Opinion
Case No. 06-06525 Adv. No. 08-00726
10-10-2012
In re: BACHRACH CLOTHING, INC., Debtor. BACHRACH CLOTHING, INC., Plaintiff, v. EDGAR H. BACHRACH, et al., Defendants.
Hon. Pamela S. Hollis
Memorandum Opinion
Introduction
Debtor BCI brought this action to avoid transfers made to its former owners. After five days of trial and review of thousands of pages of additional evidence submitted, including financial treatises, expert reports and depositions, the court enters judgment in favor of Defendants on all counts.
Parties
Plaintiff in this adversary proceeding is Chapter 11 debtor, Bachrach Clothing, Inc. ("BCI" or "Bachrach"). Defendants are Edgar H. Bachrach ("Ed"), his sisters, Sally B. Robinson and Barbara B. James (all three together, the "Sellers"), and Barsaled, LLC ("Barsaled," and together with the Sellers, "Bachrachs" or "Defendants"). Sellers are Barsaled's only members.
Jurisdiction and Authority to Enter Final Judgment
The complaint filed in this adversary proceeding consists of fifteen counts ("Complaint"). All but three of the counts allege violations of federal bankruptcy and state fraudulent conveyance laws, citing 11 U.S.C. §§ 544(b), 548 and 550, and 740 ILCS 160/5 and 160/6. The fraudulent conveyance counts do not plead state and federal claims distinctively, presumably because the state and federal statutes are substantially similar. Additionally, Count 13 contends that Defendants, former board members of BCI, breached fiduciary duties of good faith, fair dealing, honesty and loyalty in selling BCI. Count 14 seeks to disallow Defendants' proofs of claim, citing 11 U.S.C. § 502(d) of the Bankruptcy Code, which blocks payment on a creditor's claim until that creditor returns property subject to avoidance, including fraudulent transfers. Count 15 relies on 11 U.S.C. § 510(c) of the Bankruptcy Code to subordinate claims and liens of Defendants to the extent they engaged in inequitable conduct harmful to BCI's creditors.
Unremarkably, this court has subject matter jurisdiction to hear debtor's Complaint pursuant to 28 U.S.C. § 1334 and § 157. Slightly more controversial is whether this court has the authority to enter a final judgment on all counts in light of the United States Supreme Court's decision in Stern v. Marshall, ---U.S.---, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011). However, Stern does not remove this court's authority to render a final judgment. Here, resolution of nearly all of the contested issues was necessary to adjudicate Defendants' proofs of claim. Additionally, the parties consented to a final judgment by this court.
Given the extensive discussion of Stern in hundreds of decisions since its release last year, a protracted review of its facts will be skipped. At issue was a counterclaim filed by the debtor in response to a creditor's defamation action. The creditor elected to file the defamation claim in the bankruptcy court. The Supreme Court held that the creditor consented to the bankruptcy court's entry of a final judgment on his defamation claim, but the creditor did not consent to a final judgment on the debtor's counterclaim for tortious interference. The Court found that the counterclaim was not necessary to resolving the creditor's proof of claim and was based on state common law claims that could have been asserted by the debtor independent of the bankruptcy.
Title 28 U.S.C. § 157(b)(2)(C) provides that estate counterclaims brought in response to persons filing claims against the estate are "core" proceedings. If a matter is "core," the bankruptcy judge is authorized to issue final orders instead of preparing proposed findings of fact and conclusions of law for review by an Article III court. In Stern, the Supreme Court decided this statute was too broad. By classifying counterclaims-regardless of whether they stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process--as "core proceedings," Congress went too far. Accordingly, the Court held:
Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.131 S. Ct. at 2620. The Stern court did not strike down all of § 157, and emphasized that its decision was a narrow one. Id.
The proceeding before this court does not involve common law based counterclaims. Instead the debtor seeks to invalidate Defendants' sale of BCI as fraudulent. Section 157(b)(2)(H) declares fraudulent transfer actions to be core proceedings. Until Stern, this section unquestionably authorized entry of final judgments by the bankruptcy court. A wrinkle arises, however, since the Supreme Court previously determined that fraudulent transfer actions were based on common law, independent of bankruptcy proceedings. "There is no dispute that actions to recover preferential or fraudulent transfers were often brought at law in late 18th-century England." Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43 (1989). The Stern majority's comment that its debtor's counterclaim should be treated the same as the fraudulent transfer claim in Granfinanciera raises worries about the bankruptcy judge's authority to issue a final judgment on fraudulent transfer claims. See Douglas G. Baird, Blue Collar Constitutional Law, 86 Am. Bankr. L.J. 3, 8-9 (Winter, 2012); Ralph Brubaker, A "Summary" Statutory and Constitutional Theory of Bankruptcy Judges' Core Jurisdiction After Stern v. Marshall, 86 Am. Bankr. L.J. 121, 183 (Winter, 2012). As Professor Brubaker concluded:
"We see no reason to treat Vickie's counterclaim any differently from the fraudulent conveyance action in Granfinanciera.'" Stern, 131 S. Ct. at 2618.
[T]he rationale of the Granfinanciera decision itself clearly called into doubt the constitutionality of bankruptcy judges' core jurisdiction over preference and fraudulent conveyance suits. After Stern v. Marshall, the conclusion seems inescapable that such core jurisdiction to enter final judgment-expressly conferred by Judicial Code § 157(b)(2)(F) & (H)-is unconstitutional. Without the consent of the litigants, a bankruptcy judge can do no more than hear the action and submit proposed findings of fact and conclusions to the district court.Id. at 183.
Before Stern, the filing of a proof of claim by a fraudulent transfer defendant generally permitted the bankruptcy court to enter a final judgment in the avoidance action. The holdings in Granfinanciera and Langenkamp v. Culp, 498 U.S. 42 (1990) supported this assumption. Neither of those decisions required analysis as to how much of the claim that was independent of the bankruptcy needed to be resolved in order to determine a creditor's proof of claim. For example, in Langenkamp the Supreme Court held that the mere filing of a proof of claim subjected the creditor to bankruptcy court authority-without any detailed analysis of the overlap of the creditor's proof of claim and debtor's avoidance action.
In Granfinanciera we recognized that by filing a claim against a bankruptcy estate the creditor triggers the process of "allowance and disallowance of claims," thereby subjecting himself to the bankruptcy court's equitable power. 492 U.S., atLangenkamp, 498 U.S. at 44-45.
58-59, and n.14, 109 S. Ct, at 2799-2800, and n. 14 (citing Katchen, supra, 382 U.S., at 336, 86 S. Ct., at 476). If the creditor is met, in turn, with a preference action from the trustee, that action becomes part of the claims-allowance process which is triable only in equity. Ibid. In other words, the creditor's claim and the ensuing preference action by the trustee become integral to the restructuring of the debtor-creditor relationship through the bankruptcy court's equity jurisdiction. Granfinanciera, supra, 492 U.S., at 57-58, 109 S. Ct, at 2798-2799. As such, there is no Seventh Amendment right to a jury trial. If a party does not submit a claim against the bankruptcy estate, however, the trustee can recover allegedly preferential transfers only by filing what amounts to a legal action to recover a monetary transfer. In those circumstances the preference defendant is entitled to a jury trial.
So while it was presumed that the filing of a proof of claim authorized the bankruptcy judge to enter final judgments on avoidance actions brought against the filing creditor, Stern spoils that assumption. "Stern held that the bankruptcy court could not constitutionally decide the debtor's counterclaim against a creditor, despite the fact that the creditor had not only filed a proof of claim, but also had forfeited any objection to the bankruptcy court deciding his own common law claim against the debtor." In Stern, the filing of a claim was not enough:
Eric G. Behrens, Stern v. Marshall: The Supreme Court's Continuing Erosion of Bankruptcy Court Jurisdiction and Article I Courts, 85 Am. Bankr. L.J. 387, 415 (Fall, 2011).
It was in that sense that the Court stated that "he who invokes the aid of the bankruptcy court by offering a proof of claim and demanding its allowance must abide the consequences of that procedure." Id., at 333, n. 9, 86 S. Ct. 467. In Katchen one of those consequences was resolution of the preference issue as part of the process of allowing or disallowing claims, and accordingly there was no basis for the creditor to insist that the issue be resolved in an Article III court. See id., at 334, 86 S. Ct. 467. Indeed, the Katchen Court expressly noted that it "intimate[d] no opinion concerning whether" the bankruptcy referee would have had "summary jurisdiction to adjudicate a demand by the [bankruptcy] trustee for affirmative relief, all of the substantial factual and legal bases for which ha[d] not been disposed of in passing on objections to the [creditor's proof of] claim." Id., at 333, n. 9, 86 S. Ct. 467.Stern, 131 S. Ct. at 2616-18 (emphasis added).
Our per curiam opinion in Langenkamp is to the same effect. We explained there that a preferential transfer claim can be heard in bankruptcy when the allegedly favored creditor has filed a claim, because then "the ensuing preference action by
the trustee become[s] integral to the restructuring of the debtor-creditor relationship." 498 U.S., at 44, 111 S. Ct. 330. If, in contrast, the creditor has not filed a proof of claim, the trustee's preference action does not "become[ ] part of the claims-allowance process" subject to resolution by the bankruptcy court. Ibid.; see id., at 45, 111 S. Ct. 330.
.. .There was some overlap between Vickie's counterclaim and Pierce's defamation claim that led the courts below to conclude that the counterclaim was compulsory.... But there was never any reason to believe that the process of adjudicating Pierce's proof of claim would necessarily resolve Vickie's counterclaim....
....
...Vickie's claim, in contrast, is in no way derived from or dependent upon bankruptcy law; it is a state tort action that exists without regard to any bankruptcy proceeding.
The only way to harmonize Stern with earlier decisions like Granfinanciera and Langenkamp is to conclude that the filing of a proof of claim does not automatically authorize the bankruptcy court to enter a final judgment against that creditor. Instead, the bankruptcy judge's authority hinges on an analysis of whether resolution of the debtor's independent claim is necessary to determine the creditor's proof of claim. Such a test was employed by the Seventh Circuit in In re Ortiz, 665 F.3d 906, 914-15 (7th Cir. 2011). This has led one commentator to conclude: "Without a perfect match-up of issues, such that deciding the proof of claim necessarily resolves the debtor's claim, and vice versa, Stern would indicate that a bankruptcy judge cannot decide any state law or common issue against a third party."
Ralph Brubaker, A "Summary" Statutory and Constitutional Theory of Bankruptcy Judges' Core Jurisdiction After Stern v. Marshall, 86 Am. Bankr. L.J. 121,184 (Winter, 2012) ("It appears that the only durable justification for non-Article III adjudication of the preference actions in Katchen and Langenkamp ... is the Court's 'necessity' rationale: as objections and counterclaims to creditors' claims against the estate, adjudication of the preferences was necessarily part and parcel of the summary process of adjudicating allowance of the creditors' claims against the estate.").
Behrens, supra note 2, at 426-27.
After Stern, courts disagreed on whether bankruptcy judges could enter final judgments in fraudulent conveyance actions, absent the consent of the parties. Contrast for example, In re Menotte v. United States (In re Custom Contractors, LLC), 462 B.R. 901 (Bankr. S.D. Fla. 2011); Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 466 B.R. 626, 645-46 (Bankr. D. Del. 2012) (yes) --- with Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP), 464 B.R. 348 (N.D. Cal. 2011); In re Teleservices Group, Inc., 456 B.R. 318 (Bankr. W.D. Mich. 2011); Paloian v. Am. Express Co. (In re Canopy Fin., Inc.), 464 B.R. 770 (N.D. Ill. 2011) (no).
In reviewing the twelve fraudulent transfer counts brought in this case, this court concludes it has the power to enter final orders on those counts, since they were integral and necessary to resolving Defendants' proofs of claim. All of Defendants' proofs of claim sought payment on obligations arising solely from the sale of BCI. BCI's adversary complaint tries to avoid that sale and the transfers of property that resulted from it. Ed, as collateral agent for himself and his sisters, filed secured Claim 243-1 on October 5, 2006, in the amount of $4,172,054.79 plus expenses. This claim represented Ed and his sisters' lien on BCI's collateral to secure a note issued by BCHC, the purchaser of BCI. The remaining defendant in this proceeding, Barsaled LLC, filed unsecured Claim 245-1 in the amount of $168,022.58, which represented rent due from BCI on real property transferred to Barsaled on or about the same time as the sale of BCI to BCHC. The Complaint alleges, and the court agrees, that rent to Barsaled was in connection with the Stock Purchase Agreement. Count one of the Complaint seeks to avoid all obligations created by the Stock Purchase Agreement. If debtor prevailed on this one count alone, Defendants' proofs of claim would necessarily be disallowed. The remaining fraudulent conveyance counts simply divide up the type and nature of transfers going to each defendant as a result of the sale. Disallowance of Defendants' claims would necessarily follow a judgment for the Debtor on all the fraudulent conveyance counts. This is mandated by Bankruptcy Code § 502(d) which denies payment on a claim if the creditor received and failed to return voidable transfers. Indeed, that provision anchors Count 14, which sought disallowance of the claims of Ed and his sisters (Claims 241-1 and 334-1) because of the alleged fraudulent conveyances. Count 14 incorporates the first 146 allegations of the Complaint, demonstrating the inseparable overlap between this proceeding and the claims allowance process. As a result, resolution of BCI's claims in this proceeding is necessary to determine Defendants' proofs of claim.
Ed as Collateral Agent also filed Claim 334-1 for administrative expenses.
The court recognizes § 502(d) can prevent payment on a proof of claim that was completely unrelated to a debtors' avoidance action, allowing an argument that resolution of the proof of claim does not overlap with the avoidance action. However, that is not the case here. Deciding Defendants' proofs of claim directly affects resolution of this adversary proceeding and vice versa.
Count 15 seeks to equitably subordinate Ed and his sisters' proofs of claim under § 510(c) of the Bankruptcy Code. Again, this is nothing more than claims resolution added as a count to this adversary proceeding. BCI's claim for equitable subordination depends on the existence of Defendants' claims in the first instance. Accordingly, this court retains authority to issue a final order on Count 15, which requests subordination of claims. See concurring post-Stern decisions: Burtch v. Huston (In re USDigital, Inc.), 461 B.R. 276 (Bankr. D. Del. 2011) and Direct Response Media, 466 B.R. at 645-46.
Finally, Count 13 alleges breach of fiduciary duty and incorporates nearly all of the fact allegations of the Complaint's other counts, again demonstrating an overlap with the claims resolution process. Generally, directors owe fiduciary duties only to their shareholders. However, when a company is operating in the zone of insolvency, Illinois law expands that duty to the company's creditors. See Steinberg v. Kendig (In re Ben Franklin Retail Stores, Inc.), No. 97C7934, 2000 WL 28266, at *4 (N.D. Ill. Jan. 12, 2000). If BCI was not insolvent near the time of the sale, this count falls away. If this court were to allow Defendants' proofs of claim on the basis that there was no fraudulent conveyance because debtor was solvent, there is really nothing more for any Article III court to determine on Count 13. In considering a similar situation in Stern, the majority observed that the bankruptcy judge (or referee) would have power to finally decide the avoidance action:
Although the creditor in Katchen objected that the preference issue should be resolved through a "plenary suit" in an Article III court, this Court concluded that summary adjudication in bankruptcy was appropriate, because it was not possible for the referee to rule on the creditor's proof of claim without first resolving the voidable preference issue. 382 U.S., at 329-330, 332-333, and n. 9, 334, 86 S. Ct. 467. There was no question that the bankruptcy referee could decide whether there had been a voidable preference in determining whether and to what extent to allow the creditor's claim. Once the referee did that, "nothing remains for adjudication in a plenary suit"; such a suit "would be a meaningless gesture." Id., at 334, 86 S. Ct. 467. The plenary proceeding the creditor sought could be brought into the bankruptcy court because "the same issue [arose] as part of the process of allowance and disallowance of claims." Id., at 336, 86 S. Ct. 467.Stern, 131 S. Ct. at 2616.
Because of the close relationship between the breach of fiduciary duty count and the claims resolution process, this court does have authority to enter a final order on Count 13. Stern only held that the bankruptcy court lacked power to enter a final judgment on a state or common law claim not derived solely from the bankruptcy "that is not resolved in the process of ruling on a creditor's proof of claim." 131 S. Ct. at 2620. In Stern, unlike here, "[t]here thus was never reason to believe that the process of ruling on Pierce's proof of claim would necessarily result in the resolution of Vickie's counterclaim." Id. at 2617-18.
In this case, Stern will be applied narrowly, in line with its majority opinion which emphasized:
We do not think the removal of counterclaims such as Vickie's from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a "narrow" one.Stem, 131 S. Ct. at 2620.
....
Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.
After this court presided over a lengthy trial, post-trial briefs were filed, and the matter was taken under advisement, Ed and his sisters (but not Barsaled) were given leave to withdraw their proofs of claim on or about February 20, 2011. Order on Plaintiff's Motion to Voluntarily Dismiss Adversary Proceeding No. 09-00225 (Dkt. 56). The withdrawal of claims occurred months before the Stern decision. No language specifically referred to the effect of the claims withdrawal on the bankruptcy court's power to finally adjudicate this proceeding. Presumably, this is because the parties consented to the court's power, and Stern had not yet surfaced to create an uproar.
Defendants won this case, so it is unlikely they will ever assert that withdrawal of their claims voided the bankruptcy judge's power to render a final decision. However, if debtor tries to avert its loss by such a belated argument, it should fail. Two ^re-Stern decisions are instructive. EXDS, Inc. v. RK Elec., Inc. (In re EXDS, Inc.), 301 B.R. 436 (Bankr. D. Del. 2003) involved an attempt by a defendant to withdraw a proof of claim in order to demand a trial by jury. This court agrees with that court's statements on pp. 440-41:
Given the clear directive of Langenkamp, I do not believe it makes any difference on the jury trial issue whether I authorize RK to withdraw its proof of claim. At the time of the filing of the adversary complaint, RK was subject to theId. (alternations in original).
jurisdiction of this court where there is no right to a jury trial. In the words of Langenkamp, RK submitted itself to the "claims-allowance process" of the equity court. Stated differently, in the words of the Travellers opinion, RK lost its right to a jury trial because it elected to participate in the equity court proceeding. Given the unequivocal language of Langenkamp and Travellers as to the effect of filing a proof of claim, I do not believe that a creditor can, for strategic reasons, reverse the result it triggered by filing a proof of claim by later withdrawing the claim....
In an analogous situation, the court in In re Sea Lsland Cotton Trading, Inc., 2000 WL 33952877, at *2-3 (Bankr. S.D. Ga. July 25, 2000) found that "[d]efendants submitted themselves to the jurisdiction of this court by filing proofs of claim in the bankruptcy case. The subsequent assignment of the claim does not divest this court of jurisdiction over Defendants." Another analogous situation is found in In re Barrett Refining Corp., 221 B.R. 795 (Bankr. W.D. Okla. 1998). There the court held that the State of Mississippi relinquished any right of sovereign immunity by filing a proof of claim even where that proof of claim stated that the State "reserved" state sovereign immunity.
In the matter before me, as in the Langenkamp case, the proof of claim was filed before the avoidance action was commenced. That fact pattern suggests a result similar to that involving federal jurisdiction based on diversity. Federal diversity jurisdiction depends on the citizenship of the parties at the time suit is filed. See, e.g., Anderson v. Watt, 138 U.S. 694, 702-03, 11 S. Ct. 449, 34 L. Ed. 1078 (1891) ("And the [jurisdictional] inquiry is determined by the condition of the parties at the commencement of the suit."); see also Minneapolis & St. Louis R.R. Co. v. Peoria & Pekin Union R.R. Co., 270 U.S. 580, 586, 46 S. Ct. 402, 70 L. Ed. 743 (1926) ("The jurisdiction of the lower court depends upon the state of things existing at the time the suit was brought.").
Following this decision was Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 349 B.R. 108 (Bankr. S.D.N.Y. 2006), where the court held that disposition of a proof of claim did not affect the bankruptcy judge's power to finally adjudicate matters:
The disposition of a claim, alone, does not nullify the consequences of a creditor's invocation of jurisdiction premised upon such claim. See EXDS, Inc. v. RK Electric, Inc. (In re EXDS, Inc.), 301 B.R. 436, 439-41 (Bankr. D. Del. 2003) (concluding that "a creditor [cannot], for strategic reasons, reverse the result it triggered by filing a proof of claim by later withdrawing the claim"); The Academy, Inc. v. James, Hoyer, Newcomer, & Smiljanich, P.A., et al. (In re The Academy, Inc.), 289 B.R. 230, 234-35 (Bankr. M.D. Fla.) ("The fact that [the defendants in adversary proceeding] no longer wish to assert claims against theId. at 114-15 n.2.
[debtor] should not impact in any way the court's jurisdiction over them for the purpose of the [debtor]'s claims against them.").
Accordingly, once the bankruptcy court's power is properly invoked and the case tried to a conclusion, no party may challenge the outcome by relying on a subsequent claim withdrawal. Any other result invites gamesmanship and a waste of resources.
Even if withdrawal of some claims could affect the bankruptcy court's power, the parties consented to this court's authority to enter a final judgment. Since the issue in Stern only involved the bankruptcy judge's authorization to issue a final judgment, and not subject matter jurisdiction to hear the case, the parties may agree to a final adjudication by the bankruptcy court. That was made plain in Stern when the majority held that the creditor who brought his defamation claim to the bankruptcy court, and voluntarily litigated it there, waived his right to trial before an Article III court:
As mentioned previously, defendant Barsaled did not withdraw its proof of claim in the February 2011 order.
We agree with Vickie that Pierce not only could but did consent to the Bankruptcy Court's resolution of his defamation claim....Stern, 131 S. Ct. at 2607-08.
Indeed, Pierce apparently did not object to any court that § 157(b)(5) prohibited the Bankruptcy Court from resolving his defamation claim until over two years— and several adverse discovery rulings—after he filed that claim....
Given Pierce's course of conduct before the Bankruptcy Court, we conclude that he consented to that court's resolution of his defamation claim (and forfeited any argument to the contrary). We have recognized "the value of waiver and forfeiture rules" in "complex" cases, Exxon Shipping Co. v. Baker, 554 U.S. 471, 487-488, n. 6, 128 S. Ct. 2605, 171 L. Ed. 2d 570 (2008), and this case is no exception. In such cases, as here, the consequences of "a litigant. . . 'sandbagging' the court-remaining silent about his objection and belatedly raising the error only if the case does not conclude in his favor," Puckett v. United States, 556 U.S. 129, ---, 129 S. Ct. 1423, 1428-29, 173 L. Ed. 2d 266 (2009) (some internal quotation marks omitted)--can be particularly severe. If Pierce believed that the Bankruptcy Court lacked the authority to decide his claim for defamation, then he should have said so--and said so promptly. See United States v. Olano, 507 U.S. 725, 731, 113 S. Ct. 1770, 123 L. Ed. 2d 508 (1993) (" 'No procedural principle is more familiar to
this Court than that a constitutional right,' or a right of any other sort, 'may be forfeited ... by the failure to make timely assertion of the right before a tribunal having jurisdiction to determine it'" (quoting Yakus v. United States, 321 U.S. 414, 444, 64 S. Ct. 660, 88 L. Ed. 834 (1944))). Instead, Pierce repeatedly stated to the Bankruptcy Court that he was happy to litigate there. We will not consider his claim to the contrary, now that he is sad.
Several post-Stern cases hold that parties may consent to final adjudication by the bankruptcy court and forfeit or waive any right to a final adjudication by an Article III court. See In re Olde Prairie Block Owner, LLC, 457 B.R. 692 (Bankr. N.D. Ill. 2011); Hawaii Nat 7 Bancshares, Inc. v. Sunra Coffee LLC (In re Sunra Coffee LLC), No. 09-01909, 2011 Bankr. LEXIS 4047 (Bankr. D. Haw. Oct. 18, 2011). Moreover, this consent may be implied by the conduct of the parties. See In re Custom Contractors, 462 B.R. at 909; Ardi Ltd. P'ship v. The Buncher Company (In re River Entm't Co.), 467 B.R. 808 (Bankr. W.D. Pa. 2012). All of these cases agree that parties who litigate before the bankruptcy court through lengthy stages, without objection, will be deemed to have consented to a final judgment by the bankruptcy court.
BCI elected to file its case before the bankruptcy court and alleged in paragraph 16 of the Complaint: "This adversary proceeding constitutes a core proceeding within the meaning of one or more subsections of 28 U.S.C. § 157(b)." All Defendants admitted to this allegation. Additionally, in the jointly prepared Stipulations of Fact for Trial, the parties again agreed that: "This adversary proceeding constitutes a core proceeding within the meaning of one or more subsections of 28 U.S.C. § 157(b)." (¶ 15). As held in Mercury Companies, Inc. v. FNF Sec. Acquisition, Inc., 460 B.R. 778 (D. Colo. 2011):
"[A]n allegation that the proceeding is core serves as an express consent for the bankruptcy court to treat that proceeding as core and enter a final order in that proceeding," In re C. W. Mining Co., No. 2:09CV417DAK, 2009 U.S. Dist. LEXIS 115705, 2009 WL 4906702, at *2 (D. Utah Dec. 11, 2009). The parties' admissions in their pleadings that the Adversary Proceeding was a coreId. at 781-82.
proceeding constituted consent to the authority of the Bankruptcy Court to enter orders and judgment in the proceeding.
...Here, not only did the parties admit in their responsive pleadings that the action was a core proceeding, but neither party made any allegation that the action or any claim therein was non-core, and neither party made any mention that they did not consent to the authority of the Bankruptcy Court to enter orders and judgment (as they were required to do under Federal Rule of Bankruptcy Procedure 7012(b) if they believed it was a non-core proceeding). This also constituted consent to the authority of the Bankruptcy Court to enter orders and judgment in the Adversary Proceeding. See Citizens Concerned for Separation of Church & State v. City & County of Denver, 628 F.2d 1289, 1293 (10th Cir. 1980) (observing that where an answer fails to deny jurisdictional allegations, the allegations are properly deemed admitted).
Finally, the Adversary Proceeding was filed on January 27, 2010, and Defendants waited nearly 19 months, until August 15, 2011, to challenge the authority of the Bankruptcy Judge to enter orders and judgment in the Adversary Proceeding. In the meantime, not only did Defendants consent in their responsive pleadings to the authority of the Bankruptcy Court to enter orders and judgment, but they also heavily litigated the action in the Bankruptcy Court, filing a witness and exhibit list (ECF No. 46), deposition notices (AP ECF No. 59, 64-66, 105, 106, 111), expert disclosures (AP ECF No. 97), a motion for partial summary judgment (AP ECF No. 90), a motion for summary judgment (AP ECF No. 124), and a motion in limine (AP ECF No. 125). In so doing, Defendants' impliedly consented to the authority of the Bankruptcy Court to enter orders and judgment in the Adversary Proceeding. See In re Millenium Seacarriers, Inc., 419 F.3d 83, 96 (2d Cir. 2005) ("[L]ienors, by litigating their maritime liens before the bankruptcy court, consented to the bankruptcy court's equitable jurisdiction to adjudicate and extinguish their liens . . . ."); In re Kaiser Steel Corp., 95 B.R. 782, 788 (Bankr. D. Colo. 1989) ("[C]onsent under [28 U.S.C. §] 157(c)(2). . . may be implied from a timely failure to object to the Bankruptcy Court's jurisdiction; or it may be implied from any act which indicates a willingness to have the Bankruptcy Court determine a claim or interest.").
Because the parties in this proceeding admitted that the matters to be decided here are core, they expressly consented to a final adjudication by this court. Consent may also be implied. At no time before, during, or after the trial of this case did any party object to or question the power of this court to finally decide the matters before it. The parties have had an opportunity to digest Stern's holding for over a year and have yet to raise any questions regarding this court's authority. The opportunity is now foreclosed. Findings of Fact - Rule 7052, Federal Rules of Bankruptcy Procedure
The court took under advisement Defendants' request to admit as evidence for truth of the matter: DX 22, 29, 54 and 60 (mostly pre-bankruptcy statements of Sun employees who became BCI directors or officers) offered as party admissions; DX 43, 47, 50, 51, 60, 138, 209 and 210 (statements by Sun employees alleged to be debtor's agent); McGladrey & Pullen work papers DX 206 and 207 and Prior Witness Statements DX 46, 187 and 209, alleged admissible under Rule 801(d)(1). Plaintiff objected primarily on hearsay grounds. Defendants' total exhibits consisted of over ten thousand pages, plus depositions and trial transcripts of many more thousands of pages, most of which were admitted and considered. The court did not rely on the truth of the matter of any of these contested exhibits to issue findings of fact or other rulings in this opinion, so their admission will be denied as cumulative. The question presented regarding admission was not an easy one. BCI supported its objection that these were not party admissions with ample case law holding that the estate was separate from the pre-bankruptcy debtor. However, as indicated in this opinion, Sun appeared to be controlling the estate at various moments in the bankruptcy. In particular, the estate hired Alliance Management, and its retention agreement provided that Alliance was subject to the direction of Sun employee Woelcke. Had the evidence not been cumulative, the court may well have made an exception to the cases cited by debtor on the basis that Sun in substance was the estate. Such a ruling, however, would prolong this decision and is not necessary.
1. Events Leading up to Sale of Debtor
BCI, or "Bachrach," was a mall-based retailer of men's apparel. Until 2005, BCI was owned and operated by the Bachrach family. Ed's great grandfather, Henry Bachrach, founded the business in 1877, after selling civilian suits to returning Civil War soldiers for twenty five cents. Henry's original Decatur, Illinois store was called "Cheap Charley". The business grew to a peak of 82 stores in the mid-1990s. Until the business was sold in 2005, there were only four presidents: founder Henry; his son Edgar, Edgar's son Henry and Henry's son—Ed Bachrach, a defendant in this action. Before the 2005 sale, one hundred percent of the business' stock was owned by trusts in favor of Ed and his two sisters. Ed, his sisters, and brother-in-law Ronald James, who is married to sister Barbara James, sat on BCI's board of directors, and constituted BCI's entire board of directors up until the sale (the "Directors").
Ed Bachrach's trust held the majority of BCI's shares. Ed worked in the family business starting at the age of seven. Ele received an accounting degree from Northwestern University in 1970, and returned to Bachrach as a controller in 1976, following a stint in the Army and four j years as a staff accountant with Ernst & Whinney. Ed became a licensed CPA in 1971.
Ed reported to his father Henry when he started as controller in 1976. Ed became President of BCI in 1979 and held that position until the company was sold in 2005. During Ed's time with the company from 1976 up to 2005, he was intimately familiar with its financial situation. During most of those years, BCI was profitable. BCI's assets never exceeded its liabilities, and the company was always able to pay its debts as they became due. Not a single vendor refused favorable credit terms because of a concern that BCI could not pay its debts, nor was the company ever sued for failing to pay its debts. The company never experienced negative working capital nor did anyone express a concern that its working capital was too small. Also during the years that Ed ran the company, BCI's operations were financed primarily by the positive cash flow generated by the company. "We always carried significant cash balances. And when it was time for us to make an investment in either additional working capital or other fixed assets, we did it with that cash." (Testimony of Ed Bachrach, Trial Transcript Vol. 1, at 55-56)
Although operations were generally funded with cash, the business had lines of credit with financial institutions. BCI used the lines only two or three years in the late 1990s when the business was rapidly expanding. The funds were borrowed on a seasonal basis and all loans were paid off after the holiday season. The banks never required any personal guarantees for the loans, and the lines were unsecured when they were actually used. BCI never had any long term debt during Ed's tenure.
Sometime during the 1990s Ed determined that stores located in smaller cities were not as profitable as those located in major markets. He decided to prune these less profitable stores in favor of consolidating the business into larger markets. BCI's overall sales revenues declined between years 2000 and 2004, due at least in part to planned store closures. However, same store sales were up and down in some of those years and remained flat on an aggregated basis, notwithstanding 9/11's general assault on the economy. During this discrete period, BCI was using more cash than it was generating, although in 2004 it did report positive earnings before interest, taxes and depreciation (EBITDA) after adjustments for non-recurring items. Such items included store closings and consultant fees incurred to evaluate replacing Ed with outside management so he could pursue other goals.
The comparable decline over five years was less than a half percent. See, for example, the five year comparison total of-0.39% in Plaintiff's Demonstrative Exhibit (PDX) 7.
Joint Exhibit (JX) 024 at 4, Sun reports that adjusted 2004 EBITDA was a positive $97k.
Project Euro Shirt, JX 025 at 25: "The Company hired Senn Delaney to provide consulting advice regarding a potential transition from an owner-operated Management strategy to an owner/outside-operated Management strategy. These one-time, non-recurring Management consultant fees have been added back to 2004 EBITDA." See also Sun due diligence, JX 024 at 21: "Non-Recurring Management Consulting Fee-Add-backs represent costs incurred by the Company for external consultants under Mr. Bachrach's initiative to bring in non-family management and directors. This plan was later abandoned."
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Between 1999 and 2004 Ed explored selling the family business to pursue a life-long goal of returning to school for an advanced degree in economics and political science. He conferred with investment bankers and consultants but received no offers. During that time, a number of options were discussed. Ed's notes of various meetings included information communicated by the consultants on selling the business, liquidation, bankruptcy, preference actions and elements of fraudulent transfer actions. While there was no evidence on why these matters were discussed, none of the consultants suggested that BCI was insolvent or unable to pay its debts. Ed does not specifically recall why he took notes on these issues--indicating he simply wrote down comments of others but cannot recall the context. (Testimony of Ed Bachrach, Trial Transcript Vol. 1, at 70)