Bankruptcy Law

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 bankruptcy proceedings.

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, 11-Jul