Neil W. Bason, United States Bankruptcy Judge.
The factual and procedural background is set forth in the concurrently issued Opinion On Directors' And Officers' Duties Upon Insolvency, And Related Issues. Capitalized words have the meanings set forth in that opinion.
This Bankruptcy Court has an independent duty to examine its jurisdiction and authority. See In re Rosson, 545 F.3d 764, 769 n. 5 (9th Cir.2008) (jurisdiction); In re Pringle, 495 B.R. 447, 455 (9th Cir. BAP 2013) (authority). Although "jurisdiction" and "authority" sound very similar, the Supreme Court has distinguished between (A) bankruptcy courts' broad subject matter jurisdiction and (B) their narrower constitutional and statutory authority to issue final judgments or orders, as opposed to issuing proposed findings of fact and conclusions of law that are subject to de novo review by an Article III Court. See Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015); Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011); In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 567 (9th Cir.2012), aff'd sub nom Executive Benefits Ins. Agency v.
For the reasons set forth below, this Bankruptcy Court concludes that it has subject matter jurisdiction on all claims, and has the authority to issue final judgments or orders on pretrial matters that do not involve factual findings such as the present motions. In addition, this Bankruptcy Court has the authority to issue final judgments or orders, including factual findings, on (1) the plaintiff's objections to the Directors' claims (including equitable subordination) and (2) the avoidance claims against the Primary Directors. To the extent that this Bankruptcy Court does not have the authority to issue a final judgment or order, the accompanying opinion should be deemed to be proposed findings of fact and conclusions of law for de novo review by an Article III Court.
Bankruptcy courts are "units" of the federal district courts, to which all bankruptcy proceedings have been referred. See 28 U.S.C. § 151; Cent. Dist. Cal. General Order No. 13-05; LBR 5011-1(a). As such, this Bankruptcy Court has jurisdiction over all civil proceedings (1) "arising under title 11," i.e., any proceedings to enforce rights created by the Bankruptcy Code, (2) "arising in" a bankruptcy case, i.e., other proceedings that would not exist outside a bankruptcy case, such as case administration, or (3) "related to" a bankruptcy case, i.e., any proceedings the out-come of which could "conceivably" have any effect on the bankruptcy estate. See 28 U.S.C. §§ 157(a), 1334(b); In re Harris, 590 F.3d 730, 737 (9th Cir.2009); In re Marshall, 600 F.3d 1037, 1054 (9th Cir. 2010); In re Fietz, 852 F.2d 455, 457 (9th Cir.1988) (adopting "related to" test of Pacor, Inc. v. Higgins, 743 F.2d 984 (3rd Cir.1984)) (the "related to" test is not quite as broad as it sounds, based on the actual holding of Pacor, but is sufficiently broad for present purposes).
The complaint's claims for avoidance and recovery under §§ 547, 548 and 550 all "arise under" the Bankruptcy Code. In contrast, the complaint's avoidance claims against the Directors under State law do not "arise under" the Bankruptcy Code, nor do its claims for breach of fiduciary duty, waste, and unjust enrichment. All of those claims also can exist outside of the bankruptcy case so they do not "arise in" this case within the meaning of the statute. As to those claims this Bankruptcy Court only has "related to" jurisdiction (which, as discussed below, bears on whether this Bankruptcy Court can only issue proposed findings of fact and conclusions of law).
The complaint's objections to the Directors' claims, including both allowance generally (11 U.S.C. § 502) and equitable subordination (11 U.S.C. §§ 502, 510), are quintessentially "arising under" proceedings. They consist of determining the parties' "hierarchically ordered claims to a pro rata share of the bankruptcy res." Stern, 131 S.Ct. 2594, 2614 (quoting Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989)) (discussing the non-jurisdictional issue of what proceedings are "core," but the same concept presumably applies to jurisdictional issues because the Court interpreted statutory "core" proceedings to be coterminous with statutory "arising in" and "arising under" jurisdiction. Id. at 2605.).
In short, this Bankruptcy Court has subject matter jurisdiction, although as to some of the complaint's claims it has only "related to" jurisdiction.
This Bankruptcy Court's authority to issue final judgments or orders is governed
Bankruptcy courts have the statutory authority to issue final judgments or orders in "core" proceedings. 28 U.S.C. § 157(b)(2). Congress used that terminology in an attempt to track the Supreme Court plurality's decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).
The statutory list is non-exclusive (28 U.S.C. § 157(b)(2)) but the courts have been careful to interpret the statute and its "catchall" provisions narrowly, and they "have considered factors such as whether the rights involved exist independent of title 11, depend on state law for their resolution, existed prior to the filing of a bankruptcy petition, or were significantly affected by the filing of the bankruptcy case." In re Cinematronics, Inc., 916 F.2d 1444, 1450 n. 5 (9th Cir.1990). See also In re Castlerock Props., 781 F.2d 159 (9th Cir.1986). This court also bears in mind that a "determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law." 28 U.S.C. § 157(b)(3).
The complaint's avoidance actions are all statutorily "core." 28 U.S.C. § 157(b)(2)(F) & (H). As for the complaint's claims against the Directors for breach of fiduciary duty, waste, and unjust enrichment, they arguably could be interpreted to come within some of the broader statutory definitions of "core" proceedings, but such a reading would be too broad. That would run counter to both the Supreme Court's interpretation of statutory "core" proceedings, to be coterminous with statutory "arising in" and "arising under" jurisdiction (Stern, 131 S.Ct. 2594, 2605), and the Ninth Circuit's narrow interpretation of the "catchall" definitions of core proceedings (Cinematronics, 916 F.2d 1444, 1450 n. 5; Castlerock, 781 F.2d 159). As for the final category of claims in the complaint—allowance of the D & O claims, including subordination issues—those are statutorily core. See 11 U.S.C. §§ 502, 510; 28 U.S.C. § 157(b)(2)(B) & (O).
On the one hand, the Supreme Court has directed the lower courts not to rule a statute unconstitutional (in this case 28 U.S.C. § 157(b)) except to the extent truly necessary. See, e.g., Washington State Grange v. Washington State Republican Party, 552 U.S. 442, 450-51, 128 S.Ct. 1184, 170 L.Ed.2d 151 (2008); Boos v. Barry, 485 U.S. 312, 331, 108 S.Ct. 1157, 99 L.Ed.2d 333 (1988); Regan v. Time, Inc., 468 U.S. 641, 652, 104 S.Ct. 3262, 82 L.Ed.2d 487 (1984).
On the other hand, to safeguard "individual liberty and separation of powers" there are constitutional limits on the authority of Bankruptcy Judges, who are appointed under Article I instead of Article III of the Constitution, to issue final judgments and orders. Stern, 131 S.Ct. 2594, 2615. In analyzing those limits the Supreme Court has focused primarily on whether the "public rights" exception to Article III applies. See, e.g., id. at 2611-15 & 2618-19 (plurality opinion).
One definition of "public rights" is that if "`it depends upon the will of [C]ongress whether a remedy in the courts shall be allowed at all' [then] Congress could limit the extent to which a judicial forum was available." Stern, 131 S.Ct. 2594, 2612 (quoting Murray's Lessee v. Hoboken Land & Imp. Co., 59 U.S. 272, 18 How. 272 at 284, 15 L.Ed. 372 (1855)). For example, a bankruptcy discharge arguably is a matter of public rights because Congress need not provide any discharge at all. The same reasoning arguably could apply more broadly, because Congress need not enact
More recent decisions, however, have expressly declined to endorse such a broad general rule. See Stern, 131 S.Ct. 2594, 2614 n. 7 (plurality opinion); Bellingham, 702 F.3d 553, 561 (acknowledging "demise" of general rule that controversies at the "core of the bankruptcy process implicated public rights"). As the Supreme Court has acknowledged, its reasoning has not been "entirely consistent." Stern, 131 S.Ct. 2594, 2611 (plurality); and see id. at 2621 (Scalia, J., concurring). Nevertheless, the Stern plurality has articulated two alternative tests to determine when a Bankruptcy Judge can issue a final judgment or order:
These two alternatives are examined below.
This first test—whether the action at issue "stems from the bankruptcy itself" (Stern, 131 S.Ct. 2594, 2618)—confusingly sounds very similar to the pre-Stern test: whether the controversy at issue is at the "core of the bankruptcy process." Bellingham, 702 F.3d 553, 561. The Ninth Circuit fortunately has explained, after a careful review of Granfinanciera, Stern, and other Supreme Court cases, that the difference is whether there is a jury right:
Under this first Stern test, a bankruptcy court lacks the authority to issue final judgments or orders on fraudulent transfer and preference actions because jury rights apply to both types of actions. See Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (jury right for preference actions); Bellingham, 702 F.3d 553, 565 (jury right for fraudulent transfer actions). See also Reply (dkt. 61) p. 2, n.1 (preservation of jury rights).
Of the statutorily "core" claims, that leaves only the complaints' objections to the Directors' claims (including equitable subordination). See In re USDigital, Inc., 461 B.R. 276 (Bankr.D.Del.2011) (§ 510(c) claims are both statutorily and constitutionally core). The Directors have not established that they have any jury right as to these claims, so under Stern's first alternative test this Bankruptcy Court can issue final judgments or orders on those claims, i.e., on Counts 24-32 of the complaint (dkt.1). Some of the other claims might also qualify, however, under Stern's alternative test.
In referring to an action that "would necessarily be resolved in the claims allowance process" (Stern, 131 S.Ct. 2594, 2618, emphasis added), the Stern plurality apparently means to encompass both (i) the
The plaintiff objects to the claims of the Primary Directors and RHM against the bankruptcy estate under § 502(d), which provides:
This statute requires the determination of both the existence and amount of any avoidable transfer as part of the claims allowance process. Therefore, adjudication of those claims against the bankruptcy estate necessarily would resolve the estate's claims for avoidance and recovery of avoidable transfers. This Bankruptcy Court therefore can issue a final judgment or order as to the avoidance claims.
The Supreme Court explained this analysis under the Bankruptcy Act, in a case involving an avoidable preference:
The Supreme Court has confirmed that this same analysis applies under § 502(d) of the Bankruptcy Code. See Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) (if creditor files proof of claim then, per § 502(d), preference action "becomes part of the claims-allowance process which is triable only in equity" so no jury right) (citation omitted); Stern, 131 S.Ct. 2594, 2615-18 (plurality opinion, Part III.C.2) (following Katchen & Langenkamp).
Therefore, this Bankruptcy Court has the authority to issue final judgments or orders on the plaintiff's avoidance claims against the Primary Directors and RHM because, by virtue of § 502(d), the plaintiffs' claims "would necessarily be resolved in the claims allowance process." Stern, 131 S.Ct. 2594, 2618 (emphasis added). See also Bellingham, 702 F.3d 553, 562, n. 7 ("not possible" to rule on claim allowance without resolving fraudulent transfer issue).
The plaintiff has only brought § 502(d) claims against the Primary Directors and RHM. But all of the Directors have filed claims (see Complaint (dkt.1) ¶ 222) and the plaintiff seeks equitable subordination of those claims under § 510(c). Id. ¶¶ 221-24 and, e.g., ¶ 227. At first it may appear that the same reasoning applies under § 510(c) as under § 502(d), but that is not so.
It is true that part of the claims allowance process is a determination of the equitable subordination claim, and the equitable subordination claim rests on exactly the same set of factual allegations as the plaintiff's other claims, so litigation regarding equitable subordination might include whether the plaintiff can establish the other claims alleged in the complaint. See generally In re Granite Partners, LP, 210 B.R. 508, 515 (Bankr.S.D.N.Y.1997) ("allegations of aiding and abetting [a third party's] fraud also satisfy the pleading requirement for equitable subordination"). But those other claims would not "necessarily be resolved in the claims allowance process." Stern, 131 S.Ct. 2594, 2618 (emphasis added).
For example, the plaintiff might be able to prevail on its equitable subordination claim without prevailing on its fraudulent transfer claims. That distinguishes § 510(c) litigation from other types of litigation in which it has been held that non-core claims are necessarily resolved as part of the claims allowance process. See, e.g., In re Wash. Coast I, LLC, 485 B.R. 393, 406-07 (9th Cir. BAP 2012) (Bankruptcy Court could issue final judgment as to lien priority dispute, notwithstanding that underlying issues depended on Washington State law, because the dispute was inherent in the claims resolution process, and also because it "involves the adjudication of rights created by the Bankruptcy Code under § 506"); In re Deitz, 760 F.3d 1038 (9th Cir.2014) (nondischargeability action necessarily involved determination of the underlying non-core claims, so bankruptcy court could enter final judgment determining dollar amount of such claims).
To be clear, the question is whether preclusion necessarily applies, not whether it will turn out to apply. The burden of establishing equitable subordination is very heavy, so if the plaintiff can carry that burden then it might well have established most or all of the elements of some of its other claims under principles of preclusion. See generally In re First Alliance Mortg. Co., 471 F.3d 977, 1006-7 (9th Cir.2006) (although "there is surely something `inequitable' in an abstract sense
This Bankruptcy Court can issue final judgments and orders on the following claims in the complaint:
As to other claims, only proposed findings of fact and conclusions of law can be issued unless another exception to Stern applies. There is, in fact, an applicable exception for the motions to dismiss and for a more definite statement that are currently presented.
Even in a non-core proceeding, this Bankruptcy Court can issue final rulings on pretrial matters, including claim-dispositive motions, that do not require factual findings. See PDG Los Arcos, LLC v. Adams, 436 Fed.Appx. 739, 743 (9th Cir.2011) ("Even if a party is entitled to a jury trial in a noncore proceeding, the bankruptcy court may retain jurisdiction and decide a dispositive pretrial motion such as a motion to dismiss."); In re Hettick, 413 B.R. 733, 742 (Bankr.D.Mont. 2009) (in Ninth Circuit a bankruptcy court may handle pretrial matters); In re Prof' I Satellite and Commc'n, LLC, 2012 WL 6012829, at *3 (S.D.Cal.); In re Heller Ehrman, LLP, 2011 WL 4542512, at *3 (Bankr.N.D.Cal.) (citing In re Healthcentral.com, 504 F.3d 775, 787 (9th Cir.2007)). See also Arkison, 134 S.Ct. 2165 (district court's de novo review was same under appeal from summary judgment ruling as it would have been for proposed findings of fact and conclusions of law, so no violation of Stern).
The matters presently before this Bankruptcy Court for decision are purely issues of law that require no factual determinations (because the well pleaded factual allegations must be accepted as true). Therefore, notwithstanding that on some claims this Bankruptcy Court lacks the authority to issue a final judgment or order
The defendants have not expressly consented, and to the contrary they have indicated their lack of consent to this Bankruptcy Court issuing any final judgments or orders. It is worth noting, however, that parties do sometimes change such positions to avoid the expense, delay, and inconvenience of de novo proceedings, or for any other reasons. See Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) (parties can consent—expressly or impliedly—to have Stern claims heard before a Bankruptcy Court). See also In re Pringle, 495 B.R. 447 (9th Cir. BAP 2013) (rebuttable presumption of implied consent once party is alerted, or held to be alerted, to the issue of tribunal's authority and does not timely object).
In the foregoing analysis this Bankruptcy Court has attempted to follow two potentially conflicting directives from the Supreme Court. On the one hand, in Stern the Supreme Court directed the lower courts not to read too broadly Congress' grant of authority in 28 U.S.C. § 157(b), based on its concern that "separation of powers" and "individual liberty" could be threatened by the fact that Bankruptcy Judges lack a lifetime appointment and constitutional salary protection. See Stern, 131 S.Ct. 2594, 2615. The Supreme Court did not explain precisely how separation of powers or individual liberty would be threatened by an Article I Judge issuing a final judgment or order, but its references to the lack of lifetime appointment and salary protections suggests that it was concerned about actual or perceived threats to the Article I Judge's impartiality because his or her rulings might lead the other branches of government or the populace to oppose that judge's reappointment, or to call for a reduction in salary.
On the other hand, the Supreme Court has directed the lower courts not to rule a statute unconstitutional (in this case 28 U.S.C. § 157(b)) except to the extent truly necessary. See, e.g., Washington State Grange v. Washington State Republican Party, 552 U.S. 442, 450-51, 128 S.Ct. 1184, 170 L.Ed.2d 151 (2008); Boos v. Barry, 485 U.S. 312, 331, 108 S.Ct. 1157, 99 L.Ed.2d 333 (1988); Regan v. Time, Inc., 468 U.S. 641, 652, 104 S.Ct. 3262, 82 L.Ed.2d 487 (1984). Following this directive, it seems appropriate for this lower court not to interpret Stern too broadly, and instead to follow Stern's guidance that it "does not change all that much" (131 S.Ct. 2594, 2620). That seems particularly appropriate for two practical reasons.
First, although de novo review does not necessarily require a complete re-litigation of all issues (see Rule 9033(d) and Heller, 2011 WL 4542512, at n. 11), there will be considerable added expense, delay, and inconvenience to all parties (and to the Federal District Court) to the extent that the parties have to re-litigate their disputes de novo.
Second, concerns about separation of powers and individual liberties (impartiality) are tempered by the fact that Bankruptcy Judges are appointed and reappointed by Article III Judges (28 U.S.C. § 152(a)), they are paid a fixed percentage of the salaries of Article III Judges (28 U.S.C. § 153(a)) (bankruptcy judges' salaries are "equal to 92 percent of the salary of a judge of the district court of the United States"), and the District Court can withdraw the reference at any time (28 U.S.C. § 157(d)). See Wellness, 135 S.Ct. 1932,
For these reasons, and being mindful of not imposing undue costs on all parties and the District Court, the undersigned Bankruptcy Judge has attempted not to adopt too broad a reading of Stern. Nevertheless, in attempting to parse the plurality and other opinions in Stern, this opinion reluctantly concludes that de novo litigation generally will be required as to most of the complaint's claims unless those claims can be resolved without having to determine factual issues (or if the parties consent).
No party has questioned the plaintiff's standing as successor in interest to the bankruptcy estate. See Joint Plan (Case dkt. 352), Section 6.1. Venue is proper under 28 U.S.C. §§ 1408(1) and 1409(a).
For the foregoing reasons, this Bankruptcy Court concludes that it has the subject matter jurisdiction and authority to issue final judgments or orders on the claims objections (including equitable subordination) and the avoidance claims under §§ 547, 548 and 550 against the Primary Directors and RHM. In addition, in this pretrial context, this Bankruptcy Court can also issue final rulings on the motions to dismiss and for a more definite statement.