi-
are much better when the debtor is still                 tably be lost. Indeed, this is the experi-
solvent than after it becomes insolvent.                 ence in countries that require insolvency,
See generally 1 COLLIER ON BANKRUPTCY                    according to a balance sheet test, as a
¶ 1.19[1] (James William Moore ed., 14th                 condition for admission to the bankruptcy
ed.1988) [hereinafter COLLIER] (comment-                 system—businesses are generally not re-
ing on the reorganization provisions of the              organizable, and substantial economic val-
1898 Act, as amended by the Chandler                     ues are lost.9
Act). If a debtor must wait until it be-
                                                            Accordingly, the court finds that the bal-
comes insolvent to invoke the reorganiza-
                                                         ance sheet test is not the appropriate test
tion provisions under the bankruptcy law,
                                                         for insolvency in evaluating Pierce’s consti-
substantial economic values will often be
                                                         tutional challenge in this case. However,
irretrievably lost.    Congress certainly
                                                         assuming that Pierce has implicitly
could legitimately decide that it is best for
                                                         claimed that the liquidity test should also
the economy of the United States to per-
                                                         be applied by the court, the court proceeds
mit solvent debtors to reorganize under
                                                         to consider Pierce’s constitutional chal-
the bankruptcy law to preserve economic
                                                         lenge.
values.
                                                               B.    United States and English
  An additional vice of a balance sheet test
                                                                      Bankruptcy Laws
as a criterion for admission to the bank-
ruptcy system is that substantial time is                   The United States Congress has enacted
consumed in determining whether a debtor                 five bankruptcy laws.10 The first was en-

8.     Some bankruptcy courts also frequently see        10. At the time of the framing of the Constitu-
     chapter 12 cases where the debtor is quite            tion, the terms ‘‘bankruptcy’’ and ‘‘insolven-
     solvent under a balance sheet test. However,          cy’’ were applied differently and had operated
     chapter 12 cases are rare in the Central Dis-         in different systems. Bankruptcy meant the
     trict of California.                                  action against malingering debtors, while in-
                                                           solvency meant relief for the honest but unfor-
9.     The World Bank recommends against the               tunate debtor. See Sturges v. Crowninshield, 4
     use of a balance sheet insolvency test as a           Wheat. 122, 17 U.S. 122, 194–195, 4 L.Ed.
     qualification for bankruptcy. See WORLD               529 (1819) (‘‘[T]he subject [of bankruptcies] is
     BANK, PRINCIPLES AND GUIDELINES FOR EFFECTIVE         divisible in its nature into bankrupt and insol-
     INSOLVENCY AND CREDITOR RIGHTS SYSTEMS ¶ 90           vent laws TTT [A]lthough the two systems have
     (2001). Instead, if an insolvency test is to be       existed apart from each other, there is such a
     adopted in a country, the World Bank recom-           connection between them, as to render it diffi-
     mends the liquidity test—the debtor’s ability         cult to say how far they may be blended
     to pay debts as they come due. See id.                together’’); see also CHARLES WARREN, BANK-
514                            300 BANKRUPTCY REPORTER

acted in 1800 (‘‘the 1800 Act’’),11 and was         revision of English bankruptcy law,19
intended to last only five years. See gen-          which remained in force (with amend-
erally Charles Jordan Tabb, The Histori-            ments) at the time that the United States
cal Evolution of the Bankruptcy Dis-                Constitution was written.
charge, 65 Am. Bankr.L.J. 325, 344–45                 C.    The Constitutional Convention
(1991); BRUCE H. MANN, REPUBLIC OF DEBT-
ORS (2002) [hereinafter MANN]. This act                Before examining the English and Unit-
was repealed in 1803. There was no fur-             ed States statutes, we turn to the constitu-
ther federal bankruptcy law until 1841              tional convention in 1789, to see whether
(‘‘the 1841 Act’’).12 See generally Tabb, at        there is anything in the records of the
349–51. The 1841 Act lasted for an even             convention that might shed light on the
shorter time than the 1800 Act, and was             role of insolvency in the meaning of ‘‘bank-
repealed in 1843. The next bankruptcy               ruptcies’’ in the Bankruptcy Clause.
law was enacted in 1867 (‘‘the 1867 Act’’) 13         The Bankruptcy Clause received little
to deal with economic dislocations result-          discussion in the constitutional convention.
ing from the Civil War. See generally               The bankruptcy issue arose in a discussion
Tabb, at 353–55. This law lasted consider-          of the Full Faith and Credit clause, and
ably longer than its predecessors, and was          drove the constitutional extension of the
repealed in 1878.                                   Full Faith and Credit clause to acts of the
  Congress enacted permanent federal                legislature as well as judicial decisions.
bankruptcy legislation in 1898 (‘‘the 1898          See MANN, at 183; see generally id. at 182–
Act’’).14 This law was substantially revised        87. Because credit, like commerce, was
and expanded by the Chandler Act of                 not limited by state boundaries, the dele-
1938.15 It was replaced with the Bank-              gates recognized that a national system of
ruptcy Code in 1978 (effective October 1,           bankruptcy law was needed to support a
1979).16                                            national credit system upon which com-
                                                    merce depended. See id. at 185–87.
  English law has included bankruptcy
law continuously since 1542, when Parlia-              The only vote against the Bankruptcy
ment enacted the first bankruptcy law.17            Clause was cast by Roger Sherman of
The next major English bankruptcy law               Connecticut. He opposed this provision on
was enacted in 1705.18 In 1732 Parliament           the grounds that bankruptcies were pun-
enacted a comprehensive codification and            ishable by death in some cases in England,

  RUPTCY INUNITED STATES HISTORY 7 (1935) (at the   13. Bankruptcy Act of 1867, ch. 176, 14 Stat.
  time of the adoption of the Constitution, only      517 (1867) (repealed 1878).
  a few states had laws on either the subject of
  bankruptcies or insolvency, Pennsylvania be-      14. Bankruptcy Act of 1898, ch. 541, 30 Stat.
  ing the only state that had both—bankruptcy         544 (1898) (repealed 1978).
  was releasing traders from debts, insolvency a
                                                    15. Chandler Act, ch. 575, 52 Stat. 840 (1938)
  discharge of all persons from prison upon           (repealed 1978).
  surrendering their property to their credi-
  tors).                                            16.   Pub.L. No. 95–598, 92 Stat. 2549 (1978).

11. Bankruptcy Act of 1800, ch. 19, 2 Stat. 19      17. An act against such persons as do make
  (1800) (repealed 1803).                             bankrupts, 34 & 35 Hen. 8, c. 4 (1542).

                                                    18.   4 Anne, c. 17 (1705).
12. Bankruptcy Act of 1841, ch. 9, 5 Stat. 440
  (1841) (repealed 1843).                           19.   5 Geo. 2, c. 30 (1732).
                                      IN RE MARSHALL                                              515
                               Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

and he opposed granting Congress this                 debts, not insolvency, that distinguishes a
power in the United States. See Railway               debtor who is an eligible subject for bank-
Labor Executives’ Ass’n v. Gibbons, 455               ruptcy relief.20
U.S. 457, 472 n. 13, 102 S. Ct. 1169, 71                  Thus the constitutional history gives no
L.Ed.2d 335 (1982) (citing 2 M. FARRAND,              support to the argument that the founders
RECORDS OF THE CONVENTION OF 1787, at 489             intended that bankruptcy relief be limited
(1911)).                                              to insolvent debtors, or that this meaning
  The Federalist Papers, which discuss in             was included in the Bankruptcy Clause.
detail virtually every aspect of the Consti-            D.    History of Insolvency Provisions
tution, make only a single reference to the                       In Bankruptcy Law
Bankruptcy Clause. In Federalist No. 42,
                                                         Having found the evidence from the con-
James Madison wrote:
                                                      stitutional convention unhelpful, we now
  The power of establishing uniform laws
                                                      take a broader look to see what meaning
  of bankruptcy is so intimately connected
                                                      ‘‘bankruptcy’’ was given in relevant legisla-
  with the regulation of commerce, and
                                                      tion on the subject, both before and after
  will prevent so many frauds where the
                                                      the writing of the Constitution. As the
  parties or their property may lie or be
                                                      Supreme Court has told us, ‘‘Probably the
  removed into different States, that the
                                                      most satisfactory approach to the problem
  expediency of it seems not likely to be
                                                      of interpretation here involved [the power
  drawn into question.
                                                      of Congress under the Bankruptcy Clause]
THE FEDERALIST No. 42, at 239 (James                  is to examine it in the light of the acts, and
Madison) (Clinton Rossiter ed., 1961).                the history of the acts, of Congress which
  A few decades later Justice Story (then             have from time to time been passed on the
a professor at Harvard Law School), in his            subjectTTTT’’ Continental Illinois Nat’l
famous Commentaries, stated:                          Bank & Trust. v. Chicago, Rock Island &
  Perhaps, as satisfactory a description of           Pac. Ry. Co., 294 U.S. 648, 670, 55 S.Ct.
  a bankrupt law as can be framed is, that            595, 79 L. Ed. 1110 (1935).
  it is a law for the benefit and relief of              Historically, bankruptcy laws have not
  creditors and their debtors, in cases in            been conceived in the United States or
  which the latter are unable or unwilling            England for the protection of debtors,
  to pay their debts. And a law on the                whether honest or dishonest. Bankruptcy
  subject of bankruptcies, in the sense of            laws were enacted principally for the bene-
  the constitution, is a law making provi-            fit of trade and for the protection of credi-
  sions for cases of persons failing to pay           tors, to give them more powers acting in
  their debts.                                        concert to collect debts than they pos-
3 JOSEPH STORY, COMMENTARIES ON THE CON-              sessed individually. See, e.g., 2 WILLIAM
STITUTION OF THE UNITED STATES § 1108                 BLACKSTONE, COMMENTARIES *472 [hereinaf-
n.25. (1833) [hereinafter STORY]. In Jus-             ter BLACKSTONE]. Indeed, some of the
tice Story’s view, it is the failure to pay           worst abuses were committed by debtors

20. See also STORY, supra, § 1101 (‘‘it may be          and, on the other hand, to relieve unfortunate
  stated, that the general object of all bankrupt       and honest debtors from perpetual bondage to
  and insolvent laws is, on the one hand, to            their creditors, either in the shape of unlimit-
  secure to creditors an appropriation of the           ed imprisonment to coerce payment of their
  property of their debtors pro tanto to the            debts, or of an absolute right to appropriate
  discharge of their debts, whenever the latter         and monopolize all their future earnings.’’)
  are unable to discharge the whole amount;
516                            300 BANKRUPTCY REPORTER

who refused to pay their debts even                             1. Voluntary Cases
though they were solvent and eminently
                                                      The 1841 Act was the first United States
capable of paying. The principal benefit
                                                    law to authorize a debtor to file a volun-
to debtors was the avoidance of debtors’
                                                    tary bankruptcy petition.22 Neither the
prison or the discharge therefrom. See id.
                                                    1800 Act nor the English predecessors
   An analysis of the history of bankruptcy         permitted a voluntary bankruptcy filing.
laws in the United States, and of their             The 1841 Act required that a bankruptcy
predecessors in England, shows that the             petition be verified under oath and plead
Bankruptcy Clause has never been tied to            that the debtor is ‘‘unable to meet [his or
balance sheet insolvency, or insolvency of          her] debts and engagements TTTT’’
any other type. No United States bank-                 This was only a pleading requirement.
ruptcy act, and none of its English prede-          Neither the parties nor the court had the
cessors, has ever required balance sheet            authority to inquire into whether a debtor
insolvency as a condition of either volun-          was in fact insolvent. See, e.g., Ex parte
tary or involuntary bankruptcy. Of the              Hull, 12 F. Cas. 853, 856 (S.D.N.Y.1842).
five United States bankruptcy laws and its          Indeed, the court was required to declare
three principal English predecessors, only          a voluntary petitioner bankrupt on the
the 1841 and the 1867 Acts required a               debtor’s sworn representation of inability
voluntary debtor to plead that the debtor           to pay his or her debts, irrespective of the
was insolvent in a liquidity sense, i.e. that       debtor’s actual wealth and financial condi-
the debtor was unable to pay his or her             tion. See id.
debts as they became due, and such a
pleading was unchallengeable.                         A debtor filing a voluntary bankruptcy
                                                    petition under the 1867 Act was similarly
   For involuntary bankruptcy cases, insol-         required to ‘‘set forth TTT his inability to
vency began to creep into United States             pay all his debts in full TTTT’’ See id. § 11.
bankruptcy law in the 1867 Act as an                Immediately upon filing a petition stating
element in one or more ‘‘acts of bankrupt-          the debtor’s inability to pay his or her
cy,’’ any one of which would support an             debts in full and the debtor’s willingness to
involuntary bankruptcy petition. Howev-             surrender his or her estate and effects for
er, insolvency did not become the chief             the benefit of creditors and a desire to
basis for an involuntary petition until the         obtain the benefits of the bankruptcy law,
adoption of the Bankruptcy Code in 1978.            the debtor was entitled to be adjudicated a
Even now, under the Bankruptcy Code,                bankrupt. See, e.g., In re Patterson, 18
the insolvency test for an involuntary peti-        F.Cas. 1315, 1317 (S.D.N.Y.1867). No fur-
tion is the liquidity test, and not the bal-        ther inquiry as to the debtor’s ability to
ance sheet test for insolvency.21                   pay was permitted. See id. at 1318.

21. But see Thomas E. Plank, Bankruptcy and           at that time. Furthermore, even Professor
  Federalism, 71 FORD. L. REV. 1063 (2002),           Plank does not contend that bankruptcy
  where he argues that ‘‘bankruptcy’’ inherently      meant balance sheet insolvency in 1789.
  meant insolvency in the eighteenth century.
  He bases this conclusion principally on the       22. However, it appears that debtors frequent-
  examination of several eighteenth century dic-      ly arranged with friendly creditors to file es-
  tionaries, and ignores the legal history of         sentially voluntary bankruptcy cases under
  bankruptcy law. See id. at 1076–77. The             the 1800 bankruptcy law. See MANN, supra, at
  court finds this approach unpersuasive, in
                                                      228–39.
  light of the contrary history of bankruptcy law
                                   IN RE MARSHALL                                         517
                            Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

   The 1898 Act provided that a voluntary          requisite of taking advantage of bankrupt-
debtor could file a bankruptcy case with no        cy. While two of the nineteenth century
requirement of insolvency. See id. § 4(a).         acts required a debtor to plead inability to
Unlike the 1841 and 1867 Acts, the 1898            pay his or her debts as they came due, no
Act did not require a debtor to plead ina-         creditor was permitted to contest this con-
bility to pay his or her debts as they came        tention.
due. Collier explains § 4(a) as follows:                        2. Involuntary Cases
   A voluntary petitioner may be solvent or
                                                     Similarly, insolvency has never been re-
   insolvent, and his motive is generally
                                                   quired for a debtor to become an involun-
   immaterial except that the petition may
                                                   tary bankrupt, either under United States
   not be filed for purposes of perpetrating
                                                   bankruptcy law or under its English pre-
   a fraud. There is nothing in the Act
                                                   decessors.
   which requires the person to be insol-
   vent, and there seems to be no reason              The English bankruptcy laws prior to
   why, if a solvent person cares to have          the United States revolution uniformly
   his property distributed among his cred-        provided only for involuntary bankruptcy.
   itors through bankruptcy proceedings,           Uniformly, also, these laws made no provi-
   he should not be allowed to do so TTTT It       sion for insolvency as a condition of the
   will not be necessary to allege insolven-       filing of a petition in bankruptcy against a
   cy in the petition, nor prove it, to pro-       debtor. Instead, these statutes based the
   cure an adjudication [of bankruptcy].           right to file an involuntary bankruptcy pe-
1 COLLIER ¶ 4.03 (interpreting bankruptcy          tition on what became known as a debtor’s
law as it existed before the Bankruptcy            ‘‘acts of bankruptcy.’’ Any single act of
Code took effect in 1979); see Caplin v.           bankruptcy, under each of these laws, was
Marine Midland Grace Trust Co., 406                sufficient to support an involuntary bank-
U.S. 416, 423, 92 S. Ct. 1678, 32 L.Ed.2d           ruptcy petition. The qualifying acts in-
195 (1972) (‘‘Chapter X proceedings [under         cluded such conduct as refusing to pay
the 1898 Act as amended in 1938] are not           creditors, departing the country, staying in
limited to insolvent corporations but are          one’s house (to avoid service of process),
open to those corporations that are solvent        taking sanctuary, and permitting himself
in the bankruptcy (asset-liability) sense          or herself to be arrested (presumably for
but are unable to meet their obligations as        not paying debts). In addition, the credi-
they mature’’) (citing United States v. Key,       tor was required to show that the debtor
397 U.S. 322, 329, 90 S. Ct. 1049, 25               took such an action with the intent to
L.Ed.2d 340 (1970)).                               hinder or delay his or her creditors.
   After arising in the 1841 Act as a plead-         Blackstone’s COMMENTARIES ON THE LAWS
ing requirement, insolvency of any kind            OF ENGLAND, published in 1765 to 1769, are
disappeared entirely in 1878 (the date of          in accord with the English laws. Black-
repeal of the 1867 Act) as a condition of          stone wrote extensively in his COMMENTAR-
filing a voluntary bankruptcy petition in          IES about bankruptcy law. However, like

the United States.                                 the English bankruptcy law of his time,
  Thus the statutory history shows that no         Blackstone makes no reference to insol-
United States bankruptcy law has ever              vency as a qualification for bankruptcy.
required a voluntary debtor to show that           See 2 BLACKSTONE, supra, at *471–88.
he or she was in fact insolvent, under a             Blackstone’s COMMENTARIES were well
balance sheet test or otherwise, as a pre-         known to the writers of the Constitution
518                            300 BANKRUPTCY REPORTER

and to early United States judges and               See 1898 Act, § 3(a). One act of bankrupt-
lawyers. See Hanover Nat. Bank v.                   cy under this law was the preferential
Moyses, 186 U.S. 181, 187, 22 S. Ct. 857, 46         transfer, brought forward from the 1867
L. Ed. 1113 (1902); Nelson v. Carland, 42            Act, which continued to require that the
U.S. (1 How.) 265, 270–73, 11 L. Ed. 126             debtor be insolvent. See id. § 3(a)(2).
(1843) (dissenting opinion of Justice Ca-           Another act of bankruptcy supporting an
tron).                                              involuntary petition occurred when the
                                                    debtor, while insolvent, suffered or permit-
   In the United States, the first two bank-        ted a creditor to obtain a preference
ruptcy acts, the 1800 Act and 1841 Act              through legal proceedings, and who fur-
permitted a creditor to file an involuntary         ther failed to discharge the preference at
bankruptcy petition against a debtor only           least five days before a sale or final dispo-
if the debtor had committed an act of               sition of any property affected by the pref-
bankruptcy. The 1800 Act specified ten              erence. See id. § 3(a)(3). In addition, it
qualifying acts of bankruptcy, which large-         was an act of bankruptcy to admit in writ-
ly mirrored those in the English statutes.          ing the inability to pay debts and being
See 1800 Act, § 1. The 1841 Act reduced to          willing to be adjudged a bankrupt. See id.
five the qualifying acts of bankruptcy. See         § 3(a)(5). Furthermore, with respect to a
1841 Act, § 1. Like their predecessor En-           fraudulent transfer, the debtor was given
glish laws, none of the qualifying acts of          an affirmative defense of solvency. See id.
bankruptcy in either the 1800 or the 1841           § 3(c); see generally 1 COLLIER ¶ 1.19[1].
Acts included insolvency as an element or
                                                       Congress amended the fourth act of
factor to be considered in making an adju-
                                                    bankruptcy (making an assignment for the
dication of bankruptcy.
                                                    benefit of creditors) in 1903 to include
   The 1867 Act was the first to introduce          having a receiver or trustee take charge of
insolvency as an element in any of the acts         the debtor’s property while the debtor was
of bankruptcy. Of the nine statutory acts           insolvent. See Act of February 5, 1903, 32
of bankruptcy 23 that could support an in-          Stat. 797; see also In re Valentine Bohl
voluntary petition under the 1867 Act, one          Co., 224 F. 685 (2d Cir.1915) (dismissing
was the granting of a preferential transfer,        involuntary petition on three grounds: the
‘‘being bankrupt or insolvent, or in con-           debtor was balance sheet solvent when the
templation of bankruptcy or insolvency              state court receiver was appointed, it was
TTTTT’’ See 1867 Act, § 39. None of the             impossible to determine whether the dis-
other acts of bankruptcy in the 1867 Act            trict court receivership was ordered ‘‘be-
involved the insolvency of the debtor.              cause of [balance sheet] insolvency’’ (as the
                                                    clause required for an involuntary receiv-
  In the 1898 Act insolvency began to take          ership), and there was no evidence of a
a prominent role in the acts of bankruptcy          fraudulent transfer). In 1926, Congress
that could support an involuntary petition.         added yet a fifth act of bankruptcy involv-
The original version of the 1898 Act de-            ing the debtor’s insolvency to the 1898 Act:
creased to five the number of bankruptcy            suffering, while insolvent, a lien that was
acts, three of which involved insolvency.           not vacated or discharged within thirty

23. Case law under the 1867 Act treated a            King, 108 U.S. 379, 385, 2 S. Ct. 765, 27 L.Ed.
  general assignment for the benefit of creditors    760 (1883). This act of bankruptcy also did
  as a tenth act of bankruptcy. See Boese v.         not require the debtor’s insolvency.
                                    IN RE MARSHALL                                            519
                             Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

days thereafter. See Act of May 27, 1926,           standing a debtor’s solvency. The Code
44 Stat. 662.                                       permits a court to order relief against the
    In the 1898 Act (but not previously),           debtor if, within 120 days of the filing of
‘‘insolvency’’ was defined. This definition         the petition, a custodian, receiver or agent
adopted the modified balance sheet test             is appointed or takes possession of less
that now appears in § 101(32)(A). See               than substantially all of the debtor’s prop-
1898 Act § 1(19); see also American Nat’l           erty to enforce a lien. See § 303(h)(2).
Bank & Trust Co. v. Bone, 333 F.2d 984,                However, virtually every involuntary pe-
986–87 (8th Cir.1964) (utilizing a balance          tition filed under the Bankruptcy Code
sheet to show insolvency); Syracuse Engi-           relies on § 303(h)(1),24 which authorizes an
neering Co. v. Haight, 110 F.2d 468, 471            involuntary case where the debtor ‘‘is gen-
(2d Cir.1940). This definition was a                erally not paying such debtor’s debts as
change from the previous understanding of           such debts become due unless such debts
solvency for the purposes of bankruptcy             are the subject of a bona fide dispute
law. While the previous statutes con-               TTTT’’ Thus insolvency is now a major fac-
tained no definition of solvency, it was
                                                    tor in an involuntary bankruptcy case.
generally understood that the liquidity test
                                                    But it is the liquidity definition of insolven-
applied in the bankruptcy context. See gen-
                                                    cy that controls, and not the balance sheet
erally 1 COLLIER ¶ 1.19[1].
                                                    definition on which Pierce relies.
   The Chandler Act in 1938, which sub-
                                                       The court concludes from the foregoing
stantially amended the 1898 Act, expanded
                                                    history that, at the time that the Constitu-
the scope of the 1903 addition by applying
it both when the debtor was insolvent (on a         tion was written, insolvency of any kind
modified balance sheet basis) and when the          was utterly unknown as a requirement for
debtor was unable to pay his or her debts           filing a bankruptcy case. Thus it is not
as they matured (the liquidity definition).         credible that the framers of the Constitu-
The Chandler Act also revised the various           tion thought that a requirement of insol-
reorganization provisions added to the              vency was included in the concept of
1898 Act beginning in 1933. For these               bankruptcy that found its way into the
provisions (the predecessors of chapter             Bankruptcy Clause. Furthermore, insol-
11), the liquidity definition of insolvency         vency has never been a statutory require-
was ordinarily invoked.                             ment for either voluntary or involuntary
                                                    bankruptcy under United States bank-
   Throughout the career of the 1898 Act
                                                    ruptcy law. Finally, balance sheet insol-
(which was repealed effective September
                                                    vency was altogether unknown for bank-
30, 1979), making a general assignment for
                                                    ruptcy purposes in the United States until
the benefit of creditors was an act of bank-
                                                    1898.
ruptcy that did not require the insolvency
of the debtor. See id. § 3(a)(4).                          E. Watershed Developments
                                                             in Bankruptcy Concepts
  The Bankruptcy Code, while reducing to
two the acts of bankruptcy that can sup-              The development of bankruptcy law did
port an involuntary petition, continues to          not end with the writing of the Bankruptcy
permit an involuntary bankruptcy notwith-           Clause in the United States Constitution in

24. As a bankruptcy judge for nearly twenty           involuntary bankruptcy petitions. I can re-
  years, I have handled nearly a hundred thou-        call only one that probably was based on
  sand bankruptcy cases. Perhaps two hun-             § 303(h)(2).
  dred of these cases have commenced with
520                         300 BANKRUPTCY REPORTER

1787. There are three watershed develop-          Each of these provisions constituted a
ments in United States bankruptcy law           landmark change in bankruptcy law from
since that date.                                that known in 1787 when the Bankruptcy
   The first major development, which was       Clause was written into the Constitution.
introduced in the 1841 Act, was the author-     In the words of the Supreme Court itself,
ization for a debtor to file a voluntary        these extensions of bankruptcy law were of
bankruptcy case without waiting for a           a ‘‘fundamental and radically progressive
creditor to file an involuntary petition        nature.’’ Louisville Joint Stock Land
against the debtor. Justice Catron, sitting     Bank v. Radford, 295 U.S. 555, 588, 55
on circuit in the district of Missouri, found   S.Ct. 854, 79 L. Ed. 1593 (1935) (quoting
this provision constitutional in In re Klein,   Continental Illinois, 294 U.S. at 671, 55
42 U.S. 277, 1 How. 277, 11 L. Ed. 275, 14 S. Ct. 595). Nonetheless, the Supreme
F.Cas. 716, 718 (1843), reported in a note      Court found that each of these develop-
to Nelson v. Carland, 42 U.S. (1 How.)          ments comes within the ambit of the Bank-
265, 277, 11 L. Ed. 126 (1843). The Su-          ruptcy Power, and thus is constitutional.
preme Court cited Klein with approval on        Radford, 295 U.S. at 587–88, 55 S. Ct. 854;
this issue in Hanover Nat’l Bank v. Moys-       Continental Illinois, 294 U.S. at 671, 55
es, 186 U.S. 181, 186, 22 S. Ct. 857, 46 S. Ct. 595.
L.Ed. 1113 (1902).
                                                   More generally, the Supreme Court has
   The second landmark major develop-
                                                very recently stated that the Constitution
ment, also adopted in the 1841 Act, was
                                                should not be restricted to a particular
the extension of the bankruptcy law to
                                                generation’s interpretation of the Constitu-
individuals who are not traders. The Su-
                                                tion: ‘‘As the Constitution endures, per-
preme Court approved this development
                                                sons in every generation can invoke its
also in Moyses, 186 U.S. at 186, 22 S.Ct.
                                                principles in their own search for greater
857, again relying on Klein.
                                                freedom.’’ Lawrence v. Texas, ––– U.S.
   The third major landmark development         ––––, 123 S. Ct. 2472, 2484, 156 L. Ed. 2d 508
was the addition of reorganization as a         (2003) (finding due process violation in
mode of bankruptcy authorized under the         Texas statute prohibiting same-sex sod-
Bankruptcy Clause. This first reorganiza-       omy).
tion provision appeared in United States
law in the Act of March 3, 1933, which was        In contrast to these landmark bankrupt-
signed by President Hoover on his last day      cy law changes, the filing of a bankruptcy
in office.25 The Supreme Court validated        case by or with respect to a solvent debtor
the constitutionality of reorganization un-     has always been permitted under bank-
der the Bankruptcy Clause in Continental        ruptcy law, both under every bankruptcy
Illinois Nat. Bank & Trust Co. v. Chicago,      law enacted in the United States and un-
R.I. & P. Ry., 294 U.S. 648, 668, 55 S.Ct.      der every prior law enacted in England.
595, 79 L. Ed. 1110 (1935) (railroad reorga-          F.   Supreme Court Case Law
nization under § 77 of the 1898 Act as
amended in 1933); accord, United States            Supreme Court case law likewise gives
v. Bekins (In re Lindsay–Strathmore Irri-       no support to the thesis that, as a constitu-
gation Dist.), 304 U.S. 27, 47, 58 S. Ct. 811,   tional matter, congressional power to pro-
82 L. Ed. 1137 (1938).                           vide bankruptcy protection must be limited

25. The various reorganization provisions en-    were substantially revised in the Chandler Act
  acted over several years beginning in 1933     of 1938.
                                    IN RE MARSHALL                                            521
                             Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

to those who are insolvent, whether under           plenary power to Congress over the whole
a balance sheet test or otherwise.26 Even           subject of ‘bankruptcies,’ and did not limit
if the English bankruptcy law in effect in          it by the language [that they] used.’’)
1787 had limited bankruptcy to debtors                 The core of the federal bankruptcy pow-
who satisfied an insolvency test, this would        er, according to the Supreme Court, is
not be determinative in this case more              ‘‘the restructuring of debtor-creditor rela-
than two centuries later.                           tions TTTT’’ Northern Pipeline Construc-
         1.    Expansive Supreme                    tion Co. v. Marathon Pipe Line Co., 458
              Court Statements                      U.S. 50, 71, 102 S. Ct. 2858, 73 L. Ed. 2d 598
  The United States Supreme Court has               (1982) (plurality opinion). Beyond this
consistently taken an expansive view of the         core, as a general rule, the Supreme Court
Bankruptcy Powers, to permit their appli-           has said, ‘‘the subject of bankruptcies is
cation in the context of the enormous ex-           incapable of final definition.’’ Gibbons, 455
pansion of the economy since 1787 and the           U.S. at 466, 102 S. Ct. 1169; accord Wright
correspondingly great elaboration of the            v. Union Central, 304 U.S. at 513, 58 S.Ct.
legal structures supporting it:                     1025; Continental Illinois, 294 U.S. at
  [T]he notion that the framers of the              669–70, 55 S. Ct. 595 (‘‘[t]hose limitations
  Constitution, by the bankruptcy clause,           have never been explicitly defined, and any
  intended to limit the power of Congress           attempt to do so now would result in little
  to the then existing English law and              more than a paraphrase of the language of
  practice upon the subject long since has          the Constitution without advancing far to-
  been dispelledTTTT Whether a clause in            ward its full meaning.’’). In Gibbons the
  the Constitution is to be restricted by           Supreme Court stated:
  the rules of the English law as they                 [W]e have previously defined ‘‘bankrupt-
  existed when the Constitution was                    cy’’ as the subject of the relations be-
  adopted depends upon the terms or the                tween an insolvent or nonpaying or
  nature of the particular clause in ques-             fraudulent debtor and his creditors, ex-
  tion.                                                tending to his and their relief. Con-
Continental Illinois, at 668, 55 S. Ct. 595.            gress’ power under the Bankruptcy
The Supreme Court has repeatedly and                   Clause contemplates an adjustment of a
consistently held that the Bankruptcy                  failing debtor’s obligations. This power
Powers are not limited to the meaning of               extends to all cases where the law
the term ‘‘bankruptcy’’ at the time of the             causes to be distributed, the property of
formulation of the Constitution. See, e.g.,            the debtor among his creditors. It in-
Wright v. Union Central Life Ins. Co., 304             cludes the power to discharge the debtor
U.S. 502, 58 S. Ct. 1025, 82 L. Ed. 1490                 from his contracts and legal liabilities, as
(1938); Adair v. Bank of America NTSA,                 well as to distribute his property. The
303 U.S. 350, 354, 58 S. Ct. 594, 82 L.Ed.              grant to Congress involves the power to
889 (1938); Hanover National Bank, at                  impair the obligation of contracts, and
187, 22 S. Ct. 857 (‘‘The framers of the                this the States were forbidden to do.
Constitution were familiar with Black-              Gibbons, 455 U.S. at 466, 102 S. Ct. 1169
stone’s Commentaries, and with the bank-            (emphasis added, quotations and citations
rupt laws of England, yet they granted              omitted).

26. The court has found no relevant case law          Bankruptcy Appellate Panel.
  from the Ninth Circuit or the Ninth Circuit
522                         300 BANKRUPTCY REPORTER

   In Moyses, the Court added that the         (1991), to state that one Congressional
debtor ‘‘may be, in fact, fraudulent, and      purpose of chapter 11 is ‘‘permitting busi-
able and unwilling to pay his debts; but       ness debtors to reorganize and restructure
the law takes him at his word, and makes       their debts in order to revive the debtors’
effectual provision, not only by civil, but    businesses and thereby preserve jobs and
even by criminal, process, to effectuate his   protect investors.’’ Id. at 163, 111 S.Ct.
alleged intent of giving up all his proper-    2197. In addition, the Court said in that
ty.’’ Id. at 861. Thus the ‘‘subject of        case:
bankruptcies’’ includes the power to dis-        Chapter 11 also embodies the general
charge a debtor from contracts and legal         Code policy of maximizing the value of
liabilities, and to distribute the debtor’s      the bankruptcy estate. Under certain
property to creditors. Id. at 188, 22 S.Ct.      circumstances a consumer debtor’s es-
857 (upholding the constitutionality of the      tate will be worth more if reorganized
Bankruptcy Act of 1898 insofar as it au-         under Chapter 11 than if liquidated un-
thorized the discharge of a judgment on a        der Chapter 7. Allowing such a debtor to
promissory note). The Court in Moyses            proceed under Chapter 11 serves the
also stated: ‘‘all intermediate legislation,     congressional purpose of deriving as
affecting substance and form, but tending        much value as possible from the debtor’s
to further the great end of the subject,—        estate.
distribution and discharge,—are in the         Id. The Court used this rationale in Toibb
competency and discretion of Congress.’’       to hold that individual consumers, like the
Id. at 186, 22 S. Ct. 857 (quoting In re        debtors in this case, are entitled to take
Klein, 14 F.Cas. No. 716 (D.Mo.1843), re-      advantage of chapter 11 to reorganize
printed in a note to Nelson v. Carland, 42     their financial affairs, even though they
U.S. (1 How.) 265, 277, 11 L. Ed. 126, 130      may have no business to reorganize. See
(1843)).                                       id. at 160–66, 111 S. Ct. 2197.
   The Court further stated in Continental        Similarly, in Bank of America NTSA v.
Illinois that bankruptcy ‘‘may be con-         203 N. LaSalle St. P’ship, 526 U.S. 434,
strued to include a debtor who, although       119 S. Ct. 1411, 143 L. Ed. 2d 607 (1999), the
unable to pay promptly, may be able to         Court stated that, ‘‘the two recognized pol-
pay if time to do so be sufficiently extend-   icies underlying Chapter 11[are] preserv-
ed,’’ i.e., a solvent debtor. Id. at 668, 55   ing going concerns and maximizing proper-
S.Ct. 595. There is no reason to believe       ty available to satisfy creditors TTTT’’ Id. at
that the bankruptcy laws of the nineteenth     453, 119 S. Ct. 1411.
century exhausted congressional power un-         The debtors in this case at least qualify
der the Bankruptcy Clause. See id.             as ‘‘nonpaying’’ debtors, in the terminology
   The Supreme Court has also spoken on        of Gibbons, and they certainly appeared to
the essential purposes of chapter 11, under    be failing when they filed their case. If
which the debtors filed this case. In          they enjoy a bonanza from their chapter 11
N.L.R.B. v. Bildisco & Bildisco, 465 U.S.          plan, it will result from Pierce’s refusal to
513, 527, 104 S. Ct. 1188, 79 L. Ed. 2d 482       file a claim on his $12 million Texas judg-
(1984), the Court stated that the policy of    ment.
chapter 11 is to permit the successful reha-     Furthermore, the court finds that the
bilitation of debtors. The Court elaborat-     chapter 11 plan in this case maximizes the
ed this policy in Toibb v. Radloff, 501 U.S.   property available to satisfy creditors. At
157, 111 S. Ct. 2197, 115 L. Ed. 2d 145           the time of filing, it was not at all clear
                                       IN RE MARSHALL                                              523
                                Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

that the debtors could pay their creditors             plicitly applying to a single (albeit large)
in full. The plan settles this issue.                  debtor, and no other similarly situated
      2. Cases Finding Bankruptcy                      debtors, unconstitutionally violated the
       Provisions Unconstitutional                     uniformity requirement of the Bankruptcy
                                                       Clause. A bankruptcy law, the Supreme
   There are very few Supreme Court
                                                       Court held, must at least apply uniformly
cases holding that Congress has exceeded
                                                       to a defined class of debtors. See id. at
its constitutional powers in legislating on
                                                       473, 102 S. Ct. 1169. But see Regional
the subject of bankruptcy. In light of the
                                                       Rail Reorganization Cases, 419 U.S. 102,
foregoing expansive descriptions of Con-
                                                       158–60, 95 S. Ct. 335, 42 L. Ed. 2d 320 (1974)
gress’ powers under the Bankruptcy
                                                       (holding that bankruptcy statute governing
Clause, these cases shed little light on any
                                                       railroad reorganization in one region did
relevant limitations on Congress’ Bank-
                                                       not violate Uniformity Clause when no
ruptcy Powers.
                                                       railroad reorganization was pending out-
   Perhaps the best known case holding                 side that region). Similarly, the Ninth
unconstitutional a provision of bankruptcy             Circuit has held that § 317(a) of the Judi-
law is Louisville Joint Stock Land Bank v.             cial Improvements Act of 1990, which au-
Radford, 295 U.S. 555, 55 S. Ct. 854, 79                thorizes bankruptcy administrators (em-
L.Ed. 1593 (1935), which invalidated the               ployed by the judicial branch) to substitute
Frazier–Lemke addition to the 1898 Act                 for United States Trustees (employed in
that permitted a farmer to pay rent in-                the Department of Justice) in two states
stead of mortgage payments for five years              alone (North Carolina and Alabama) vio-
and then retire the mortgage by paying                 lates the Uniformity Clause. See St. An-
only the (likely reduced) fair market value            gelo v. Victoria Farms, Inc., 38 F.3d 1525,
of the property. The principal vice of this            1531–32 (9th Cir.1994).
provision, the Supreme Court found, was                   In Granfinanciera, S.A. v. Nordberg,
that Congress applied it only to mortgages             492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed. 2d 26
existing on the date of enactment, and thus            (1989), the Supreme Court held that the
it constituted a taking of existing property           bankruptcy power did not permit Congress
rights of mortgage holders in violation of             to eliminate a party’s Seventh Amendment
the Just Compensation clause of the Fifth              jury trial right by relabeling the cause of
Amendment.27 See id. at 589–602, 55 S.Ct.              action and assigning it to a specialized
854.                                                   court in equity. Id. at 61, 109 S. Ct. 2782.
  In Railway Labor Executives’ Ass’n v.                Also well known is Northern Pipeline Con-
Gibbons, 455 U.S. 457, 469–73, 102 S.Ct.               struction Co. v. Marathon Pipe Line Co.,
1169, 71 L. Ed. 2d 335 (1982), the Supreme               458 U.S. 50, 102 S. Ct. 2858 (1982), where
Court held that bankruptcy legislation ex-             the Supreme Court found in 1982 that the

27. See also United States v. Security Industrial        actment. See id. at 82, 103 S. Ct. 407. But
  Bank, 459 U.S. 70, 103 S. Ct. 407, 74 L.Ed.2d           see Webber v. Credithrift (In re Webber), 674
  235 (1982), where the Supreme Court con-               F.2d 796 (9th Cir.1982), in which the Ninth
  strued narrowly the provision in § 522(f) that         Circuit held that a debtor may take advantage
  permits a debtor to avoid the fixing of a lien         of § 522(f) to avoid the fixing of a lien on an
  on an interest of the debtor in property, to the       interest in property that impaired an exemp-
  extent that the lien impairs an exemption.
                                                         tion, where the lien had been fixed before the
  The Court held that, to avoid a likely violation
                                                         effective date of the Bankruptcy Code (and
  of the Just Compensation Clause of the Fifth
  Amendment, this provision must not permit              § 522(f)) but after the enactment of the Code.
  the avoidance of liens existing before its en-         See id. at 803–04.
524                         300 BANKRUPTCY REPORTER

Bankruptcy Clause did not authorize Con-              G. Substantive Due Process
gress to grant bankruptcy jurisdiction to
                                                   Pierce contends that Howard’s bank-
judges lacking Article III tenure.
                                                ruptcy case deprives him of his substantive
   There are also very few lower court          due process rights, thereby invoking ‘‘dor-
decisions finding a bankruptcy law provi-       mant’’ substantive economic due process
sion unconstitutional. There is one con-        rights that have disappeared from Su-
temporary example.          A battle rages      preme Court jurisprudence since the
among lower courts today on whether             1930’s. The Fifth Amendment provides, in
rights clearly legislated under the Bank-       relevant part, ‘‘nor shall any person TTT be
ruptcy Clause can be enforced under             deprived of life, liberty or property, with-
§ 106(a) in federal court against state gov-    out due process of law TTTT’’ Under this
ernments in light of the Eleventh Amend-        theory, the Fifth Amendment is a limita-
ment (constitutionalizing state sovereign       tion on the scope of ‘‘the subject of bank-
immunity) and case law thereunder. In           ruptcies.’’
Hood v. Tennessee Student Assistance               Recent Supreme Court decisions make it
Corp. (In re Hood), 319 F.3d 755, 761–68        clear that substantive due process is alive
(6th Cir.), cert. granted, ––– U.S. ––––, 124   and well in its jurisprudence, insofar as it
S.Ct. 45, 156 L. Ed. 2d 703 (2003), the Sixth     concerns individual rights and liberties.
Circuit held that the Bankruptcy Clause         See, e.g., Lawrence v. Texas, ––– U.S.
authorized Congress, notwithstanding the        ––––, 123 S. Ct. 2472, 2484, 156 L. Ed. 2d 508
Eleventh Amendment, to abrogate state           (2003) (finding due process violation in
sovereign immunity in bankruptcy mat-           Texas statute prohibiting same-sex sod-
ters. In contrast, the following circuit        omy). In contrast, substantive economic
court decisions have held that the Elev-        due process remains sound asleep in Su-
enth Amendment prevents Congress from           preme Court jurisprudence. Thus, entire-
abrogating state sovereign immunity in          ly apart from the particular controversy
bankruptcy matters: Nelson v. La Crosse         before this court, Pierce faces a steep up-
County Dist. Attorney (In re Nelson), 301       hill climb to invoke substantive economic
F.3d 820, 832 (7th Cir.2002); Mitchell v.       due process.
Franchise Tax Bd. (In re Mitchell), 209
F.3d 1111, 1121 (9th Cir.2000); Sacred             Apparently the only Supreme Court
Heart Hosp. v. Pennsylvania (In re Sa-          case addressing substantive due process
cred Heart Hosp.), 133 F.3d 237, 243 (3d        rights in the bankruptcy context is Canada
Cir.1998); Department of Transportation         Southern Ry. v. Gebhard, 109 U.S. 527, 3
and Development v. PNL Asset Mgmt. Co.          S.Ct. 363, 27 L. Ed. 1020 (1883), where
LLC (In re Fernandez), 123 F.3d 241, 243        New York bondholders challenged a Cana-
(5th Cir.), amended by 130 F.3d 1138, 1139      dian railroad ‘‘scheme of arrangement’’
(5th Cir.1997); Schlossberg v. Maryland         specially authorized by Canadian statute.
(In re Creative Goldsmiths), 119 F.3d           The bondholders had not participated in
1140, 1145–46 (4th Cir.1997).                   the Canadian proceeding. The Court
                                                found that the scheme was ‘‘no more than
  This case today does not require the          is done in bankruptcy’’ in the United
court to determine the limits of the Bank-      States, and thus that the scheme should be
ruptcy Powers granted to the federal gov-       enforced in a United States court against
ernment in the Constitution. Accordingly,       all creditors. See id. at 537–40, 3 S.Ct.
the court leaves this issue to another day.     363. The Supreme Court rejected the
                                    IN RE MARSHALL                                         525
                             Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

substantive due process challenge to the            have planted mutual distrust in the breasts
arrangement. See id. at 537, 3 S. Ct. 363.           of all classes of citizens, and have occa-
  Procedural due process rights under the           sioned an almost universal prostration of
Fifth Amendment clearly apply in the                morals.’’ The states, because they were
bankruptcy context. In Hanover Nat.                 sovereign, possessed broad power to dis-
Bank v. Moyses, 186 U.S. 181, 187, 22               charge debts and contractual obligations.
S.Ct. 857, 46 L. Ed. 1113 (1902), for exam-             What has happened to this power? The
ple, the Supreme Court found that the               grand bargain of 1787 was that states sur-
notice requirements of the Fifth Amend-             rendered it to the new federal government
ment Due Process Clause applied and                 in exchange for the checks and balances of
were satisfied. The Court rejected the              a federal system that would restrain the
contention that personal notice of the filing       new national legislature from unwise debt
was required. The Court found that bank-            forgiveness. Moyses, 186 U.S. at 187, 22
ruptcy proceedings are, generally speak-            S.Ct. 857. Thus, the grant of power to
ing, in the nature of proceedings In rem,           Congress over the ‘‘subject of bankrupt-
for which notice by publication and mail            cies’’ in Article I, Section 8 is balanced
satisfy due process requirements. Pierce            with the prohibition in Article I, Section
does not complain of procedural due pro-            10, forbidding states from impairing the
cess violations in this case.                       obligation of contracts. The power to dis-
   [4] The court finds it unnecessary to            charge debts and contractual obligations
explore in detail the constitutional conse-         was not extinguished: it was surrendered
quences of bankruptcy legislation that falls        to the federal government. See id.
outside the Bankruptcy Powers of the                   [5–7] There is a significant difference,
Constitution. If this case were to fall out-        with respect to the Bankruptcy Power,
side the scope of the Bankruptcy Clause,            between property interests and contract
the court assumes without deciding that             rights. See Webber v. Credithrift (In re
the law would violate some constitutional           Webber), 674 F.2d 796, 802 (9th Cir.1982).
provision. However, the court does not              In the bankruptcy context, property rights
reach this issue because the court finds            enjoy at least a measure of protection un-
that Congress has the power under the               der the Due Process and Just Compensa-
Bankruptcy Clause to determine that a               tion Clauses of the Fifth Amendment.
debtor may invoke rights under the Bank-            See, e.g., Louisville Joint Stock Land
ruptcy Code to adjust obligations with              Bank v. Radford, 295 U.S. 555, 55 S.Ct.
creditors before the debtor becomes insol-          854, 79 L. Ed. 1593 (1935) (just compensa-
vent under a balance sheet test.                    tion); United States v. Security Industrial
   The larger constitutional issue concerns         Bank, 459 U.S. 70, 103 S. Ct. 407, 74
the power to extinguish debts and cancel            L.Ed.2d 235 (1982) (same). On the other
contractual obligations. Under the Arti-            hand, Congress is not prohibited from
cles of Confederation, the states possessed         passing laws that impair the obligation of
and used this power, to the consternation           contracts. See, e.g., Continental Bank v.
of many. See Alexander Hamilton, THE                Rock Island Ry., 294 U.S. 648, 680, 55
FEDERALIST NO. 85, praising the new                 S.Ct. 595, 79 L. Ed. 1110 (1935); Webber,
constitution’s ‘‘precautions against the rep-       674 F.2d at 802. ‘‘In fact, the very essence
etition of those practices on the part of the       of bankruptcy laws is the modification or
State governments which have undermined             impairment of contractual obligations.’’
the foundations of property and credit,             Webber, 674 F.2d at 802.
526                          300 BANKRUPTCY REPORTER

   [8] The protection of property rights in    der the Constitution to authorize a debtor
the bankruptcy context, however, is mea-       who is solvent, whether in the balance
sured. The Supreme Court made this             sheet sense or in the liquidity sense, to file
clear in Wright v. Union Central Life Ins.     a chapter 11 case and to confirm a plan of
Co., 304 U.S. 502, 58 S. Ct. 1025, 82 L.Ed.     reorganization.
1490 (1938):                                     The court has previously found against
   Property rights do not gain any absolute    Pierce on his statutory objections to the
   inviolability in the bankruptcy court be-   chapter 11 plan and on his motion to dis-
   cause created and protected by state        miss based on bad faith. Accordingly, the
   law. Most property rights are so creat-     court finds that the chapter 11 plan should
   ed and protected. But if Congress is        be confirmed and the motion to dismiss
   acting within its bankruptcy power, it      should be denied.
   may authorize the bankruptcy court to
   affect these property rights, provided           NOTICE OF FILING SECOND
   the limitations of the due process clause            AMENDED OPINION
   are observed.                                 Pursuant to Dressler v. Seeley Co. (In re
                                               Silberkraus), 336 F.3d 864, 869 (9th Cir.
Id. at 518, 58 S. Ct. 1025.
                                               2003), the court HEREBY GIVES NO-
   [9] In this case, Pierce has neither        TICE of the filing of its Second Amended
property rights nor contract rights to as-     Opinion on Plan Confirmation And Motion
sert against the debtors. He does not          To Dismiss (Constitutional Issues) in the
even have a claim against the debtors in       above case, a copy of which is attached.
this case, because he refused to file his

                                                            ,
claim. He has only a Texas state court
judgment that is on appeal. This claim is
in danger of discharge if the debtors’ chap-
ter 11 plan is confirmed. The court finds
that this is an insufficient basis to find a
                                                     In re Viola Carolyn LUCAS,
violation of Pierce’s Fifth Amendment eco-              also known as Carolyn
nomic substantive due process rights in                     Lucas, Debtor.
this case.
                                                 Orvey R. Cousatte, Administrator of
             IV.   Conclusion                      the Estate of Imogene Collier,
   The court concludes that Pierce’s consti-            Plaintiff–Appellant,
tutional challenge to the debtors’ bank-                             v.
ruptcy case and their plan of reorganiza-         Viola Carolyn Lucas, Defendant–
tion under chapter 11 cannot be sustained.                    Appellee.
The court finds that the balance sheet test
                                                         BAP No. KS–02–088.
for insolvency was unknown in United
                                                      Bankruptcy No. 01–12092–7.
States bankruptcy law until 1898, when
                                                        Adversary No. 01–5116.
balance sheet insolvency first entered
United States bankruptcy law. Prior            United States Bankruptcy Appellate Panel
thereto, insolvency in the bankruptcy con-               for the Tenth Circuit.
text always meant liquidity (or equity) in-                   Oct. 20, 2003.
solvency.
   [10] The court finds that Congress val-         Judgment creditor brought adversary
idly exercised the Bankruptcy Powers un-       proceeding against Chapter 7 debtor, seek-