Seventh Circuit Delivers Split Decisions for Trustee

By Ron Peterson and Landon Raiford

Jenner & Block, LLP

Chicago, IL 

 

On July 7, the Seventh Circuit delivered two opinions involving trustee Ronald Peterson.   In one case, the Trustee's claim was dismissed under the doctrine of in pari delicto, while in the second, the trustee's malpractice claim against a law firm stated a plausible claim.   In both cases, the trustee for Lancelot Investors Fund, Ltd. had sued professionals for contributing to the debtor's demise.   (Click on the style of the case for a link to the decison).

Peterson v. McGladrey LLP, No. 14-1986 (7^th Cir. July 7, 2015)

In McGladrey, the Seventh Circuit recently expanded on an earlier decision (also in the same litigation) that the doctrine of in pari delicto may apply to a bankruptcy trustee if the doctrine otherwise would apply under the relevant state law.  In McGladrey, the trustee alleged that McGladrey negligently committed its audit of the debtor, and that if McGladrey had not done so, it would have discovered that the debtor was actually investing in a Ponzi scheme thereby saving the debtors millions of dollars lost through further investments in that scheme.  McGladrey argued that even if the trustee’s contentions were correct, McGladrey could not be liable because the debtors committed their own fraud by giving false information to its investors regarding certain safeguards the debtors stated they had put in place but which were not.  The question before the Seventh Circuit was whether the in pari delicto doctrine only applies if the plaintiff and defendant commit the same misconduct.  

Fifth Circuit Takes a Mulligan on Golf Channel Fraudulent Transfer Decision

By Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX

One of the biggest challenges in unwinding a Ponzi scheme is figuring out who has to give back money and who gets to keep what they have.    Since promoters don't advertise the fact they are engaging in a Ponzi scheme, some people who thought they were dealing with a legitimate business end up being sued to recover so-called "fraudulent transfers."  The Golf Channel case is a perfect illustration of this problem.   Although the Fifth Circuit initially decided that the Golf Channel was ineligible to assert a defense that they provided value in good faith, they have decided to take a mulligan.   The panel has withdrawn its initial opinion and has certified the question to the Texas Supreme Court.    Janvey v. The Golf Channel Incorporated, No. 13-11305 (5th Cir. 6/30/15)

What Happened

 According to the Court:

For nearly two decades, Allen Stanford operated a multi-billion dollar Ponzi scheme2 through more than 130 affiliated entities centered around Stanford International Bank Limited (Stanford).3 To sustain the scheme, Stanford promised investors exceptionally high rates of return on certificates of deposit (CD) and sold these investments through advisors employed at the affiliated entities. Some early investors received the promised returns, but, as was later discovered, these returns were merely other investors’ principal. Before collapsing, Stanford had raised over $7 billion selling these fraudulent CDs.

Opinion, p. 3.   In order to get its brand out in front of sports audiences, Stanford purchased $5.9 million of advertising from the Golf Channel.  

Massachusetts Bankruptcy Court Allows "Vesting" of Property to Secured Creditor Under Chapter 13 Plan

By Louis Robin

Law Office of Louis Robin

Longmeadow, MA

In In re Sagendorph, II, No. 14-4675, 2015 Bankr. LEXIS 2055 (Bankr. D. Mass. 6/22/15), Bankruptcy Judge Hoffman, in a well reasoned and workmanlike opinion, has mechanically and, in my opinion and that of most debtor practitioners, properly applied the provisions of Chapter 13 to allow "vesting" of property to a secured creditor; the opinion may even provide secured creditors an opportunity to save significant foreclosure costs.  In this decision, Judge Hoffman permitted a debtor to surrender a property, and take the additional step of vesting the property to the secured creditor.  Section 1325(a)(5)(C) permits “surrendering” of assets as one of the alternatives for treatment of a secured claim as a precondition to confirmation.  “Vesting” is permitted as an element of plan under Section 1322(b)(9).  Despite Wells Fargo's objection that “vesting” was “subservient”, Judge Hoffman found no such direction in the Code – Section 1325 only set forth the confirmation requirements, while Section 1322 set forth terms that are permissible.

The Massachusetts state law prohibition of involuntary transfers of real estate did not restrict the Bankruptcy Code provisions because bankruptcy law, as a federal law, preempts state law.

Wellness Case Brings Healing for Authority of Bankruptcy Courts

By Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX

Resolving an issue left open by two prior decisions, the Supreme Court ruled that the right to entry of a final judgment by an Article III court, like the right to trial by jury, is a personal right which can be waived or consented away (subject to supervision by an Article III Court).    The decision left Chief Justice Roberts, whose broad language in Stern v. Marshall spawned a plethora law review articles, in the minority, while Justice Sotomayor wrote for the six justices in the majority.   Wellness International Network, Ltd. v. Sharif, No. 13-935 (5/26/15).

The Stern Problem

Article III of the Constitution states that the judicial power is vested in courts created under that Article, which is to say, judges appointed by the President, confirmed by the Senate and enjoying life tenure.    Over the years, Congress created many other judges, such as U.S. Magistrate Judges, Administrative Law Judges and Bankruptcy Judges, to help with the workload of the federal courts.   These judges were not appointed by the President or confirmed by the Senate and did not enjoy life tenure.    While they were under the supervision of Article III Judges, some of these legislatively created judges enjoyed great levels of independence.

Wellness International v. Sharif: The Supreme Court Decides Whether Consent Permits Entry of Final Orders on Non-Core Issues and “Stern” Claims

By Louis S. Robin

Law Offices of Louis Robin

Longmeadow, MA  

 The Supreme Court, in an opinion eagerly anticipated by bankruptcy practitioners and the bankruptcy judiciary, has issued its opinion in Wellness International v. Sharif.   The Court permitted parties to consent to entry of final orders in non-core and “Stern” issues. As a 6 – 3 decision, there are still issues remaining to be decided.

Factual Background

            Richard Sharif was the debtor/defendant in a dischargeability case which included a count seeking to determine that a trust, which the debtor alleged he administered for the benefit of his mother and sister was Sharif's alter ego and that its assets were part of the bankruptcy estate. Although litigation persisted with the alleged consent of the debtor Sharif, default judgments were eventually issued by the Bankruptcy Court, including Count V regarding the trust. This trust judgment was reversed by the Seventh Circuit which ruled that the Bankruptcy Court did not have jurisdiction, regardless of consent, to issue judgments on these claims which could be considered “Stern” claims – that is, final judgments on “claims that seek only to 'augment' the bankruptcy estate” and would otherwise “exis[t] without regard to any bankruptcy proceeding.” Slip Opinion at 9, citing Stern, 564 U.S. at ___, ___ (slip Op., at 27, 34). The debtor Sharif's sole defense on appeal was that the Bankruptcy Court lacked jurisdiction to issue final judgments, regardless of consent. 

Supreme Court Allows Parties to Consent to Entry of Final Judgment

By Wanda Borges

Borges and Associates, LLC

Syosset, NY

In Stern v. Marshall, the Supreme Court held that a Bankruptcy Court (an Article I Court) did not have the power to enter a final judgment in a case involving a state law counterclaim asserted by a debtor in bankruptcy.  Since the Stern v. Marshall decision, the courts have been split on the issue of whether or not consent between the parties can permit the Bankruptcy Courts to hear a matter which would normally be relegated only to Article III Courts (i.e. the U.S. District Courts).  The Fifth, Sixth and Seventh Circuits said that consent was not enough to permit the Bankruptcy Court to finally decide issues reserved for the Article III Courts.  The Ninth Circuit ruled that consent was sufficient to enable the Bankruptcy Court to issue a final ruling on any matter.

The Supreme Court itself had wrestled with this issue of consent in the past.  In the matter of Commodity Futures Trading Comm’n v. Schor, the Court held that the right to have a matter heard before an Article III court was “personal” and “subject to waiver”.  In the matter of Gomez v. United States, the Supreme Court held that a Magistrate Judge was not permitted to supervise voir dire in felony trials without the consent of the defendant.  In the matter of Peretz v. United States, although, the Court held that “allowing a Magistrate Judge to supervise jury selection,” with consent “does not violate Article III”.