Bachrach Clothing, Inc. v. Bachrach (In re Bachrach Clothing, Inc.)

• Decision Date: 10 October 2012
• Docket Number: Adversary No. 08–00726.,Bankruptcy No. 06–06525.
• Citation: 480 B.R. 820
• Parties: In re BACHRACH CLOTHING, INC., Debtor. Bachrach Clothing, Inc., Plaintiff, v. Edgar H. Bachrach, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

480 B.R. 820

In re BACHRACH CLOTHING, INC., Debtor.Bachrach Clothing, Inc., Plaintiff,

v.Edgar H. Bachrach, et al., Defendants.

Bankruptcy No. 06–06525.

Adversary No. 08–00726.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Oct. 10, 2012.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Robert M. Fishman, Mark L. Radtke, Peter J. Roberts, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, George J. Spathis, Horwood Marcus & Berk Chtd., Chicago, IL, for Plaintiff.

R. Scott Alsterda, Patrick F. Ross, Lindsay E. Wilson Gowin, Michael Philippi, Ethan E. Trull, Amy M. Gardner, Ungaretti & Harris LLP, Chicago, IL, for Defendants.

Lawrence C. Gottlieb, Jeffrey L. Cohen, Cooley LLP, New York, NY, Jason Frye, Neal Gerber Eisenberg, Chicago, IL, Attorneys for the Official Creditors Committee.

Wendy Epstein, Kirkland & Ellis, Chicago, IL, Attorney for Sun.

Memorandum Opinion

PAMELA S. HOLLIS, Bankruptcy Judge.

Introduction

Debtor BCI brought this action to avoid transfers made to its former owners. After five days of trial and review of thousands of pages of additional evidence submitted, including financial treatises, expert reports and depositions, the court enters judgment in favor of Defendants on all counts.

Parties

Plaintiff in this adversary proceeding is Chapter 11 debtor, Bachrach Clothing, Inc. (“BCI” or “Bachrach”). Defendants are Edgar H. Bachrach (“Ed”), his sisters, Sally B. Robinson and Barbara B. James (all three together, the “Sellers”), and Barsaled, LLC (“Barsaled,” and together with the Sellers, “Bachrachs” or “Defendants”). Sellers are Barsaled's only members.

Jurisdiction and Authority to Enter Final Judgment

The complaint filed in this adversary proceeding consists of fifteen counts (“Complaint”). All but three of the counts allege violations of federal bankruptcy and state fraudulent conveyance laws, citing 11 U.S.C. §§ 544(b), 548 and 550, and 740 ILCS 160/5 and 160/6. The fraudulent conveyance counts do not plead state and federal claims distinctively, presumably because the state and federal statutes are substantially similar. Additionally, Count 13 contends that Defendants, former board members of BCI, breached fiduciary duties of good faith, fair dealing, honesty and loyalty in selling BCI. Count 14 seeks to disallow Defendants' proofs of claim, citing 11 U.S.C. § 502(d) of the Bankruptcy Code, which blocks payment on a creditor's claim until that creditor returns property subject to avoidance, including fraudulent transfers. Count 15 relies on 11 U.S.C. § 510(c) of the Bankruptcy Code to subordinate claims and liens of Defendants to the extent they engaged in inequitable conduct harmful to BCI's creditors.

Unremarkably, this court has subject matter jurisdiction to hear debtor's Complaint pursuant to 28 U.S.C. § 1334 and § 157. Slightly more controversial is whether this court has the authority to enter a final judgment on all counts in light of the United States Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). However, Stern does not remove this court's authority to render a final judgment. Here, resolution of nearly all of the contested issues was necessary to adjudicate Defendants' proofs of claim. Additionally, the parties consented to a final judgment by this court.

Given the extensive discussion of Stern in hundreds of decisions since its release last year, a protracted review of its facts will be skipped. At issue was a counterclaim filed by the debtor in response to a creditor's defamation action. The creditor elected to file the defamation claim in the bankruptcy court. The Supreme Court held that the creditor consented to the bankruptcy court's entry of a final judgment on his defamation claim, but the creditor did not consent to a final judgment on the debtor's counterclaim for tortious interference. The Court found that the counterclaim was not necessary to resolving the creditor's proof of claim and was based on state common law claims that could have been asserted by the debtor independent of the bankruptcy.

Title 28 U.S.C. § 157(b)(2)(C) provides that estate counterclaims brought in responseto persons filing claims against the estate are “core” proceedings. If a matter is “core,” the bankruptcy judge is authorized to issue final orders instead of preparing proposed findings of fact and conclusions of law for review by an Article III court. In Stern, the Supreme Court decided this statute was too broad. By classifying counterclaims—regardless of whether they stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process—as “core proceedings,” Congress went too far. Accordingly, the Court held:

Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.

131 S.Ct. at 2620. The Stern court did not strike down all of § 157, and emphasized that its decision was a narrow one. Id.

The proceeding before this court does not involve common law based counterclaims. Instead the debtor seeks to invalidate Defendants' sale of BCI as fraudulent. Section 157(b)(2)(H) declares fraudulent transfer actions to be core proceedings. Until Stern, this section unquestionably authorized entry of final judgments by the bankruptcy court. A wrinkle arises, however, since the Supreme Court previously determined that fraudulent transfer actions were based on common law, independent of bankruptcy proceedings. “There is no dispute that actions to recover preferential or fraudulent transfers were often brought at law in late 18th-century England.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). The Stern majority's comment that its debtor's counterclaim should be treated the same as the fraudulent transfer claim in Granfinanciera¹ raises worries about the bankruptcy judge's authority to issue a final judgment on fraudulent transfer claims. See Douglas G. Baird, Blue Collar Constitutional Law, 86 Am. Bankr. L.J. 3, 8–9 (Winter, 2012); Ralph Brubaker, A “Summary” Statutory and Constitutional Theory of Bankruptcy Judges' Core Jurisdiction After Stern v. Marshall, 86 Am. Bankr. L.J. 121, 183 (Winter, 2012). As Professor Brubaker concluded:

[T]he rationale of the Granfinanciera decision itself clearly called into doubt the constitutionality of bankruptcy judges' core jurisdiction over preference and fraudulent conveyance suits. After Stern v. Marshall, the conclusion seems inescapable that such core jurisdiction to enter final judgment—expressly conferred by Judicial Code § 157(b)(2)(F) & (H)—is unconstitutional. Without the consent of the litigants, a bankruptcy judge can do no more than hear the action and submit proposed findings of fact and conclusions to the district court.

Id. at 183.

Before Stern, the filing of a proof of claim by a fraudulent transfer defendant generally permitted the bankruptcy court to enter a final judgment in the avoidance action. The holdings in Granfinanciera and Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990) supported this assumption. Neither of those decisions required analysis as to how much of the claim that was independent of the bankruptcy needed to be resolved in order to determine a creditor's proof of claim. For example, in Langenkamp the Supreme Court held that the mere filing of a proof of claim subjected the creditor to bankruptcy court authority—without any detailed analysis of the overlap of the creditor's proof of claim and debtor's avoidance action.

In Granfinanciera we recognized that by filing a claim against a bankruptcy estate the creditor triggers the process of “allowance and disallowance of claims,” thereby subjecting himself to the bankruptcy court's equitable power. 492 U.S. at 58–59, and n. 14, 109 S.Ct. at 2799–2800, and n. 14 (citing Katchen, supra, 382 U.S. at 336, 86 S.Ct. at 476). If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance process which is triable only in equity. Ibid. In other words, the creditor's claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction. Granfinanciera, supra, 492 U.S. at 57–58, 109 S.Ct. at 2798–2799. As such, there is no Seventh Amendment right to a jury trial. If a party does not submit a claim against the bankruptcy estate, however, the trustee can recover allegedly preferential transfers only by filing what amounts to a legal action to recover a monetary transfer. In those circumstances the preference defendant is entitled to a jury trial.

Langenkamp, 498 U.S. at 44–45, 111 S.Ct. 330.

So while it was presumed that the filing of a proof of claim authorized the bankruptcy judge to enter final judgments on avoidance actions brought against the filing creditor, Stern spoils that assumption. “Stern held that the bankruptcy court could not constitutionally decide the debtor's counterclaim against a creditor, despite the fact that the creditor had not only filed a proof of claim, but also had forfeited any objection to the bankruptcy court deciding his own common law claim against the debtor.” ² In Stern, the filing of a claim was not enough:

It was in that sense that the Court stated that “he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure.” Id., at 333, n. 9, 86 S.Ct. 467. In Katchen one of those consequences was resolution of the...