A Unified Theory of Bankruptcy Court Jurisdiction: Wellness International v. Sharif

A unified view

By Donald L. Swanson

Federal courts in the U.S. bankruptcy system have been struggling for decades with the extent and limits of bankruptcy court jurisdiction under the U.S. Constitution.

The difficulty begins with Articles I and III of the U.S. Constitution:

–Article I, Section 8, says:

“The Congress shall have power to . . . establish . . . uniform laws on the subject of bankruptcies throughout the United States.”

–Article III, Section 1, says:

“The judicial power of the United States, shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish. The judges . . . shall hold their offices during good behaviour, and shall, at stated times, receive for their services, a compensation, which shall not be diminished during their continuance in office.”

The problem arises because bankruptcy courts are established under Article I (not under Article III), yet the end product of a bankruptcy court’s efforts is a judicial decision. So, we have an Article I judge serving an Article III – type role. This creates a separation-of-powers (between Congress and the judiciary) issue, and separation-of-powers is a crucial part of the constitutional system in these United States.

A Headache

This separation-of-powers issue has created, over many years, a headache for nearly everyone dealing with it. In the latest pronouncement on the issue by the U.S. Supreme Court (in Wellness International v. Sharif, decided May 26, 2015), we get a sense of that headache.

–The issue in Wellness is whether a bankruptcy court can hear and resolve the claim that a business entity is an alter ego of the bankruptcy debtor. The dissenting opinion authored by Chief Justice Roberts explains how the bankruptcy court, (i) has no constitutional authority to resolve a fraudulent transfer claim, but (ii) does have constitutional authority to resolve an alter ego claim.

[Editorial  Note: This minute distinction illustrates the technical difficulties involved.]

–The dissenting opinion authored by Justice Thomas emphasizes, (i) the difficulties and complexities of issues surrounding the constitutional authority of bankruptcy courts to issue judicial rulings, (ii) the need to grapple with and resolve these difficulties and complexities, and (ii) the failure of the majority opinion to do so in the Wellness case.

–The majority opinion rules that bankruptcy courts have authority to resolve all the types of disputes that Congress has assigned to it when the parties consent, either explicitly or by implication, to that authority.

–The majority opinion describes any constitutional concerns over its consent ruling as “de minimis”; while the dissenting opinion authored by Chief Justice Roberts sees great constitutional peril in the majority’s jurisdiction by consent ruling – it’s a slippery-slope type of concern he is expressing; and the dissenting opinion authored by Justice Thomas sees a middle ground in which the Supreme Court needs to grapple with and resolve the difficulties and complexities involved.

As a practical matter, the Wellness International ruling should resolve most constitutional issues on bankruptcy court authority. But it’s still troubling that there is no complete-consensus, on the U.S. Supreme Court, for a unified constitutional theory of bankruptcy court authority.

[Editorial Note:  It will be interesting to see how Justice Gorsuch fits into all of this.]

The Justice Thomas dissent describes the problem like this:

Modern bankruptcy courts “adjudicate a far broader array of disputes than their earliest historical counterparts. And this Court has remained carefully noncommittal about the source of their authority to do so.”

A Unified Theory

But it seems that the U.S. Supreme Court has, in fact, provided a unified theory of bankruptcy court jurisdiction in the Wellness International v. Sharif opinion. Here are the elements of that theory.

1. The source of authority is the specific “bankruptcies” reference in Article I of the Constitution;

2. Congress has properly expanded on the specific reference in Article I by making bankruptcy courts and bankruptcy judges a “unit” of the Article III district courts and subject to Article III control;

3. Congress has properly allocated the division of labor between Article III district courts and their bankruptcy court units, with the core/non-core and “related to” distinctions and the “proposed findings of fact and conclusions of law” mechanism; and

4. Stern v. Marshall issues are a limited exception to the proper allocation, but bankruptcy courts can still address these issues by consent of the parties or by “proposed findings and conclusions” to the district court.

Why wouldn’t these elements work as a unified theory? Answer: They should, according to the Supreme Court majority.

Why do we need to continue grappling with such history-based distinctions as public rights v. private rights that create confusion and difficulty? Answer: We don’t, according to the Supreme Court majority.

And how could this unified theory degenerate into the slippery-slope problem that Chief Justice Roberts envisions? Answer: It shouldn’t, according to the Supreme Court majority.

Remaining Constitutional Authority Question

The only remaining constitutional authority question is this:

–Which issues still require “de novo” review (absent consent of the parties) under Stern v. Marshall, rather than a deferential review as a final judicial order?

Surely this narrow question can be resolved with dispatch and efficiency.


It looks like a unified theory of bankruptcy court jurisdiction is now provided by the U.S. Supreme Court!

Mediation “Dream Team” Appointed in Puerto Rico — But With a “Voluntary” Limitation and Impediment

Puerto Rico’s location on the map

By Donald L. Swanson

On May 21, 2017, the Financial Oversight and Management Board for Puerto Rico files its “Petition” initiating a proceeding under the Puerto Rico Oversight, Management, and Economic Stability Act. This proceeding is described as a pseudo-bankruptcy and is pending in the U.S. Bankruptcy Court for the District of Puerto Rico (Case No. 17 BK 3566).

Mediation Order Appointing “Dream Team”

On June 14, 2017, the presiding Judge in the Puerto Rico case enters an “Order and Notice of Preliminary Designation of Mediation Team” (Doc. 74). This Order appoints a five-member team of mediators that’s widely recognized as a mediation “Dream Team.”

This Dream Team “is led by Chief Judge Barbara Houser” of the U.S. Bankruptcy Court for the Northern District of Texas. The other four members are:

–Judge Thomas L. Ambro of the U.S. Court of Appeals for the Third Circuit;
–Judge Nancy Friedman Atlas of the U.S. District Court for the Southern District of Texas;
–Judge Christopher Klein of the U.S. Bankruptcy Court for the Eastern District of California; and
–Judge Victor Marrero of the U.S. District Court for the Southern District of New York.

The mediation Order appears to follow the approach, made famous by the City of Detroit bankruptcy, of appointing a mediator team to help shepherd along the bankruptcy proceeding of a governmental entity. The mediation Order appears to be a very good step!

“Voluntary” Limitation

To quibble on one point, however, the mediation Order contains this limiting provision:

–“Participation in mediation sessions will be voluntary.”

Why would a presiding Judge appoint a five-person mediation Dream Team but permit them to mediate only when disputing parties volunteer to do so?

Detroit Bankruptcy – A Contrasting Example

Participation in mediation efforts, back in the City of Detroit bankruptcy, are anything but “voluntary.” Consider these earliest mediation steps in the Detroit bankruptcy (Case No. 13-53846 in the U.S. Bankruptcy Court for the Eastern District of Michigan):

July 18, 2013 — Detroit files its Petition under Chapter 9 of the Bankruptcy Code.

August 13, 2013 – Presiding Bankruptcy Judge Steven Rhodes enters a “Mediation Order” (Doc. 322), which provides:

“After consultation with the parties involved, the Court may order the parties to engage in any mediation that the Court refers in this case”; and

The Judicial Mediator “is authorized to enter any order necessary for the facilitation of mediation proceedings” and “may, in his discretion, direct the parties to engage in facilitative mediation on substantive, process and discovery issues.”

August 16, 2013 – The Judicial Mediator, Chief Judge Gerald Rosen of the U.S. District Court for Eastern District of Michigan, issues his “Order to Certain Parties to Appear for First Mediation Session” (Doc. 334), which identifies 12 parties and says:

“IT IS HEREBY ORDERED the above-named parties shall appear for an initial mediation session before the Honorable Gerald E. Rosen, Chief Judge of the United States District Court for the Eastern District of Michigan, in his Courtroom, . . . on Tuesday, September 17, 2013 at 11:00 a.m.

The mediator team in the City of Detroit bankruptcy, led by Judge Rosen, aggressively and effectively exercises the broad authority granted to them. And their efforts prove to be successful.

Mandated Mediation – A Common Tool

Moreover, mandated mediation is a commonly-used tool in many courts, both state and Federal, throughout these United States. In the U.S. circuit courts of appeals, for example, every circuit but one has a mandatory mediation provision. And studies show these mandatory provisions to be highly successful in achieving settlements.

Empirical Studies – And Puerto Rico’s Experience

Furthermore, empirical studies show that “voluntary” mediation programs commonly suffer from limited use.  Such study results are consistent with Puerto Rico’s pre-filing experience: “voluntary” mediation initiatives made little-to-no headway.  So, the “voluntary” limitation in this case might even leave the Dream Team with little-to-do beyond imploring parties to mediate their disputes.


The presiding Judge in the Puerto Rico case takes a major step by establishing a mediation system and appointing a mediation Dream Team. But the Judge limits mediation efforts, at the outset, to “voluntary” participation. This “voluntary” limitation on the Dream Team’s efforts is likely to impede and impair the effectiveness of the Dream Team’s mediation efforts.

Justice Neil Gorsuch Authors His First Opinion as Justice of the U.S. Supreme Court

Trump Supreme Court
Supreme Court Justice Neil Gorsuch, with his wife Louise (photo from The Denver Post)

By Donald L. Swanson

The case is Henson v. Santander Consumer USA Inc., U.S. Supreme Court Case No. 16-349, decided June 12, 2017.  The case is on appeal from the Fourth Circuit Court of Appeals.  The question is whether the Fair Debt Collection Practices Act applies when you “purchase a debt and then try to collect it for yourself.”

The Fourth Circuit says the Act does not apply in such a circumstance.  And the unanimous opinion of the Supreme Court affirms the Fourth Circuit’s ruling.

The Henson v. Santander opinion is written by the newest member of the Supreme Court, Justice Neil Gorsuch.  And this is his first written opinion as a Supreme Court Justice.

Henson v. Santander is a companion case to the recently-decided Midland Funding v. Johnson opinion by the U.S. Supreme Court on a consumer bankruptcy issue under the Fair Debt Collection Practices Act (see this article on the Midland Funding decision).

The following are excerpts from the new Henson v. Santander opinion that provide a flavor of Justice Gorsuch’s writing style and analysis.

The Act

“Disruptive dinnertime calls, downright deceit, and more besides drew Congress’s eye to the debt collection industry” and resulted in “the Fair Debt Collection Practices Act, a statute that authorizes private lawsuits and weighty fines designed to deter wayward collection practices.”

The Issue

“So perhaps it comes as little surprise that we now face a question about who exactly qualifies as a ‘debt collector’ subject to the Act’s rigors. Everyone agrees that the term embraces the repo man—someone hired by a creditor to collect an outstanding debt. But what if you purchase a debt and then try to collect it for yourself—does that make you a ‘debt collector’ too? That’s the nub of the dispute now before us.”

Common Ground

Everyone agrees on the facts of the case and that Santander, as purchaser of CitiFinancial loans, “sought to collect in ways petitioners believe troublesome under the Act.”

Everyone also agrees that “third party debt collection agents generally qualify as ‘debt collectors’” under the Act, “while those who seek only to collect for themselves loans they originated generally do not.”  So, “[a]ll that remains in dispute is how to classify individuals and entities who regularly purchase debts originated by someone else and then seek to collect those debts for their own account.”

Textual Analysis

“[W]e begin, as we must, with a careful examination of the statutory text. . . . [T]he Act defines debt collectors to include those who regularly seek to collect debts ‘owed . . . another.’ And by its plain terms this language seems to focus our attention on third party collection agents working for a debt owner—not on a debt owner seeking to collect debts for itself.  . . . All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’”

Petitioners’ Arguments on Statutory Construction

“Petitioners reply that this seemingly straightforward reading overlooks an important question of tense. They observe that the word ‘owed’ is the past participle of the verb ‘to owe.’ And this, they suggest, means the statute’s definition of debt collector captures anyone who regularly seeks to collect debts previously ‘owed . . . another.’  . . . If Congress wanted to exempt all present debt owners from its debt collector definition, petitioners submit, it would have used the present participle ‘owing.’”

“But this much doesn’t follow even as a matter of good grammar, let alone ordinary meaning. Past participles like ‘owed’ are routinely used as adjectives to describe the present state of a thing—so, for example, burnt toast is inedible, a fallen branch blocks the path, and (equally) a debt owed to a current owner may be collected by him or her.  . . . Just imagine if you told a friend that you were seeking to ‘collect a debt owed to Steve.’ Doesn’t it seem likely your friend would understand you as speaking about a debt currently owed to Steve, not a debt Steve used to own and that’s now actually yours?”

“Looking to other neighboring provisions in the Act, it quickly comes clear that Congress routinely used the word ‘owed’ to refer to present (not past) debt relationships. For example, in one nearby subsection, Congress defined a creditor as someone ‘to whom a debt is owed.’  . . . In another subsection, too, Congress required a debt collector to identify ‘the creditor to whom the debt is owed.’ . . . Yet petitioners offer us no persuasive reason why the word ‘owed’ should bear a different meaning here.”

“Congress expressly differentiated between a person ‘who offers’ credit (the originator) and a person ‘to whom a debt is owed’ (the present debt owner). . . . Elsewhere, Congress recognized the distinction between a debt ‘originated by’ the collector and a debt ‘owed or due’ another. . . . And elsewhere still, Congress drew a line between the ‘original’ and ‘current’ creditor. . . . Yet no similar distinction can be found in the language now before us.”

Petitioners argue that “debt purchasers surely qualify as collectors at least when they regularly purchase and seek to collect defaulted debts—just as Santander allegedly did here.”  They “point again to the fact that the statute excludes from the definition of ‘debt collector’ certain persons who obtain debts before default.”  This exclusion, they suggest, “implies that the term ‘debt collector’ must embrace those who regularly seek to collect debts obtained after default.”

The Court rejects this argument.  “For while the statute surely excludes from the debt collector definition certain persons who acquire a debt before default, it doesn’t necessarily follow that the definition must include anyone who regularly collects debts acquired after default. After all and again, under the definition at issue before us you have to attempt to collect debts owed another before you can ever qualify as a debt collector.”

Petitioners’ Arguments on Congressional Intent

“Faced with so many obstacles in the text and structure of the Act, petitioners ask us to move quickly on to policy. Indeed, from the beginning that is the field on which they seem most eager to pitch battle.”

“Petitioners assert that Congress passed the Act in large measure to add new incentives for independent debt collectors to treat consumers well. In their view, Congress excluded loan originators from the Act’s demands because it thought they already faced sufficient economic and legal incentives to good behavior. But, on petitioners’ account, Congress never had the chance to consider what should be done about those in the business of purchasing defaulted debt. That’s because, petitioners tell us, the ‘advent’ of the market for defaulted debt represents ‘one of the most significant changes’ to the debt market generally since the Act’s passage in 1977.”

“[W]e will not presume with petitioners that any result consistent with their account of the statute’s overarching goal must be the law but will presume more modestly instead ‘that [the] legislature says . . . what it means and means . . . what it says.’”

“In the end, reasonable people can disagree with how Congress balanced the various social costs and benefits in this area. . . . After all, it’s hardly unknown for new business models to emerge in response to regulation, and for regulation in turn to address new business models. Constant competition between constable and quarry, regulator and regulated, can come as no surprise in our changing world. But neither should the proper role of the judiciary in that process—to apply, not amend, the work of the People’s representatives.”


“The judgment of the Court of Appeals is Affirmed.”

U.S. Congress and Supreme Court Support ADR — But Some Bankruptcy Courts Remain Nonconformist on Mediation


By Donald L. Swanson

There is “a kind of ‘hostility to arbitration’ that led Congress to enact” the Federal Arbitration Act.

Kindred Nursing Centers v. Clark, U.S. Supreme Court Case No. 16-32 (decided May 15, 2017).

Alternative dispute resolution processes (“ADR”) include arbitration and mediation.


Congress passed the Federal Arbitration Act (“Arbitration Act”) to promote the use of arbitration for resolving disputes that would, ordinarily, be filed in state and Federal courts and to eliminate opposition to arbitration. And in the Kindred Nursing Centers v. Clark opinion, the U.S. Supreme Court upheld, last month, the broad reach and effectiveness of the Arbitration Act against challenges under Kentucky’s State Constitution.


Similarly, Congress passed the Alternative Dispute Resolution Act of 1998 (“Mediation Act”) to promote the use of mediation in Federal courts and to eliminate opposition to mediation. The U.S Supreme Court has yet to rule upon the effectiveness of the Mediation Act, but the Supreme Court would, undoubtedly, support the Mediation Act’s statutory requirements for mediation in the same manner the Court is supporting statutory requirements for arbitration in Kindred Nursing Centers v. Clark.

The Mediation Act requires U.S. district courts, and their bankruptcy units, to establish local rules for, (i) promoting the use of mediation in their courts, and (ii) providing for mediation confidentiality.

Yet, some bankruptcy judges remain hostile to the use of mediation in their courts, or they are indifferent: seeing little value in mediation. Such hostility and indifference are reflected in the following three examples.

1.  A Bankruptcy Judge in Texas declares in open court that he does not like mediation, believes mediation is a waste of time and money, and is unlikely to approve mediation under any circumstances.

2.  The bankruptcy district in Northern Illinois (Chicago) recently revokes its existing local rules on mediation (including confidentiality provisions) as “unnecessary.”

3.  Approximately 70% of all bankruptcy districts have adopted some type of local rule on mediation. The rest, however, haven’t. And judges in the don’t-have districts often earn a reputation for being indifferent, or even hostile, to mediation.

In light of the requirements of the Mediation Act, each of these three examples seems out-of-place, at a minimum, and in violation of Federal law, when viewed in a less-generous light.

Moreover, the absence of local mediation rules in approximately 30% of all bankruptcy districts is particularly troubling because of the existence of such resources as the Model Local Rules on Mediation and the accompanying Commentary offered by the American Bankruptcy Institute.

How can this be!!

A History of Ancient Bankruptcy Laws

Ancient History   (photo by Marilyn Swanson)

By: Donald L. Swanson

Etymology of the word “Bankrupt”

According to the 1899 treatise linked below, the word “bankrupt” comes from the ancient days of Florence, Italy, when that city “occupied a prominent place among the commercial cities of the world.”

The word “bankrupt” arises from the Latin words, “banca rotta,” which mean “broken bench” or “broken counter.”  A creditor’s custom, for a debt-delinquent merchant in ancient Florence, is to break the merchant’s bench or counter.

The British later adopt this phrase in its own debtor/creditor laws but anglicized it like this:

–insert “bank” for “banca”; and

–replac “rotta” with “rupt,” which means “broken” (“rupture” is a derivative).

Hence, the word, “bankrupt.”

Ancient Bankruptcy History

Centuries before the rise of Rome, creditor/debtor remedies are harsh.  The Draconian code, for example, “permitted creditors to dismember the body of their debtor.”


As Rome rises to predominance, however, creditor/debtor laws improve.

–In Caesar’s time, the “distinguishing feature of modern bankruptcy” begins:

“the debtor who surrendered all of his goods to his creditors was relieved of the harsh penalties of the older systems.”

–And, over subsequent time, such penalties “were further mitigated by discharging him of his obligations.”

England Bankruptcy History

The first English law on debtor/creditor issues (enacted in 1542) is, essentially, a penal statute:

–“Debtors who fled the kingdom or concealed themselves were made criminals, and their effects were seized and distributed among their creditors without extinguishing their obligations.”

–These provisions applied “to all who ‘craftily obtaining into their hands great substance of other men’s goods, do suddenly flee to parts unknown, or keep their houses, not minding to pay, or return to pay, but at their own wills and pleasures consume the substance obtained by credit from other men for their own pleasure and delicate living, against all reason, equity and good conscience.’”

The term “acts of bankruptcy” is first found in The Charitable Uses Act of 1601 (a/k/a the Statute of Elizabeth).  Such “acts” allow a commission to seize and distribute a bankrupt’s property.

Upon enactment of the Statute of Anne in 1706, bankruptcy becomes a civil matter, instead of a statutory crime.

–A debtor can now surrender all his property to a commission and receive a “discharge” of “his person” and of “any property that he might subsequently acquire” from all existing debts.

The treatise linked below explains that this “humane enactment” of 1706, which is “followed in all subsequent legislation on the subject,” has a two-fold object:

“(1) To dedicate the property of an insolvent debtor to the ratable payment of his debts”; and

“(2) to grant him a discharge from his existing obligations, to the end that he may be restored to the activities of life, freed from the burdens visited upon him by previous misfortunes in business.”

The 1899 treatise adds this opinion on such two-fold object of the 1706 law:

“It may be justly remarked that there is nothing more to be accomplished by any law on the [bankruptcy] subject; all other provisions are matters of detail more or less effectively designed to accomplish these ends.”



Bush,   “The National Bankruptcy Act of 1898, with Notes, Procedure and Forms“, (1st Edition, 1899), The Banks Law Publishing Co.


How Mediation Can Be Effective – Even When it Doesn’t Happen

Evading the mediator

By: Donald L. Swanson

Arch Coal, Inc., files bankruptcy on January 11, 2016.

By the month of May 2016, the debtor and its creditors are in contentious negotiations over terms of a Chapter 11 plan.  At one point, the parties think they have an agreement in principal, but things fall apart when putting settlement details on paper.

On June 23, 2016, the Official Creditors Committee moves for a Bankruptcy Court order “directing the appointment of a mediator.”   In the Motion, the Committee says this:

–“all of the parties appear to agree that consensus should be reached” on confirmation issues and that “such consensus is in the best interests” of everyone;

–the Committee “remains hopeful that even before this Motion is heard by the Court, the parties may resolve their issues.”

–mediation “could yield enormous dividends and avoid the long delay that would certainly result from a litigation Armageddon.”

On June 24, 2016, various parties file a “Joinder” in support of the Motion, saying this:

–“the parties are heading toward a long and costly litigation, involving a host of complex issues,” so the parties need to “make a final good faith attempt to resolve their disputes amicably and in an expedited fashion.”

The Court schedules the Motion and Joinder for hearing on July 6, 2016.

By July 5, 2016, the parties reach an agreement on plan confirmation issues, and the hearing on mediator appointment does not occur.

Now . . . all of this would seem irrelevant in my world, except for the fact that I’ve had a similar experience:

–I’ve been appointed mediator in a court-mandated mediation, only to have the parties settle before the mediation could begin.

In my appointment-without-performance situation, I didn’t know whether to feel flattered or offended, or neither, by the prompt settlement.  In fact, while typing this, I’m not sure whether I’m bragging or complaining.

So . . . there you have it: two anecdotes showing how mediation can be effective – even when it doesn’t happen.





What Happens to Fraudulent Transfer Claims When Barred by Bankruptcy’s Two-Year Statute of Limitations?

Are the claims dead and buried?

By Donald L. Swanson

Two Hypotheticals and a Question:

First Hypothetical: Debtor makes a fraudulent transfer shortly before filing Chapter 7 bankruptcy. The Chapter 7 Trustee refuses to pursue the fraudulent transfer claim, and the Bankruptcy Code’s two-year statute of limitations expires.

Second Hypothetical: Debtor makes a fraudulent transfer shortly before filing Chapter 11 bankruptcy. The Chapter 11 debtor continues in possession, without appointment of an official committee. The Bankruptcy Code’s two-year statute of limitations expires, without any effort to pursue the fraudulent transfer claim.

A Question: What happens to the fraudulent transfer claims in these hypotheticals after expiration of the two-year statute of limitations?

U.S. District Court’s Answer

The answer from one U.S. District Court is this: the fraudulent transfer claims “automatically revert” to creditors, who may then pursue those claims in state court. Here’s the District Court’s analysis:

“Because creditors’ avoidance claims are not property of the estate, the trustee has a limited time in which to bring them,” and “when the two-year limitation on trustee avoidance claims expires, the claims automatically revert” to creditors.

In re Tribune Company Fraudulent Conveyance Litigation, Multidistrict Litigation No. 11 MD 2296, 499 B.R. 310  (S.D.N.Y. 2013).

The District Court cites three cases to support its answer.

First case – A farm equipment dealership:

In re Integrated Agri, Inc., 313 B.R. 419, 427-28 (Bankr. C.D.Ill. 2004).  In this Chapter 7 case the trustee files a fraudulent transfer action after expiration of the Bankruptcy Code’s two-year statute of limitations. The court rules that, once the trustee’s claim is prohibited by expiration of the statute of limitations, a creditor “regains standing to pursue a state law fraudulent conveyance action, in its own name and for its own benefits.”

Second case – An embezzler:

Klingman v. Levinson, 158 B.R. 109, 113 (N.D. Ill. 1993). The Defendant embezzeles money, and Plaintiff sues. Levinson files bankruptcy but does not receive a discharge of Plaintiff’s claim. Levinson’s bankruptcy trustee does not pursue any fraudulent conveyance claim. Accordingly, the court rules: “The trustee’s exclusive right to maintain a fraudulent conveyance action expires and creditors may step in (or resume actions) when the trustee no longer has a viable cause of action.”

Third case – A murderer:

In re Tessmer, 329 B.R. 776, 779 (Bankr. M.D. Ga. 2005). Ethel Tessmer kills her husband. After her conviction for felony murder, she transfers her interest in real estate to her parents. Then the former mother-in-law sues her for wrongful death, and the murderer files Chapter 7 bankruptcy. The bankruptcy case then follows “a somewhat tortured path,” involving a court-approved settlement of the fraudulent transfer claim, the grant of a discharge to debtor, and considerable litigation over the legal effects of such events, which result “in a great deal of confusion.” However, the Court determines that the trustee’s settlement prevents further action by the mother-in-law: “[C]reditors do not regain the right to sue unless the trustee abandons the claim or he no longer has a viable cause of action because, for example, the statute of limitations has run.”

Appeal to Second Circuit

On appeal, the Second Circuit Court of Appeals rejects the District Court’s answer above in a § 546(e) defense context. Here is what the Second Circuit says:

–The inference is that, if the two-year statute of limitations is not met by the bankruptcy estate, the fraudulent transfer claims “revert” to creditors “in full flower,” who may then pursue their own state law fraudulent transfer actions.

–This inference “finds no support in the language of the [Bankruptcy] Code” or its “purposes” and is a ”glaring anomaly.”

However, the Second Circuit limits its ruling on this “revert to creditors” issue to the § 546(e) context before it:

–“We resolve no issues regarding the rights of creditors to bring state law, fraudulent conveyance claims” outside the § 546(e) context.

Appeal to U.S. Supreme Court

The Second Circuit’s ruling in this case is, currently, the subject of a Petition for a Writ of Certiorari to the U.S. Supreme Court in the case of Deutsche Bank Trust Company America v. Robert R. McCormick Foundation, Supreme Court Case No. 16-317. The Supreme Court has yet to rule on this Petition.

It will be interesting to see if, and how, the U.S. Supreme Court addresses this fraudulent transfer issue.

How a Judge Makes Mediation Work: Supporting Mediation with Timely Orders

Making it work: Shoulder-to-the-wheel support

By Donald L. Swanson

“We in bankruptcy impair contracts all day, every day . . . That is what we do.”

–Judge Steven Rhodes, as quoted by Nathan Bomey in “Detroit Resurrected: To Bankruptcy and Back.”

Michigan’s State Constitution provides that public pension rights cannot be impaired.  So, pensioners take the position, in Detroit’s bankruptcy, that pension rights are sacrosanct and cannot be touched.  Their positions in mediation are, therefore, inflexible.

An Initial Supporting Order

Judge Rhodes wrestles with the question of whether contract rights of pensioners can be impaired in bankruptcy.  And he issues an early order on that question.  He rules:

–The U.S. Bankruptcy Code takes precedence over pension provisions in Michigan’s Constitution; and

–Therefore, the contract rights of public pensioners can be modified and impaired in bankruptcy.

Bomey reports in Detroit Resurrected that this ruling, “delivered a blow to unions” and exposed “a serious crack in a financial foundation” previously believed “to be indestructible.”  This ruling brings unions and pensioners to the mediation bargaining table to negotiate the best deal possible–and they negotiate a very good deal.

Without this ruling, Detroit’s bankruptcy might still be slogging along in bankruptcy.  Instead, it creates an incentive for unions and pensioners to bargain for settlement.  And the ultimate results are invaluable for the pensioners—their decision to bargain, instead of fighting in court, proves to be well-taken.

Another Example of Supporting Mediation with a Timely Order

Similarly, Judge Rhodes supports the mediation effort in another context by expressing his opinion on a contentious issue.  Bomey reports:

–Detroit is in a dispute with outlying counties over regionalization of Detroit’s water system, and the mediation is at impasse.

–Judge Rhodes addresses the dispute by declaring his “sense” that “a regional water authority” is “in the best interest” of the City and all its customers.

–Judge Rhodes adds that, “if we do not take advantage of this unique opportunity,” it will, in all likelihood, “be lost forever.”

–The result: “the counties caved” and reached a settlement, “rather than risk having one imposed” upon them by Judge Rhodes.


Such supportive-rulings work!

And they provide a model for other courts to follow.

–Judicial action addressing the merits of contentious issues can be useful, if not essential, in creating incentives for settlement.

Romance and “Insider” Status, with Other Oddities, at U.S Supreme Court (U.S. Bank v. Village at Lakeridge)

An Oddity

By Donald L. Swanson

On March 27, 2017, the U.S. Supreme Court grants certiorari in the case of U.S. Bank N.A. v. Village at Lakeridge, LLC, U.S. Supreme Court Case No. 15-1509.

The Facts

Kathie Bartlett is one of five owners of a company that owns the Debtor. So, both Kathie Bartlett and her company are “insiders” of the Debtor under § 101(31).

The bankruptcy Debtor proposes a plan of reorganization. The plan identifies only two impaired claims: (i) U.S. Bank’s $10 million, fully-secured claim, and (ii) a $2.76 million unsecured claim of the Debtor’s owner—i.e., Kathie Bartlett’s company. A problem for plan confirmation is the requirement that at least one impaired class of claims must vote to accept the plan – and insider claims aren’t counted in the vote (see § 1129(a)(10)). Since U.S. Bank opposes confirmation and the $2.76 million claim is held by an insider, the § 1129(a)(10) requirement for one-consenting-class is an impediment.

To get around this impediment, Kathie Bartlett’s company assigns its $2.76 million claim to Dr. Robert Rabkin for a payment of $5,000. This assignment gets dicey because Kathie Bartlett and Dr. Rabkin “share a close business and personal relationship.” Dr. Rabkin says he made this small, speculative investment for business reasons: for the chance to get a big payoff, since the plan provides a $30,000 dividend on this claim.  But U.S. Bank isn’t buying this reason: they think he’s conspiring with his girlfriend to evade a confirmation requirement.

From the Debtor’s perspective, the assignment to Kathie Bartlett’s close friend is a creative-but-legitimate way to satisfy a plan confirmation requirement. From the opposing creditor’s perspective, the assignment is the same as cheating—and the question is whether they’ll get away with it.

An Oddity

You’d think the primary issue discussed by the courts in this case would be:

Can an insider do that? Can an insider actually evade the non-insider acceptance requirement by assigning its claim to a friend who is not an insider?

As a bankruptcy practitioner, I want to know the answer to this question. I want to know how aggressive a debtor and its insiders might be in addressing plan confirmation requirements.

And you’d think we’d get a direct and clear explanation and answer for such a question in this case. But think again. Believe it or not, we probably won’t. Here’s why:

First, both the Ninth Circuit Court of Appeals and its Bankruptcy Appellate Panel focus on two questions in this case: (i) is Dr. Rabkin an insider, and (ii) did Dr. Rabkin act in good faith. They find in favor of Dr. Rabkin on both issues. And that, according to such courts, is the end of the inquiry and discussion.  But what about the good faith of the Debtor and the insider?

Second, in its Petition for a Writ of Certiorari to the U.S. Supreme Court, Appellant identifies three questions to be resolved. But the Supreme Court limits its grant of certiorari “to Question 2 Presented by the Petition.” And here is what Question 2 asks:

Whether the appropriate standard of review for determining non-statutory insider status is the de novo standard of review applied by the Third, Seventh and Tenth Circuit Courts of Appeal, or the clearly erroneous standard of review adopted for the first time by the Ninth Circuit Court of Appeal in this action?

Say what?! The Supreme Court is going to decide, in this case, only a “standard of review” question for determining who is/isn’t an insider?! Isn’t that question too narrow?  Now . . . I understand that standards for resolving insider/non-insider distinctions are important in a variety of contexts: as in the 90-days vs. one-year reach-back for preference liability. But still . . . I want a direct and clear explanation and answer on the how-aggressive-can-a-debtor-be question!!

The Ninth Circuit Court of Appeals had a clear opportunity to take on this how-aggressive question directly. In fact, the Ninth Circuit previously addressed this very question — and did so directly:

“[D]ebtors unable to obtain the acceptance of an impaired creditor simply could assign insider claims to third parties who in turn could vote to accept. This the court cannot permit.’”

Wake Forest Inc. v. Transamerica Title Ins. Co. (In re Greer West Inv. Ltd. P’ship), 81 F.3d 168, 1996 WL 134293, at *2 (9th Cir. Mar. 25, 1996) (unpublished) (emphasis added).

Instead of addressing the issue directly, however, the Ninth Circuit Court in the present case merely scolds the Appellant (in footnote 10) for citing an unpublished opinion.

Another Oddity

The courts in this case are struggling with how a romantic relationship fits into the insider v. non-insider analysis. The Ninth Circuit courts decide that Dr. Rabkin is NOT an insider, despite his romantic relationship with Kathie Bartlett. Here are details of their relationship, enumerated by the courts in this case and used to reach the non-insider decision:

–they see each other “regularly” but don’t “cohabitate”
–they pay their own bills and living expenses
–they’ve “never purchased expensive gifts” for each other
–she doesn’t “exercise control over” him
–he had “little knowledge of, and no relationship” with her business interests before the Debtor’s bankruptcy

Here’s hoping the courts can devise a better way to scrutinize romantic relationships for insider status, than trying to distinguish between “seeing regularly” vs. “cohabitating” or trying to decide if one party “exercises control” over the other. If they can’t, deposition and trial testimonies on the “insider” question could start resembling episodes of Seinfeld or Big Bang Theory.

A Third Oddity

One standard for evaluating an “insider” status is whether the transaction in question occurred at arms-length.

Dr. Rabkin testifies that his reasons for purchasing the $2.76 million claim are strictly business. However, the Bank believes his motives include helping his girlfriend. In an effort to prove as much, the Bank makes an offer—in its deposition of Dr. Rabkin—to purchase the same claim from him for a payment of $50,000. And then, in the same deposition, they increase the offer amount to $60,000. Dr. Rabkin doesn’t accept either offer or attempt any negotiations with the Bank—either during or after the deposition.

Here’s the oddity:

–The Bankruptcy Court apologizes to Rabkin “on behalf of the legal profession” for the “offensive conduct” of the Bank’s attorney in the deposition (see footnote 7 in BAP opinion).

–And the Bankruptcy Judge’s Order describes the conduct for which he apologized as an “offensive offer” to purchase Dr. Rabkin’s claim during his deposition “for twice as much as Dr. Rabkin could recover under the Debtor’s Plan.”

Seriously?! Offering twice-as-much is conduct worthy of an apology “on behalf of the legal profession”?! There must be something more about the manner-of-delivery – although none is identified. Otherwise, the twice-as-much offer seems like a clever attempt at exposing the existence of ulterior motives.


Here’s hoping that the U.S. Supreme Court will find a way to address the how-aggressive-can-a-debtor-be question in this case, despite its professed limitation to Question 2.

Mandating Mediation to Develop a Mediation Culture

A glaring contradiction? (Photo by Marilyn Swanson)

By:  Donald L. Swanson

[T]he full benefits of mediation are not reaped when parties are left to participate in it voluntarily.

D. Quek, Mandatory Mediation: An Oxymoron? Examining the Feasibility of Implementing a Court-Mandated Mediation Program, Cardozo Journal of Conflict Resolution, Vol 11:479, at 483 (Spring 2010).

The article linked above is written by Dorcas Quek, whose resume includes this:

“L.L.B. (National University of Singapore); L.L.M. (Harvard Law School); Visiting Researcher at Harvard Law School (2008-2009); Assistant Registrar and Magistrate in the Singapore High Court (2005-2007) and District Judge in the Primary Dispute Resolution Centre in the Singapore Subordinate Courts (June 2009 onwards).”


Ms. Quek’s article examines “the current debate in the United States concerning court-mandated mediation.” Here are some of her findings:

Mediation “may well be under-utilized in certain jurisdictions” because parties and attorneys “are still accustomed to treating litigation as the default mode of dispute resolution” and because “initiating mediation” may be “perceived as a sign of weakness.”

“In many jurisdictions, the rates of voluntary usage of mediation have been low.”

Where the “reticence towards mediation is due to unfamiliarity with or ignorance of the process,” court-mandated mediation “may be instrumental” in overcoming “prejudices or lack of understanding.”

“Studies show that parties who have entered mediation reluctantly still benefited from the process even though their participation was not voluntary.”

Observation / Recommendation

Ms. Quek draws this interesting observation / recommendation:

The “most compelling reason” for a court to mandate mediation is “to increase awareness and the usage of mediation services.” So, court-mandated mediation:

–should be utilized “only” as “a short-term measure” in courts where mediation “is relatively less well developed”; and

–is an expediency that “should be lifted as soon as” the awareness and utilization of mediation “has reached a satisfactory level.”

Value Judgment

And she bases such conclusion, in part, on this value judgment:

The term “mandatory mediation” is “a glaring contradiction.” Mediation emphasizes “self-determination, collaboration and creative ways” of resolving disputes and concerns, and “attempts to impose” a mediation process may “undermine the raison d’ˆetre” of mediation. Accordingly, “there must be compelling reasons to introduce mandatory mediation.”

While we can quibble with the idea of limiting mandated mediation, her point on using it to jump-start mediation where it’s struggling to get traction is sound.


In most state and Federal trial courts these days, mediation is firmly entrenched. In such courts, mandatory mediation isn’t improper: it’s, simply, not needed. Here’s why:

If you listen to litigators (who practice in such courts) talking about their cases, about what they have coming-up-next, and about their successes and disappointments, mediation will be a focal point of those discussions. No one needs to suggest mediation to these litigators or to encourage its use: they’ve already factored mediation into their case strategies – and mediation will always play a role. So, discussions of “mandating” mediation, for these litigators, is more of a redundancy than anything else.

Changing the Culture

But for many bankruptcy courts, mediation is still an unfamiliar and little-used process. In these courts, efforts to mandate mediation would be helpful in changing the culture.

Studies show that practitioners with little-or-no experience in mediation are reluctant to use it—and are uncertain on how it can be used effectively. And it shouldn’t be a surprise that mediation is a seldom-used process among these practitioners.

And my experience is that, (i) the adoption of local mediation rules will not, in and of itself, create a demand for mediation: “build it and they will come” does not work for mediation rules; but (ii) a local judge can change things by ordering cases into mediation. Once the judge starts requiring mediation, either by direct order in specific disputes or by local rule, the culture starts to change: practitioners start to become comfortable with mediation and start using it.


So . . . a major initiative in courts where mediation is little-used would be to start ordering specific cases into mediation and to mandate mediation by local rule.