Bestwall LLC
ORDER DENYING THE MOTIONS TO DISMISS OF CLAIMANTS WILSON BUCKINGHAM AND ANGELIKA WEISS AND THE OFFICIAL COMMITTEE OF ASBESTOS CLAIMANTS
This matter comes before the court on the February 17, 2023 Motion to Dismiss of Claimants Wilson Buckingham and Angelika Weiss (Dkt. 28821) (the “Buckingham Motion“) and the March 30, 2023 Official Committee of Asbestos Claimants’ Motion to Dismiss for Lack of Subject Matter Jurisdiction (Dkt. 2925) (the “Committee‘s Motion“) (collectively the “Motions to Dismiss“). The court concludes that it has jurisdiction over this matter pursuant to
Facts and Procedural History
1. Bestwall LLC (the “Debtor“) filed a petition under Chapter 11 of the
2. The Motions to Dismiss constitute the third and fourth motions to dismiss this bankruptcy case. On August 15, 2018, the Official Committee of Asbestos Claimants (the “Committee“) filed a motion to dismiss this case as a bad faith filing pursuant to
3. On August 12, 2019, the Committee filed a notice of appeal (Dkt. 917) of the Opinion and Order, a motion for leave to appeal (Dkt. 918), and a request for certification of direct appeal to the Fourth Circuit (Dkt. 920). This court approved the request for the direct appeal on September 11, 2019 in its Certification for Direct Appeal to the United States Court of Appeals for the Fourth Circuit Under
4. On February 3, 2023, the Committee filed a notice of supplemental authority (W.D.N.C. Dkt. 126) (“Committee‘s Notice“) bringing to the attention of the District Court the “pertinent and significant new authority” of the opinion of the United States Court of Appeals for the Third Circuit in the LTL Management case (the “LTL Opinion“). Committee‘s Notice at 2; see LTL Mgmt., LLC v. Those Parties Listed on Appendix A to Complaint and John and Jane Does 1–1000 (In re LTL Mgmt., LLC), 64 F.4th 84 (3d Cir. 2023). Based on the LTL Opinion, the Committee urged the District Court to accept the pending notice of appeal (or grant the Committee‘s motion for leave to pursue an interlocutory appeal) so the Fourth Circuit would have a chance to consider the applicability of the Carolin standard to “a debtor that failed to exhibit financial distress prior to invoking the substantial protections of the Bankruptcy Code.” Committee‘s Notice at 2. The Debtor responded (W.D.N.C. Dkt. 13) (“Debtor‘s Response to Committee‘s Notice“) and asserted that nothing about the LTL Opinion changed the reasons why the District Court should “deny leave to appeal the interlocutory order denying the Committee‘s motion to dismiss Bestwall‘s bankruptcy case.” Debtor‘s Response to Committee‘s Notice. The Debtor further opined that the LTL Opinion is based on a different standard and has no application to the appeal of the Opinion and Order. Id. at ¶ 3.
6. The Committee filed a second motion to dismiss (Dkt. 938) (the “Second Motion to Dismiss“) on August 16, 2019, arguing primarily that the case should be dismissed
7. In the Committee‘s Motion (its third motion to dismiss this case), the Committee moves to dismiss this case for lack of constitutional subject matter jurisdiction. The Committee asserts that the Debtor is not an eligible subject of bankruptcy pursuant to the Bankruptcy Clause of the Constitution because it lacks sufficient financial distress. Committee‘s Motion at 2. According to the Committee, the Debtor is neither insolvent nor in need of bankruptcy for its survival and, therefore, does not qualify for bankruptcy relief. Id. The Committee insists that “Bestwall‘s economic health and ability to timely and fully pay all its creditors, including all present and future asbestos claimants, is (and was at the time of its bankruptcy filing) unthreatened. Neither financial nor operational requirements have necessitated bankruptcy restructuring, and Bestwall is therefore not an eligible ‘subject of [B]ankruptc[y]’ as that word was understood by the drafters of the Constitution and the delegates ratifying the Constitution.” Id. The Committee contends that “a bankruptcy court must first determine whether the entity seeking debtor status meets the fundamental requirements of the Constitution” before considering statutory restrictions on debtors, including whether a bankruptcy case should be dismissed as a bad faith filing. Id. In other words, the Debtor must be in sufficient financial distress to be constitutionally eligible to seek protection under the Bankruptcy Code.
8. In support of its argument, the Committee cites findings of fact made by this court in its Opinion and Order and its July 29, 2019 Memorandum Opinion and Order Granting the Debtor‘s Request for Preliminary Injunctive Relief (A.P. Dkt. 1649) in reliance on the Debtor‘s assertion that it is fully capable of paying all asbestos claims in full with the support of the funding agreement. Id. at 4. The Committee further relies on developments that have occurred since the filing of the case to demonstrate that Bestwall‘s financial wherewithal has grown stronger as this case has progressed. Id. at 4–5. Specifically, the Committee points to the facts that since the filing of the case, Bestwall has created and funded a $1 billion qualified settlement trust; New GP‘s equity value has increased by $7.1 billion to $27.8 billion; and New GP has upstreamed over $5 billion in dividends to its ultimate parent, Koch Industries. Id. at 5.
9. The Committee asserts that this motion to dismiss “is a new and distinct argument from any previously raised; [and] it also provides additional context for considering the proper scope and application of the Fourth Circuit‘s Carolin test,” which it concedes was the focus of the First Motion to Dismiss. Id. at 7, 9. According to the Committee, in addition to lacking constitutional subject matter jurisdiction, the “Fourth Circuit‘s case law, regarding debtors whose bankruptcies were dismissed for bad faith, must be read, interpreted and applied within the constitutional limitations of bankruptcy jurisdiction.” Id. at 20. The Committee says that consistent with the constitutional requirement of significant financial
10. This part of the Committee‘s argument is consistent with the Buckingham Motion. Mr. Buckingham argues this case must be dismissed because it does not meet the good-faith threshold established by the Fourth Circuit in Carolin, the Debtor is not eligible for bankruptcy relief because it is neither in financial distress nor facing “overwhelming liabilities,” and it cannot confirm a § 524(g) plan of reorganization. Buckingham Motion at 7. The Buckingham Motion relies extensively on the Third Circuit‘s recent LTL Opinion dismissing the LTL Management case as a bad faith filing in urging the court to dismiss this case under
11. In response, the Debtor contends that the court lacks jurisdiction to consider the Buckingham Motion because it seeks the same relief that was sought by the Committee in its First Motion to Dismiss on fundamentally the same grounds. Debtor‘s Response to the Buckingham Motion at 1, 17–25. The Debtor argues the court is divested of jurisdiction to consider the Buckingham Motion due to the Committee‘s appeal of the court‘s Opinion and Order denying the First Motion to Dismiss and its motion for leave to appeal. Id. at 5–8. In addition, the Debtor insists that Mr. Buckingham should be barred by the doctrine of laches from bringing his motion to dismiss given the length of time this case has been pending. The Debtor also argues that the Opinion and Order is law of the case and the court should deny the Buckingham Motion because it seeks to dismiss
12. Similarly, in its response to the Committee‘s Motion, the Debtor asserts that the doctrines of laches and law of the case bar the Committee‘s argument and that this court is divested of jurisdiction to consider the dismissal issues raised in the Committee‘s Motion because they are pending before the District Court on appeal. Debtor‘s Opposition to the Official Committee of Asbestos Claimants’ Third Motion to Dismiss Chapter 11 Case (Dkt. 2973) at 2, 13–19. In response to the Committee‘s assertion that this court lacks subject matter jurisdiction, the Debtor insists that the court has jurisdiction and has properly exercised it in the six years this case has been pending. Id. at 2, 6–13. According to the Debtor, the question of eligibility to be a debtor is not a question of jurisdiction because bankruptcy courts have subject matter jurisdiction over all cases filed under the Bankruptcy Code. Id. at 7 (quoting In re Auto. Pros., Inc., 370 B.R. 161, 167 (Bankr. N.D. Ill. 2007)). Further, the Debtor argues that the Bankruptcy Clause of the United States Constitution does not impose an insolvency or financial distress requirement to be a debtor. Id. at 9.
Discussion
13. Mr. Buckingham seeks dismissal of this case under Carolin largely for the same reasons previously argued by the Committee in its First Motion to Dismiss and considered and decided by this court in its Opinion and Order. As demonstrated by the chart (“Debtor‘s Chart“) attached as Exhibit A to the Debtor‘s Response to the Buckingham Motion, Mr. Buckingham and the Committee use similar language to argue that the court should dismiss this case as a bad faith filing and that the Debtor and/or New GP are not in financial distress.
14. Pursuant to the law of the case doctrine and in the interest of finality, “when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.” Carlson v. Bos. Sci. Corp., 856 F.3d 320, 325 (4th Cir. 2017) (quoting TFWS, Inc. v. Franchot, 572 F.3d 186, 191 (4th Cir. 2009)); see also Mar-Bow Value Partners, LLC v. McKinsey Recovery & Transformation Servs. U.S., LLC, 469 F. Supp. 3d 505, 524 (E.D. Va. 2020) (“[C]learly, courts could not perform their duties satisfactorily and efficiently if a question once considered and decided were to be litigated anew in the same case . . . .” (quoting Sejman v. Warner-Lambert Co., 845 F.2d 66, 68–69 (4th Cir. 1988))).
15. To determine the extent to which the law of the case governs, the court must first determine what issues it decided in the Opinion and Order and then decide whether any exceptions apply that might justify departing from the law of the case. See Mar-Bow, 469 F. Supp. 3d at 525. “The Fourth Circuit has recognized three exceptions to the law of the case doctrine: ‘(1) a subsequent trial produces substantially different evidence, (2) controlling authority has since made a contrary decision of law applicable to the issue, or (3) the prior decision was clearly erroneous and would work manifest injustice.‘” Id. (quoting TFWS, 572 F.3d at 191). In addition, “the Supreme Court has advised that a ‘court has the power to revisit prior decisions of its own or of a coordinate court in any circumstance, although as a rule courts should be loathe to do so in the
16. As previously explained, the court concluded under Carolin in its Opinion and Order that this case is not objectively futile because Bestwall has the resources with which to reorganize, and, therefore, the court did not need to reach the issue of whether the case was filed in subjective bad faith and declined to dismiss this case under the Fourth Circuit‘s two-prong dismissal standard. Bestwall, 605 B.R. at 49–51. In reaching that conclusion, the court found that attempting to resolve asbestos claims through section 524(g) is a valid reorganizational purpose and that the volume of current asbestos claims coupled with the number of claims to be filed is sufficient financial distress for the Debtor to file this Chapter 11 case. Id. at 49.
17. In considering the exceptions to the law of the case doctrine, the court notes that Mr. Buckingham does not cite to substantially different evidence (or any evidence produced in a subsequent trial) sufficient to cause this court to revisit the Opinion and Order. Rather, he relies on the comments of Bestwall‘s counsel at a meeting of the American Bankruptcy Institute, Buckingham Motion at 4, 5, 17, 20, 21, that largely appear to have been taken out of context and are not inconsistent (when read in context) with statements Debtor‘s counsel has made on the record to this court. Mr. Buckingham focuses on the dividends issued by Georgia-Pacific post-petition, id. at 5, 6, 14–15, 16–17, 27, that have been disclosed throughout this case and are consistent with corporate practice predating this case, see Stipulation Regarding Postpetition Dividends Paid by Non-Debtor Georgia-Pacific LLC (Dkt. 997); Declaration of Tyler L. Woolson (Dkt. 998); Second Stipulation Regarding Postpetition Dividends Paid by Non-Debtor Georgia-Pacific LLC (Dkt. 2346); Declaration of Tyler L. Woolson (Dkt. 2347); Declaration of Julie A. Anderson (Dkt. 2857). Additionally, the Debtor‘s rejection of the Committee‘s plan does not serve as a basis for this court to reconsider the Opinion and Order. At a prior hearing in this case, the court noted that the Committee‘s plan is “akin to dismissal” and would need to be modified to be confirmable. See Oct. 22, 2020 Hr‘g Tr. 16:22–24; 17:22–23.
18. Mr. Buckingham points to the Fourth Circuit‘s recently-issued opinion in the Kaiser case as new law issued by controlling authority that is applicable to the issue of whether the court should dismiss this case under Carolin. Buckingham Motion at 2, 6, 11 (citing In re Kaiser Gypsum Co., 60 F.4th 73 (4th Cir. 2023)). According to Mr. Buckingham, in Kaiser “the Fourth Circuit Court of Appeals reiterated the purpose of Chapter 11 generally and of Section 524(g) specifically: it is for (a) financially distressed debtors, (b) faced with overwhelming asbestos liabilities, to (c) create a trust that marshals limited and inadequate assets so that present and future claimants share equitably—providing all with a better outcome than a forced liquidation.” Buckingham Motion at 2 (emphasis omitted) (citing Kaiser, 60 F.4th at 77–78). Mr. Buckingham, however, misconstrues the discussion of section 524(g), which is in two introductory paragraphs of an opinion that addresses an insurer‘s standing to object to a Chapter 11 plan. Financial distress was not at issue in Kaiser, and the cited portion of Kaiser actually confirms that “§ 524(g) of the Bankruptcy Code allows a Chapter 11 debtor with substantial asbestos liabilities to obtain a channeling injunction that diverts all asbestos claims, current and future, to a trust established by the debtor‘s reorganization
19. Mr. Buckingham also relies heavily on the Third Circuit‘s recent LTL Opinion as mandating the dismissal of this case. See supra ¶ 10. That opinion, however, is neither controlling nor applicable to this matter. Indeed, the Third Circuit recognizes in the LTL Opinion that “[i]n the Fourth Circuit, a court can only dismiss a bankruptcy petition for lack of good faith on a showing of the debtor‘s ‘subjective bad faith’ and the ‘objective futility of any possible reorganization.‘” LTL, 64 F.4th 98 n.8 (quoting Carolin, 886 F.2d at 694). The Third Circuit also acknowledges the reference by the bankruptcy court below to the Fourth Circuit‘s dismissal standard as a “much more stringent standard for dismissal of a case for lacking good faith” than the standard in the Third Circuit, but it did not analyze—nor should it have—whether this case should be dismissed pursuant to that standard. Id. (quoting In re LTL Mgmt., LLC., 637 B.R. 396, 406 (Bankr. D.N.J. 2022)).
20. In sum, the Buckingham Motion seeks to have this court reconsider its earlier ruling in the Opinion and Order. Counsel for Mr. Buckingham insists to the contrary and at the hearing on the Buckingham Motion, he argued that the First Motion to Dismiss “was a different focus at a different time on different facts by a different party.” March 15, 2023 Hr‘g Tr. 19:12–13. While the movant is different and the motion was filed four and a half years after the First Motion to Dismiss, the focus is on substantially the same facts, some new facts that the court does not consider to be substantially different evidence, and some new law that is either not controlling or is consistent with the court‘s Opinion and Order. And the ultimate question remains exactly the same: should the court dismiss this case as a bad faith filing under Carolin? Neither the new facts cited by Mr. Buckingham nor the new law issued since the court entered its Opinion and Order cause this court to conclude that its earlier decision to deny the First Motion to Dismiss was either erroneous or works a manifest injustice, extraordinary circumstances do not exist which cause this court to revisit its earlier decision, and the court concludes that the Opinion and Order continues to be the law of this case.
21. In addition to concluding that the Opinion and Order is the law of this case and should not be reconsidered, the court also thinks that its jurisdiction to do so is questionable given the pending appeal of the Opinion and Order. Generally, the timely filing of a notice of appeal “confers jurisdiction on the court of appeals and divests the district court11 of its control over those aspects of the case involved in the appeal.” Levin v. Alms & Assocs., Inc., 634 F.3d 260, 263 (4th Cir. 2011) (quoting Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982)). For the same reasons, “[a] bankruptcy court is divested of jurisdiction with respect to matters raised in an appeal to a higher court.” In re Bryant, 175 B.R. 9, 13 (W.D. Va. 1994) (citing In re Bialac, 694 F.2d 625, 627 (9th Cir. 1982)).
22. The court is attuned to the fact that bankruptcy cases often raise multiple issues, many of which are entirely unrelated to issues involved in an appeal. For that reason, “[t]he application of a broad rule that a bankruptcy court may not consider any request filed while an appeal is pending has the potential to severely hamper a bankruptcy court‘s ability to administer its cases in a timely manner.” Whispering Pines, 369 B.R. at 758 (citations omitted). And courts recognize that “when a notice of appeal has been filed in a bankruptcy case, the bankruptcy court retains jurisdiction to address elements of the bankruptcy proceeding that are not the subject of that appeal.” In re Scopac, 624 F.3d 274, 280 (5th Cir. 2010) (quoting In re Transtexas Gas Corp., 303 F.3d 571, 580 (5th Cir. 2002)). The end result is a functional test: “once an appeal is pending, it is imperative that a lower court not exercise jurisdiction over those issues which, although not themselves expressly on appeal, nevertheless so impact the appeal so as to interfere with or effectively circumvent the appeal process.” Id. (quoting Whispering Pines, 369 B.R. at 759).
23. That is the situation here given the similarity between the issues raised in the Buckingham Motion and those on appeal in the District Court. For this court to exercise jurisdiction over the issues raised in the Buckingham Motion could unnecessarily interfere with or confuse the appeal process. For the same reasons previously explained, the Buckingham Motion is an attempt to have the court reconsider its Opinion and Order, and the issues raised in the motion are closely related to the issues on appeal in the District Court. The Buckingham Motion seeks dismissal of this case for “cause” under
24. There is an exception to the divestment rule if the appeal is interlocutory. See BAE Sys. Tech. Sol. & Servs., Inc. v. Republic of Korea, No. 14-3551, 2016 WL 6167914, at *3 (D. Md. Oct. 24, 2016) (“Interlocutory appeals do not divest [lower] courts of jurisdiction.” (citing Columbus-Am. Discovery Grp. v. Atl. Mut. Ins. Co., 203 F.3d 291, 302 (4th Cir. 2000))). The determination of whether the Opinion and Order is interlocutory, however, is also pending in the District Court. As Bryant recognized, “it is not for this court to determine ultimately whether its order is properly appealable such that jurisdiction has vested in the appellate court.” 175 B.R. at 12–13. To rule on that issue and to reconsider the court‘s earlier ruling on the First Motion to Dismiss while the appeal remains pending could moot the appeal, lead to inconsistent results, or prompt a second appeal. Undoubtedly, it would unnecessarily muddy the waters. For those reasons, the court will decline to consider the merits of the issues raised in the Buckingham Motion.12
25. With respect to the arguments the Committee makes regarding Carolin by extension of its subject matter jurisdiction argument, the court will decline to reconsider its earlier rulings in the Opinion and Order for the same reasons it is declining to consider the Buckingham Motion on the merits. Issues of subject matter jurisdiction, however, “may be resurrected at any point in the litigation.” Gonzalez v. Thaler, 565 U.S. 134, 141 (2012); see also Ashcroft v. Iqbal, 556 U.S. 662, 671 (2009) (“Subject-matter jurisdiction cannot be forfeited or waived and should be considered when fairly in doubt.” (citing Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006))); Educ. Credit Mgmt. Corp. v. Kirkland (In re Kirkland), 600 F.3d 310, 315 (4th Cir. 2010) (“[S]ubject matter jurisdiction may be questioned at any stage of litigation, including an appeal.“); In re Aldrich Pump LLC, Ch. 11 Case No. 20-30608, 2023 WL 9016506, at *9 (Bankr. W.D.N.C. Dec. 28, 2023) (“Lack of subject matter jurisdiction can be asserted at any time.” (citations omitted)). Because the absence of subject matter jurisdiction may be raised at any time, the court will consider that aspect of the Committee‘s Motion.
27. Since subject matter jurisdiction can be raised at any time and is a requirement for courts to exercise their power, it cannot be defeated by equitable defenses. See Gonzalez, 565 U.S. at 141 (“Subject-matter jurisdiction can never be waived or forfeited.“); cf. Valley Historic Ltd. P‘ship v. Bank of N.Y., 486 F.3d 831, 838 (4th Cir. 2007) (deciding even res judicata does not overcome a bankruptcy court‘s obligation to determine its subject matter jurisdiction). The concepts of consent, waiver, and estoppel do not apply to subject matter jurisdiction because it is created and limited by the Constitution and statutes. Constantine v. Rectors & Visitors of George Mason Univ., 411 F.3d 474, 480 (4th Cir. 2005); see MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 298 (2023) (“[N]ot even such egregious conduct by a litigant could permit the application of judicial estoppel as against a jurisdictional rule.“). Similarly, neither laches nor the law of the
28. Since the equitable defenses proffered by the Debtor are insufficient to defeat a motion challenging subject matter jurisdiction, the court will consider the Committee‘s Motion on the merits. The Committee‘s nuanced argument is that the court does not have constitutional subject matter jurisdiction to hear this case due to the Debtor‘s lack of financial distress.15 See supra ¶ 7. Put another way, the Committee contends that the language of the Bankruptcy Clause implicitly disqualifies entities that are not suffering financial distress from invoking the subject matter jurisdiction of this court. Since there is no subject matter jurisdiction, according to the Committee, this case is void and must be dismissed.
29. Accordingly, the court must look to the language of the Bankruptcy Clause and its meaning in order to determine whether there is subject matter jurisdiction for this case. The Bankruptcy Clause is found at
30. Since the language of the Bankruptcy Clause does not address the meaning of “the subject of Bankruptcies,” the court looks to the meaning of the clause at the time of adoption and as interpreted by courts since then. Bankruptcy and insolvency law16 as practiced in 1787 in England and the United States (pre-Constitution) undoubtably influenced the Framers of the Bankruptcy Clause. See Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 362 (2006) (“It is appropriate to presume that the Framers of the Constitution were familiar with the contemporary legal context when they adopted the Bankruptcy Clause....“). English law bore some similarities with modern bankruptcy law, but the modern bankruptcy practitioner would probably be more struck by the differences. See Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 487, 499-503 (1996) [hereinafter ”Constitutional Limits“] (discussing similarities and differences). Eighteenth-century English bankruptcy was exclusively for the benefit of creditors, and the system was strictly involuntary. Cont‘l Ill. Nat‘l Bank & Tr. Co. of Chi. v. Chi., Rock Island & Pac. Ry. Co., 294 U.S. 648, 668 (1935). But see Constitutional Limits, supra, at 496 n.33 & 510 (arguing that English bankruptcy was only technically limited to involuntary petitions because friendly creditors frequently commenced cases). The concept of the discharge of debts was not introduced until 1705 (along with the death penalty for fraudulent debtors), and Parliament conditioned discharge on the consent of 80% of the creditor body (in number and amount of debt) the following year. Constitutional Limits, supra, at 500, 505-06. In addition, only businessmen (“traders“) could be debtors in England at the time.17 Hanover Nat‘l Bank of the City of N.Y. v. Moyses, 186 U.S. 181, 184-85 (1902).
Despite these fundamental differences, some aspects of 18th century English bankruptcy law, such as the use of the predecessors of trustees, meetings of creditors, and proofs of claims, would be recognizable to a modern bankruptcy practitioner. Constitutional Limits, supra, at 500-01. Perhaps most importantly for this court‘s present purposes, 18th century English bankruptcy law did not require insolvency.18 In re Klein, 14 F. Cas. 716, 717 (C.C.D. Mo. 1843) (“By the English law, . . . it mattered not whether the defendant was insolvent or otherwise . . . .“); Thomas E. Plank, Bankruptcy and Federalism, 71 FORDHAM L. REV. 1063, 1094 (2002) [hereinafter Bankruptcy and Federalism] (noting that insolvency was not always required by 18th century laws). But see Bankruptcy and Federalism, supra, at 1094 (arguing that “acts of bankruptcy” and other jurisdictional requirements represented “more particular examples of insolvency“).
31. Some American colonies and states got an early start on federalism, embraced the idea of the states as the laboratories of democracy, see New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (“It is one of the happy incidents of the federal system that a single courageous state may, if its citizens chose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.“), and experimented more with their bankruptcy systems. Bankruptcy and Federalism, supra, at 1085. Unlike English law, certain jurisdictions allowed voluntary proceedings, non-consensual discharge of debts, and non-trader debtors. Klein, 14 F. Cas. at 717; Bankruptcy and Federalism, supra, at 1085-87.
32. Against this backdrop, the Framers of the Constitution met in Philadelphia and adopted, among other provisions, the Bankruptcy Clause. Unfortunately for courts trying to divine its meaning 250 years later, the Framers did not give us much with which to work. See Constitutional Limits, supra, at 527 (noting that “[t]he proceedings of the Constitutional Convention shed little light” on the intent of the Bankruptcy Clause). The only vote against the Bankruptcy Clause came from a member of the Connecticut delegation who feared giving Congress the power to institute the death penalty as a punishment for bankruptcy. Katz, 546 U.S. at 369 (citation omitted); Ry. Lab. Execs.’ Ass‘n v. Gibbons, 455 U.S. 457, 472 & n.13 (1982) (citation omitted). In the only meaningful, if brief, discussion of bankruptcy in The Federalist, James Madison emphasized the close relationship between bankruptcy and commerce as proof of the importance of uniform bankruptcy laws. Gibbons, 455 U.S. at 465-66 (“As James Madison observed, ‘[t]he power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.‘” (alteration in original) (quoting THE FEDERALIST No. 42 at 285 (N.Y. Heritage Press 1945))). There is no direct evidence about whether the Framers intended to enshrine English bankruptcy law into the Constitution or had a more general concept of bankruptcy in mind. Constitutional Limits, supra, at 527. Likewise, there is no direct evidence that the Framers intended to require financial distress for bankruptcy jurisdiction.
33. It is difficult to discern exactly what the Framers had in mind for bankruptcy law, and subsequent developments (and the Supreme Court opinions allowing them) suggest that the Framers’ intent was not of utmost importance, as the Framers could not have foreseen the ways that American bankruptcy would change (and be allowed to change). The liberalization of bankruptcy law, however, did not start immediately. The first several Congresses attempted but failed to pass a
34. More fundamental changes to the American bankruptcy system followed. The 1841 Act took a “radical step forward” by introducing voluntary petitions. Cont‘l Ill., 294 U.S. at 670; see also In re Marshall, 300 B.R. 507, 516, 520 (Bankr. C.D. Cal. 2003) (noting that the 1841 Act was the first American bankruptcy law that allowed voluntary petitions), aff‘d, 403 B.R. 668 (C.D. Cal. 2009), aff‘d, 721 F.3d 1032 (9th Cir. 2013).20 Previous bankruptcy regimes were intended to benefit creditors and viewed debtors as dishonest, but the 1841 law began the assumption of the honest but unfortunate debtor. Cont‘l Ill., 294 U.S. at 670-71 (quoting Loc. Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)). Justice Catron, sitting as a circuit judge, reversed a district court ruling that the Bankruptcy Clause only allowed the 1787 English version of bankruptcy. Klein, 14 F. Cas. at 716, 719.
35. Insolvency was never a requirement for English or early American involuntary cases, which instead required “acts of bankruptcy.” Marshall, 300 B.R. at 517-18. The 1841 Act did include a requirement for voluntary debtors to plead an inability to pay their debts, but it “was only a pleading requirement” as “[n]either the parties nor the court had the authority to inquire into whether a debtor was in fact insolvent.” Id. at 516 (citing Ex parte Hull, 12 F. Cas. 853, 856 (S.D.N.Y. 1842)). This insolvency pleading requirement carried over into the 1867 Act but “disappeared entirely in 1878 (the date of repeal of the 1867 Act)” and did not reappear for voluntary cases in subsequent bankruptcy laws. Id. at 517.
36. The 1867 Act also continued the expansion of (or at least change in) American bankruptcy law from its English roots. A creditor challenged a provision of the 1867 Act allowing discharge on the partial payment of debt as not part of “the subject of Bankruptcies” as intended by the Bankruptcy Clause. In re Reiman, 20 F. Cas. 490, 492-93 (S.D.N.Y. 1874). A future Supreme Court justice, then-Judge Blatchford, catalogued the differences between bankruptcy as practiced in England and the United States and held that “[i]t cannot be doubted, that [C]ongress, in passing laws on the subject of bankruptcies, is not restricted to laws with such scope only as the English bankruptcy laws had when the [C]onstitution was adopted.” Id. at 495-96; see also Constitutional Limits, supra, at 539-40 (summarizing Reiman and noting Judge Blatchford‘s subsequent Supreme Court position).
37. Congress enacted the first permanent American bankruptcy law in 1898. Constitutional Limits, supra, at 540. Among other innovations, the 1898 Act removed the need for creditors to consent to the debtor‘s discharge. Id. The Supreme Court faced a creditor‘s complaint that the 1898 Act violated the Bankruptcy Clause due to a lack of uniformity, the delegation of legislative power to the states, allowing
38. Congress further expanded the 1898 Act in 1933 by adding reorganization provisions for individuals, farmers, and railroads. Constitutional Limits, supra, at 541. Both the Supreme Court and the Fourth Circuit endorsed the expansion. See Cont‘l Ill., 294 U.S. at 671 (“[T]hese acts, far-reaching though they be, have not gone beyond the limit of congressional power; but rather have constituted extensions into a field whose boundaries may not yet be fully revealed.“); Campbell v. Alleghany Corp., 75 F.2d 947, 951 (4th Cir. 1935) (“[W]e entertain no doubt as to the constitutionality of the statute.“). The Supreme Court concluded that the “fundamental and radically progressive . . extensions” were within Congress‘s bankruptcy power and showed the ability of the Bankruptcy Clause to address changes in business and social interactions, Cont‘l Ill., 294 U.S. at 671, while the Fourth Circuit noted that Congress was addressing the shortfalls of prior bankruptcy laws, Campbell, 75 F.2d at 951.
39. Congress overhauled the 1898 Act by adopting our current bankruptcy law, the Bankruptcy Code, in 1978. Frank R. Kennedy, The Commencement of a Case Under the New Bankruptcy Code, 36 WASH. & LEE L. REV. 977, 981 (1979). Congress sought the recommendations of a Commission on Bankruptcy Laws of the United States, id. at 977-78, and, among other things, the Commission recognized the potential for a delay in filing a bankruptcy case to doom a reorganization before it even started and sought to remove barriers to voluntary petitions, REPORT OF THE COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. No. 93-137, pt. 1, at 75 (1973) [hereinafter “REPORT“]. Accordingly, the Code provides for a “liberalization of access” by making the “order for relief”21 “equivalent to adjudication under the Bankruptcy Act and ... tantamount to an order approving the court‘s exercise of jurisdiction” and requiring “[n]either insolvency nor inability to pay debts nor even the fact that the debtor is indebted in any amount . to be alleged or proved” in voluntary petitions. Kennedy, supra, at 983-84 (footnote omitted); see also Constitutional Limits, supra, at 496 (noting that, other than a few exceptions, “there is no requirement of insolvency in any sense” to commence voluntary cases under the Bankruptcy Code).
40. This brief overview of the history of American bankruptcy law shows great change and innovation since the adoption of the Bankruptcy Clause, and the Supreme Court has described the clause in terms that suggest Congress has nearly unlimited power to determine the proper “subject of Bankruptcies.” The Court has repeatedly emphasized that the “subject of Bankruptcies” is not limited to the English and/or early state version of bankruptcy in 1787. Wright, 304 U.S. at 513 (citing Adair v. Bank of Am. Nat‘l Tr. & Sav. Ass‘n, 303 U.S. 350, 354 (1938); Cont‘l Ill., 294 U.S. at 668); Cont‘l Ill., 294 U.S. at 668 (remarking that the idea that the Framers intended to limit Congress to English law had been long-dispelled (in 1935)); Moyses, 186 U.S. at
41. If the language of the Bankruptcy Clause does not require bankruptcy as practiced in 1787, what exactly does it mean? The Supreme Court has resisted giving us a precise definition and has even asserted, as recently as 2022, that the scope of the Bankruptcy Clause cannot be fully defined. Siegel v. Fitzgerald, 596 U.S. 464, 473 (2022) (“[T]he ‘subject of bankruptcies is incapable of final definition . . . .‘” (quoting Wright, 304 U.S. at 513)); see also Moyses, 186 U.S. at 186 (“In considering the question before me, I have not pretended to give a definition (but purposely avoided any attempt to define) the mere word ‘bankruptcy.‘” (quoting Klein, 14 F. Cas. at 718)); Federal Bankruptcy Jurisdiction, supra, at 747 (“[B]ankruptcy has become the seemingly inscrutable crucible of federal jurisdiction theory.“). Similarly, the Supreme Court has said there are some limits to Congress‘s power pursuant to the Bankruptcy Clause, but the limits are also beyond definition. Cont‘l Ill., 294 U.S. at 669-70 (“Those limitations have never been explicitly defined, and any attempt to do so now would result in little more than a paraphrase of the language of the Constitution without advancing far toward its full meaning.“). Given its inability to define the contours of the bankruptcy power, it is not surprising that the Court treats bankruptcy jurisdiction as unusual and unique. See, e.g., Allen v. Cooper, 589 U.S. ___, 140 S. Ct. 994, 1002 (2020) (noting that Katz reflects “what might be called bankruptcy exceptionalism” and distinguishing Katz based on the “‘singular nature’ of bankruptcy jurisdiction” (quoting Katz, 546 U.S. at 369 n.9)).
42. The Supreme Court has, however, attempted to describe elements of the undefinable bankruptcy power. For example, the “Court has repeatedly emphasized that the Bankruptcy Clause‘s language, embracing laws on the subject of Bankruptcies,’ is broad.” Siegel, 596 U.S. at 473; see also Charles J. Tabb, The Bankruptcy Clause, the Fifth Amendment, and the Limited Rights of Secured Creditors in Bankruptcy, 2015 No. 2 UNIV. ILL. L. REV. 765, 766 (“[T]he scope of congressional power . . . is exceedingly broad.“), 778 (“Justice Catron‘s extraordinarily broad definition of the scope of congressional power under the Bankruptcy Clause [in Klein] has been quoted in numerous cases with approval by the Supreme Court .... ” (emphasis added)). In fact, the scope is so broad that it includes concepts that do not fit neatly into any possible definition. See, e.g., Wright, 304 U.S. at 514 (observing that the purchase of a debtor‘s property by a third party is not part of the debtor-creditor relationship but “does enter into the radius of the bankruptcy power over debts“);
43. Congress‘s bankruptcy power is not just broad; it is also potent. Courts and commentators are especially fond of describing the power as “plenary”23 and use similar terms that suggest that Congress‘s power in this field approaches omnipotence. Siegel, 596 U.S. at 474 (“plenary” (quoting Moyses, 186 U.S. at 187)); Int‘l Shoe Co. v. Pinkus, 278 U.S. 261, 265 (1929) (“unrestricted and paramount“); Campbell, 75 F.2d at 955 (“plenary“); Reiman, 20 F. Cas. at 496 (“general, unlimited and unrestricted“); Ralph Brubaker, Explaining Katz‘s New Bankruptcy Exception to State Sovereign Immunity: The Bankruptcy Power as a Federal Forum Power, 15 ABI L. REV. 95, 131 (2007) (“practically unlimited“); Federal Bankruptcy Jurisdiction, supra, at 746 (“Congress, of course, has plenary legislative power ‘on the subject of Bankruptcies.’ “). In In re Klein, Justice Catron describes a “general and unlimited” power that “gives the unrestricted authority to [C]ongress over the entire subject, as the parliament of Great Britain had it, and as the sovereign states of this Union had
it before the time when the [C]onstitution was adopted.”24 14 F. Cas. at 717.
44. When courts do discuss the boundary of the bankruptcy power, it is usually in reference to the uniformity requirement mentioned in the Bankruptcy Clause, and uniformity is frequently referenced as the singular restriction. See Siegel, 596 U.S. at 476 (“Although the Bankruptcy Clause confers broad authority on Congress, the Clause also imposes a limitation on that authority: the requirement that the laws enacted be ‘uniform.‘” (emphasis added)); Gibbons, 455 U.S. at 468 (“Unlike the Commerce Clause, the Bankruptcy Clause itself contains an affirmative limitation or restriction upon Congress’ power: bankruptcy laws must be uniform throughout the United States.” (emphasis added)); Kunzler v. Kohaus, 5 Hill 317, 324 (N.Y. 1843) (“The power conferred is without restriction, save in its uniformity.“). The court does not place excessive emphasis on one word, particularly an extremely short one, but it is notable that uniformity is described as the limitation on the bankruptcy power and not one of the limitations or even the primary one. But see Tabb, supra, at 767 (“Two limits appear in the Clause: that the law be ‘uniform,’ and that it be ‘on the subject of Bankruptcies.’ “).
45. As suggested by a broad and supreme power that is not moored to its roots in English bankruptcy law, courts and commentators have also described the ability of the Bankruptcy Clause to adapt to changing conditions, once as bluntly as “The concept changes.” Wright, 304 U.S. at 513; see also Cont‘l Ill., 294 U.S. at 668 (describing a tendency toward “progressive liberalization” of the bankruptcy power since its inception); Tabb, supra, at 804 (“[T]he scope of the constitutional grant on the ‘subject of Bankruptcies’ has an expansive and elastic reach . . . .“); Constitutional Limits, supra, at 567-68 (arguing that even though the automatic stay and discretionary
46. Despite forswearing the ability to do so, the Supreme Court has occasionally offered or endorsed definitions of the bankruptcy power. These definitions, however, tend to “result in little more than a paraphrase25 of the language of the Constitution without advancing far toward its full meaning.” Cont‘l Ill., 294 U.S. at 669-70. Bankruptcy jurisdiction “extends to all cases where the law causes
to be distributed the property of the debtor among his creditors; this is its least limit. Its greatest is a discharge of the debtor from his contracts. And all intermediate legislation, affecting substance and form, but tending to further the great end of the subject-distribution and discharge-are in the competency and discretion of [C]ongress.” Klein, 14 F. Cas. at 718; see Constitutional Limits, supra, at 538 (noting that the Supreme Court has repeatedly expressed its approval of the Klein definition (citing United States v. Bekins, 304 U.S. 27, 47 (1938);26 Radford, 295 U.S. at 588 n.18; Cont‘l Ill., 294 U.S. at 669; Moyses, 186 U.S. at 186)). The “subject of Bankruptcies” is “not, properly, anything less than the subject of the relations between an insolvent or non-paying or fraudulent debtor, and his creditors, extending to his and their relief.” Reiman, 20 F. Cas. at 496; see Constitutional Limits, supra, at 540 n.291 (noting that the Supreme Court endorsed the Reiman definition in Wright, 304 U.S. at 513-14, Radford, 295 U.S. at 588 n.18, Cont‘l Ill., 294 U.S. at 672-673, and Moyses, 186 U.S. at 187). “[T]he restructuring of debtor-creditor relations . . . is at the core of the federal bankruptcy power . . . .” N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982).
47. While the language of the Bankruptcy Clause, the history of American bankruptcy law, and the Supreme Court‘s descriptions of the bankruptcy power do not definitively answer, or even directly address, the question of whether constitutional subject matter jurisdiction requires a debtor in financial distress,27 the absence
and the pleas of commentators about how the bankruptcy system should work (which is not always the same as how it actually operates), see Judith K. Fitzgerald, Over-Thinking Ramifications of the Dismissal of LTL Management LLC‘s Bankruptcy, HARV. L. SCH. BANKR. ROUNDTABLE (Feb. 14, 2023), https://bankruptcyroundtable.law.harvard.edu/2023/02/14/texas-two-step-and-the-future-of-mass-tort-bankruptcy-series-postscript-and-analysis-of-third-circuit-dismissal-of-ltl-managements-bankruptcy/ (claiming the LTL Opinion “determined that the need for some form of imminent and demonstrable financial relief is foundational to invoking bankruptcy jurisdiction”28); Ralph Brubaker, The Texas Two-Step and Mandatory Non-Opt-Out Settlement Powers, HARV. L. SCH. BANKR. ROUNDTABLE (July 12, 2022), https://bankruptcyroundtable.law.harvard.edu/2022/07/12/texas-two-step-and-the-future-of-mass-tort-bankruptcy-series-the-texas-two-step-and-mandatory-non-opt-out-settlement-powers/ (theorizing that the risk of solvent defendants undercompensating their victims might be acceptable when there is “a clear and present threat to entity viability“); Constitutional Limits, supra, at 492, 545 (arguing that insolvency is a jurisdictional requirement for bankruptcy).
48. It is not surprising that the popular understanding of the term “bankruptcy” relates to insolvency or that many bankruptcy opinions include references to insolvency, see, e.g., Wright, 304 U.S. at 513-14 (quoting Reiman, 20 F.
Cas. at 496), since most debtors are insolvent, see In re Ultra Petroleum Corp., 51 F.4th 138, 142 (5th Cir. 2022) (“Bankruptcy is ordinarily for the insolvent.“); Aldrich, 2023 WL 9016506, at *17 (observing that “the vast majority” of debtors are insolvent and financially distressed); Constitutional Limits, supra, at 488 (“[M]ost
11, especially in the context of an asbestos or mass tort case, need not be due to insolvency.“); In re Mid-Valley, Inc., 305 B.R. 425, 429 (Bankr. W.D. Pa. 2004) (Fitzgerald, J.) (“The Bankruptcy Code does not require that a debtor be insolvent.“); Marshall, 300 B.R. at 509 (holding that the Bankruptcy Clause does not require insolvency), 519 (“[I]t is not credible that the framers of The Constitution thought that a requirement of insolvency was included in the concept of bankruptcy that found its way into the Bankruptcy Clause.“), and no court has held that insolvency is a prerequisite for constitutional subject matter jurisdiction. References to insolvency in bankruptcy opinions are dicta, see, e.g., Bartenwerfer, 598 U.S. at 72 (referring to the Bankruptcy Code‘s balance between insolvent debtors and creditors in the first sentence of the opinion); Kunzler, 5 Hill at 320 (asserting that “bankruptcy” is synonymous with “insolvency“), and the court is not bound by dicta, see Katz, 546 U.S. at 363 (citing Cohens v. Virginia, 6 Wheat. 264, 399-400 (1821)).
49. In addition, “insolvency” and “financial distress” do not mean the same thing, LTL, 64 F.4th at 102 (“To say, for example, that a debtor must be in financial distress is not to say it must necessarily be insolvent.“), and the Committee explicitly and emphatically rejects the concept of an insolvency requirement for bankruptcy jurisdiction, Official Committee of Asbestos Claimants’ Consolidated Reply in Support of the Committee‘s Motion to Dismiss for Lack of Subject Matter Jurisdiction (Dkt. 2993) (“Committee‘s Reply“) at 8 (“[T]he Committee does not argue that an entity must be insolvent to file for bankruptcy.“). There are several ways to define “insolvency,” two of which are regularly used in bankruptcy: (1) balance sheet
insolvency, and (2) the liquidity (or “equity” or “cash flow“) test for insolvency. Marshall, 300 B.R. at 511-513. Generally, balance sheet insolvency means a debtor‘s total debt exceeds the value of its property. Balance-sheet insolvency, BLACK‘S LAW DICTIONARY (9th ed. 2009) (“Insolvency created when
50. The liquidity test for insolvency does not compare a debtor‘s assets and liabilities. Instead, it looks at whether a debtor is promptly paying its debts. Equity insolvency, BLACK‘S LAW DICTIONARY (9th ed. 2009) (“Insolvency created when the debtor cannot meet its obligations as they fall due.“). The Bankruptcy Code includes a version of the liquidity test in section 101(32)(C) that courts use to determine the eligibility of municipalities to file bankruptcy under Chapter 9. See
51. While insolvency examines whether a debtor‘s liabilities exceed its
assets (literally for balance sheet insolvency and figuratively under the liquidity test), financial distress is a more nebulous concept that implies a less severe degree of financial trouble than insolvency. The LTL Opinion, which the Committee (understandably) puts great stock in, does not attempt to define “financial distress.” LTL, 64 F.4th at 102 (“[W]e need not set out any specific test to apply rigidly when evaluating financial distress.“), 110 (“[W]hile it is unwise today to attempt a tidy definition of financial distress justifying in all cases resort to Chapter 11, we can confidently say the circumstances here fall outside those bounds.“). The concept is so vague that the Committee does not attempt to precisely define it despite asking this court to determine that it is implicitly required by the Bankruptcy Clause. See Committee‘s Motion at 20 (asserting that “[t]his court need not determine where the constitutional line is” because it is so clear that the Debtor is not in financial distress). The court accepts the Committee‘s argument that the Debtor has never been in financial distress in the sense that its access to the funding agreement, and, therefore, Georgia-Pacific‘s assets, makes it able to pay any conceivable liabilities now and in the foreseeable future (and the Debtor does not argue to the contrary), but the requirements of constitutional subject matter jurisdiction, especially given the potentially drastic consequences of the lack thereof, see infra ¶ 53, need to be definable. As previously noted, no court has ever concluded that financial distress is a requirement for constitutional subject matter jurisdiction, and there is some indication in the case law that it is not, see, e.g., United States v. Huebner, 48 F.3d 376, 379 (9th Cir. 1994)
(“The Bankruptcy Act31 does not require any particular degree of financial distress as a condition precedent to a petition seeking relief.“); Rudd v. Laughlin, 866 F.2d 1040, 1041-42 (8th Cir. 1989) (“[T]he statutes governing the authority of federal courts to hear bankruptcy cases do not limit jurisdiction according to amounts involved.“); In re Honx, Inc., No. 22-90035, 2022 WL 17984313, at *2 (Bankr. S.D. Tex. Dec. 28, 2022) (concluding that a debtor with asbestos liability did not commence its case in bad faith because “Congress recognized that an asbestos bankruptcy differs from a ‘classic’ bankruptcy with an insolvent or near-insolvent debtor“); In re Gen. Growth Props, Inc., 409 B.R. 43, 60 (Bankr. S.D.N.Y. 2009) (declining to establish a rule that debtors cannot file bankruptcy unless their debt is due within a particular period of time); In re Mirant Corp., No. 03-46590, 2005 WL 2148362, at *12-13 (Bankr. N.D. Tex. Jan. 26, 2005) (using laches to deny motions to dismiss despite allegation that the debtor “was highly solvent and financially healthy on the date of its bankruptcy filing and has continued to be so since that date“).
52. Given the lack of support in bankruptcy history for a financial distress requirement, the relative abundance of references to insolvency (and, at least in relevant scholarship, support for an insolvency requirement), and the similarity of the two concepts (i.e., both look at the financial problems of a debtor), it is not surprising or unreasonable for the Committee to use references to insolvency to
support its argument, but the Committee‘s rejection of the implications of most of the authorities it cites for support undermines its position. For example, the Committee says “a debtor‘s eligibility to be a proper ‘subject of Bankruptc[y]’ within the meaning of the Bankruptcy Clause ‘is a jurisdictional requirement for invoking a bankruptcy proceeding,‘” quoting Professor Plank. Committee‘s Motion at 17 (quoting Constitutional Limits, supra, at 492). Professor Plank‘s full assertion, however, is that “[t]he insolvency of the debtor in this sense [i.e., in the sense of balance sheet or liquidity insolvency] is a jurisdictional requirement for invoking a bankruptcy proceeding.” Constitutional Limits, supra, at 492 (emphasis added). The Committee uses Professor Plank‘s contention, which advocates a position that the Committee explicitly disclaims (that insolvency is a jurisdictional requirement), to support its claim that a different concept, financial distress, is a jurisdictional requirement. Similarly, the LTL Opinion prompted the Committee‘s Motion to some extent, see Committee‘s Motion at 9 (“In light of the LTL Mgmt. decision ..., the Committee believes that the Court should now address whether Bestwall is constitutionally eligible to be a debtor in bankruptcy.” (footnote omitted)), and the Committee cites it for support, see May 17, 2023 Hr‘g Tr. 18:8-10 (“[T]he language in LTL is entirely consistent with what we believe is the constitutional limitation on a company that seeks to access the bankruptcy laws.“). In that case, however, the Third Circuit determined that it and the bankruptcy court below had subject matter jurisdiction, LTL, 64 F.4th at 99 (“The Bankruptcy Court had jurisdiction of the bankruptcy case under, inter alia, 28 U.S.C. §§ 157(a) and 1334(a). We have jurisdiction of the appeals
under
53. One reason for the lack of support for a constitutional financial distress requirement is the difficulty in administering such a rule. Professor Plank, a leading
F.3d at 838 (“We do not find that these principles and our precedent, however, can be read or extended to preclude the bankruptcy court from exercising its unflagging obligation to examine its subject matter jurisdiction at every stage of the proceeding.“), but determining that subject matter jurisdiction was lost due to post-petition developments would be contrary to both the Bankruptcy Code and long-standing traditions of bankruptcy practice, see, e.g.,
inheritance, or some other financial good fortune. See, e.g., In re Miloni, No. 20-30258, slip op. at 1-2 (Bankr. W.D.N.C. Nov. 8, 2023) (approving sale of debtor‘s real property with proceeds to pay off Chapter 13 plan at 100% and surplus refunded to the debtor and noting post-petition appreciation of the real property). Under the version of the financial distress rule advocated by Mr. Buckingham and Maune Raichle, these Chapter 13 cases could instead conclude with dismissal due to the court‘s post-petition
54. Whether assessed only at the beginning of a case or throughout, determining whether a debtor is in financial distress would not be easy. As previously mentioned, the Committee is not concerned with a standard for the determination because it asserts that this case is not a close call. See Committee‘s Reply at 16 (“Experience up until now has not required courts to further clarify those limits (and
even now this Court does not have to define the dividing line).“). But a constitutional rule would apply to all of the cases before the court, now and in the future, so the court needs to have some idea of how to enforce it. Other courts and commentators have noted the difficulty of enforcing a theoretical insolvency rule, see, e.g., Marshall, 300 B.R. at 513 (noting the extensive amount of time necessary to make a solvency determination); Constitutional Limits, supra, at 493 (“To be sure, whether and when a debtor becomes insolvent in either sense may present difficult factual and conceptual questions.“), and insolvency is a defined and familiar concept compared to financial distress.34 Any consideration of the practicalities of a financial distress rule leads to more questions than answers. The Committee and its allies may not be concerned with the logistics of applying its rule in contexts other than this unusual case, but the court would have to apply a constitutional rule across the board, and very few debtors have access to the resources of Fortune 500 companies.
55. Another problem with a financial distress requirement for subject matter jurisdiction is the tension with the goal of getting potential debtors to commence their cases early. In adopting the Bankruptcy Code, Congress saw the benefit in incentivizing Chapter 11 debtors to file their cases in time to maintain the value of their estates and avoid liquidation.35 Gen. Growth, 409 B.R. at 60; In re Johns-Manville Corp., 36 B.R. 727, 736 (Bankr. S.D.N.Y. 1984); Kennedy, supra, at 980-81; REPORT, supra, at 75. Under the Committee‘s rule, however, debtors would
have to thread the needle between filing early enough to preserve value as encouraged by the Code but not filing too early and therefore facing dismissal (or the threat thereof) for an absence of sufficient financial distress. In addition, the assessment of financial distress by courts would itself cause some loss of value. Cf. Marshall, 300 B.R. at 513 (“If a reorganization is held up pending a determination of balance sheet insolvency, businesses will rarely be reorganized, and at least some of the reorganization
56. Consistent with a policy decision to allow liberal access and encourage early filing, Congress did not make the statutory subject matter jurisdiction requirements for bankruptcy very strenuous. While the instant dispute focuses on the Constitution, the court notes that this case satisfies the modest statutory requirements for subject matter jurisdiction.
matter jurisdiction of the bankruptcy court do not look at financial distress, insolvency, or any other characteristics of debtors.
57. Accordingly, if Congress decided to add a financial distress requirement for debtors in bankruptcy, it would most likely not implicate the subject matter jurisdiction of the court. Congress would likely add the requirement to section 109, which “defines who may be a debtor under the various chapters of the Code.” Toibb v. Radloff, 501 U.S. 157, 160 (1991); see also Kennedy, supra, at 986 (similar). Section 109‘s requirements for debtor eligibility are not jurisdictional. In re Zarnel, 619 F.3d 156, 169 (2d Cir. 2010); Rudd, 866 F.2d at 1042 (citations omitted); see also In re Phillips, 844 F.2d 230, 235 n.2 (5th Cir. 1988) (section 109(g) is not jurisdictional); In re Stinnie, 555 B.R. 530, 533 (Bankr. W.D. Va. 2016) (section 109(h) is not jurisdictional); In re Baxter, Ch. 7 Case No. 06-30452, slip op. at 8 (Bankr. W.D.N.C. May 17, 2006) (section 109(h) is not jurisdictional). But see In re Keziah, 46 B.R. 551, 554 (Bankr. W.D.N.C. 1985) (“§ 109 is a part of the eligibility (to be a debtor) section which involves the subject matter jurisdiction of this Court.“).36 In municipal bankruptcies, which do require insolvency, the requirement is in section 109(c), and it is not jurisdictional. Hamilton Creek, 143 F.3d at 1385 n.2. A bankruptcy case commences even if a debtor is not eligible under a particular chapter, see, e.g., Tatsis,
72 B.R. at 910 (“Movant argues that in the event a debtor files a petition pursuant to Title 11, but chooses a chapter for which he is not qualified, then there is no jurisdiction of any kind or type in the court and the filing is a nullity. This argument is incorrect.“), or at all, see, e.g., Zarnel, 619 F.3d at 169 (“[W]e find that the restrictions of § 301 and § 109(h) are not jurisdictional, but rather elements that must be established to sustain a voluntary bankruptcy
58. In part due to the harsh results of a decision that subject matter
jurisdiction is lacking, the Supreme Court has been trying “to bring some discipline” to the jurisdictional analysis in recent years. MOAC, 598 U.S. at 298 (quoting Henderson v. Shinseki, 562 U.S. 428, 435 (2011)). The Eleventh Circuit, applying the Supreme Court‘s guidance in the bankruptcy context, noted that “the failure of a cause of action does not automatically produce a failure of jurisdiction.” In re Trusted Net Media Holdings, LLC, 550 F.3d 1035, 1042 (11th Cir. 2008) (quoting Steel Co. v. Citizens for a Better Env‘t, 523 U.S. 83, 91 (1998)); see also id. at 1043 (concluding that the requirements of
59. There is no need for a harsh new jurisdictional rule because there are other ways for courts to address any perceived abuse by debtors lacking financial distress. Cf. Constitutional Limits, supra, at 555 (“The requirement of good faith, the ability to lift the automatic stay for cause, and the discretion to disapprove rejection
of contracts may be sufficient to prevent solvent debtors from abusing the bankruptcy process.“). As previously noted, the LTL Opinion is a basis for the Committee‘s Motion. See supra ¶¶ 51-52. In contrast with the Committee‘s Motion, however, the Third Circuit decided that it had jurisdiction, LTL, 64 F.4th at 99, and dismissed the LTL case pursuant to section 1112(b) because the debtor could not show that it commenced its case in good faith due to its
financially healthy companies cannot be subject to dismissal for cause.“); Constitutional Limits, supra, at 548-551 (collecting cases). Some courts even find “cause” under section 362 to grant relief from the automatic stay when a debtor files a case in bad faith. See, e.g., In re Corp. Deja Vu, 34 B.R. 845, 850 (Bankr. D. Md. 1983) (“The petition was filed in bad faith. This bad faith constitutes cause to allow the secured creditor relief from the stay.“); Constitutional Limits, supra, at 551 (citing In re Dixie Broad., Inc., 871 F.2d 1023 (11th Cir.), cert. denied, 493 U.S. 853 (1989)). In addition, some courts deny access to special bankruptcy rules and protections based on a debtor‘s solvency without examining good faith. See, e.g., Claughton v. Mixson, 33 F.3d 4, 6-7 & n.4 (4th Cir. 1994) (affirming bankruptcy court‘s lifting of stay due to debtor‘s solvency); Constitutional Limits, supra, at 551-52 (collecting cases including Claughton). There are many tools available for bankruptcy courts to deal with a debtor‘s lack of financial distress without a new rule of subject matter jurisdiction.
60. Based primarily on its analysis of the history of the Bankruptcy Clause and the Supreme Court‘s interpretation of Congress‘s expansive power pursuant to it, this court holds that financial distress is not a prerequisite for bankruptcy subject matter jurisdiction pursuant to the Constitution. Instead, the court joins others that have held that the subject matter jurisdiction for bankruptcy extends to all cases filed under the Bankruptcy Code. See, e.g., Zarnel, 619 F.3d at 169 (“Restricting whether an individual may be a debtor either under the Bankruptcy Code in general or under a given chapter does not
district court, delineated in
Conclusion
While framed as new arguments, the Buckingham Motion and portions of the Committee‘s Motion actually seek reconsideration of this court‘s prior Opinion and Order on the Debtor‘s good faith without satisfying the standard for reconsideration. The law of the case doctrine counsels against a court straying from its previous legal conclusions. Furthermore, the divestment rule prevents a court from addressing issues on appeal, and the Committee‘s attempt to appeal the Opinion and Order was pending in the District Court when the Motions to Dismiss were filed, argued, and ruled on.
In addition to the good faith argument, the Committee‘s Motion asserts a new basis for dismissal: an absence of constitutional subject matter jurisdiction based on the Debtor‘s lack of financial distress. After analyzing the Bankruptcy Clause of the Constitution and its interpretation by the Supreme Court, other courts, and outside commentators, the court is confident that the Constitution does not require debtors to have financial distress in order for bankruptcy courts to have subject matter jurisdiction. The court‘s conclusion is buttressed by the complete lack of support for the Committee‘s novel argument in the relevant case law, the practical problems with a jurisdictional financial distress requirement, the policy decision to encourage potential debtors to file their cases early, the Supreme Court‘s recent approach to
issues of subject matter jurisdiction, and the ability of bankruptcy courts to use other tools to address the problem asserted by the Committee.
Based on these findings and conclusions, and for the additional reasons set forth on the record at the July 28, 2023 hearing (which record is incorporated herein), the Motions to Dismiss are hereby DENIED.
SO ORDERED.
United States Bankruptcy Court
This Order has been signed electronically. The Judge‘s signature and Court‘s seal appear at the top of the Order.