Ninth Circuit Holds Bankruptcy Courts Lack Authority to Enter Final Judgment in Fraudulent Conveyance Actions

ABI Bankruptcy Brief | December 4 2012

December 4, 2012

NEWS AND ANALYSIS

NINTH CIRCUIT HOLDS BANKRUPTCY COURTS LACK AUTHORITY TO ENTER FINAL JUDGMENT IN FRAUDULENT CONVEYANCE ACTIONS

In a decision issued today in Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc., Case No. 11-35162), the Ninth Circuit held that bankruptcy courts lack authority to enter final judgment in fraudulent conveyance actions against nonclaimants. Relying upon the U.S. Supreme Court's decision in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) and Stern v. Marshall (131 S. Ct. 2594 (2011), the appellate court noted that the public rights exception to the rule of Article III adjudication does not encompass federal-law fraudulent conveyance claims, even though Congress designated such claims as core proceedings. Instead, bankruptcy courts have the power to hear fraudulent conveyance cases and submit reports and recommendations to the district court. The panel also held that the right to a hearing in an Article III court is waivable, and that the nonclaimant defendant in this case, by not objecting earlier on in the case, consented to the bankruptcy judge's adjudication of the fraudulent conveyance claim. To view a summary of the decision and read the full text of the opinion, visit ABI's VOLO here.

ANALYSIS: FINANCIALLY SICK FIRMS OFTEN GRANT BONUSES IN MONTHS BEFORE BANKRUPTCY FILING

More than 1,600 insiders—executives and others controlling a company—received bonuses, salaries, fees and other compensation totaling more than $1.3 billion in the months before their companies filed for chapter 11, according to a Wall Street Journal analysis of more than 80 bankruptcy cases over the past five years. Financially ailing companies such as Hostess Brands often pay bonuses and other compensation to executives and private-equity owners before filing for bankruptcy protection. Hostess's bankruptcy judge said during a Nov. 29 hearing that the payments "will definitely be looked at" as he approved the company's request to start liquidating and laying off more than 18,000 employees. Hostess was exploring a potential bankruptcy filing in July 2011 when its board voted to boost the salary of its chief executive and other high-level officers, according to creditors. Five months later, it filed for chapter 11, its second bankruptcy filing in a decade. Financially ailing companies often pay bonuses and other compensation to executives, directors and private-equity owners in the months before filing for bankruptcy protection. Federal law prevents "retention" bonuses paid to such "insiders" after a bankruptcy case is filed but not before. Read more. (Subscription required.)

OBAMA RECESS APPOINTMENTS FACE FIRST APPEALS COURT TEST

President Barack Obama’s authority to make appointments without U.S. Senate approval is being considered by an appeals court for the first time in a test of so-called pro-forma sessions set up by Republican lawmakers, Bloomberg News reported on Saturday. To prevent Obama from appointing officials after Congress started a holiday break last December, House and Senate Republicans refused to adopt a resolution to formally adjourn. Congressional Republicans opposed to the powers granted the Consumer Financial Protection Bureau were seeking to block the president from appointing former Ohio Attorney General Richard Cordray as the new agency’s first head, having refused a confirmation vote since he was nominated in July. Obama also appointed Cordray on Jan. 4. His appointment is being contested in a Washington, D.C., lawsuit while the validity of the president's naming of three National Labor Relations Board members on Jan. 4 has been raised in at least three other cases. Read more.

COMMENTARY: THE MORTGAGE CHALLENGE

The biggest economic policy error of President Obama's first term was the failure to address foreclosures effectively, according to a New York Times editorial on Sunday. By favoring the voluntary cooperation of banks in reducing monthly payments for hard-pressed borrowers, Obama’s policies did more to shield the banks from losses than to help homeowners and stabilize the market. Recent signs of a housing recovery aside, nearly three million loans are now in or near foreclosure, according to Moody’s Analytics. In addition, some five million borrowers who are current in their payments have high-rate mortgages that they have not refinanced, in part because of excessive bank fees. In all, nearly 12 million borrowers collectively owe $600 billion more on their mortgages than their homes are worth, a loss of wealth and a load of debt that make a strong and steady economic recovery all but impossible. The question now is whether Obama will use his second term to push through effective mortgage reform, according to the editorial. A first test of his resolve will be the swift nomination of a new director for the agency that oversees Fannie Mae and Freddie Mac, the government-controlled mortgage companies that own or back most mortgages. While new leadership at Fannie Mae and Freddie Mac is a key to more relief, the push for more help also could be strengthened through support of legislation that would expand refinancings and principal reductions. A sound mortgage-relief agenda, according to the editorial, also requires an enforcement plan. Read more.

COMMENTARY: BANKRUPTCY FOR DETROIT LOOMS AS UNIONS AND THE CITY COUNCIL RESIST REFORM

Michigan lawmakers have kept Detroit on life support for the past six months and may need to do so indefinitely barring a miraculous economic recovery, according to a Wall Street Journal editorial today. The city will run out of cash this month unless the state releases $30 million in bond proceeds, which are being held in escrow under a consent agreement that council members reluctantly approved in April. The rescue package ties $137 million in state aid to reforms and lets Mayor Dave Bing redo labor contracts. The city has already drawn $40 million from the state and may soon be cut off since council members last month rejected a contract for a legal firm to advise the mayor, a condition of further aid. Read more. (Subscription required.)

STUDENT-LOAN COLLECTION TARGETED FOR OVERHAUL IN CONGRESS

Congress will consider overhauling debt collection in the $100 billion-a-year U.S. student loan program, replacing it with automatic withdrawals from borrowers' paychecks tied to their income, Bloomberg News reported today. Rep. Tom Petri (R-Wis.) plans to introduce legislation as soon as this week that would require employers to withhold payments from wages in the same way they do taxes. Payments would be capped at 15 percent of borrowers’ income after basic living expenses. The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceed credit- card debt. Under the new system, the government would no longer need to hire private debt-collection companies and charge fees that add as much as 25 percent to borrowers' loan balances, leaving defaulted former students even deeper in the hole. Read more.

In related news, Rep. George Miller (D-Calif.), the ranking Democrat on the House Education Committee, is looking into student-loan practices by private lenders that he says resemble the runaround homeowners were given by mortgage lenders, CongressDaily reported yesterday. He is asking the Government Accountability Office to examine problems reported by student borrowers and has asked Sallie Mae Inc., Wells Fargo, the Pennsylvania Higher Education Assistance Agency, and Citigroup for information on their practices.

For more on the issue of student loan practices, be sure to listen to ABI’s latest podcast.

LATEST ABI PODCAST FEATURES STUDY ON STUDENT LOAN DISCHARGES AND THE UNDUE HARDSHIP STANDARD

The latest ABI Podcast features ABI Resident Scholar Susan Hauser speaking with Jason Iuliano, the author of "An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard." Iuliano, a graduate of Harvard Law School and currently a Ph. D. candidate at Princeton University, discusses the methodology of his study and a few of the conclusions that can be drawn from it about student loan discharges and the undue hardship standard in bankruptcy. Click here to listen.

ABI IN-DEPTH

ABI'S INTERACTIVE BANKRUPTCY CODE AND RULES SITE UPDATED TO INCLUDE AMENDMENTS EFFECTIVE DEC. 1

ABI's Bankruptcy Code and Rules site has been updated with all proposed amendments to Federal Rules of Bankruptcy Procedure 1007, 2015, 3001, 7054 and 7056 that took effect Dec. 1. Use the most current Code and Rules by going to http://law.abi.org/.

WEBCASTS NOW AVAILABLE OF CHAPTER 11 COMMISSION EVENTS, CONCERT DEDICATED TO ABI MEMBER STEVEN GOLICK

Looking to learn about ABI’s Chapter 11 Commission’s efforts in 2013? Catch the final 2012 public hearing of the Commission? Listen to a concert by ABI’s Indubitable Equivalents dedicated to Steven Golick? Follow the links below to access the webstreams of these recent events:

• ABI's media teleconference held Dec. 3: "Teleconference to Look at Chapter 11 Commission to Date: What Have We Learned?" Click here.

• Final public hearing of ABI's Commission to Study the Reform of Chapter 11 that took place on Nov. 30 at ABI’s Winter Leadership Conference. Click here.

• Performance of ABI’s Indubitable Equivalents dedicated to ABI member, leader and band mate, Steven Golick, who has recently undergone successful surgery to remove a brain tumor. Watch the concert at www.abiband.com.

NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: SUPREME COURT SEEKS VIEW OF SOLICITOR GENERAL IN BANKRUPTCY EXEMPTION CASE

The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent blog explores the decision by the U.S. Supreme Court yesterday to ask the U.S. solicitor general to provide perspective on whether a bankruptcy court has the power to levy a financial charge against a chapter 7 debtor's residential property, which he has claimed falls under the homestead exemption (Stephen Law v. Alfred Siegel, No. 12-5196, U.S. Sup.).

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

LATEST BLOOMBERG LAW VIDEO: BILL ON BANKRUPTCY- PATRIOT COAL CASE KICKED FROM MANHATTAN TO ST. LOUIS

The decision sending the Patriot Coal Corp. reorganization to St. Louis will focus debate on the near impossibility of convincing a judge in New York or Delaware to send a bankruptcy somewhere else, as Bloomberg Law's Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle discuss on their new video. Click here to watch.

ABI Quick Poll

A licensee of a trademark has the right to retain the license even when a debtor rejects the underlying contract creating the license. (Sunbeam Products, 7th Cir.)

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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