The case of a creditor who did not want to acknowledge
that its debt had really and truly been paid received little sympathy from the
Fifth Circuit which rejected a panoply of defenses and affirmed the Bankruptcy
Court ruling that "The Senior Loan Has Been PAID!!!" Fire Eagle, LLC v. Bischoff (Matter of Spillman Development
Group, Ltd., Case No. 11-51057 (5th Cir. 2/28/13). I previously wrote about the
Bankruptcy Court decision from Judge Frank Monroe
here. The decision is significant because it shows that Stern v. Marshall
is not a silver bullet for parties seeking to avoid bankruptcy court decisions.
As discussed below, it also rejects a magical approach to bankruptcy law.
The case involved a golf course that filed for chapter
11, which was a common occurrence in Austin. After the debtor and a lienholder
fought to a stalemate, the Bankruptcy Court ordered a section 363 sale. The
lienholder, Fire Eagle, LLC, held two liens, a first lien which was guaranteed,
and a second lien which was not. Fire Eagle was the high bidder at the sale,
making a $9.3 million credit bid, which was approximately $200,000 more than
the amount of its guaranteed first lien debt.
Rejoicing at their good fortune, the guarantors requested
a declaratory judgment that their obligation had been satisfied. Fire Eagle
objected to the Bankruptcy Court's jurisdiction as well as venue. It also
contended that its credit bid reduced its "claim" but not its
"debt" and that it was therefore free to continue pursuing the guarantors.
The Bankruptcy Court ruled for the guarantors. In addition to the quoted
language above, the Court told Fire Eagle that "This is the Bankruptcy
Court; not fantasy land" and "This is not rocket science." The
District Court affirmed.
The Fifth Circuit Explains Jurisdiction and
In the post-Stern era, it is helpful to remember
that there are three separate doctrines that govern a bankruptcy court's
ability to render a final decision:
a. Jurisdiction under section 1334;
b. Statutory authority under section 157; and
c. Constitutional authority under Article III of the
Under 28 U.S.C. Sec. 1334, there is jurisdiction for
"civil proceedings arising under title 11, or arising in or related to
cases under title 11." "Related to" jurisdiction, which is the
broadest category, applies if the case "could conceivably have any effect
on the estate being administered in bankruptcy." While Fire Eagle correctly
stated that bankruptcy courts generally cannot "entertain collateral
disputes between third parties that do not involve the bankruptcy or its
property," the Fifth Circuit found that if Fire Eagle were to succeed in
recovering from the guarantors, this would reduce its deficiency claim which
would free up more money for the other creditors. The Court noted that "We
have previously held that similar attenuated, hypothetical effects of
third-party litigation can give rise to related-to bankruptcy jurisdiction." Opinion,
Thus, jurisdiction turns on the broad "any
conceivable effect" test. However, this is not the end of the inquiry. Once
jurisdiction is present, the question is which court has the power to exercise
Statutory authority to render a final judgment is
contained in 28 U.S.C. Sec. 157(b). If a matter is statutorily defined as a
"core" proceeding the Bankruptcy Court may enter a final judgment. Otherwise,
the Court must submit proposed findings of fact and conclusions of law to the
U.S. District Court absent consent of the parties.
The Fifth Circuit found that the dispute between Fire
Eagle and the guarantors qualified as a core proceeding because it was
"dependent upon the rights created in bankruptcy."
Because the basis for this dispute is whether Fire
Eagle's credit bid had the effect of extinguishing the Senior Indebtedness, and
because the right to credit bid is purely a creature of the Bankruptcy Code,
see 11 U.S.C. § 363(k), we fail to see how this proceeding does not qualify as
core under § 157(b)(1) and therefore hold that the bankruptcy court's entering
an order without reference to the district court was within its statutory
Opinion, pp. 6-7.
Finally, there is the matter of constitutional authority
to render a final judgment. This is the legacy of Stern v. Marshall. Because
the Court of Appeal's discussion of Stern is succinct and clear, I quote
it in its entirety below:
In Stern v. Marshall, the Supreme Court held
that it was unconstitutional for a bankruptcy court to issue a judgment on a
state-law counterclaim for tortious interference with a gift expectancy,
despite the fact that the claim itself was statutorily "core" pursuant to §
157(b)(2)(C) (defining as core proceedings "counterclaims by the estate against
persons filing claims against the estate"). 131 S. Ct. 2594, 2600-01 (2011). It
based this decision on the fact that the counterclaim was in no way reliant or
dependent on proceedings in bankruptcy-it just happened to have been a
counterclaim to a claim asserted in a bankruptcy proceeding. Id. at 2611. Fire
Eagle contends that its claims in this matter are similarly beyond the
constitutional authority of the bankruptcy courts to decide.
However, Stern itself stated that its holding was reliant on the fact
that the counterclaim at issue was "a state law action independent of the
federal bankruptcy law and not necessarily resolvable by a ruling on the
creditor's proof of claim in bankruptcy." Id. Fire Eagle's claim, on the
other hand, is inextricably intertwined with the interpretation of a right
created by federal bankruptcy law-the interpretation of the effect of Fire
Eagle's credit bid is in fact determinative of Fire Eagle's claim. We therefore
conclude that Stern is inapplicable and that there was no constitutional
bar to the bankruptcy court's exercise of its jurisdiction over this
statutorily core matter.
Opinion, p. 7.
The Fire Eagle opinion contains a formulation that
I believe will be widely used in Stern analysis, namely, that if an
issue relates in some substantive manner to a creditor's claim, then the
Bankruptcy Court has authority to enter a final judgment. While this is not the
full extent of authority under Stern, it is a convenient way to handle many
of the disputes likely to arise.
Exploring the Zen of a Credit Bid
There is a theory making the rounds of the
creditor's bar that there is a critical distinction between a "debt"
and a "claim" and that if a dispute can be phrased in terms of the
"debt," that the Bankruptcy Court lacks the ability to act upon the
"debt." This theory finds its support in cases such as In re Five
Boroughs Mortg. Co., Inc., 176 B.R. 708, 712 (Bankr. E.D. N.Y. 1995). Fire
Eagle made a variant of this argument, contending that the credit bid affected
only the the claim in bankruptcy and not the underlying debt. This required the
Court to consider the meaning of a credit bid. Not surprisingly, the Court of
Appeals concluded that there is no functional difference between a credit bid
and cash. The Court wrote:
Fire Eagle's first argument is logically unsound. If Fire
Eagle had been outbid at the § 363(b) auction, as it nearly was, or if it had
simply declined to credit bid its claims, then the cash proceeds from that
auction would have been applied against the Senior Indebtedness as the most
senior debt in the bankruptcy estate. If the Senior Indebtedness was paid in
full with these cash proceeds, then it would be absurd to suggest that Fire
Eagle could separately proceed against the guarantors. Under such a theory,
Fire Eagle would be undeniably receiving recovery in excess of the face value
of the Senior Indebtedness by virtue of guarantees that explicitly provide for
their own termination on the payment in full of the Senior Indebtedness.
Consequently, for Fire Eagle's argument to be correct, its credit bid must not
have been equivalent to a cash payment for the assets purchased. Title 11 U.S.C.
§ 363(k), though, provides that credit bidders "may offset [their] claim
against the purchase price" of the property that is the subject of the § 363(b)
bankruptcy sale. This provision explicitly contemplates mixed bids of cash and
claims, implicitly presupposing an equivalence with cash of the value of the
credit bid. We agree with the bankruptcy court and district court that Fire
Eagle's credit bid constituted a payment-in-full of the Senior Indebtedness,
just as if SDG's assets had been sold for cash.
Opinion, p. 10. The Court of Appeals also rejected
several other insubstantial arguments.
The Fifth Circuit should be commended for providing a
clear road map on some difficult issues of bankruptcy law. The Court also
deserves kudos for rejecting the magical view of bankruptcy law. I have heard
apocryphal stories that when the Bankruptcy Code was in its infancy, creditors
would make arguments that the automatic stay did not control over a creditor's
contract rights or that the discharge was not effective without the creditor's
consent. These particular instances of wishful thinking are now in the distant
past. However, in recent years there have been a rash of cases in which unhappy
parties asserted that the Bankruptcy Court simply did not have the power to do
whatever it did. The Supreme Court rejected these challenges in United
Student Aid Funds, Inc. v. Espinosa, 130 S.Ct. 1367 (2010) and Travelers
Indemn. co. v. Bailey, 129 S.Ct. 2195 (2009), each of which involved
collateral attacks on bankruptcy court orders, but limited the Bankruptcy
Court's power in Stern v. Marshall, 131 S.Ct. 2594 (2011). The
resurgence of these types of challenges requires practitioners to remain sharp
in their basic bankruptcy concepts and requires courts to distinguish between
serious arguments and those which are seductive but ultimately insubstantial. In
the present case, the Fifth Circuit succeeded in making this distinction.
subscribers can access enhanced versions of the opinions and annotated versions
of the statutes cited in this article:
Eagle, LLC v. Bischoff (Matter of Spillman Development Group, Ltd.), 2013 U.S.
App. LEXIS 4490 (5th Cir. 2/28/13)
11 U.S.C.S. § 363
U.S.C.S. § 1334
28 U.S.C.S. § 157
Constitution Art. III
v. Marshall, 2011 U.S. LEXIS 4791 (Jun. 23, 2011)
re Five Boroughs Mortg. Co., Inc.,
176 B.R. 708, 712 (Bankr. E.D. N.Y. 1995)
United Student Aid Funds, Inc. v. Espinosa,
130 S.Ct. 1367 (2010)
more at A Texas Bankruptcy Lawyer's Blog
For more information about LexisNexis
products and solutions connect with us through our corporate site.