In Re: New York Skyline, Inc.
Filing
15
OPINION AND ORDER. Accordingly, I hold that: (1) Skyline did not consent to the bankruptcy court's power to enter a final judgment over non-core matters; (2) Skyline's claims are not core; and (3) there is a need for a further explanation as to whether the bankruptcy court had the power to hear the Skyline claims and to issue proposed findings of fact and conclusions of law with respect to those claims. The Judgment is hereby vacated and this case is remanded to the bankruptcy court for the limited purposes just described. (Signed by Judge Shira A. Scheindlin on 6/16/2014) (lmb) (Main Document 15 replaced on 6/16/2014) (lmb).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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USDCSDNY
)(
DOCTJMENT
In re
f EL!!CDtONICALLY FlI1ID
D<:c #:
•
NEW YORK SKYLINE, INC.,
I DATE FILED: (d
I
/(4
--·
Debtor.
I
NEW YORK SKYLINE, INC.,
Appellant,
OPINION AND ORDER
- against -
13 Civ. 7686 (SAS)
EMPIRE STATE BUILDING TRUST
COMPANY L.L.C. and EMPIRE STATE
BUILDING ASSOCIATES, L.L.C.,
Appellees.
·---------------------------------------------------
)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
Appellant New York Skyline Inc. ("Skyline") operates "SkyRide," a
helicopter simulator on the second floor of the Empire State Building (the
"Building"). Skyline and appellees 1 are parties to Lease and License agreements
The Building is owned by non-party Empire State Land Associates
L.L.C., which is wholly-owned by the Empire State Building Associates L.L.C.
1
I'-\
entered into in February 1993, amended from time to time, and assumed by
Skyline pursuant to section 365 of the Bankruptcy Code (“section 365”) during its
chapter 11 bankruptcy case.2
Skyline appeals from an Order and Final Judgment issued by
Bankruptcy Judge Stuart M. Bernstein on September 11, 2013 (the “Judgment”) in
a pre-confirmation adversary proceeding.3 As a threshold matter, Skyline contends
that under Stern v. Marshall,4 Judge Bernstein lacked constitutional authority to
(“ESBA”), the master lessee of the Building. The Empire State Building Company
L.L.C. (“ESBC”) manages the Building, and the Empire State Building, Inc.
(“ESBI”) owns the leasehold for the observation decks located on the 86th and
102nd floors (the “Observation Decks”). See Empire State Building Co. L.L.C. v.
New York Skyline, Inc. (In re New York Skyline, Inc.), 479 B.R. 71, 76 (Bankr.
S.D.N.Y. 2012) (“Authority Decision”). I refer to ESBC, ESBI and ESBA
collectively as “ESB.”
2
ESBA subleases the Building to ESBC. ESBC and Skyline are parties
to a sublease, as amended (the “Lease”), and a license, as amended (the “License”).
See id. Under the Lease and License, Skyline occupies space on the second and
third floors of the Building and operates SkyRide.
3
See Adversary Proceeding Docket No. 108. Citations to “Adv. Pro.
Docket No. __” are to the docket in adversary proceeding number 09-01145.
Citations to “Bankr. Docket No. __” are to the docket in Skyline’s bankruptcy
case.
4
564 U.S. __, 131 S. Ct. 2594 (2011).
2
enter a judgment in the adversary proceeding.5 On the merits, Skyline argues that
Judge Bernstein committed reversible errors with respect to (1) ESB’s claim that
Skyline breached a provision of a 2005 Lease and License amendment (the “2005
Agreement”) which prohibited Skyline from paying commissions or sales
incentives to Skyline representatives working in certain areas; and (2) Skyline’s
claim that Article 42 of the Lease “requires ESB to bill Skyline based on a survey
that estimates Skyline’s actual consumption, as opposed to its estimated overall
capacity to consume electricity.”6 For the reasons set forth below, the Judgment is
vacated and this case is remanded.
II.
BACKGROUND
A.
The 2005 Agreement
In April 2005, ESB moved the ticket office for the Observation Decks
to the second floor of the Building and reversed the direction of the “West
5
See Appellant New York Skyline’s Memorandum of Law in Support
of Appeal from Decisions and Orders of the Bankruptcy Court (“Appellant
Mem.”), at 1.
6
Id. (citing Empire State Building Co. L.L.C. v. New York Skyline, Inc.
(In re New York Skyline, Inc.), No. 09-10181, 2013 WL 655991 (Bankr. S.D.N.Y.
Feb. 22, 2013) (“Electricity Decision”) and New York Skyline, Inc. v. Empire State
Building Co. L.L.C. (In re New York Skyline, Inc.), 497 B.R. 700 (Bankr. S.D.N.Y.
2013) (“Protocol Decision”)).
3
Escalators” leading to SkyRide.7 Skyline brought an action against ESB in state
court seeking declaratory, injunctive, and monetary relief relating to its right to
access the West Escalators under the Lease.8 Prior to a hearing on Skyline’s
motion for a preliminary injunction, the parties executed the 2005 Agreement, and
stipulated to discontinue the action with prejudice. The 2005 Agreement permitted
Skyline access to its premises through the West Escalators and addressed some, but
not all, of the many disputes between the parties.9 One issue was ESB’s concern
“about Skyline representatives selling tickets in the Building and Skyline and other
vendors clogging” entrances.10 In response, the parties agreed to a protocol
provision requiring Skyline employees or representatives working in areas “of or
near the building” to wear uniforms approved by ESB and prohibited them from
being paid commissions or sales incentives.11
7
See Empire State Building Co. L.L.C. v. New York Skyline, Inc. (In re
New York Skyline, Inc.), 432 B.R. 66, 72 (Bankr. S.D.N.Y. 2010) (“Skyline I”).
8
See id.
9
See id.
10
See Appellant Mem. at 3-4.
11
See id. at 4.
4
In July 2008, ESB served Skyline with a Notice to Cure demanding
Skyline pay $431,000 in Building security fees claimed under the 2005
Agreement.12 On August 18, 2008, Skyline filed an action in state court (the
“Skyline Action”).13 The action was referred to the same judge that presided over
the 2005 lawsuit.14
B.
Skyline’s Bankruptcy
1.
Skyline’s Chapter 11 Filing and the Removal of the Skyline
Action
On January 12, 2009, Skyline filed a voluntary petition for relief
under chapter 11 of the Bankruptcy Code. Skyline’s largest creditor by far was its
secured lender, which held a claim of over $24 million as of the petition date.15
Roughly ninety trade creditors held unsecured claims totaling $130,000.16 In
12
See id. at 7.
13
See id. at 7-8.
14
See id. at 8; Skyline I, 432 B.R. at 74 (describing ESB’s conduct
following the 2005 Agreement and noting that “[i]t became so bad that ESB’s
lawyers admitted that they were embarrassed”).
15
See Debtor’s Disclosure Statement with Respect to Debtor’s Fourth
Amended Plan of Reorganization (“Disclosure Statement”) ¶ 9.
16
See id. ¶ 10.
5
addition, ESB asserted claims based on the disputes under the parties’ agreements.
ESB filed an adversary proceeding against Skyline on March 4, 2009
(the “ESB Action”),17 and removed the Skyline Action to the bankruptcy court on
March 30, 2009.18 The Notice of Removal states that the bankruptcy court has
jurisdiction over the Skyline Action pursuant to Title 28, United States Code,
sections 1334(b) and 1452(a) because the Skyline Action is “related to” Skyline’s
bankruptcy case.19 The Notice of Removal also states that “[u]pon removal, the
[Skyline Action] will be a ‘non-core’ matter, see 28 U.S.C. § 157(b)(2), and ESB
does not consent to entry of final orders or a judgment by the Bankruptcy Court in
the [Skyline Action].”20
2.
The April 28, 2009 Hearing
On April 7, 2009, Skyline filed a motion requesting that Judge
17
The ESB Action was assigned adversary proceeding number 09-1107.
The Judgment at issue in this appeal was entered in the Skyline Action; a separate
judgment was entered in the ESB Action.
18
See Skyline I, 432 B.R. at 74. I refer to the Skyline Action and the
ESB Action collectively as the “adversary proceedings.”
19
See Adv. Pro. Docket No. 1-1 ¶ 5.
20
Id. ¶ 6.
6
Bernstein either remand the Skyline Action or abstain, arguing that state law
predominated and the proceeding was non-core.21 The next day, Skyline filed a
motion in its bankruptcy case for a ninety-day extension of time to assume or reject
the Lease under section 365 of the Bankruptcy Code.22 Judge Bernstein considered
both motions at a hearing on April 28, 2009.23 He granted the ninety-day extension
under section 365, and denied the motion to remand or abstain reasoning that “the
issues were intertwined with the issues raised by Skyline’s anticipated motion to
assume some or all of its agreements with ESB.”24 Specifically, he determined that
the claims were core insofar as they related to the Lease assumption and
“arguably” core to the extent they related to the allowability of ESB’s proof of
21
See id. No. 3.
22
See Bankr. Docket No. 24. A chapter 11 debtor, “subject to the
court’s approval, may assume or reject any executory contract or unexpired lease
of the debtor.” 11 U.S.C. § 365(a). When there has been a default, the debtor
generally must cure the default or otherwise compensate the contracting party in
order to assume the contract. See id. § 365(b)(1). The debtor must assume a lease
for nonresidential real property by the earlier of 120 days from the filing of the
petition or the date of confirmation of a plan or it is deemed rejected. See id. §
365(d)(4)(A). The 120-day period may be extended for an additional 90 days
without consent of the lessor provided the request for extension is made within the
120-day period. See id. § 365(d)(4)(B).
23
See 4/28/09 Hearing Transcript (“4/28/09 Tr.”), Bankr. Docket No.
24
Skyline I, 432 B.R. at 74.
30.
7
claim.25 Judge Bernstein later entered a stipulation and order which fast-tracked
claims in the adversary proceedings believed to be relevant to Skyline’s decision to
assume or reject the Lease under section 365.26
3.
The Adversary Proceedings, the First Motions for Summary
Judgment, and the Assumption of the Lease and License
The ESB Action asserted eleven claims.27 Count I sought a
declaratory judgment that the 2005 Agreement was part of the Lease and the
License and therefore would need to be assumed along with the Lease and the
License.28 Counts II through X sought declaratory relief, injunctive relief, and
specific performance in connection with conduct by Skyline alleged to violate
provisions of the Lease.29 Count XI sought attorneys’ fees under the Lease for
ESB’s expenses in connection with bringing the ESB Action.30 ESB alleged that
its claims were “core matters pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (O),
25
4/28/09 Tr. at 26.
26
See Adv. Pro. Docket No. 8. In addition, the adversary proceedings
were jointly administered for trial purposes.
27
See Complaint, Docket No. 1 in adversary proceeding number 09-
28
See id. ¶¶ 98-104.
29
See id. ¶¶ 105-153.
30
See id. ¶¶ 154-157.
1107.
8
among others.”31 In its Answer, Skyline stated that the allegation was a legal
conclusion to which no response was necessary, but in any event denied
knowledge as to the truth or falsity of the allegation.32
Skyline filed a Second Amended Complaint on May 1, 2009, and a
Third Amended Complaint (the “Complaint”) on July 29, 2009.33 The Complaint
asserts claims for rescission of the 2005 Agreement, declaratory judgment,
injunctive relief, breach of specific provisions of the Lease and License, unjust
enrichment, prima facie tort, and tortious interference with contract. In addition,
Count Nineteen asserts claims for turnover and violations of the automatic stay
pursuant to sections 542 and 362 of the Bankruptcy Code in connection with
breaches of the Lease and License agreements.
The Complaint alleges that jurisdiction is proper because the claims
either arise in title 11, under title 11, or are related to the pending chapter 11 case.34
It also states that “[f]or the reasons articulated by the Hon. Stuart M. Bernstein on
April 28, 2009 in connection with the denial of Skyline’s motion to remand, the
31
Id. ¶ 10.
32
See Answer, Docket No. 10 ¶ 10 in Adv. Pro. No. 09-1107.
33
See Adv. Pro. Docket Nos. 5, 30.
34
See Complaint ¶ 25.
9
causes of action alleged in this Complaint are “core” matters pursuant to 28 U.S.C.
§ 157(b)(2).”35 On September 15, 2009, ESB filed an answer and asserted nine
counterclaims.36
On July 17, 2009, in connection with the order expediting claims
relevant to Skyline’s decision to assume or reject the Lease, the parties crossmoved for partial summary judgment. In its motion, Skyline sought a
determination that Article 42 of the Lease, relating to electricity charges, is
ambiguous. ESB moved with respect to five of Skyline’s claims, including the
Third Claim, which was to rescind the 2005 Agreement. Just after the motions
were filed, Skyline moved to assume the Lease.37 On July 28, 2009, during oral
argument on the motions for summary judgment, Skyline indicated it would seek
assumption of the Lease regardless of whether it could rescind the 2005
Agreement. On September 17, 2009, Judge Bernstein granted Skyline’s motion to
assume over ESB’s objection.38 Pursuant to the assumption order, Skyline
assumed both the Lease and License, paid $306,991.02 to ESB in undisputed cure
35
Id. ¶ 26. See generally 4/28/09 Hearing Tr.
36
See Adv. Pro. Docket No. 33.
37
See Bankr. Docket No. 38.
38
See id. No. 57.
10
amounts, and was directed to escrow $768,120.76 for disputed cure amounts.39
Among the disputed items were “security charges, access fees, electrical charges,
late fees, and attorneys’ fees.”40
Judge Bernstein issued his decision on the parties’ cross-motions on
June 21, 2010. He dismissed Skyline’s rescission claim in part because the Lease,
License, and 2005 Agreement were a single, indivisible agreement for purposes of
assumption under section 365.41 Judge Bernstein concluded that by assuming the
2005 Agreement, Skyline had ratified it, which barred a claim for rescission.42 He
denied Skyline’s request for a determination that Article 42 is ambiguous, holding
that it was “not appropriate to use summary judgment as a vehicle for fragmented
adjudication of non-determinative issues.”43
4.
Plan Confirmation
On August 13, 2010, Skyline filed a Fourth Amended Chapter 11 Plan
39
See id.
40
Id.
41
See Skyline I, 432 B.R. at 76-77.
42
See id. at 82.
43
Id. at 88 (quotation marks omitted).
11
of Reorganization (the “Plan”),44 which was confirmed on October 12, 2010.45
Article 11 of the Plan is a retention of jurisdiction provision. It states in relevant
part that the court retained jurisdiction “(b) To determine any and all adversary
proceedings, applications, and contested matters that are pending on the Effective
Date”; “(i) To hear and determine all Claims, controversies, suits and disputes
against the Debtor to the full extent permitted under 18 U.S.C. § 1334 and 28
U.S.C. § 157”; and “(j) To hear, determine and enforce all Claims and causes of
action which may exist on behalf of the Debtor or the Debtor’s Estate, including,
but not limited to, any right of the Debtor or the Debtor’s Estate to recover assets
pursuant to the provisions of the Bankruptcy Code.” 46 On February 28, 2011,
Judge Bernstein entered a Final Decree after determining that the Plan had been
substantially consummated, and closed Skyline’s bankruptcy case.47 The Final
Decree provided that “the Bankruptcy Court shall retain jurisdiction over the
pending adversary proceedings” between Skyline and ESB.48
44
See Bankr. Docket No. 132. Confirmation of Skyline’s Third
Amended Plan was denied in July 2010 after a confirmation hearing at which ESB
was the only objecting party. See id. No. 130.
45
See id. No. 144.
46
Id. No. 132 § 11.1(b), (i), (j) (emphasis added).
47
See id. No. 164.
48
Id.
12
5.
The Parties’ Remaining Claims, ESB’s Motion for Partial
Summary Judgment, and the Authority Decision
On June 17, 2011, the parties filed a Joint Final Pretrial Order in
which each side agreed to voluntarily dismiss a number of claims.49 As a result of
the parties’ agreements and Judge Bernstein’s earlier summary judgment ruling,
Skyline’s five remaining claims were the Fourth Claim, but only to the extent it
sought a declaration that ESB breached certain contractual duties; the Twelfth
Claim, for damages and declaratory relief in connection with the electricity
charges; the Fourteenth Claim, for damages for breach of the covenant of good
faith and fair dealing; the Fifteenth Claim, for prima facie tort; and the Eighteenth
Claim, for tortious interference with contract. Of the twenty claims or
counterclaims brought by ESB, eight were submitted for trial – the cause of action
for attorneys’ fees, and seven counterclaims requesting declaratory relief, specific
performance, and injunctive relief relating to various disputes under the parties’
agreements, including the protocol provision. 50
On July 15, 2011, ESB filed a motion for partial summary judgment.51
49
See Adv. Pro. Docket No. 48.
50
See id. On July 6, 2011, the parties entered into a stipulation
dismissing each cause of action except for the claim for attorneys’ fees. See id.
Docket No. 53.
51
See id. Docket No. 55.
13
Prior to its time to file opposition, Skyline raised concerns based on Stern v.
Marshall and asked for an extension of time to brief the issue.52 Judge Bernstein’s
memorandum endorsement and order stated that:
It is not clear whether the limitation on a bankruptcy court’s
jurisdiction to ‘hear and determine’ a non-core matter would be
implicated by the Empire State Building’s motion for partial
summary judgment. Regardless of the disposition, the Court will
not make any findings of fact or enter a final judgment.
Furthermore, it appears that the parties have consented to the
Court’s authority to ‘hear and determine’ all of the issues, at least
in adversary proceeding 09-1145. [Skyline] alleged in its Third
Amended Complaint . . . that the causes of action alleged in the
complaint were core, and [ESB] admitted the allegation in its
Answer . . . .53
Nonetheless, Judge Bernstein permitted the parties to make the argument that the
bankruptcy court lacked “the power to ‘hear and determine’ the motion or the
adversary proceedings, or that it lack[ed] the subject matter jurisdiction even to
make a ‘report and recommendation’ to the District Court . . . .”54 In addition, he
directed each party “to advise the Court[] in writing[] . . . whether it expressly
consents to the bankruptcy court’s authority to ‘hear and determine’ and enter final
52
See Bankr. Docket No. 167.
53
Adv. Pro. Docket No. 62.
54
Id.
14
judgments in these adversary proceedings.”55 Judge Bernstein concluded that “[i]n
the event the parties do not expressly consent, or are not deemed to have impliedly
consented, the Court will proceed in accordance with Rule 9033 of the Federal
Rules of Bankruptcy Procedure.”56 ESB filed a letter indicating that it consented to
the bankruptcy court’s authority, and Skyline filed a letter indicating that it did
not.57
In its opposition to ESB’s motion for partial summary judgment,
Skyline questioned the bankruptcy court’s jurisdiction and authority to enter a final
judgment and sought remand to the state court.58 Skyline stated that it never
conceded that its claims were core and that its section 157(b)(2) allegation in the
Complaint indicated only that the claims were core “‘[f]or the reasons articulated
by the Hon. Stuart M. Bernstein on April 28, 2009 . . . .’”59 On the issue of
55
Id.
56
Id. Rule 9033(a) provides that “[i]n non-core proceedings heard
pursuant to 28 U.S.C. §157(c)(1), the bankruptcy judge shall file proposed findings
of fact and conclusions of law.”
57
See Adv. Pro. Docket No. 63; Bankr. Docket No. 168.
58
See Adv. Pro. Docket No. 65 at 10-20.
59
Id. at 12 (quoting Complaint ¶ 26); 4/28/09 Hearing Tr. at 26
(bankruptcy court held that certain claims were core and others were “arguably”
core). In addition, Skyline indicated that it had “abandoned its right to a jury trial
on its tort claims because research disclosed that a motion to withdraw the
15
consent, Skyline argued that “[a]ny such consent would surely have been by
implication, but based on the mandate of the Bankruptcy Court after it had rejected
Skyline’s efforts to return these matters to state court.”60 Skyline further argued
that its consent could not have been “unequivocal or free of duress” because it “had
no immediate appeal rights once remand and abstention were denied.”61
ESB argued that for the most part Stern was not relevant to the issues
before Judge Bernstein because Stern did not address subject matter jurisdiction.62
However, ESB stated that Stern confirmed that Judge Bernstein had authority to
resolve Skyline’s claims against ESB because they are “part of the allowance or
disallowance of ESB’s claims against the estate.”63 ESB further argued that
Skyline expressly consented to allowing Judge Bernstein to enter final orders in the
adversary proceedings as part of the Plan. In this regard, ESB noted that the Plan
reference would be futile in June 2011.” Adv. Pro. Docket No. 65 at 19. ESB’s
remaining claims were counterclaims relating to the protocol provision in the 2005
Agreement, Skyline’s right to sell New York City-themed memorabilia at the gift
shop, and matters concerning the fire alarm system, and its claim for attorneys’
fees. See id. at 14.
60
Adv. Pro. Docket No. 65 at 18.
61
Id. at 19.
62
See id. No. 70 at 3-5.
63
Id. at 5.
16
“uses bankruptcy terms of art regarding the Court’s authority to ‘hear’ and to
‘determine’ certain matters.”64
On May 11, 2012, Judge Bernstein issued the Authority Decision. He
stated that at the time the Skyline Action was removed and the ESB Action was
commenced “the claims and counterclaims asserted, at a minimum, ‘related to’ or
were non-core claims in Skyline’s bankruptcy case.”65 He reasoned that because
jurisdiction is determined at the time an action is commenced, “[n]either the
confirmation of Skyline’s plan nor anything else that subsequently occurred
deprived this Court of its subject matter jurisdiction over those claims and
counterclaims.”66 Judge Bernstein held that he could enter a final judgment on the
parties’ claims because both parties had expressly consented to such authority –
ESB in its letter, and Skyline in the Plan.67 He noted that “nothing compelled
Skyline to include these provisions in the Plan” and that the provisions,
“[s]eparately and in combination, . . . reflect Skyline’s consent to this Court’s
64
Id. at 9 (citing 28 U.S.C. § 157(b)(1) and (c)(1)).
65
Authority Decision, 471 B.R. at 78.
66
Id. at 79 (citing In re Porges, 44 F.3d 159 (2d Cir. 1995)).
67
See id. (citing to Plan § 11.1(b) and (j)).
17
authority to hear and determine, and enter final judgments in connection” with the
parties’ claims.68 With respect to ESB’s claim for attorneys’ fees, Judge Bernstein
held that it was core, and therefore consent was not required, because Skyline was
required to cure defaults when it assumed the Lease pursuant to section 365.69 On
the merits, Judge Bernstein granted ESB’s motion as to three of Skyline’s claims,
leaving only the Twelfth Claim, relating to the electricity charges, and the Fourth
claim, relating to other alleged breaches. In addition, Judge Bernstein granted
partial summary judgment in favor of ESB on its claim for attorneys’ fees asserted
in the ESB Action, but held that ESB was not entitled to pursue a counterclaim for
attorneys’ fees in the Skyline Action.70
6.
The Trials
Trial was held on the electricity claim in the Skyline Action on
September 24 and October 24, 2012.71 Following the trial, ESB moved for
judgment on partial findings. On February 22, 2013, Judge Bernstein issued the
68
Id.
69
See id. at 80.
70
See id. at 85.
71
See Adv. Pro. Docket Nos. 84, 86.
18
Electricity Decision, which granted ESB’s motion and dismissed Skyline’s Twelfth
Claim. A second trial was held on May 6 and 7, 2013, relating to, among other
things, the use of independent contractors to sell tickets in areas “of or near the
Building.”72 On August 20, 2013, Judge Bernstein issued the Protocol Decision,
noting at the outset that “[b]oth sides have consented to the Court’s authority to
enter a final judgment in this matter.”73 He found that ESB was entitled to a
declaration that a specified area between 36th Street and 31st Street was “of or near
the Building” and thus Skyline breached the 2005 Agreement by paying
independent contractors working within that area.74 Judge Bernstein permanently
enjoined Skyline from paying commissions to any employees or representatives
working within a specified area.75 Skyline’s subsequent motion for a stay of the
72
See id. Nos. 98, 99.
73
Protocol Decision, 497 B.R. at 703 n.3 (citing Authority Decision,
472 B.R. at 79-80).
74
See id. at 715-16.
75
Judge Bernstein also found that (1) ESB did not breach the parties’
agreements relating to the installation of television monitors and signage and (2)
Skyline breached the Lease provision regarding the sale of souvenirs, but did not
breach the provision that prohibits Skyline from paying commissions or sales
incentives to its employees. See id. at 703.
19
injunction pending this appeal was denied on October 10, 2013. 76 Skyline appeals
the issuance of the injunction, but not the denial of the stay pending appeal. 77
III.
LEGAL STANDARD
A district court functions as an appellate court in reviewing
judgments rendered by bankruptcy courts.78 Findings of fact are reviewed for clear
error,79 whereas findings that involve questions of law, or mixed questions of fact
and law, are reviewed de novo.80 A district court “may affirm, modify, or reverse a
bankruptcy judge’s judgment, order, or decree or remand with instructions for
further proceedings.”81
76
See New York Skyline, Inc. v. Empire State Building Co. L.L.C. (In re
New York Skyline, Inc.), No. 09-1145, 2013 WL 5487938 (Bankr. S.D.N.Y. Oct.
10, 2013).
77
On October 18, 2013, Judge Bernstein entered a money judgment of
$20,000 on ESB’s claim for attorneys’ fees and closed the ESB Action. See
Docket No. 65 in adversary proceeding number 09-1107.
78
See In re Sanshoe Worldwide Corp., 993 F.2d 300, 305 (2d Cir.
1993).
79
See Fed. R. Bankr. P. 8013 (“Findings of fact . . . shall not be set aside
unless clearly erroneous, and due regard shall be given to the opportunity of the
bankruptcy court to judge the credibility of the witnesses.”).
80
See In re Adelphia Commc’ns Corp., 298 B.R. 49, 52 (S.D.N.Y. 2003)
(citing In re United States Lines, Inc., 197 F.3d 631, 640-41 (2d Cir. 1999)).
81
Fed. R. Bankr. P. 8013.
20
IV.
APPLICABLE LAW
A.
Bankruptcy Jurisdiction and Bankruptcy Court Authority
Section 1 of Article III of the United States Constitution provides that
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, both of the
supreme and inferior Courts, 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.
Under Article III, Congress cannot
withdraw from judicial cognizance any matter which, from its
nature, is the subject of a suit at the common law, or in equity, or
admiralty. . . . At the same time there are matters, involving public
rights, which may be presented in such form that the judicial
power is capable of acting on them, and which are susceptible of
judicial determination, but which congress may or may not bring
within the cognizance of the courts of the United States, as it may
deem proper.82
Since the enactment of the first federal bankruptcy law in 1800, Congress has
permitted the initial adjudication of certain bankruptcy issues by non-Article III
officials, subject to review by the district court.83 For example, prior to the
82
Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272,
284 (1856).
83
See Plank, Why Bankruptcy Judges Need Not and Should Not Be
Article III Judges, 72 Am. Bankr. L.J. 567, 607-609 (1998).
21
Bankruptcy Act of 1978 (the “Act”),
federal district courts served as bankruptcy courts and employed
a “referee” system. Bankruptcy proceedings were generally
conducted before referees, except in those instances in which the
district court elected to withdraw a case from a referee. The
referee’s final order was appealable to the district court. The
bankruptcy courts were vested with “summary jurisdiction” – that
is, with jurisdiction over controversies involving property in the
actual or constructive possession of the court. And, with consent,
the bankruptcy court also had jurisdiction over some “plenary”
matters – such as disputes involving property in the possession of
a third person.84
As explained in the Senate Report, a central purpose of the Act was to eliminate
the “great cost and delay to the estate” that resulted from the inability of
bankruptcy courts to adjudicate plenary matters without consent.85 To accomplish
this goal without running afoul of the Constitution, many, including the House,
advocated giving bankruptcy judges Article III status, but this effort was
unsuccessful. Instead, the Act “eliminat[ed] the distinction between ‘summary’
and ‘plenary’ jurisdiction, [and] grant[ed] the new [bankruptcy] courts jurisdiction
over all civil proceedings arising under title 11 or arising in or related to cases
84
Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50,
53 (1982) (“Marathon”) (citations omitted).
85
S. Rep. No. 95-989, at 153 (1977), reprinted in 1978 U.S.C.C.A.N.
5787, 5939.
22
under title 11.”86
The plurality opinion in Northern Pipeline Construction Co. v.
Marathon Pipe Line Co., invalidated this broad grant of authority. The Supreme
Court held that a bankruptcy court did not have constitutional authority to enter a
final judgment adjudicating a contract claim against a party not otherwise a part of
the bankruptcy proceedings. As explained by Justice Brennan:
[T]he restructuring of debtor-creditor relations, which is at the
core of the federal bankruptcy power, must be distinguished from
the adjudication of state-created private rights, such as the right to
recover contract damages that is at issue in this case. The former
may well be a “public right,” but the latter obviously is not.
Appellant Northern’s right to recover contract damages to
augment its estate is “one of private right, that is, of the liability
of one individual to another under the law as defined.”87
By entering a judgment, the Article I bankruptcy court improperly exercised the
“judicial Power of the United States,” which is vested in Article III courts where
judges have life tenure and salary protections. In response, Congress enacted the
1984 amendments to the Judicial Code, which are contained in the Bankruptcy
86
Marathon, 458 U.S. at 54 (quotation marks and alterations omitted)
(emphasis in original).
87
Id. at 71-72 (quoting Crowell v. Benson, 285 U.S. 22, 51 (1932)).
23
Amendments and Federal Judgeship Act of 1984.88 The 1984 Amendments
addressed the concerns raised in Marathon by making a distinction between
proceedings that are “core” and those that are considered “noncore,”89 and limiting
the role of the bankruptcy court with respect to the latter.
Section 1334 of title 28 of the United States Code addresses
bankruptcy jurisdiction, and section 157, which permits the district courts to refer
bankruptcy matters to bankruptcy courts,90 delineates the division of labor between
the district court and the bankruptcy court.91 While sections 1334 and 157 serve
different purposes, the language of each tracks the other. Section 1334(b) 92 states
88
See Pub. L. No. 98-353, § 122(b) (1984).
89
See Pied Piper Casuals, Inc. v. Insurance Co. of the State of
Pennsylvania, 72 B.R. 156, 158 (S.D.N.Y. 1987).
90
The United States District Court for the Southern District of New
York has referred its bankruptcy jurisdiction to the bankruptcy courts of this
district pursuant to its Amended Standing Order of Reference, 12 Misc. 00032
(S.D.N.Y. Jan. 31, 2012).
91
See, e.g., Stern, 131 S. Ct. at 2607 (stating that once referred,
“[s]ection 157 allocates the authority to enter final judgment between the
bankruptcy court and the district court”). In addition, section 158 governs appeals
from bankruptcy court orders.
92
Under paragraph (a), the district courts “have original and exclusive
jurisdiction of all cases under title 11.” A bankruptcy “case” is commenced by
filing a petition for relief under title 11.
24
that the district courts have original, but not exclusive, “jurisdiction of all civil
proceedings93 arising under title 11, or arising in or related to cases under title
11.”94 Section 157 permits bankruptcy courts to enter final judgments in “core”
proceedings,95 which are defined, using the same terms as in section 1334, as
proceedings “that arise in a bankruptcy case or under Title 11.”96 Thus, bankruptcy
93
“Proceedings” is interpreted broadly to include any civil matter or
dispute that occurs during the administration of a bankruptcy case.
94
The district court has jurisdiction if a proceeding comes within any of
these three categories. See Stern, 131 S. Ct. at 2603. “‘Arising under’ jurisdiction
exists where one invokes a substantive right created by federal bankruptcy law.”
Glinka v. Murad (In re Housecraft Indus. USA, Inc.), 310 F.3d 64, 70 (2d Cir.
2002). “‘[A]rising in’ proceedings are those that are not based on any right
expressly created by title 11, but nevertheless, would have no existence outside of
the bankruptcy.” Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987).
Accord Baker v. Simpson, 613 F.3d 346, 351 (2d Cir. 2010) (same). A proceeding
is “related to” a case under title 11, “if the outcome of the litigation might have any
conceivable effect on the bankruptcy estate, or has any significant connection with
the bankrupt estate.” Lead I JV, LP v. North Fork Bank, 401 B.R. 571, 581
(E.D.N.Y. 2009) (quotation marks omitted). Accord Publicker Indus., Inc. v.
United States (In re Cuyahoga), 980 F.2d 110, 114 (2d Cir. 1992) (“The test for
determining whether litigation has a significant connection with a pending
bankruptcy proceeding is whether its outcome might have any conceivable effect
on the bankrupt estate.”) (quotation marks omitted).
95
28 U.S.C. § 157(b)(1).
96
See Stern, 131 S. Ct. at 2605; 28 U.S.C. § 157(b)(1) (“Bankruptcy
judges may hear and determine all cases under title 11 and all core proceedings
arising under title 11, or arising in a case under title 11, referred under subsection
(a) of this section, and may enter appropriate orders and judgments, subject to
25
courts retain the same powers with respect to core matters as they had under the
Act.97
However, section 157 limits a bankruptcy judge’s authority in “related
to” proceedings. Under section 157(c)(1)
[a] bankruptcy judge may hear a proceeding that is not a core
proceeding but that is otherwise related to a case under title 11.
In such proceeding, the bankruptcy judge shall submit proposed
findings of fact and conclusions of law to the district court, and
any final order or judgment shall be entered by the district judge
after considering the bankruptcy judge’s proposed findings and
conclusions . . . .
Significantly, a bankruptcy judge may also enter a final judgment on non-core
claims if the parties consent.98 Pursuant to section 157(b)(3), “[t]he bankruptcy
judge shall determine . . . whether a proceeding is a core proceeding . . . or is a
proceeding that is otherwise related to a case under title 11.”99 As explained by the
review under section 158 of this title.”). Section 157(b)(2) sets forth examples of
“core” proceedings.
97
See Stern, 131 S. Ct. at 2610.
98
See 28 U.S.C. § 157(c)(2); In Men’s Sportswear, Inc. v. Sasson
Jeans, Inc. (In re Men’s Sportswear, Inc.), 834 F.2d 1134, 1137-38 (2d Cir. 1987).
99
See also Fed. R. Bankr. P. 7008(a) (“In an adversary proceeding
before a bankruptcy judge, the complaint, counterclaim, cross-claim, or third-party
complaint shall contain a statement that the proceeding is core or non-core and, if
non-core, that the pleader does or does not consent to entry of final orders or
26
Supreme Court, “[t]he terms ‘non-core’ and ‘related’ are synonymous.”100
In Stern, the Supreme Court held that the current statutory regime
failed to remedy all the constitutional infirmities identified in Marathon.
Specifically, a bankruptcy court improperly exercised the “judicial Power of the
United States” by entering a final judgment on a common law counterclaim by the
estate against a creditor for tortious interference, despite the fact that such a claim
is characterized by the Bankruptcy Code as a “core” claim under section
157(b)(2)(C).101 Thus, “bankruptcy courts must define the core/non-core
judgment by the bankruptcy judge.”); id. 7012(b) (“A responsive pleading shall
admit or deny an allegation that the proceeding is core or non-core. If the response
is that the proceeding is non-core, it shall include a statement that the party does or
does not consent to entry of final orders or judgment by the bankruptcy judge. In
non-core proceedings final orders and judgments shall not be entered on the
bankruptcy judge’s order except with the express consent of the parties.”).
100
Stern, 131 S. Ct. at 2605 (quotation marks omitted).
101
See id. at 2608. Following Marathon, the Second Circuit noted that
“both the Supreme Court and this court have concluded that the Marathon holding
was a narrow one and have broadly construed the jurisdictional grant in the 1984
Bankruptcy Amendments.” In re S.G. Phillips Constructors, Inc., 45 F.3d 702,
705 (2d Cir. 1995). Likewise, the Second Circuit has indicated that Stern should
be construed narrowly. See In re Quigley Co., Inc., 676 F.3d 45, 52 (2d Cir. 2012)
(noting that the holding of Stern was narrow, and that “[e]njoining litigation to
protect bankruptcy estates during the pendency of bankruptcy proceedings, unlike
the entry of the final tort judgment at issue in Stern, has historically been the
province of the bankruptcy courts.”). Nonetheless, a number of courts in this
Circuit have applied Stern to limit the authority of bankruptcy courts to enter final
27
distinction on a case by case basis by evaluating both the form and the substance of
the particular proceeding.”102
B.
Bankruptcy Jurisdiction Beyond Section 1334
“The jurisdiction of the bankruptcy courts, like that of other federal
courts, is grounded in, and limited by, statute.”103 Nonetheless, courts have held
that bankruptcy courts have inherent or ancillary jurisdiction to enforce their own
orders.104 According to the Supreme Court, federal courts may assert ancillary
jurisdiction for two separate, though sometimes related, purposes: “(1) to permit
judgments on claims that are often integral to the bankruptcy process, such as
actions to set aside fraudulent conveyances. See, e.g., In re Madison Bentley
Assocs., LLC, 474 B.R. 430, 438-39 (S.D.N.Y. 2012) (stating that “[c]ourts . . .
have consistently held that, after Stern, bankruptcy courts lack authority to issue
final judgments on fraudulent conveyance claims”).
102
In re Ames Dep’t Stores, Inc., No. 06 Civ. 5394, 2008 WL 7542200,
at *6 (S.D.N.Y. June 4, 2008).
103
Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995).
104
See, e.g., In re Petrie Retail, Inc., 304 F.3d 223, 230 (2d Cir. 2002)
(“A bankruptcy court retains post-confirmation jurisdiction to interpret and enforce
its own orders.”); In re Chateaugay Corp., 213 B.R. 633, 638 (S.D.N.Y. 1997); In
re Fibermark, Inc., 369 B.R. 761, 765 (Bankr. D. Vt. 2007) (citing Local Loan Co.
v. Hunt, 292 U.S. 234, 239 (1934) (“That a federal court of equity has jurisdiction
of a bill ancillary to an original case or proceeding in the same court, whether at
law or in equity, to secure or preserve the fruits and advantages of a judgment or
decree rendered therein, is well settled.”)).
28
disposition by a single court of claims that are, in varying respects and degrees,
factually interdependent; and (2) to enable a court to function successfully, that is,
to manage its proceedings, vindicate its authority, and effectuate its decrees.”105
The Second Circuit has also held that bankruptcy courts may exercise
supplemental jurisdiction.106 However, some lower courts have questioned the
exercise of such jurisdiction.107 As explained by one court
the jurisdictional grant in 28 U.S.C. § 1334(b) and 28 U.S.C. §
157, by implication, negates a bankruptcy court’s exercise of
jurisdiction of a supplemental non-federal claim in instances
where that claim has no impact on the bankruptcy estate. The
carefully crafted conferral of jurisdiction under 28 U.S.C. § 1334
and 28 U.S.C. § 157 would be undermined if bankruptcy courts
were authorized to exercise supplemental jurisdiction.108
105
Peacock v. Thomas, 516 U.S. 349, 354 (1996) (citing Kokkonen v.
Guardian Life Ins. Co. of America, 511 U.S. 375, 380-81 (1994)).
106
See Klein v. Civale & Trovato, Inc. (In re Lionel Corp.), 29 F.3d 88,
92 (2d Cir. 1994).
107
See generally In re Cavalry Const., Inc., 496 B.R. 106 (S.D.N.Y.
2013) (discussing cases); In re Dreier LLP, No. 10-5456, 2012 WL 4867376, at *4
(Bankr. S.D.N.Y. Oct. 12, 2012) (“‘There is a serious question whether the
supplemental jurisdiction statute is applicable to the jurisdiction exercisable by
bankruptcy judges.’”) (quoting 16 Daniel R. Coquillette, et al., Moore’s Federal
Practice § 106.05[10], at 106.34.2(1) (3d ed. 2012)).
108
Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 353 B.R. 51, 61
(Bankr. S.D.N.Y. 2006) (citing In re Walker, 51 F.3d 562, 573 (5th Cir. 1995)
(“[I]t would be somewhat incongruous to gut this careful system [of ‘core’ and
29
In addition, the Second Circuit has held that a bankruptcy court may retain
jurisdiction over an adversary proceeding even after the bankruptcy case has been
dismissed provided that the exercise of jurisdiction would be consistent with the
principles of pendent jurisdiction.109 In that case, the adversary proceeding was
core because it was brought under section 502 of the Bankruptcy Code to
“determine the validity of the claims and the amount allowed.”110 Prior to the
debtor’s election to voluntarily dismiss his case, the bankruptcy court “had
conducted a trial on all contested issues and had issued a decision, and the matter
awaited only the filing of findings of fact and conclusions of law and the entry of a
‘non-core’ bankruptcy court jurisdiction] by allowing bankruptcy courts to exercise
supplemental jurisdiction.”)).
109
See Porges, 44 F.3d at 162-63 (stating that when jurisdiction is
retained following dismissal “a court must consider four factors in determining
whether to continue to exercise jurisdiction: judicial economy, convenience to the
parties, fairness and comity”). As a general rule, courts are required to analyze the
Porges factors when deciding to retain jurisdiction. See, e.g., In re Millenium
Seacarriers, Inc., 458 F.3d 92, 96 (2d Cir. 2006) (stating that “a party that has not
objected to the forum court’s failure to make specific findings relevant to the
Porges factors is not entitled to remand for such findings (or, for that matter, a
dismissal of the action) when we are satisfied that the forum court did not
improperly exercise subject matter jurisdiction by abusing its discretion in
retaining jurisdiction”).
110
Porges, 44 F.3d at 164 (quotation marks and alterations omitted).
30
judgment.”111 The Second Circuit held that the Bankruptcy Court had authority
under section 502 to enter a money judgment112 and further that “the exercise of a
court’s equitable powers to enter judgment is particularly appropriate where the
court’s decision would have preclusive effect in any subsequent proceedings.” 113
Although a bankruptcy court’s jurisdiction shrinks following
confirmation of a plan, a bankruptcy court may retain post-confirmation
jurisdiction pursuant to the plan.114 A party seeking post-confirmation relief must
satisfy two requirements:
First, the party must establish that the matter has a close nexus to
the bankruptcy plan or proceeding, as when a matter affects the
interpretation, implementation, consummation, execution, or
administration of the confirmed plan. Second, the party must
111
Id. at 163.
112
See id. at 164.
113
Id. at 165. Other Second Circuit decisions that considered retention of
jurisdiction under Porges have also involved contexts that invoke principles of
ancillary jurisdiction. See Millenium Seacarriers, Inc., 458 F.3d at 96 (“[J]udicial
economy and convenience to the parties are both served by the Bankruptcy Court’s
interpretation of its own Sale Order due to its familiarity with the facts. Fairness
and comity are not affected either way.”) (quotation marks omitted); In re Aquatic
Dev. Group, Inc., 352 F.3d 671, 676 (2d Cir. 2003) (interpretation of confirmation
order)).
114
See Hospital & Univ. Property Damage Claimants v. Johns–Manville
Corp. (In re Johns–Manville Corp.), 7 F.3d 32, 34 (2d Cir. 1993).
31
show that the plan provides for the retention of jurisdiction over
the dispute. Courts have found the requisite nexus where
adjudication of the post-confirmation dispute will affect the
interests of creditors or requires interpretation of the
reorganization plan. However, where the case has been fully
administered and the interests of creditors will be unaffected by
the resolution of the dispute, bankruptcy courts have declined to
exercise post-confirmation subject matter jurisdiction.115
The scope of post-confirmation jurisdiction following the entry of a final decree
and closure of a case has not been well defined,116 although courts agree that such
jurisdiction is more limited.117
V.
DISCUSSION
A.
Skyline Did Not Consent to the Bankruptcy Court’s Entry of a
Final Judgment
Pursuant to section 157(b)(3), Judge Bernstein was required to
determine whether the adversary proceedings were core or non-core. He addressed
the status of the claims on April 28, 2009, in the context of Skyline’s remand
motion and request under section 365, and determined that the claims
were core insofar as they related to the Lease assumption and “arguably” core to
115
In re Kassover, 448 B.R. 625, 632-33 (S.D.N.Y. 2011) (quotation
marks omitted).
116
See, e.g., Fibermark, 369 B.R. at 766.
117
See Kassover, 448 B.R. at 632.
32
the extent they related to the allowability of ESB’s proof of claim.118 There is no
indication in the record that Judge Bernstein modified or revisited his
determination under section 157(b)(3) between the hearing on April 28, 2009, and
August 13, 2010, when Skyline filed the Plan. In addition, Judge Bernstein
determined that the claims were core relying in part on In re CBI Holding Co., Inc.,
which held that certain state-law counterclaims were core under section
157(b)(2)(C).119 As discussed, however, the Supreme Court subsequently held in
Stern that section 157(b)(2)(C) was unconstitutional. Thus, “before Stern,
[Skyline] had little reason to believe” that it had a viable challenge to the
determination that the claims were core or that Judge Bernstein “was not
constitutionally empowered to enter ‘judgment’” on its claims.120
118
4/28/09 Tr. at 26.
119
See 529 F.3d 432, 464-65 (2d Cir. 2008).
120
Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld
LLP, 462 B.R. 457, 471 (S.D.N.Y. 2011). That is not to say that Judge Bernstein’s
determination was incorrect or that CBI Holding Co. does not survive Stern, points
on which I take no position. But Stern certainly alters the landscape. See, e.g.,
Stern, 131 S. Ct. at 2630 (Breyer, J., dissenting) (“[U]nder the majority’s holding,
the federal district judge, not the bankruptcy judge, would have to hear and resolve
the counterclaim. Why is that a problem? Because these types of disputes arise in
bankruptcy court with some frequency. See, e.g., In re CBI Holding Co.”);
Weisfelner v. Blavatnik (In re Lyondell Chem. Co.), 467 B.R. 712, 722 (S.D.N.Y.
2012) (“There is no implied consent where, as here, defendants seek withdrawal at
33
“[A] waiver of important rights should only be found where it is fully
knowing.”121 Based on Judge Bernstein’s determination that the claims were core,
it would be difficult to find that Skyline had voluntarily and knowingly consented
to the entry of judgment on non-core claims absent express language in the Plan
indicating such consent.122 If the claims were core, then Judge Bernstein could
enter a final judgment whether or not Skyline consented, and there would be no
reason for Skyline’s Plan to either mention non-core claims or indicate consent
under section 157(c)(2). However, the Plan makes no mention of consent, non-
the close of discovery before any trial activities or judgment, and where new
precedent renders unclear the authority of the bankruptcy [court] to enter final
judgment on certain claims.”).
121
Development Specialists, Inc., 462 B.R. at 472. Accord In re Men’s
Sportswear, 834 F.2d at 1138 (“[A] court should not lightly infer from a litigant’s
conduct consent to have private state-created rights adjudicated by a non-Article III
bankruptcy judge. Indeed, to do so would violate the spirit of Northern Pipeline,
which emphasizes that the power to adjudicate private rights, such as the right to
recover contract damages, cannot be lodged in a court lacking ‘the essential
attributes of the judicial power.’”) (quoting Northern Pipeline, 458 U.S. at 87).
122
See, e.g., Adelphia Recovery Trust v. FLP Group, Inc., No. 11 Civ.
6847, 2012 WL 264180, at *3-4 (S.D.N.Y. Jan. 30, 2012) (“Defendants sought to
remain in Bankruptcy Court in 2007 because, inter alia, the claim was ‘core.’
There is no indication that Defendants, in conceding that the claim was ‘core,’
expressly consented to final adjudication by a bankruptcy judge. While this may
have been implied at that time, Stern provided defendants with a legal basis to
contest the Bankruptcy Court’s adjudicative power that they did not have before.”)
(quotation marks and alterations omitted).
34
core claims, section 157(c)(2), or entry of final judgments.
Instead, Article 11 of the Plan is a jurisdiction retention provision. 123
However, “[j]urisdiction retention language from a Plan, by itself, does not confer
upon a bankruptcy court authority to enter final orders.” 124 The fact that the Plan
contains language authorizing the bankruptcy court to ‘hear and
determine’ these claims is [ ] unavailing. This order confirmed
the bankruptcy court’s subject matter jurisdiction; it did not
address the bankruptcy court’s authority to enter final judgments
under Article I.125
In addition, Bankruptcy Rules 7008(a) and 7012(b) provide a far more direct
means for litigants to indicate their express consent to the entry of final judgment
123
Likewise, the Confirmation Order provides that “[t]he Court hereby
retains jurisdiction over the Bankruptcy Case to the fullest extent provided for in
Article 11 of the Plan.” Bankr. Docket No. 144 ¶ 30. “Bankruptcy Case” is
defined in the Plan to mean the “Chapter 11 bankruptcy case of the Debtor.” Plan
¶ 1.7. To be sure, the Plan language was sufficient to retain jurisdiction. However,
the issue here is whether the jurisdiction provision also addresses the authority of
the bankruptcy court to enter final judgment on non-core claims.
124
Lyondell Chem. Co., 467 B.R. at 722-23 (citing Stern, 131 S. Ct. at
2607 noting that the allocation of authority to enter final judgment between the
bankruptcy court and the district court “does not implicate questions of subject
matter jurisdiction”).
125
Id. at 722.
35
in non-core adversary proceedings.126 As the language in these rules suggests,
express consent implies both an acknowledgment that a proceeding is non-core and
assent to the bankruptcy court’s entry of a final judgment notwithstanding the right
to have the claim determined by an Article III judge. A general statement that
jurisdiction is retained to “hear and determine” an adversary proceeding does not,
without more, indicate such consent because section 157(b)(1) uses the same terms
to refer to a bankruptcy court’s authority to enter final judgments on core claims –
and a bankruptcy judge can exercise that authority without consent.
As discussed, the Plan language must be considered in the context of
Judge Bernstein’s determination that the proceeding was core and in light of
Stern.127 For example, section 11.1(p) of the Plan states that the court retains
126
See Fed. R. Bankr. P. 7008(a) (“In an adversary proceeding before a
bankruptcy judge, the complaint, counterclaim, cross-claim, or third-party
complaint shall contain a statement that the proceeding is core or non-core and, if
non-core, that the pleader does or does not consent to entry of final orders or
judgment by the bankruptcy judge.”); Id. 7012 (“A responsive pleading shall admit
or deny an allegation that the proceeding is core or non-core. If the response is that
the proceeding is non-core, it shall include a statement that the party does or does
not consent to entry of final orders or judgment by the bankruptcy judge. In
non-core proceedings final orders and judgments shall not be entered on the
bankruptcy judge’s order except with the express consent of the parties.”).
127
Judge Bernstein relied on Plan sections 11.1(b) and (j). Section
11.1(b) states that the court has jurisdiction “[t]o determine any and all adversary
proceedings, applications, and contested matters that are pending on the Effective
36
jurisdiction to “hear and determine,” inter alia, fraudulent conveyance actions.
Fraudulent conveyance actions “arise under” section 548 of the Bankruptcy Code
and are listed as core in section 157(b)(2), but following Stern, courts have held
that bankruptcy judges may not enter final judgments in such cases absent the
consent of the parties.128 Although “hear and determine” is used in both sections
11.1(j) and 11.1(p), it cannot seriously be argued that section 11.1(p) indicates
express consent under section 157(c)(2). Following Stern, and absent express
consent, the bankruptcy court would be required to issue proposed findings of fact
Date.” Rather than use the bankruptcy term of art “hear and determine,” which
itself is insufficient to manifest consent in the context of jurisdiction retention,
section 11.1(b) only uses the term “determine,” mirroring section 157(b)(3), which
states that “[t]he bankruptcy judge shall determine . . . whether a proceeding is a
core proceeding under this subsection or is a proceeding that is otherwise related to
a case under title 11.” Whereas section 11.1(b) refers to adversary proceedings,
section 11.1(j) is a more general provision relating to claims brought on behalf of
the “Debtor” for the enhancement of the “Estate,” and, in any event, cannot be read
as express consent to the bankruptcy court’s authority to enjoin Skyline, now a
former debtor, from compensating its employees for certain activities. By the same
token, section 11.1(i), which Judge Bernstein did not discuss, states that the court
has jurisdiction “[t]o hear and determine all Claims, controversies, suits and
disputes against the Debtor to the full extent permitted under 18 U.S.C. § 1334 and
28 U.S.C. § 157.” This provision must be read narrowly, because it expressly
limits the bankruptcy court’s authority to “hear and determine” claims against the
debtor by what section 157 allows, and section 157 does not permit a bankruptcy
court to enter a judgment in a non-core proceeding absent consent.
128
See, e.g., Adelphia Recovery Trust, 2012 WL 264180, at *3-4.
37
and conclusions of law on either pre- or post-confirmation fraudulent conveyance
actions brought by Skyline.129 Accordingly, I find that Skyline did not consent to
the entry of a final judgment on non-core claims and the Judgment is vacated.130
B.
Authority Under Section 157
There is an additional problem that requires remand of this appeal for
further proceedings. Judge Bernstein relied on cases that stand for the proposition
that jurisdiction is determined at the time of the filing of an adversary proceeding
and concluded that “[a]t the time that the [Skyline] Action was removed and the
129
See Executive Benefits Ins. Agency v. Arkison, 573 U. S. ___, slip. op.
at 9-11 (June 9, 2014). Skyline alleged that its claims were core based on the
determination made by Judge Bernstein at the April 28, 2009 hearing. See
Complaint, Adv. Pro. Docket No. 30 ¶ 26. ESB admitted that allegation, and
asserted that its counterclaims were core pursuant to section 157(b)(2)(A), (B), and
(O). See Answer, Adv. Pro. Docket No. 33 ¶¶ 26, 267. Skyline does not appear to
have filed an answer to the counterclaims. However, after three years of piecemeal
litigation, Judge Bernstein determined in the Authority Decision that the remaining
claims were non-core. Based on these facts, I cannot conclude that Skyline
consented to the entry of final judgment. See generally Stern, 131 S. Ct. at 260708, 2614 (finding that defendant’s consent to the bankruptcy court’s final
adjudication of its proof of claim did not mean defendant consented to the
bankruptcy court’s final adjudication of plaintiff’s state law counterclaim).
130
I also note that the Authority Decision does not consider whether
Skyline could have withdrawn its consent – even if it had consented – based on
changed circumstances, such as the issuance of the Final Decree and the nature of
the claims remaining following the parties’ stipulations and the entry of partial
summary judgment.
38
ESB Action was commenced in this Court, the claims and counterclaims asserted,
at a minimum, ‘related to’ or were non-core claims in Skyline’s bankruptcy
case.”131 While jurisdiction may continue to exist, it does not follow that the
adversary proceedings continued to be “related to” the bankruptcy case for
purposes of section 157.132 The nature of the claims that went to trial,133 the
confirmation of the Plan, and the issuance of the Final Decree, strongly suggest
that the claims were no longer related to Skyline’s bankruptcy case. The issue,
then, is not solely whether Skyline consented to the court hearing a non-core
matter. If the claims are not “related to” the bankruptcy case, then even consent
might not permit the bankruptcy court to hear the matter.134 Thus, if section 157(c)
131
Authority Decision, 471 B.R. at 78 (emphasis added).
132
See, e.g., Walker, 51 F.3d at 573.
133
In May 2012, Judge Bernstein noted in the Authority Decision that the
order approving assumption of the Lease listed certain “disputed cure claims,”
including “electrical charges.” 471 B.R. at 80 n.6. However, he explained that
“[i]t appears [ ] that the only remaining monetary claim asserted by ESB relates to
attorneys’ fees.” Id. Moreover, Judge Bernstein held that ESB was not entitled to
pursue attorneys’ fees in connection with its counterclaims in the Skyline Action.
See id. at 85.
134
See 28 U.S.C. § 157(c)(1) (“A bankruptcy judge may hear a
proceeding that is not a core proceeding but that is otherwise related to a case
under title 11.”) (emphasis added); Arkison, slip op. at 10 (“With the ‘core’
category no longer available for the Stern claim at issue, we look to §157(c)(1) to
39
does not apply, the issuance of proposed findings of fact and conclusions of law
may exceed the scope of the reference under section 157(a). It is for this reasons
that I cannot simply treat Judge Bernstein’s rulings as proposed findings of fact
and conclusions of law pursuant to section 157(c)(1). Accordingly, this case is
remanded for the limited purpose of asking the esteemed bankruptcy judge to
consider the basis for issuing proposed findings of fact and conclusions of law
pursuant to section 157(c)(1) or other authority. In addition, the bankruptcy court
should determine which claims were core when decided and, if necessary, enter a
separate judgment with respect to only those claims. Upon receiving the
bankruptcy court’s decision explaining the basis for his authority to issue proposed
findings of fact and conclusions of law, this Court will make a final determination
of whether to request such findings and conclusions or to withdraw the reference
for further proceedings.135
determine whether the claim may be adjudicated as a non-core claim – specifically,
whether it is ‘not a core proceeding’ but is ‘otherwise related to a case under title
11.’ If the claim satisfies the criteria of §157(c)(1), the bankruptcy court simply
treats the claims as non-core: The bankruptcy court should hear the proceeding
and submit proposed findings of fact and conclusions of law to the district court for
de novo review and entry of judgment.”).
135
See, e.g., Lyondell Chem. Co., 467 B.R. at 723 n.8 (noting that a
bankruptcy court has authority to determine its adjudicative authority pursuant to
Stern and Article III subject to review by the district court).
40
VI.
CONCLUSION
Accordingly, I hold that: ( 1) Sky line did not consent to the bankruptcy
court's power to enter a final judgment over non-core matters; (2) Skyline's claims
are not core; and (3) there is a need for a further explanation as to whether the
bankruptcy court had the power to hear the Sky line claims and to issue proposed
findings of fact and conclusions of law with respect to those claims. The Judgment
is hereby vacated and this case is remanded to the bankruptcy court for the limited
purposes just described.
SOPRDERED:
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Sliirq A. Sch,eiiidllri · U.S.D.J.
Dated:
New York, New York
June 16,2014
- Appearances -
For Appellant:
For Appellees:
James Wilson Perkins, Esq.
Greenberg Traurig, LLP
200 Park Avenue
New York, NY 10166
(212) 801-3188
David Scott Tannenbaum, Esq.
Stern, Tannenbaum & Bell, L.L.P.
380 Lexington Avenue
Suite 3600
New York, NY 10168
(212) 792-8484
Charles Addison Stewart, III, Esq.
Stewart Occhipinti, LLP
One Exchange Plaza
55 Broadway
Suite 1501
New York, NY 10006
(212) 239-5500
42
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