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Bankruptcy Procedure
University of Illinois School of Law
Brubaker, Ralph

Bankruptcy Procedure, Brubaker, Spring 2015 (no textbook)
Procedural joinder device to force CR to present all claims in one forum
Complex procedure:  attracts usual class action probs w/determining Ds aggregate liability, but also allocating D/DR limited resources b/t class action Ps and other CR
How to manage all this w/regard to Constitution
E.g., Marathon, Stern, Wellness Int'l
English history
Appoint commissioners to deal w/ petition of particular DR
Gather all DRs property and distribute
Not court of record
Resolve various disputes (e.g., amount/validity of CR claim)
Some judicial functions, but under supervision of Lord Chancellor in equities
U.S. history
Earliest statute was in 1800, no permanent BK law until 1898 Act
1898 Act continued/amended until 1978 Code
Many jdx concepts of Act incorporated into Code
1800 Act copied English Act at the time, including use of commissioners
Gave fed courts jdx not only over all CR claims against DR, but also over all matters and proceedings in BK
SCOTUS interpreted this as being broad enough to give fed courts jdx over DR causes of action against others
In England, this type of action against a third party would not have been considered part of BK proceedings, would have had to sue third party in superior court w/ proper jdx
SCOTUS said this was OK, tho
1898 Act centered around notions of in rem jdx originating in England
BK court where proceedings were pending exercised in rem jdx over all property that was in  BK court's possession through court officer/ttee
Everything that went into administering property was under in rem jdx
Summary jdx
Ttee could only sue third party  where DR could have sued
i.e., state court, maybe fed dist court
Plenary jdx/in personam
Act did NOT only give BK court summary jdx, but by and large, it was summary
All claims by or against estate
As a general matter, no plenary jdx except in some specific instances
Avoidance actions
Corporate reorganizations
Over all ttee's plenary suits against third parties
Consent of litigants
General non-BK rule:  can consent to personal jdx, but not subject matter jdx (federalism concerns)
Art II limits on fed jdx
Up to Congress to authorize fed courts to hear these cases
Congress is the entity who authorized SMJ here, so no separation of powers issues
If D consented, proceedings could proceeds as summary rather than plenary
Failure to object at earliest possible time was considered consent to fed jdx and summary disposition
If CR filed proof of claim , then fed jdx over ttee's suit against CR
Process of administering estate
Katchen:  ttee's counterclaims are part of summary process against CR
A proof of claim was potentially a trigger to fed/summary jdx for all types of claims that would otherwise be outside court's jdx
Jdx by ambush
Federalism/adjudication concerns
Act referee's were not Art III judges
Authorized judges to refer cases to referees
Appointed as officers of fed dist courts for 6-yr terms
Performed judicial function in BK case
Issue final binding orders, reviewable by appeal to dist court
Statute did reserve authority to perform specific acts to fed judge
Like enjoining a state judge
SCOTUS imposed limitation that referees could only exercise summary jdx
By consent and ambush
Act conferred plenary jdx on fed dist courts
As long as party timely objected to summary jdx by referee, these types of suits could only be heard in fed dist court
Fed dist judges didn’t have a ton of interest in BK cases, so they were happy to constantly refer
National BK law automatically referred cases to referees
'78 Act & Marathon
Congress overhauled Act in 1970s, replaced it with 1978 Code
Specifically targeted bifurcated summary/plenary jdx scheme
Line-drawing problems
Constructive possession, esp. of intangible property
Intangible cause of action would be  considered w/in ttee's constructive possession unless D had substantial defense (not merely colorable) to $$$ being sought
If substantial defense, then D was adverse claimant, this was plenary suit
Clubby nature of BK practice
Rigged in favor of ttees, cronyism, etc…
Referee elevated to BK judge
Some proposals to make BK judges Art III judges, but this idea was strongly opposed by existing fed judges (esp. CJ Burger) b/c it would dilute the prestige of being an Art III judge
1978 was sort of a compromise
BK judge, no Art III status, thus no Constitutional protections
Appointed by President w/advice/consent of Senate, 14-yr terms
Pay subject to reduction by Congress
Were these new BK judges “exercising the judicial power of the US?”
Northern Pipeline v. Marathon
NP filed ch. 11 under Code
After filing, NP, as DIP, sued Marathon for pre-petition breach of K
Would be property of NP's BK estate, so it said this action was being brought in BK court
Marathon moved to dismiss, arguing BK judge could not constitutionally exercise jdx
Under 1898 Act, this would have been plenary suit w/fed jdx (corp reorg exception)
Could this action be adjudicated by non-Art III tribunal?
Under Act, no
Under Code, apparently so
“Arising under” Code, or “arising in or related” to case under ch. 11; in rem and in personam
Code gave non-Art III BK judges broad grant of jdx, and this violated Art III
Narrowest ground on which SCOTUS would agree:  Code is unconstitutional as applied to this state-law cause of action against Marathon
BK courts routinely decide issues of state law
Are BK proceedings similar to “public rights?”
Restructuring of DR-CR relations, might be, but adjudicating state-created private rights is not
Under Act, referees only had summary jdx, so this case would have to be decided by dist court
Emphasis on state-law nature of claim
B/c state law is everywhere in BK, over which state law claims can BK courts issue final adjudications?
Brennan:  public rights exception
State created private rights cannot be adjudicated by non-Art III tribunal
When Congress creates a right, it can create methods to adjudicate that right
Northern's state-law claim is in fed court b/c of its relationship to its reorganization
Restructuring DR-CR rights is “core” of fed BK power
Which matters are at the “core” of BK matters, then?  (Apparently, not this)
Rhenquist:  no fed rule of decision for any issues in this suit
No method of adjudication hinted a

Fed BK law completely preempts state BK law
Only federal dist courts can entertain BK cases against a DR
Proceedings can be litigated in any court that has jdx
CR can get relief from stay and proceed in state court w/state remedies (e.g., foreclosure)
Automatic referral of BK cases to BK courts
28 USC 157
(a) Each dist court may provide that any or all cases under title 11 or any or all proceedings arising under/in or related to a case shall be referred
(b)(1) BK judges may hear and determine all cases under title 11 and all core proceedings arising under/in case under title 11, and may enter appropriate orders and judgments, subject to review under 158
(b)(3) BK judge shall determine whether a proceeding is core or related to under title 11
(c)(1) BK judge may hear non-core proceeding that is related to, but shall only submit proposed findings of fact and conclusions of law to dist court; any final order shall be entered by dist court de novo
(c)(2) dist court, w/consent of all parties, may refer a proceeding related to a case to BK judge to hear, determine and enter appropriate orders and judgments subject to review under 158
What constitutes consent?  Silence?  Implication?
Bankr. R. 7008(a):  when filing a complaint, shall contain statement that is core/noncore, and if noncore, then line whether party consents
Bankr. R. 7012:  responsive pleading shall admit/deny that proceeding is core/noncore, should include statement that please does/not consent
SCOTUS in Stern seemed to endorse notion of implied consent
Who enters final order?
Core proceedings -> BK judge, subject to conventional appellate review; 157(b)
Non-core proceedings -> federal dist court; 157(b)(1)
Construe what is core/non-core w/backdrop of Marathon
What is core/non-core?  Jdx nexuses
Arising under -> cause of action is created by BK Code (e.g., preferential xfers)
Arising in -> in absence of BK case, this cause of action wouldn't exist, or would exist in a different form
Related to -> cause of action that could have been brought outside of BK
Katchen v. Landy
Ttee brought action t void preference payment made by petitioner w/in preference period
Ttee said since payment made w/in preference period, it can be recovered
In rem v. in personam
Cause of action for $$$ judgment outside BK prob in personam
Once BK is established, it is a claim against the estate over which the ttee has in rem jdx, and thus against specific property of estate
Under BAFJA, this is core under 157
Counterclaim being made to a proof of claim
Look first to 157(b)(2)(C)