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Anna Nicole Smith and the Supremes

Published on April 10, 2012 in Bankruptcy Court. 0 Comments

by Monette W. Cope, Esq.

While it may appear that Anna Nicole Smith’s legacy will be her controversial public persona, her real legacy will likely be the Supreme Court’s confusing decision in Stern v. Marshall, 131 S. Ct. 2594  (2011).  This decision casts doubt on a bankruptcy court’s authority to issue final and binding orders when an action in bankruptcy is based on a state law and leads to uncertainty as to the enforceability of those bankruptcy court orders.

Anna Nicole married a wealthy man decades her senior, and after his death, sued his son in a Texas state court under a Texas law prohibiting “tortious interference with a gift.”  In short, she accused the son of fraudulently convincing her husband to keep her out of the will.

She then filed bankruptcy and the son filed a proof of claim and an adversary alleging the Texas suit defamed him. She filed a counterclaim, claiming the same tortious interference as she did in the Texas case.  The bankruptcy court found the son did tortiously interfere with her inheritance and awarded her millions. However, the Texas court later found the opposite and awarded her nothing.  The son appealed the bankruptcy court’s decision to the federal district court, which agreed with the bankruptcy court, but slashed the award.

Eventually, the Supreme Court was called upon to sort the mess out.  The son argued that the bankruptcy court did not have authority to enter an order on Anna Nicole’s counterclaim.  The Supreme Court agreed and disagreed.   It decided that while the Bankruptcy Code gives the bankruptcy court authority to enter a final order on the counterclaim arising under state law, the Constitution does not.  Ergo, the bankruptcy court’s order awarding Anna Nicole her supposed widow’s due was not a final and enforceable order.

The case then presents a murky definition of proceedings in which a bankruptcy order is final and enforceable:  1) If “the action at issue stems from the bankruptcy itself” or 2) If “the action would necessarily be resolved in the claims allowance process”. 

Confused?  So are many bankruptcy and other federal judges.

It’s safe to say that orders on routine matters like motions for relief from stay or objections to confirmation are final orders.  The murkiness arises when a claim involves a state court matter or a matter that has a parallel state law.  An example is fraud.  If a creditor has an action for nondischargeability of its claim based on fraud in bankruptcy, it would also have an action for fraud in the state court.   Can a bankruptcy judge issue a final and enforceable ruling of fraud? 

This article greatly simplifies the court’s decision and is not intended to be a scholarly discussion of Stern and its many potential ramifications.  What it is intended to do is alert creditors of this case.  Federal and bankruptcy courts are beginning to issue decisions clarifying bankruptcy courts’ authority, and tend to uphold the authority of the bankruptcy court to issue final orders, but the bankruptcy court’s authority is not always upheld if the issue involves state law.  If you are a litigant in such an action in bankruptcy court, it would be wise to discuss this with your attorney to determine if any special steps need to be taken to either ensure a final order, or not… whichever is to your advantage.

Monette is a Junior Partner in the Bankruptcy Group based in the Chicago office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 312.253.9614 and .

Bankruptcy in the Making: A Look Back at Bankruptcy Law and Its Formation

Published on April 3, 2012 in Bankruptcy Court. 0 Comments

By Keri P. Ebeck, Esq. and James P. Valecko, Esq.

“All bankrupts were insolvent, but few insolvents were bankrupt.”[1] This statement was very true of those who lived and conducted business in the American Colonies and subsequently in the newly formed United States of America. In colonial America, where cash was an incredibly scarce commodity, the mercantile economy operated almost solely on credit. When an economy relies so heavily on credit, default is inevitable. In order to deal with the significant rate of default, each individual colony and/or state established its own collection laws and practices with the ultimate, but highly unsuccessful remedy being debtor’s prison. The practice of committing debtors to debtor’s prison, a practice adopted from England, quickly produced the same flaws which haunted the British system: that a debtor committed to prison cannot provide for himself, his family or become a productive member of society. Creditors remain frustrated and unsatisfied, debtor’s and their families became wards of the social system and the economy was deprived of a potential entrepreneur. Recognizing the need for relief for debtors, several colonies and states made attempts at legislating insolvency laws. These laws which could allow a debtor to be freed from debtor’s prison would not provide a discharge of the underlying debt allowing the debt to follow the debtor for the rest his life.

The concept of bankruptcy finds its origins in England of the 1500′s.  A statute passed during the reign of Henry VIII is regarded as the first bankruptcy law. This statute authorized the imprisonment of debtors, the seizure of their property and assets and distribution of the estate among the creditors. English law viewed debtors as criminals but the remedies of collections were kept outside the courts and in the hands of individual creditors.[2] Many of the early English bankruptcy laws served as a model for the Bankruptcy Act of 1800, the first American bankruptcy law and each modern bankruptcy law thereafter. As an example, upon commencing a bankruptcy under English law, the Lord Chancellor would appoint a bankruptcy “commissioner” to oversee the bankruptcy and liquidate the debtor’s assets- this is clearly the origin of the modern Chapter 7 trustee.[3] English law from 1705 created a discharge provision but only upon creditor consent. And a 1732 English law introduced the concept of allowing the debtor to keep a modest amount of property as “exempt” from his creditors.

Early American attempts at bankruptcy law, the Bankruptcy Acts of 1800 and 1841, were enacted at times of financial and economic panic in the early United States but did not survive the test of time. The Act of 1800 only lasted three years, and the Act of 1841 only two years.  But with each law, the United States moved closer to modern bankruptcy law as we know it today. The Bankruptcy Act of 1800 allowed creditors to file involuntary bankruptcies against their debtors in an effort to collect their debts in a proportioned amount. This system hints at the modern goal of leveling the playing field amongst the creditors competing over a debtor’s estate. In fact, the Act of 1800 included provisions for bringing preferential payments back into the estate and avoiding fraudulent conveyances by the debtor.  The Act of 1800 was limited only to debtors having commercial debts and in excess of $1,000.00 – a significant amount for that time. This intentionally left the everyday destitute debtor without the potential for bankruptcy relief and the potential threat of debtor’s prison.

The Bankruptcy Act of 1841 was expanded to allow for voluntary bankruptcies. During the Acts’ two short years, 41,000 bankruptcy petitions were filed.[4] The Bankruptcy Act of 1867 introduced a concept for a plan for distribution, provided both for voluntary and involuntary bankruptcies, and gave original jurisdiction over bankruptcies to the federal district courts.[5]

After the failure of the railroads and the resulting court-ordered receiverships, the Bankruptcy Act of 1889 was enacted and remained in effect for eighty-eight years. This Act created the “referees” who were appointed by the bankruptcy courts, who later became known as bankruptcy judges in 1973.[6] Congress eventually passed several laws in the early 1930′s and 1940′s after the Depression, which made a move from pro-creditor bankruptcy to pro-debtor bankruptcy. By 1970, Congress took another pro-debtor step and enacted a law to allow the debtor to protect and enforce one’s bankruptcy discharge.

On November 6, 1978, President Carter signed the Bankruptcy Reform Act of 1978, which governs bankruptcy law in the United States today, albeit with several amendments. This was the first bankruptcy act that was not put into place because of economic or financial downturn and was also the first that was not drafted or lobbied by creditors but by the bankruptcy community of lawyers. The most notable provisions from the Act of 1978 were the creation of the bankruptcy trustee and encouragement of debtors to utilize Chapter 13 reorganization.

Thomas Paine argued that “credit made freely available by paper money encouraged people to spend beyond their means, to consume rather than invest”[7] Commerce, trade and manufacturing depends upon the availability of credit, and with the availability of credit comes the possibility of default.

Written by Keri Ebeck, an associate in the Bankruptcy Group of Weltman, Weinberg & Reis Co., LPA, located in the Pittsburgh office, and edited by James Valecko, a partner in the Bankruptcy Group. Keri can be reached at 412.338.7102 and .

Footnotes:
[1] Mann, Bruce H.  Republic of Debtors: Bankruptcy in the Age of American Independence, 2002. Print.
[2] Tabb, Charles J. “A Brief History of Bankruptcy Law” (1995). Web.
[3] Id.
[4] Hansen, Bradley. “Bankruptcy Law in the United States”. EH. Net. Encyclopedia, edited by Robert Whaples. Aug 14, 2001.
[5] Tabb, Charles J. “A Brief History of Bankruptcy Law” (1995). Web.
[6] Id.
[7] Mann, Bruce H.  Republic of Debtors: Bankruptcy in the Age of American Independence, 2002. Print.

Middle District of Florida Has a New Chief Bankruptcy Judge

Published on March 28, 2012 in Bankruptcy Court. 0 Comments

By Damian A. Valladares, Esq.

The Middle District of Florida has a new Chief Bankruptcy Judge.  The Honorable Karen S. Jennemann replaced Judge Paul Glenn and commenced her four year term on October 1, 2011.  Chief Judge Jennemann sits in the Orlando Division of the Middle District.  To assist with Chief Judge Jennemann’s caseload, as she now takes on the administrative duties of Chief Judge, the Honorable  Benjamin Cohen of the Northern  District  of Alabama has been approved to sit with the Bankruptcy Court  for  the  Middle  District of Florida. Judge Cohen has already began assisting the Orlando Division.  We look forward to working with Judge Cohen and learning his preferences and particularities.

Chief Judge Jennemann has said one of her first priorities will be effectuating greater uniformity to Middle District bankruptcy practice.  Currently the Middle District of Florida, the second busiest bankruptcy court in the nation, consists of three divisions: Tampa, Jacksonville, and Orlando; and one sub-division: Ft. Myers.  There are eight permanent judges, and with the addition of Judge Cohen, three judges loaned from other states.  Each of the three major divisions in the Middle District have often acted as independent districts, with rules dictated by administrative orders, or just traditional practice.  This can be confusing to the participants in the bankruptcy process, and result in errors, delays, and confusion.

Chief Judge Jennemann’s first step in her effort to create a uniform practice in the Middle District affects Jacksonville.  Starting January 1, 2012, Jacksonville negative-notice Motions for Relief will have the same negative-notice time as Tampa and Orlando.  Now a Motion for Relief filed on negative notice in Jacksonville will be eligible for default 21 days from the date of filing.  Future steps will include a uniform model Chapter 13 plan, and uniform rules for mediations for mortgage modifications.

We believe uniformed rules and procedures in the Middle District Bankruptcy Courts will lead to more efficiency, certainty, and will ultimately benefit creditors.  We will continue to keep our clients informed of significant changes in practice and procedure, and as always look forward to fielding any questions or concerns.

If you have any questions on this matter, please contact Mr. Damian A. Valladares, Esq. Damian is an associate attorney practicing in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA, focused on bankruptcy services. Based in the Ft. Lauderdale, Florida office, Damian can be reached at 954.740.5234 and .

United States Bankruptcy Court Judge for the District of Rhode Island Announces Plans to Retire

Published on February 10, 2012 in Bankruptcy Court. 0 Comments

by Keri Ebeck, Esq.

Rhode Island’s first and only bankruptcy judge, Arthur N. Votolato Jr. announced his plans to retire after 44 years on the bench.

The Providence Journal posted on February 9, 2012 that Judge Votolato’s retirement will most likely begin this summer. Judge Votolato’s current 14-year appointment runs until May 2013, but he has indicated that he will step down early to spend time with his family. Judge Arthur N. Votolato Jr. is 81 years old and is the longest continuously serving active bankruptcy judge in the United States. He also currently serves as the Chief Judge for the First Circuit Bankruptcy Appellate Panel.

There has been no indication as to an interim or new appointment of a bankruptcy judge for Rhode Island at this time.

U.S. Bankruptcy Court Welcomes Newly Appointed Honorable Judge Carlota M. Bohm

Published on December 22, 2011 in Bankruptcy Court and Local Procedures & Rules. 0 Comments

On December 20, 2011, the United States Bankruptcy Court for the Western District of Pennsylvania held its Investiture Ceremony for the newly appointed Honorable Carlota M. Bohm.

Judge Bohm started her career as a law clerk to two Bankruptcy Judges and has concentrated her practice primarily in bankruptcy since 1981. Prior to being appointed and sworn in, Judge Bohm was a Bankruptcy Trustee on the U.S. Trustee’s Panel for the Western District of Pennsylvania and an attorney with the firm of Houston Harbaugh in Pittsburgh.

The United States Bankruptcy Court for the Western District of Pennsylvania sought a new judicial appointment after the untimely passing of the Honorable M. Bruce McCullough in November 2010.