I'd like to welcome you all I would I'd like to welcome you all to today's American College of bankruptcy Boston College Law School bankruptcy law symposium I before we started I asked to Ingrid Hill injure how many years we've been doing this now and we couldn't remember but it's been at least 10 so we'll call this the effort for lack of a better name that the 10th annual bankruptcy law symposium at Boston College Law School I'd like to begin by thanking I'm Michael Goldberg I am the regent for the First Circuit of the American College of bankruptcy I'd like to begin by thanking a few people and thanking an institution Boston College Law School has played host to this program for all of its years and it is indeed a wonderful host it's a wonderful place to hold this seminar and so thanks to the Dean and to the school for allowing us to come back year after year second although she's not in the room I'd like to thank Ingrid Hill enger' whose determination hard work and inspired leadership plays a significant role there she is Ingrid thank you for all of your hard work and for ensuring that bankruptcy practice will continue for many years to come well well well staffed third thank you to Jay Geller who's to my left Jay is our education chair and has done what I think you will find to be a terrific job putting together a fascinating program so before I sit down I just want to tell those in the room a couple of things about the american college of bankruptcy which is one of the co-sponsors of today's conference so the american college is an organization that recognizes the achievements of insolvency professionals and judges around the country and really throughout the world through its eleventh circuit's it puts on programs just like this symposium and many others some of those programs include Moot Court competitions negotiating competitions seminars at law schools to discuss bankruptcy law practice and other similar educational programs and these take place throughout the eleventh circuit's across the country but the the colleges crown jewel is really it's pro bono efforts funded by the college and its foundation that foundation and the college's pro bono committee provide a significant amount of support to pro bono bankruptcy programs around the country as of last year the college generated grants 263 of those programs around the country awarding grants totaling four hundred and eighty thousand dollars without those funds it's pretty clear that programs like the program that's here and other local law schools simply couldn't provide the legal services to those who couldn't afford it that they do provide so those are some of the things that the college does in between sponsoring symposia like this it is the college's delight to be here today and to co-sponsor this program and with those remarks I'm going to turn it over to Jay Geller who's going to introduce our and get the program started thank you welcome everyone thank you for being here thank you thank you she's been a great help from putting this together thank you to the College First Circuit Education Committee for assisting me and in putting this program together Thank You panelists for making the trip and being part of this program and thank all of you for attending be a lot of wasted effort if you weren't here so thank you very quickly an overview of the program for today we're gonna have two panels for simplicity sake I call them the recurring issues panel and the Supreme Court practice panel this first panel is going to talk about the history not not so much your traditional seminar that you may go to or your typical program or they talk about what the court decided this term or what they decided last term what they might how they might come out on a case this year but we're going to be talking about issues that have confronted the court repeatedly since the early 1800s and why they're there why in fact they keep recurring and then the second panel which will begin at approximately 240 will be Supreme Court practitioners talking about what it's like to practice before the Supreme Court in the bankruptcy arena and otherwise and how you get your case before the Supreme Court and how you brief it to try to get five justices on your side so I think it'll be an interesting one for not only bankruptcy practitioners but appellate attorneys and they had folks that have an instan an interest in constitutional law we'll have a 15-minute break after the first panel there are CLE forms that we'll have up front at the break we've sought approval for 2.75 hours of CLE credits so if anybody needs that we'll have that up front a little bit later last thing before we begin questions and comments we encourage them feel free to raise your hand I think there is at least one microphone floating around that will have some yes thank you for agreeing to do that and so I reserve the right however to limit that if we wind up not getting to hear from our panelists because I think they have a lot to say so we'll just try to keep that under control we'll hopefully have a few minutes at the end but feel free to interject with questions and comments with that I'd like to introduce our first panel and I remember thinking about this and saying how am I gonna introduce these people and I decided to go in alphabetical order so as not to offend anybody professor Douglas Baird is at the University of Chicago he has authored a book called elements of bankruptcy it's in its sixth edition and I was thinking about trying to talk about all the things he's written and decided I'd rather have him spend time talking to us but to put aside or actually recover my Boston accent he's wicked smaht and I think you'll find that out and our next panelist is the Honorable Robert Gerber Robert Gerber served for 15 years as a bankruptcy judge in the Southern District of New York I think many of you and you know him from the Northeast Conference he's been a frequent attendee worked on some of the largest cases that this country has ever seen in Adelphia Lyon Dell and of course General Motors and I could go on and he's an adjunct professor at the Columbia Law School spent his practicing career at free Frank and a friend and one of the nicest people you'll ever meet in the bankruptcy field and the last member of this panel but not least is James spray reagan again I think most of you know M James is one of the if not the premier debtors lawyer in the country if not the world he has worked on some of again the largest cases that we've ever seen in this kind United Airlines General Growth Properties one that you might have heard of recently Toys R Us and I could go on and on so that is who we have and I'm honored to have them here and we're going to start off with judge Gerber talking to us about jurisdiction and article one power thanks Jane Jesus me he's tasked me with the you know the very very narrow topic of what we talk about is jurisdiction but which more technically speaking isn't jurisdiction because that comes out of the judicial code 28 USC 1331 in the bankruptcy area and rather bankruptcy judges power to decide stuff and he's also asked me to talk about due process in the bankruptcy area that's a lot of stuff to cover in a limited time so I'm going to set the table with some fundamentals provide what I think is a structural framework for an understanding of the most important holdings in this area and then use the remainder of my time which hopefully will be the bulk of it to provide my take away from these cases now before I do that I want to give a lot of credit to to folks three folks actually one professor Ronald man of Columbia Law School who's written a book on bankruptcy in the Supreme Court a very recent one and in my judgment a very good one and Ken clay and his partner Whitman Holt who've also written a book actually Ken wrote two on bankruptcy in the Supreme Court which helped me sort out my own ideas which are based on just 15 years of episodic exposure to this stuff Doug with no disrespect to your academic colleagues I'm going to discuss this as the pragmatist that I am and also with no disrespect to your academic colleagues Doug Doug is much better this way I'm gonna try to speak in as plain English as I can and to be as non-technical as I can so let's let's get going and before I get into what are going to turn out to be ten separate cases decided by the US Supreme Court and what I'll call the power to decide area again as a substitute for jurisdiction I need to set the table with a couple of things there are two or three people and I think only two or three people in the room who are old users like I am who practiced under the Act but understanding the stuff we're going to be talking about is materially assisted by understanding how it used to be in the old days and a fundamental concept which many of you may have heard about but which is so important that it's worthy of discussion and that is that bankruptcy is historically in RIM there are at least three major decisions of the United States Supreme Court Gardner versus New Jersey central Virginia Community College against cats and Tennessee assistance Corp versus hood which have said that with varying degrees of specificity so what does that mean as a practical matter we have a pile of assets in the estate and we have decisions to make as to who's going to get a piece of the action from those assets and how claims are going to be determined to get the right into the doorway to do that now you're also going to hear that to administer bankruptcy fairly we have to recapture assets back into the race the the estate from time to time most significantly by recovering fraudulent conveyances and Trant and preferences also less commonly unauthorized post-petition in transactions turnover and the like but as we go through it today keep in mind and ask yourself a silent question are we talking about dishing out pieces of action in the race are we talking about the asset acquisition process because that's going to have a material effect on how we look at these things going forward or respectfully how I would suggest to the supreme court that it do it in the next case to come down the road next thing that's helpful to understand is the structure of the old act we've had a number of bankruptcy acts over the years 1800 in the 1840s about 1867 but most significantly in 1898 as it was this amended by the Chandler Act Amendments during the Depression era and the old Act had a decidedly in rem focus and now you know where I'm coming from when I started with in rem one was a section two of the old Act which talked about the jurisdiction of then referees later called bankruptcy judges now called bankruptcy judges to hear what they called proceedings proceedings are what we now call in bankruptcy parlance cases and you can always tell a an article 3 judge who doesn't know anything about bankruptcy when he or she talks about a modern case as being a proceeding when the word really would be case conversely proceedings can now include and most commonly do include as adversary proceedings things that come up under the umbrella of the case so think of it as exactly flip-flopped now from the way that it was in the old days back in the old days and this is where I started as a young associate bankruptcy courts had what they called summary jurisdiction which was in what was called straight bankruptcy at the time what we now think of this chapter 7 jurisdiction to deal with the ass in which the state had actual or constructive possession there was a twist to it because under 311 of the Chandler Act Amendments under an old chapter 11 and I'm talking about an X I 11 that in rem jurisdiction also covered assets in which the estate had title even if it didn't have possession of them but you can still see the in rem focus across the board by contrast if a bankruptcy trustee were in chapter 11 old eleven a debtor in possession wanted to go out and grab additional assets in such as to recover a fraudulent conveyance it had to bring what was then called a plenary action it could be brought in state court it could be brought in federal court but the bankruptcy judge or referee I think I'll use referee when I'm talking about the old act days could not decide it by means of that summary jurisdiction that I just turned to talk about keep that in mind too as we discussed the new cases that came thereafter now I want to talk about ten separate cases that define the modern jurisprudence jurisprudence at the Supreme Court visa vie bankruptcy litigation and now you'll understand what so many why I'm talking as quickly as I am for which I you have my apology first I want to read something to you I'm reading from everybody have one of these a Constitution of the United States of America Congress has the power in addition to establishing a uniform rule of naturalization to establish uniform laws on the subject of bankruptcies throughout the United States I want you to remember it because when I talk about the Supreme Court cases to file you're ever going to never going to hear those words again you would be astounded I would suggest as to the extent to which a court that has at least seemingly had great interest in textual analysis and plain meaning has failed to consider the import of those words now I'm no longer a judge I it would be very hard for the Congress to take away my pension unless of course with the recent tax cuts it can't afford it so I'm going to express a few thoughts that I wouldn't have decided articulated two years ago but I'll try to stay roughly in turn but okay so let's now talk about those ten cases and the first one I want to talk about is actually not a code case at all it's an Act case Kachin versus landing and that one in an opinion by justice white the court held that the bankruptcy I talk like bankruptcy judge the referee had some reject a jurisdiction to order the return of a preference that was asserted by a trustee in response to a claim by after a creditor had filed a proof of claim in the Bankruptcy Court there are three things I want you to take away from Kachin first of course the factual predicate the target of the preference action had actually filed a claim but remember we're now talking in the days of summary jurisdiction in general a referee couldn't hear a plainer reaction so how could the referee do it with its summary jurisdiction here and by the way there were so few women referees and bankruptcy judges back in those days that III may slip into a male gender for which I apologize but notice that the court didn't just up hold taking by reason of that preference to claim down to zero the court authorized an affirmative recovery of that preference so yeah we can understand why using its in rem jurisdiction the referee could have said oh oh you got a preference don't bother me don't bother the other creditors don't dilute their recoveries you don't get anything the court authorized the money coming in the door interesting especially in light of what you're going to hear down the road secondly entirely missing from that decision is an expression you're going to hear when I talk about the nine cases to follow public right we'll come back to that and try to get our arms around it but you won't see it or hear about it in cancer and the third important takeaway from my perspective about catching is that the opinion which was written by justice white was it white was a very pragmatic approach he really cared about there being a functional bankruptcy process as you hear discussion of those cases you're going to see a pendulum that swings from that very Pro process approach one that really cares about what's good for putting more money into the pockets of creditors and reorganizing companies to one which is much more structural and institutionally based and much less focused on what it takes to get the job done in a way that's efficient and fair you will see for that reason that although that opinion was written by justice white pretty soon justice White's going to start winding up on the dissenting site and notice that pattern as we go forward next case is one that I'm going to talk about very quickly it's one of three or four cases that are in bankruptcy cases at all it's called atlas ruling the court unanimously held that challenges to OSHA orders occupational safety orders that were issued by an administrative law judge needn't offer a jury trial and it talked about what we're going to hear more about the public rights doctrine which is a doctrine emanating from a case called Mary's lessee in the mid-1800s which basically said that when Congress was dealing with certain kinds of Rights and I'll be more precise when I read the exact language as I find it further on which were of a public nature as contrasted to a private nature it could set up the mechanisms for dealing with rights of that character as it saw fit it could offer a jury trial it could deny a jury trial it could offer and have them decided by an article 3 judge or it could have offer and have them decided by a non article 3 judge that was a case in which a revenue collector who was supposed to be collecting revenues and ponying them up to the government violated his duty and the court was dealing with the remedies for doing that and it held that under those circumstances because of the nature of that being the public right and there the government was a plaintiff a jury trial needn't be provided then we get to a case that at least everybody who's a judge or a practitioner knows will northern pipeline versus marathon pipeline this is the first of the postcode cases and it comes up by reason of a statutory change not in the bankruptcy code but in the judicial code 28 USC which had given bankruptcy courts and they were now called bankruptcy court's jurisdiction of three types arising under jurisdiction which is a species of federal question jurisdiction except instead of applying to the entire US code it applied to the Bankruptcy Code arising in jurisdiction which generally related to kinds of matters that would not appear except in a bankruptcy case and related to jurisdiction which would in conceptual terms be stuff that would have an effect upon an estate but which would not fall within the first two categories by way of example bringing a contract case that would bring money into the estate which would be of unquestionable desirability to the creditor community could be asserted only under related to jurisdiction the court dealt with that and I'm going to deal with it much quicker than it deserves but in a decision that could not get five votes the court held by a plurality decision that the Judicial Code provision 28 USC I think it was 1413 71 excuse me what's unconstitutional in its entirety based upon its unconstitutionality when used as the method for bringing a contract claim a state law claim in the Bankruptcy Court and it didn't get as I mentioned five votes but there was a common thread by two additional judges who were concurring and basically we think of Marathon as standing for the proposition that the court held apart from the fact that that whole section of the code whether it was offensive in any other respects or not could not be used to provide for a jurisdictional basis for an estate bringing a related to claim on a purely state law claim notice that it did not then address in any way the federal question claims that might be brought that could bring new value into the estate or in bringing value back into the estate such as fraudulent conveyance claims on the one hand or a preference recoveries and the plurality distinguished in its discussion the restructuring of debtor-creditor relations which I would suggest to you is a sophisticated way of talking about the in rem type of stuff that I was talking about before which it described as being at the core of federal bankruptcy power from the adjudication of state created private rights it was the state private rights characterization which brought the two additional judges in to what was effectively a six judge judgment that the statute as drafted could not stand now remember that expression I used a moment ago the core of federal bankruptcy power that comes out of a marathon those of you which I guess it's most of your judges are practitioners who still practiced in the days of 28 USC 157 where it really made a difference we'll remember the expression court proceedings and the expression court proceedings at least in my judgment had its origin and the distinction that was made in that fashion jumping ahead and forgive me again for rushing we then have two non bankruptcy cases Union Carbide and CFTC versus sure in each of which the Supreme Court upheld said it was okay to have federal schemes in which tribunals other than article 3 courts could hear claims for private damages for damages in the event of non bankruptcy disputes in Union Carbide the court held importantly that it would no longer be of the view that for there to be a public right that the US government be a party to the litigation five judges held that for a long time during his lifetime Justice Scalia differed with that view he recognized the existence of public rights as providing an exception under which an article 3 judge wouldn't to hear a controversy but he believed the government should still be a party to it that view which is understandable in light of much of its history nevertheless was rejected by those five judges in Union Carbide and remains the law today unless the court were for some reason to overrule that's holding in that in similar cases jumping back now into the bankruptcy world and we come up with a very case called gran fin on Sierra and for those of you who speak Spanish better than my high school Spanish if I've butchered the pronunciation excuse me versus Norbert that was a case in which the court held that parties who had not submitted proofs of claim in a bankruptcy case had a right to a jury trial which is a first cousin of the issue of a bankruptcy judges power to decide things so we have the opposite of Kachin versus landing and I think the most important thing to think about grunt fin NC area is not that holding which is not all that surprising when you compare and contrast it to catch and B landing but other things that it said it's an initial premise was that unless a legal action involves public rights Congress can't deprive parties of a jury trial and also said that if a statutory right is not closely intertwined with a federal regulatory program that Congress has the right to enact then it must be adjudicated by an article 3 court and if the right is legal in nature then it carries a jury trial word right as well now by the way most of the time we're talking about the rights of bankruptcy judges to decide stuff remember that federal district judges have that same subject matter jurisdiction that bankruptcy judges do and it's a good rule of thumb by the way for you to analyze these issues by saying well if it weren't a lowly article 1 bankruptcy judge dealing with this stuff but we're a district judge dealing with the same issue would he or she have subject matter jurisdiction most of the time on the type of things I'm talking about a district judge would but by the same token if a claim is equitable a district judge doesn't have to grant a jury trial trial right any more than a bankruptcy judge does so think here about how the issues have slightly different application when you're talking about a bankruptcy judges power on the one hand and a district judges on the other what the court also said which wasn't so relevant in fennan ciara but it's going to become more relevant I think in the next case comes that comes down the road if indeed it's litigated the court said and this may be dictum it may not be although the issue admits of some debate a bankruptcy trustees right to recover a fraudulent conveyance under 11 USC Section 548 a – seems to us more accurately characterized as a private rather than a public right as we've used those terms in our article three decisions that would at least seemingly suggest the bankruptcy judges have to be very careful in assuming power over claims to recover fraudulent conveyances and I'm not sure of preferences would be regarded as meaningfully different and that may be coming up down the road the next case we can deal with very quickly especially since it was per curiam Langenkamp V Culp that involved a case where targets of a preference action had filed proofs of claim and just like Kachin V Landy bankruptcy judge can decide the issue but once again notice that the court authorized two separate things not just erasing the claim not just saying thou shalt not collect out of my bankruptcy estate which I think most of all of us would agree is a classic and rem function but I can pick your pocket and take that money back and give it to the remainder of the creditor community so at least as long as Langenkamp V Culp would remain good law that capability still exists and by the way in such a situation there's no right to a jury trial then we jump forward to stern vs.
Marshall and I think most of you know about it so I'm only going to make a few observations there certain versus Marshall as we know holds that a state law counterclaim could not consistent with the Constitution be asserted against an entity even that had filed a proof of claim when there was not a full congruence between the claim that had been submitted to the bankruptcy court and the subject of the counterclaim I'm dramatically overly generalizing but I think what I said is sufficiently accurate that was so even though as a matter of statute it was a corm matter it was expressly stated to be a core matter and the decision was driven on an amalgam of some of the things that I've talked about before it was not a public right it was not an in rem action and although the statute had said it was okay it was an overreach by the federal judiciary particular concern was given to whether or not it was a public right by this time it was clear that a public right no longer requires the US government to be a party nevertheless public right had been historically understood as involving either one or another of three main categories a matter where Congress had legislated with respect to territories that were not States had imposed invoked its power to prescribe rights relating to court martials or involved public rights and we've talked about what public rights are and we think we know what public rights are they are either rights to which the US government is a party or involve a federally enacted regulatory scheme for which the action is an integral part now other concerns appear as well that Congress might be aggrandizing itself or putting it conversely humbling the judiciary at the article 3 judiciaries expense but once again we're talking about institutional concerns and by the way notice that nothing that I've said yet talks about the fairness of the proceeding proceedings of this character could be judicially reviewed by an article 3 judges albeit under the deference on fact-finding that article 3 judges given but they nevertheless could be judicially reviewed with that said the stern versus Marshall Court stated Justice Roberts speaking for the 5 judge majority we do not think the removal of counter claims such as Vickie's from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute we agree with the United States that the question presented here is a narrow one that's been paraphrased by many at saying that Justice Roberts didn't believe that Stern versus Marshall was a big deal well any of us who has been in the real world for the last decade and knows that that isn't exactly accurate my former colleague Shelly Chapman wrote and one of the early decisions after Stern that Stern had become the mantra of every litigant who for strategic or tactical reasons would rather litigate somewhere other than the Bankruptcy Court and in one of my early post stern decisions I determined that I should abstain from the matter where I was concerned that the estate would be engaged in Bleak House litigation determining whether or not any final any orders that I entered could be regarded as final orders that the estate could enforce apropos that want you guys to think back to what justice white cared about back in Kachin versus landing about efficiency the Supreme Court gave its view of that concern in Stern it said it goes without saying that the fact that a given law or procedure is efficient convenient and useful will not save it if it is contrary to the Constitution I think it's also fair to say that dumb decisions by bankruptcy judges can lead to the necessity for article three judges to deal with this stuff the controversy that was decided at the Bankruptcy Court in Stern was a first cousin of an issue that was already pending in the Texas probate court I don't know how many bankruptcy judges we have in the room now probably half a dozen or a dozen I suspect that each one of them would have given serious thought if it were other than a no-brainer to abstain from dealing with an issue of that character and not getting the US courts into the pickle that they were thereafter in two other cases though some and this will bring me to the end of it and I hope I'm not talking way too long I suspect I am so get Jason crank it up things get better in the arkinson case the Supreme Court held that you could still provide proposed findings of fact for review by a district judge and and wellness the court held that parties could still consent to the final order of a bankruptcy judge so the thing for that what are our takeaways one is already apparent you see the swinging pendulum first from efficiency and what's good for creditors and their needs and concerns to structural concerns maybe back now a little bit to efficiency let's cross our fingers not much of a change well we I would suggest to you that it is still a change as the need for judge Levinson and Delaware to talk about whether Stern prevents entry of elements of a confirmation order suggests but hopefully with some of the attention to reality that we now see in arkinson and wellness that'll be a little bitter objections to claims there was musing in first in the oral argument in stern and then even in Justice Scalia's concurring opinion asking well do you think that if a claim is asserted under state law a bankruptcy judge can now decide it well my suggestion to you is of course it he can of course she can and that if the law were to hold otherwise in light of the historical in rem jurisdiction of the bankruptcy courts that question will answer itself if anybody really wants to depress the point the bankruptcy clause I read it at the beginning you haven't heard much more about it because you haven't heard much more about it from the Supreme Court you know Congress has the right to enact rules for the regulation of the armed forces based upon that it has the authority to authorize court martials but the same power has not been applied in the bankruptcy area so I could say more but I see my friend standing very diplomatically and if anybody has any questions at the end I'll try deal with them thanks for your time thank you judge I think you had had perhaps the heaviest burden in terms of what you were trying to cover and some of the complexity so we'll have some time for questions later professor I think are you planning on going next is that great okay not about the jurisdictional stuff but just about substantive issues and how the Supreme Court thinks about substance and of course a couple of preliminary observations if they are confronting a discrete substantive area of the law they're smart people they have good law clerks they will do good lawyerly jobs with respect to that particular issue what I want to do though is try to say well ask the following question what can we see generally about how they think about bankruptcy cases and and how we should think about what they're doing and how that's different than the way they might address any particular issue of statutory construction a couple of initial observations but they are not bankruptcy experts they're not close to being bankruptcy experts I should also say the Supreme Court is a they not in it there are a number of different lawyers who have different types of experience of Justice Kagan has almost none Justice Breyer Justice Ginsburg district court Italy but the court of appeals at least heard a number of cases so again you don't want to over generalize but one thing you can't do is go in and expect that they're really going to understand things like the difference between dip financing and exit financing and you shouldn't also be shocked if they write an opinion that gets it wrong you can say what about their law clerks well they all went to Yale they never took so let me let me start with just just to be provocative and give you what I think is the most important Supreme Court decision ever which is a button or vs.
United States now Buckner versus United States has the interesting characteristic of being a pre-code case that is super by statute that deals with an obscure point of North Carolina lien law okay so why am I talking about it well that's like saying Erie is a railway case the relevant language is Butner is property interests are created and defined by state law unless some federal interest requires a different result there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding a party should not receive a windfall by happenstance of bankruptcy in other words the basic idea is when the Supreme Court looks at a set of non bankruptcy rights unless there's some specific bankruptcy policy that says they should do something different they're going to respect that right and that's the basic posture they're going to bring to every case even though it's been superseded by statute I looked it's been cited by the Supreme Court more than a dozen times it's raised in cases like wine trout that dealt with the attorney-client privilege where what the Supreme Court does is say well wait a second what's the non bankruptcy analog how do we think about who gets to assert the attorney-client privilege in bankruptcy this is just a standard theme they used I want to make two comments about bankruptcy history and this is the jurisprudence from the 1930s and this is a Yin again and a yang in the 1930s there were a number of cases in which the Supreme Court focused on the fact that secured creditors held property rights they're not just senior but they actually hold property rights and they say that really matters that has Fifth Amendment implications we take property seriously this is a food that still resonates through the jurisprudence today I'm especially in an era where a majority of the court probably believes in federalism and believes in deference to state laws and so forth relevant quote from Louisville joint-stock Land Bank versus Radford which declared unconstitutional Frazier Olympic yet lemke act of it if the public interest requires and permits the taking of property of individual mortgagees in order to relieve the necessities of individual mortgagors where can we just translate that if the public interest requires and permits to take seeing a property of secured creditors in order to relieve the necessities of individual debtors resort must be had by eminent domain no I'm not saying that they that the that's the way the Supreme Court's going to talk today but that's a shadow that class casts a the Supreme Court will cast over any time Jamie comes along and wants to take away my right as a secured creditor something that has dramatically changed however is if you read the Supreme Court cases of the 1930s you'll see repeated references to the statute of 13 Elizabeth the the old fraud standard fraudulent conveyance statute they'll talk repeatedly about how bankruptcy courts are courts of equity bankruptcy courts have the power to figure this stuff out bankruptcy courts have the power to fashion remedies and this is where we get the origins of substitute consolidation of equitable subordination of various things like that that's the way the supreme court talked about bankruptcy judges in the 1930s that's not with us today that's not the way the Supreme Court is thinking about bankruptcy judges today the standard theme of bankruptcy jurisprudence is repeated decisions by the Supreme Court to limit the discretion of bankruptcy judges and they'll do this in case it's like rad lacks is a good example there is interpretative ambiguity and they say the Bankruptcy Code says sales with credit bidding that's the only way you can do sales period that's a natural move they make you can point to these cases where they do it over and over again and to cite justice Robert he was being confirmed up he was talking about all judges but he means it specifically with respect to bankruptcy judges they should just called balls and strikes what they want is that you respect on bankruptcy rights and when there's a federal bankruptcy policy that requires different result that's fine but you have to tell me we're in the bankruptcy code that says that you can't say you know gee this is this will maximize the value of the estate's no no we're not talking about a general right to give the debtor a win all by happenstance of bankruptcy show me a particular right and if you can show me a particular right in bankruptcy that's fine but unless you can identify a particular revision to the Bankruptcy Code I'm going to define the power of the judges narrowly and I'm gonna take as my baseline non-bankruptcy right and again before people get upset remember I'm not giving my view I'm talking about the general posture the Supreme Court takes to that maybe I be I'd say the same thing if I were in the Supreme Court but I can guarantee that that's never gonna happen so in any rate up what does this mean for let's say secured creditors in particular I think if you want to cut back on the rights of the secured creditor and the supreme court you have a very long road unless you can point to some particular part of the Bankruptcy Code nothing in particular is going to happen the caveat I would give to that and this is just to talk about cases like tilt is that when it comes to valuation things are a little bit different the Supreme Court until remember said that you have a chapter 13 plan where in expectation seventy percent are going to fail and the Supreme Court said well let's calculate an interest rate that takes account of that probability of failure and that fully compensates the secured creditor for having the debtor with a 70% chance of defaulting well you need to give a risk premium for that and the bankruptcy judge has discretion to figure out when there's a 70% chance of failure what kind of risk premium compensation could be one percent or three percent and again that's not the way that's not seriously valuing the secured creditors right but but I think that may be the wrong lesson to take away from till I think the right was less to take away from telling this is another part of till where what they say is that wait a second if that kind of risk premium isn't a reasonable risk premium if the kind of risk premium you need is really I popping that says something about the chapter 13 not about the interest rate you should be charging at any rate I think there's a lot of playing the joints when it comes evaluation but I don't think it's like the play we saw before the code where courts would play with valuations in order to put a thumb on the scale this is a situation where the Supreme Court is doing valuations without necessarily being anchored on planet earth which is which is just somewhat different but anyway Jamie disagrees with everything I said okay thank you for having me here I've been asked to talk about the absolute priority rule and lucky for me the Supreme Court hasn't actually talked about it that much I'll go through a couple of things but one gerber mentioned northern pipeline would you hadn't heard mentioned in a while and I just anecdotally I started practicing law in 1985 and it was a summer associate 1984 and for those of you who remember the northern pipeline came out in 82 and they ruled the whole system unconstitutional but they stayed it and gave Congress a chance to fix it of course Congress didn't and I think they gave him a one year and then they extended for six months and then in the summer of 84 they let it go into effect and I was a summer associate than they were they actually shut down the bankruptcy system and I see some other people who were in Chicago at the time and I remember I was a summer associate going over to bankruptcy court and the judges would sit at the counsel table without the robes on and say well there is no bankruptcy system and I'm not a bankruptcy judge but if I was here's what I might do in this particular instance an amazing way it worked pretty well that only went on for about six weeks but it was an interesting time to be a summer associate so in any event so the absolute priority role I the so that rule or the rule itself predates the Bankruptcy Code notice an act that you know like a lot of things with good intentions with the belief that insiders with the support of sometimes other creditors could use the bankruptcy process or reorganization process at the time to get some sort of unfair advantage the pre-code law which goes back literally to the first case was 1899 Louisville trust and there was another case in 1913 Northern Pacific v Boyd basically said that kind of what the absolute priority rule says today that according to principles of fairness and equity creditors have to be paid before stockholders can retain any equity interest for any reason that was codified as everybody knows in 1129 B 1 which says virtually the same thing now what I think everybody knows this but sometimes I think people lose the focus that only applies in a cramdown obviously people can agree otherwise so what's the Supreme Court had to say about the absolute priority rule and what's interesting is most of what they've said is sort of evasive in dicta or unclear exactly you know the binding nature of it so you go to Los Angeles lumber products company from 1939 which even though it's a lumber products company at build ships but they this was dicta and they said not that the absolute priority rule doesn't exist but you could have and this is where the words get interesting is that a corollary is that an exception here was a deviation from the strict application of the absolute priority rule where the necessity for new capital exists in old stockholders make a fresh contribution and receive a return and receive equity and return for a participation reasonably equivalent to their contribution no objection can be made and but in this one the court actually denied confirmation of the plan because they didn't find that the stockholders had contributed any new value so they kind of made up something and did it and said well it doesn't really apply because they didn't do it and then going forward from that the lower court's trying to figure out what that case meant said the second and fourth circuit rejected the concept of there being new value plans in the seventh the ninth circuit said there could be new value plans so the Supreme Court weighed in again 60 years later in 1999 in 203 north or south which everybody has heard of which by then was happen to be the building I was practicing in Chicago Rudnick and wolfs I thought that was quite appropriate which later on became DLA there are the Supreme Court again acknowledged the existence of the new value exception as a well they used exception and then they used corollary but didn't rule on whether it existed or not because they said whether it existed and if it did exist in this case it wasn't satisfied because there wasn't a market test of the new value being put in by the equity and thus they didn't really need to decide whether the new value corollary exception existed since then there's been a bunch of lower court cases not that many even circuit court cases trying to define exactly what that means what's a market test and things like that then along comes pretty recently Jeb ik which is that quite an absolute priority rule case but it you could argue it a few different ways but that was a structured dismissal case and I will note that my firm argued it and lost it and it's interesting what it's being interpreted now by the lower courts you know pretty frequently and supreme court there held the non-consensual structured dismissal could not include a transfer of state assets that violated the absolute priority rule and it held that nothing at section 349 of the code authorized a bankruptcy court to make general end of case distributions that would be flatly impermissible in a chapter 7 liquidation or chapter 11 plan and violation of the absolute priority rule without the impaired creditors consent that's the cramdown if it only if it would be a crime now interestingly they distinguished the holding from the Second Circuit's decision in iridium not only did my firm lose that case I argued it lost it so it's another one and in that one the court affirmed the Second Circuit affirmed a pre and settlement that provided for a distribution to junior creditors of the objection of more senior creditors basically what happened was there was a and I remember this pretty vividly I remember actually when I went in to argue it in the district court we're I was sitting on one side while gotcha was sitting on the other side and they were supposed to go first and the judge said mr.
Sperry you should come up here first because you're the one who has to and tell me why I shouldn't roll for that it didn't start out well that was the district court we lost there we lost in the second circuit – uh-huh but what the iridium Court had held was there there was a desire to go after Motorola this was the iridium phones Motorola wasn't the bankrupt but they had funded the bankrupt entity with a lot of money but the Iridium creditors wanted to sue Motorola for a lot more money and they put aside a bunch of money in a trust to fund the lawsuit against Motorola even though Motorola had a first lien on all the essense disputed personally and I didn't think it was disputed that they thought it was disputed in any event they hoped that that was okay even though that couldn't have been done under a plan of reorganization that's a Second Circuit case it's not a Supreme Court case but in Jeb ik the Supreme Court said no what was done in Jeb ik was an end of case distribution and an Iridium it was middle of the case or something like that and that's distinguishing and because it only involved an interim order and that the distribution funded a litigation trust to press claims on the estates behalf to create more value for the estate and so they recognize that non-consensual departures from ordinary priority rules can be approved where they further legitimate code purposes and they also I think in thinking of what the mischief they brought in Stern I'm not sure if they were thinking about this but after they did Stern and then it ended up looking pretty broad and after a few more cases that took their way to wind to the Supreme Court after a few years they did make it kind of narrow even though Justice Roberts had said it was supposed to start out narrow here again they said that there's numerous instances where interim distributions can violate ordinary priority rules and they talked about first-day orders and really interestingly we all know as bankruptcy Jack's practicing in the more lower courts that roll-ups can be kind of controversial here they talked about roll ups as being part of the normal things that are approved as interim distributions so speaking of protecting secured creditors farmers secured creditor I would read that and say I just got license to go do roll mothers they don't really know I know I know it's just you're going back to tills 1% you're saying so they found that the the dismissal I'm sorry the structured dismissal and javac didn't serve any legitimate code purpose and and violated the absolute priority rule and those are really the Supreme Court cases that deal with the absolute priority rule so I can't go through the however many cases judge Gerber went through to define what all of this means you know as a practitioner sort of in the toiling in the vineyards I you know the my experience and you look at an Iridium which I was on one side of Jeb ik is on the other side of I there's a constant and again it's similar to what you said Jed gerber with this push-me pull-you tug between practicality commercial 'ti and adherence to what may look like the exactitude of the code but when you really burrow into it is exact is it as exact as it seems if everybody gets on board that actually doesn't matter and because you don't have cramdown and so you don't have that issue if somebody's holding out Jeff it's an example everybody was on board except for there was a class action group of plaintiffs of warn plaintiffs actually and for anybody following it there's a motion now to approve a new settlement in the Delaware Bankruptcy Code in jeddak that basically stops the skipping of the absolute priority rule and starts skipping of the worn class and gives them a distribution and they're actually objecting and says that's violence Java just convert the case to Chapter seven because that's what the Supreme Court required and we're prosecuting that settlement so I have my own view on it and that that actually complies with jeb ik because it it does exactly what Jeb exceed you need to do to be able to have a structured dismissal we'll see what the bankruptcy judge in Delaware does with that so maybe I'll stop there because a little bit of time for questions I guess but to me the the dearth of authority from the Supreme Court in the absolute priority rule context which is one of the key provisions or key you know almost philosophical conceptual underpinnings of the code is kind of striking and even where they have it you know um Los Angeles lumber is dicta the decision in two or three north lasalle is if it's not dicta they just said it didn't really apply and now we have Jeb ik where it wasn't even a plan of her organization it was a structure of dismissal so it's kind of and you know quite the mishmash of trying to figure out how to deal with it maybe the lesson is make deals and don't go to the Supreme Court so we have about ten minutes for this session and I'm and I'm glad I'm gonna sort of throw out a couple of things and then open it up to the floor for some questions let's start with the what we call jurisdiction but really is power and I hope everybody sort of understands the distinction here nobody's really contested the bankruptcy jurisdiction in Stern V Marshall right it was the question was whether you could have an article one judge decide that issue or whether he had to be decided by an article 3 judge and I think people confuse jurisdiction and power here but there have been some cases post Stewart vs.
Marshall that I've talked about well let me give maybe the what I think is a difficult example and one that could really throw a wrench in our in our practices the notion that a plan of reorganization that resolves third party claims that provides for injunctions and releases of third party claims that themselves are stern type claims that would not be capable or arguably not capable of being resolved by an article one judge can a plan approve that or do you need to get that plan blessed by an article 3 judge as was done in MMA Bob to protect against that issue is that the only way and I'll turn it I'd love to hear from the panel and I'd love to hear from the audience about some thoughts about that you're assuming third party releases are okay I'm making that first assumption that a plan most of the circuits said oh well the I was we have a case that's still pending millenniums health in the which went to the Third Circuit and precisely that issue and they said yes it is okay for the Bankruptcy Court to determine that now it began working its way back up to the circuit again a corollary type issues but I think especially the way storm has been clarified subsequently by the Supreme Court that yes the Bankruptcy Court can do that without going to the district court I don't have a dog in that fight but I agree with you Jamie and it's interesting in wellness justice alito concurred in a result and he did it because he recognized there's still an in rem aspect to what bankruptcy judges do within the bankruptcy administration of the estate and confirming plans as opposed to child for what you're talking about and I think that confirming the plan is a classic and rim exercise and I think she got it right I would say you know interesting we didn't mention this at all but you know the the root of all of this mess is the refusal to make bankruptcy judges we judge we didn't have that issue this entire panoply of stuff wouldn't exist I would say interesting I was on the ABI bankruptcy Reform Commission and we came out with this proposal after two years you know three hundred and fourteen suggestions not a word about what should be done about article one judge said why because we figured I was politically dead on arrival in the Congress and then it's just not gonna get dealt and so we're gonna keep having these types of issues professor you have any different view on that about plans that contain third party releases and injunctions of claims that are just aren't up close I would hate doing it but I would channel Jamie and say that that pains of it that the best way to handle third party released is the type of consensual plan put it in the plan hope no one objects have a plan confirmed and then the interesting thing in MMA of course was by the time we got there we had a consensual plan but we were also pre wellness right so in order to actually convince the tort defense bar which was largely advising the companies who were giving us money that they could rely on any of this stuff we put a provision in the settlements that we would go get a district court order that blessed things in the end not because frankly we thought we needed it but because in order to make the tort defense bar cough up the funds they wanted to see that provision and eventually it became a provision that CP needed but as judge Cary will remember he kind of looked at me quizzically when I suggested we had to go to the district court cuz I think he was perfectly comfortable with the fact that he had Authority as was i but but we had a broader universe sort of beyond the bankruptcy universe that we had to convince and that's that's really where it came down it might have been a different case after wellness which it was by the time we actually got the final district court order so I think the district court judge was a little perplexed too wasn't she about why she was being asked to do it well she was and then her successor as well and that's how you get rid of all that issues they're basically they solve the article 3 judge problem in 524 G that way one thing I can tell you is that Jamie and I both I can't I can't speak for you but we we began in Chicago in 1985 together and I can't tell you how much time I spent in my first five years of practice litigating withdrawal of reference motions I mean that's what we did and there were time limits if you didn't do it soon enough then you know you were basically say you would waived it and consented to the jurisdiction and if you did it too early they said come back and see me when it's trial ready there you know there was no good time to bring it but you had to bring it early because otherwise you were you were at risk judge you were no please so let me let me throw another one out there in our in our last couple of minutes there's discussion about valuation which I think is tied into much of this till now it was a chapter 13 case there's been a lot of discussion about whether applies in eleven but but most folks seem to think it does I'm a bankruptcy litigator I look at tilt and I think about a valuation an appraiser evaluation expert coming in and testifying about the adjustment in the interest rate that ought to be made between one to three percent on the basis of tilt and if it were me I would file a Daubert motion to strike that as methodologically flawed it is not what any appraiser ma eye or valuation expert would do in a million years it the the person would analyze the business the risk comparable companies and try to establish an interest rate or as many courts have done judge Gerber you may be familiar with all these the blended rates where they would say well okay bankruptcy contemplates a forced loan so for 75 or 80 percent we're going to look at the market rate for that a well secured loan and we're going to sign an interest rate and for the next ten percent we're going to treat it as mezzanine financing and look at the interest rate and the last ten percent we're going to treat as capital and looking at an equity return and we're gonna blend that that's been rejected by most courts at this point but I I think that there's a real problem with till and its methodology in terms of valuation and interest rate so any thoughts about that I again maybe a lot of bankruptcy courts are protected but I think if you get a large reorganization most of the Second Circuit is momentum momentum and and so I don't I wouldn't have any confidence that that people in 11 or gonna mechanically follow till I think that the frightening thing in momentum was that as judge crane was issuing his opinion you could watch in your Bloomberg terminal as the price of this bond that was supposed to be worth 100 just dropped to 85 and you know you have to say you're supposed to give a piece of paper that's worth a hundred and that paper is being traded and you see the price fall below 85 that's a that's a problem and that's a problem register in a large Chapter eleven when there's a lot of money and they're robust markets and things like that I think an opinion like tille lives in the chapter 13 context just because no one is really providing reality therapy and I don't think it'll survive in the in the eleven context if it actually gets the Supreme Court I mean I would say two things one you know the facts matter a lot of times in Supreme Court they don't but they there's an element of pigs get fat he'll get slaughtered and momentum the judge drained ruled against them imposed till after the same creditors were offered cash in part plus accrued for their claim but they had to give up their make home so they said no I don't want to give up the make whole so they said we'll take a note instead so you know I don't think emotion played into it but they were offered Katie could have got everything they were entitled to doesn't the make whole was later found and that be any good so who knows exactly the other thing I've always found very interesting about till from the Supreme Court apropos to your point about they don't understand bankruptcy or valuation and Dalbert motion is they say maybe it doesn't apply in eleven because eleven you might have an efficient market lers and chapter thirteen get done well it was a truck loan there's hundreds of thousands of truck loans a year that would seem to me the most efficient market I can think of you're you're from the University of Chicago and you're not gonna get it you're not gonna get a free percent risk premium from any lender for Becca but this is but to say that that was an inefficient market compared to a chapter 11 orchid I think it I think that's but again they had a prime rate leave understand primary it's not accurate great I'll be there if you could if you were grading the till opinion one of the thing we're gonna take a recess for 15 minutes fourteen minutes one of the things that's really neat is that many of the cases that you have heard about discussed here the more recent cases the last 15 or so years you're gonna get to hear on the next panel from the people who argue them in the Supreme Court