Editor: James Cole, Esquire
Reconversion from Chapter 7 back to Chapter 13 is not barred
by Section 706(a) when it is ordered pursuant to the anti-abuse
provisions of Section 707(b)(1). Advanced Control Solutions, Inc. v. Justice (In re Justice), F.3d (No. 10-3168, 8th Cir., May 17, 2011).
Debtor converted to Chapter 7 from Chapter 13 after Advanced Controls
Solutions, Inc. objected to his plan. Debtor failed to rebut a
presumption of abuse that arose in Chapter 7 under the means test of
Section 707(b)(2). Pursuant to Section 707(b)(1), the Bankruptcy Court
ordered him to consent to reconversion to Chapter 13 or face dismissal.
Advanced Controls objected to Debtor's motion to reconvert. The
Bankruptcy Court granted the motion over the objection, and Advanced
Controls appealed on the ground that Section 706(a) precludes
reconversion. Section 706(a) states, "The debtor may convert a case
under [Chapter 7] to a case under [C]hapter 11, 12, or 13 of this title
at any time, if the case has not been converted" from one of those
three chapters. The Eighth Circuit rejected the creditor's argument
under Section 706(a), holding that Section 706(a) and Section 707(b)(1)
address different situations, so the former does not preclude
reconversion ordered pursuant to the latter.
Sheriff's sale of real estate for delinquent taxes pursuant
to Missouri Municipal Land Reutilization Law extinguished debtor's
interests pre-petition even though sale had not yet been confirmed by
circuit court before (former) owner filed Chapter 13 case. Beckham v. Bond (In re Beckham), B.R. (Bankr. E.D. Mo., adv. no. 10-4412-659, April 14, 2011).
Debtor was deeded property in the City of St. Louis as "Lawrence
Beckman" at an address other than the property's address. Although a
"Grantee Rider" was attached to the deed that recited the correct
surname of "Beckham" and the property's correct address, the
Collector's records reflected the erroneous data on the first page of
the deed. Pursuant to local ordinance, Debtor signed the deed as
grantee. However, he did not require the erroneous notations on the
first page to be corrected.
Debtor thereafter failed to pay real property taxes for the years
2006-2009. The Collector of Revenue filed suit to hold a tax sale,
sending notice under the Missouri Municipal Land Reutilization Law
(MLRL) to the name and address listed in the official records. Debtor
did not receive actual notice of the lawsuit or the sale. Buyer paid
$5,000 for the property at the sale in June, 2010, and thereafter moved
to confirm the sale pursuant to the procedures of the MLRL. Debtor
filed for relief under Chapter 13 before the circuit court held its
hearing to confirm the sale. He proposed a plan that would essentially
redeem the property from the buyer over time. Debtor also filed an
adversary proceeding to set aside the tax sale. The buyer filed a
counterclaim to confirm the sale.
The Bankruptcy Court found that notice of the Collector's sale was
adequate, in that all procedures of the MLRL were satisfied. Citing
authority from the Missouri Supreme Court, including a decision from
March, 2011, the court found the MLRL procedures did not violate the
requirements of due process under the Constitutions of the United States
and of Missouri. Moreover, Debtor contributed to the lack of actual
notice by failing to correct the erroneous data on the face of deed
when he signed as grantee and by failing to check into his real estate
tax liability for over three years.
Chapter 13 allows for repayment over time of a delinquency on a
debtor's primary residence "until such residence is sold at a
foreclosure sale that is conducted under applicable nonbankruptcy law."
The bankruptcy court found that under the MLRL procedures, the tax
sale cut off all rights of the Debtor to the land itself. The MLRL does
not allow redemption after the sale, but only before. Thus, for the
purposes of Chapter 13, the land had been "sold" pre-petition. When he
filed his Chapter 13 case, therefore, Debtor lacked an interest in the
residence, and there was no delinquency to be cured. The only right
remaining to Debtor was to challenge the reasonableness of the bid at
the confirmation of the sale, which if successful could force more
money to be paid. Debtor would have the right to any excess of the
amount paid over the taxes due. In this case, the bankruptcy court
found that the amount paid by the buyer was adequate in the context of a
forced sale, citing BFP v. Resolution Trust Co., 511 U.S. 531 (1994). The sale was confirmed pursuant to the buyer's counterclaim.
DISCLOSURE: Michael K. Daming of the writer's law firm represented the buyer in the adversary proceeding.
Not all "core" matters under the Bankruptcy Code are cognizable in the Bankruptcy Courts under Article III. Stern v. Marshall, 564 U.S. (no. 10-179, June 23, 2011).
Once again the United States Supreme Court holds that Congress
cannot give jurisdiction over common law tort claims brought by one
private party against another to judges who lack the prerequisites of
the judicial power under Article III of the Constitution.
Readers may remember the parties to this long-running saga, begun by
the late Vickie Lynn Marshall (publicly, "Anna Nicole Smith") against
the late Pierce Marshall, who was the son by a prior marriage of J.
Howard Marshall. Vickie had married J. Howard, a wealthy man, about a
year before his death. Vickie and Pierce fought each other in several
courts over distribution of J. Howard's large estate and over Pierce's
claim that Vickie, through her attorneys, had defamed him in public
accounts of the controversy.
The litigation began in Texas state courts. Vickie subsequently filed
for relief in the U. S. Bankruptcy Court for the Central District of
California. Pierce filed an adversary proceeding in that court to
determine that she had defamed him and the defamation was
nondischargeable under Bankruptcy Code Section 523(a). He also filed a
bankruptcy proof of claim for the alleged damages. Vickie objected to
the proof of claim and filed a counterclaim in the adversary
proceeding, asserting a state-law cause of action in tort against
Pierce for tortiously interfering with an expectancy of inheritance, an
expectancy she alleged had been created by J. Howard's promises to her
during life. Vickie's counterclaim was already a subject of the
lawsuit pending in Texas.
In 2000, the bankruptcy court entered judgment against Pierce on
his claim and for Vickie on her counterclaim, assessing compensatory
damages at over $400 million and adding $25 million in punitive
damages. On appeal to the U. S. District Court, the court (among other
rulings) reduced the judgment to somewhat over $44 million in
compensatory damages and raised the punitive damages to the same amount,
over $44 million.
In the meantime, between the bankruptcy court's judgment and the
District Court's judgment, a jury trial in the Texas court resulted in
judgment for Pierce on Vickie's claims. The U. S. District Court in
California refused to recognize the Texas judgment as binding.
Readers who are interested in further details of the cases are
referred to the first U. S. Supreme Court decision in this saga, Marshall v. Marshall,
547 U.S. 293 (2006), in which the Court ruled on the scope of the
"probate exception" in the jurisprudence of federal court jurisdiction.
In this second trip to the highest court, Pierce's estate argued, as
it had consistently argued from the beginning, that the bankruptcy judge
lacked the power under 28 U.S.C. Section 157(b) to render final
judgment on Vickie's counterclaim. The focus of this argument was on
Congress' attempt to vest broad jurisdiction in the non-Article III
bankruptcy courts by allowing bankruptcy judges to render final
judgment in all bankruptcy cases and in "core proceedings" under
Section 157(b). The relevant portion of the statute grants to
bankruptcy judges the power to determine "cases under title 11 and all
core proceedings arising under title 11, or arising in a case under
title 11, . . ." Section 157(b)(1). Congress went on to provide a
non-exclusive list of "core proceedings," which includes
"counterclaims by the estate against persons filing claims against the
estate." Section 157(b)(2)(C). In a "non-core" proceeding under
Section 157(c), described as "a proceeding that is not a core
proceeding but that is otherwise related to a case under title 11,"
Congress restricted bankruptcy judges to submitting proposed findings
and conclusions to the District Court for a final ruling.
Pierce's estate offered the statutory argument that Vickie's
counterclaim was a "core proceeding" as defined by Congress, but it
nevertheless lay outside the scope of a bankruptcy judge's power of
final adjudication because it did not arise "under title 11" or "in a
case under title 11." It was only "related to" a case under title 11
pursuant to Section 157(c). The consequence of this argument was, as
the Court of Appeals for the Ninth Circuit had ruled, that the Texas
state court's judgment would become the earliest final judgment rendered
on the merits and would be given preclusive effect in Vickie's
As a separate argument, Pierce's estate also asserted that the
bankruptcy judge, a non-Article III judge, had no power under Article
III to determine Vickie's counterclaim, leading again to the conclusion
that the Texas judgment should be recognized as preclusive.
In a 5-4 vote, the Supreme Court disagreed with Pierce's estate on
the statutory issue but found in its favor on the Constitutional
argument. In regard to Section 157, it rejected the concept that there
was a category of "core proceedings" that bankruptcy judges could not
finally adjudicate. From the structure and context of Section 157, the
court ruled, Congress created only two categories of proceedings apart
from "cases under title 11": "core proceedings" and "non-core
proceedings." Congress intended that bankruptcy judges could finally
adjudicate all "core proceedings," and it was clear that the
counterclaim by Vickie fell within that category. The statutory scheme
was so clear to the majority that there was no room for the canon of
construction that directs courts to construe legislation to avoid
serious doubts as to constitutionality.
However, the Court further ruled that the lines drawn by Congress do
not necessarily comport with the requirements of Article III of the
Constitution. Bankruptcy judges serve limited terms of 14 years; they
are not Article III judges. The majority reiterated what a plurality
plus Justice Rehnquist concluded in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458
U.S. 50 (1982): Bankruptcy judges cannot exercise the "judicial power
of the United States" under Article III by entering final judgment on a
state common law claim between private parties. The Court
distinguished Vickie's case seeking common-law damages from
adjudications of proofs of claim in which state law questions arise.
"Vickie's claim is a state law action independent of the federal
bankruptcy law and not necessarily resolvable by a ruling on the
creditor's proof of claim in bankruptcy." It further distinguished
cases involving adjudication of "public rights," i.e., disputes
"between the Government and persons subject to its authority in
connection with the performance of the constitutional functions of the
executive or legislative departments." This was not such a case but a
lawsuit asserting the liability of one individual to another under stat
e law. Thus it was not within the power of the Bankruptcy Judge to
resolve under Article III. The court of appeals was affirmed.
The Missouri Bar Courts Bulletin,