Restructuring

Contributed by Kyle J. Ortiz
Today, in the latest installment of our series reviewing the Final Report and Recommendations of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11, we review the Commission’s comments on (i) venue and (ii) core and noncore matters – discussed in sections IX.A and IX.B, respectively. Two topics that – in a notable departure from the majority of the Report – the Commission did not issue any recommendations for reform, but for quite different reasons in each instance. The Commissioners did not provide any recommendations regarding the venue statute because they were unable to reconcile their strong and disparate views on the topic. In contrast, the commissioners demurred, on the topic of core and noncore matters, in light of the current unsettled nature of the case law on the topic following the recent Supreme Court decisions in Stern v. Marshall and Executive Benefits Insurance Agency v Arkinson, and the expectation that the Supreme Court will provide further guidance on the topic shortly in Wellness International Network v. Sharif.
Venue of Chapter 11 Cases
In their own words, the “Commissioners found [venue] issues among some of the most difficult and divisive issues considered during the Commission project.” As a consequence, the Commissioners “were unable to reach a consensus regarding whether reform of the venue statute was necessary or what potential reform might best serve the diverse interests in chapter 11 cases.” Thus, the Commissioners deviated from the standard format used throughout the Report, and, in lieu of issuing any reform recommendations, opted to provide just a summary of the competing research and deliberations on the topic.
The primary disagreement between the Commissioners and in the literature they reviewed revolved around the statute’s permissiveness of venue choices based on (i) where the debtor is incorporated (See 28 U.S.C. § 1408(1)) and (ii) the “affiliate-filing rule” (which permits a debtor to file a case in a jurisdiction where an affiliate of the debtor has previously filed a pending chapter 11) (See 28 U.S.C. § 1408(2)), and the common reliance by debtors on one of those two grounds for jurisdiction to file cases in either the Southern District of New York or the District of Delaware.
The Report noted that critics of the venue statute most frequently propose the elimination of venue choices based on the place of incorporation and on the affiliate-filing rule. These critics argue that under the current statute debtors often select venues that “bear no meaningful relationship to the business, its operations, its financial difficulties, or its stakeholders,” and that filing a case thousands of miles away from a debtor’s “management, employees, communities, and key constituencies, makes it difficult and expensive for these parties to participate in or even follow the chapter 11 case.” The Report notes that certain of the studies conducted on venue choices define venue selection based on the place of incorporation or the “affiliate filling rule” as “forum shopping.”
Supporters of the existing venue statute, on the other hand, argue that the flexibility inherent in the current system allows debtors to choose jurisdictions “that will facilitate the most effective and value-maximizing reorganization.” Additionally, for large global businesses that are geographically diverse there may not be a “particular jurisdiction that is better or more convenient for the business and all stakeholders,” and, thus, without a true home jurisdiction, such debtors should be free to choose venues that have “expertise in complex financial and operational matters and have relatively efficient procedures for handling large cases.”
Venue has been a contentious topic from the days of Enron and WorldCom through the recent venue dispute in Patriot Coal and the ongoing venue battle in Caesars, and, as the Commissioners’ disagreement makes clear, venue is sure to remain a hot button topic for the foreseeable future. This is, interestingly, notwithstanding that, according to the Report, relatively few motions to transfer venue are filed.
Core and Noncore Matters in Chapter 11 Cases
The Report’s section on core and noncore matters in chapter 11 cases should have a familiar ring to readers of the Weil Bankruptcy Blog as the issue has been extensively covered in our Stern Files series since the Supreme Court’s Stern v. Marshall decision upended the core/noncore construct enacted as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984. The 84 Act itself was a response to another paradigm shifting decision from the Supreme Court, Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., which struck down the Bankruptcy Act of 1978’s “broad jurisdictional provisions, asserting that the [78] Act unconstitutionally conferred Article III judicial power upon Article I bankruptcy judges.”
The Report notes that the 84 Act divided bankruptcy matters into (i) core matters that are central to the bankruptcy (arising under title 11 or in a case under title 11) and granted bankruptcy judges authority to enter final orders with respect to such core matters (See 28 U.S.C. § 157(b)), and (ii) non-core matters (generally common law and other matters typically reserved for Article III judges) and limited – absent consent – bankruptcy judges’ power over such noncore matters. to proposing findings and conclusions for submission to a district judge for entry of a final order. See 28 U.S.C. § 157(c). Additionally, as the Commissioner’s note, “[u]ntil recently, it has been understood that affirmative consent of the parties allows bankruptcy judges to conduct trials and enter final orders whether or not a proceeding or matter is core or noncore.”
As the Report notes, in Stern v. Marshall the Court questioned the constitutionality of the core/noncore scheme created under the 84 Act, holding that even though the 84 Act conferred statutory authority upon bankruptcy courts to enter final orders in connection with certain “core” claims (Stern specifically addressed state law counterclaims), bankruptcy courts may still lack the constitutional authority to do so if the matter is of the sort traditionally reserved for adjudication by an Article III tribunal. Although described by the Court as a “narrow” decision, Stern left the restructuring community reeling and spawned hundreds of litigations on a myriad of questions, including, “(i) whether bankruptcy judges are statutorily authorized under 28 U.S.C. § 157(c) to propose findings of fact and conclusions of law in core proceedings, and (ii) whether Article III allows a bankruptcy court to enter a final judgment on a Stern claim [statutorily core, but constitutionally noncore], with consent of the parties.”
In June of 2014, the Court issued its Arkinson decision settling the first question above by holding “that the reasoning of Stern v. Marshall constitutionally prohibits a bankruptcy court from entering final judgment on a bankruptcy ‘related to’ claim (one deemed to be noncore); nevertheless, section 157(c) allows a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court.”
As the Report notes, the Court has not yet heard oral arguments or issued a decision in Wellness Int’l Network v. Sharif, but there is wide expectation (and hope) that the Court will answer the second question above and “address the open issue of whether the bankruptcy courts can issue a final judgment in core matters where they lack constitutional authority . . . if the parties expressly consent.”
In light of the current unsettled state of the law on the topic, the Commission did not take a stance on the issues currently before the Court but concluded that the “Commission and all those interested in the efficient operation of the U.S. bankruptcy system, look forward to further clarity with respect to the scope of the bankruptcy court’s authority to hear and finally determine bankruptcy-related issues.” That sentiment, at least, is something we can all agree on.