This afternoon I had the pleasure (along with Marcus Cole). of participating in a webcast at the Washington Legal Foundation on our article on “The New Forum-Shopping Problem in Bankruptcy” focusing on the Marshall v. Marshall case. The webcase is available here. It is a bit over an hour long. The working paper that is the basis for the webcast is here.
Toward the end of the program we also discussed the pending cert petition in In re Chrysler. Earlier this week WLF, the Cato Institute, and I filed an amicus brief in the case urging the Supreme Court to take cert. The brief is available here.
DjDiverDan says:
I enjoyed the Webcast, but it seemed to focus entirely upon the Anna Nicole Smith problem — specifically, Bankruptcy Courts overreaching in trying to exercise jurisdiction over state law matters that are only tangentially (at best) related to real bankruptcy issues.
Frankly, from my perspective, there are much more serious problems of “forum shopping” in the Bankruptcy Courts, and there is nothing “new” about that problem. The problem arises because of two issues in 28 USC 1408 — first, in a voluntary case, the Debtor gets the choice of where to file, and can choose among several alternatives, including the state of incorporation for a corporate debtor. Second, in the case of a large debtor corporation with numerous affiliates, the “affiliate” rule of 1408(2) allows the Debtor to file anywhere there is a pending case for an affiliate; hence, the giant corporate debtor with numerous subsidiaries can simply file the smallest subsidiary it has in a venue appropriate to that subsidiary, then have the whole corporate family follow it (even if the main Debtor has no real relationship to or operations within that venue). It is quite often the smallest tail wagging the biggest dog.
Since Bankruptcy Judges are human, and subject to vanity, they would much rather preside over the Big Chapter 11 getting lots of publicity than have their dockets filled with nothing but no-asset consumer Chapter 7s and boring old Chapter 13s. Thus, there is a real competition among Bankruptcy Judges to attract the major cases, and the way to win that competition is to adopt the most Debtor (and Debtor’s counsel!) friendly view of the Bankruptcy Code, or even be willing to ignore the Code when it strikes the Debtor or its counsel as inconvenient. There is a very sound reason why Business Bankruptcy became an economically rewarding industry in Delaware in the 1980s — there was a Bankruptcy Judge in Delaware (yes, I’ve seen her first hand; I represented a secured creditor in the second Continental Airlines case) whose primary rule of decision was “the Debtor Wins.” That didn’t stop until a District Court Judge decided to put the brakes on (maybe he was finally overwhelmed by the number of appeals from her court where there was really no legal basis for her decision, except that the Debtor asked for the relief) by vacating the Order of Reference by which Bankruptcy Cases were delegated to the Bankruptcy Court. The competition for big cases is alive and well, and seems to be currently focused in the Southern District of New York, where Debtor’s Counsel will be awarded just about any fees they ask for ($500 per hour for a 3rd Year Associate? Fine, sounds reasonable in SDNY!), and if you represent a secured creditor hoping to preserve cash collateral, you WILL be forced to agree to a carve-out to pay Debtor’s counsel, even though Second Circuit precedent says you don’t have to.
There have been efforts to fix the problem; notably, Texas Sen. John Cornyn tried to push through an amendment to 28 USC 1408 that would have eliminated (or at the least limited) the “tail wagging the dog” scenario, and limited the use of the State of Incorporation alternative, but that was killed in its tracks by Charles Schumer, representing his wealthy New York constituents who make a very healthy living off business bankruptcies, and Joe Biden, protecting the still very healthy Bankruptcy Business in Delaware.
It seems to me that the only real remedy for that long-standing forum-shopping problem is for creditors’ counsel to simply insist upon asserting their right to an Article III tribunal, objecting to everything the Bankruptcy Judge does, and challenging the constitutionality of an involuntary delegation to an Article I Judge as provided in 28 USC 157(a). Contrary to popular understanding, the Marathon case did NOT decide that delegating core matters to an Article I Bankruptcy Judge complied with Article III; it simply was not faced with that question. The only issue properly before the Court in Marathon was whether or not allowing Article I Judges to finally decide non-core matters exceeded the limits imposed by Article III, which the Court decided in the affirmative. Giving Article I Judges final authority over core bankruptcy matters still raises an issue under Article III, and certainly seems to run afoul of the Court’s decisions in CFTC v. Shor (regarding the right to an Article III tribunal and the waiver of Article III rights), and in U.S. v. Raddatz and Crowell v. Benson (both under the Federal Magistrate Act, holding that the Article III Court must retain “all of the essential attributes of the judicial power”). Indeed, even in Marathon, Justice Rehnquist expressed doubt whether review by an Article III Court under deferential standards of appellate review was sufficient to comply with Article III. As Rehnquist stated, “I am likewise of the opinion that the extent of review by Art. III courts provided on appeal from a decision of the bankruptcy court in a case such as Northern’s does not save the grant of authority to the latter under the rule espoused in Crowell v. Benson, 285 U.S. 22 (1932). All matters of fact and law in whatever domains of the law to which the parties’ dispute may lead are to be resolved by the bankruptcy court in the first instance, with only traditional appellate review by Art. III courts apparently contemplated. Acting in this manner the bankruptcy court is not an “adjunct” of either the district court or the court of appeals.” 458 U.S. at 91. DjDiverDan(Quote)
TCO says:
Wow...most substantive comment I’ve read here. And the only one on the thread. I mean it’s like the comment is so meaty it could be better than the blog post. TCO(Quote)
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