Elaine Marshall v. J. Marshall, Iii

Case Information

NGUYEN, Circuit Judge:

This case marks the third time we have been asked to intervene in the infamous feud over the estate of the late Texas oil magnate and billionaire J. Howard Marshall, II (“J. Howard”). J. Howard died in 1995, leaving nearly all his assets to his son, E. Pierce Marshall (“Pierce”), but excluding his young wife, Vickie Lynn Marshall, also known as Anna Nicole Smith (“Vickie”), and his other son, J. Howard Marshall, III (“Howard”), from receiving any part of his fortune. The ensuing controversy, pitting wife against son and brothers against each other, has defied resolution for nearly two decades, and has survived almost all of its original players.

After J. Howard died, Vickie and Howard each unsuccessfully challenged his will in Texas probate court. In addition to losing the will contest, Howard suffered a multi- million dollar judgment after Pierce successfully counterclaimed against him on the basis of fraud. Following this loss, Howard and his wife, Ilene, filed for Chapter 11 bankruptcy in the Central District of California. Their case was assigned to United States Bankruptcy Judge Samuel 5 Bufford, who had previously presided over Vickie’s Chapter 11 bankruptcy case. 1

Pierce moved for random reassignment or recusal of Judge Bufford, objected to Howard and Ilene’s proposed Chapter 11 Plan, and moved to dismiss the bankruptcy action. Judge Bufford published three separate opinions: (1) denying Pierce’s motion for reassignment or recusal; (2) confirming the Plan and denying Pierce’s motion to dismiss with respect to his constitutional arguments; and (3) confirming the Plan and denying Pierce’s motion to dismiss with respect to his statutory arguments. Pierce appealed to the district court, which affirmed the bankruptcy court’s decisions in all respects on March 18, 2009. 2

Appellant Elaine T. Marshall (“Elaine”), Pierce’s widow, now appeals the district court’s decision, contending that the district court erred in affirming the bankruptcy court’s orders because: (1) there was no basis for non-random assignment of the case to Judge Bufford, and alternatively, Judge Bufford should have recused himself on account of apparent bias; (2) Howard and Ilene’s Chapter 11 petition and proposed Plan Vickie filed for bankruptcy protection in the Central District of California while her probate claims were still pending in the Texas court. Pierce filed a proof of claim, and Vickie successfully counterclaimed against him for tortious interference with an expectancy. Vickie’s case was extensively litigated, including twice before the Supreme Court, and is not now before us. W e nevertheless discuss certain aspects of her bankruptcy case to the extent they are relevant to this appeal. Pierce died in 2006. Elaine appears in her capacity as Successor Trustee of the Bettye B. M arshall Living Trust, Trustee of the J. Howard Marshall, II Marital Trust Number Two, and Successor Trustee of the E. Pierce Marshall Family Trust Created Under the B ettye B. Marshall Living Trust Indenture Dated October 30, 1990 (collectively “the Trusts”). 6 I N THE M ATTER OF : M ARSHALL were unconstitutional; and (3) Howard and Ilene’s Chapter 11 petition and proposed Plan were filed in bad faith. We have jurisdiction pursuant to 28 U.S.C. § 158(d), and we affirm.

B ACKGROUND I.

T HE V ICKIE L YNN M ARSHALL C ASE In the Texas probate court, Vickie claimed that she was entitled to a portion of J. Howard’s estate, and that Pierce had tortiously interfered with her expectancy of a gift from her husband. While the probate case was pending, she filed for bankruptcy in California, and the matter was assigned to Judge Bufford. Pierce filed a proof of claim, arguing that he held a defamation claim against Vickie that was not subject to her bankruptcy discharge. Vickie counterclaimed, contending, as she had in probate court, that Pierce tortiously interfered with her expectancy of a gift from J. Howard. Judge Bufford dismissed Pierce’s proof of claim against Vickie, and proceeded to consider Vickie’s counterclaim against Pierce. Over the course of the bankruptcy proceedings, Judge Bufford determined that Pierce had engaged in various discovery abuses and issued both monetary and non-monetary sanctions against him. 3

In September 1998, Pierce moved to withdraw the case

from bankruptcy court. District Judge William D. Keller Specifically, Judge Bufford found that Pierce (a) destroyed documents; ^[3]

(b) failed to respond to discovery requests; (c) failed to produce a privilege log and documents in camera ; and (d) failed to produce documents held by J. Howard’s attorneys.

withdrew the bankruptcy reference in part in October 1998, after which Judge Bufford stated his intent to submit a memorandum to “assist [Judge Keller] in his review of the matter.” On February 1, 1999, Judge Keller stayed Judge Bufford’s prior sanctions orders. The next day, Judge Bufford declared the stay invalid and issued terminating sanctions against Pierce on Vickie’s tortious interference counterclaim as a result of Pierce’s purported discovery abuses. On March 9, 1999, Judge Keller vacated and remanded Judge Bufford’s initial sanctions order, citing a lack of evidence. Then, after acknowledging receipt of Judge Bufford’s memorandum, Judge Keller vacated his order 5 withdrawing the bankruptcy reference. On May 20, 1999, Judge Bufford entered a final sanctions order, once again deeming many of Vickie’s allegations established as a sanction against Pierce.

Judge Bufford then held a five-day hearing on Vickie’s counterclaim. On the first day, Judge Bufford conducted an unusual press conference of sorts on the record, where he responded to reporters’ questions, noted that the case was related to the Texas probate litigation, and explained the procedures by which reporters could obtain public records or court filings. Approximately eleven months later, Judge Judge Keller’s October 21, 1998 minute order granted Pierce’s motion ^[4]

to withdraw with respect to Pierce’s defamation claim and Vickie’s counterclaim. Vickie’s Chapter 11 petition, Pierce’s proof of claim, and aspects of Pierce’s defamation claim that pertained to dischargeability of debt, as well as all pending discovery matters were to remain before the bankruptcy court. The minute order also indicated that “[a]ll discovery matters which the bankruptcy judge determines are necessary to the ‘core’ bankruptcy proceedings . . . shall proceed before the bankruptcy court.” The contents of the memorandum remain undisclosed. ^[5]

8

Bufford entered judgment in Vickie’s favor and against Pierce in the amount of $449,000,000, with an additional punitive damages award of $25,000,000. See Marshall v.

Marshall ( In re Marshall ), 257 B.R. 35, 39, 40 (Bankr. C.D. Cal. 2000). Judge Bufford acknowledged that the damages

were “mainly based” on facts that were presumed to be true by virtue of his final sanctions order.

Several months later, the Texas probate court rendered judgment in favor of Pierce in the probate case, ordering Vickie to pay Pierce’s attorneys’ fees in the amount of $541,000. The Probate Court later modified its order to specify that the fee award arose solely out of conduct that occurred after Vickie’s bankruptcy discharge. However, Judge Bufford overturned the probate court’s fee award, finding that it violated Vickie’s bankruptcy discharge and was barred by judicial estoppel. The district court affirmed Judge Bufford’s decision, but we reversed and remanded, finding that the attorneys’ fees award did not violate Vickie’s bankruptcy discharge, as it was based solely on conduct that occurred after the discharge. Marshall v. Marshall ( In re

Marshall ), 119 F. App’x 136 (9th Cir. 2004).

The Supreme Court ultimately held that the bankruptcy court lacked ^[6]

constitutional authority to enter a final judgment on Vickie’s common law tort counterclaim. Stern v. Marshall , 131 S. Ct. 2594, 2601 (2011). Judge Bufford sua sponte withdrew the final sanctions order on ^[7]

January 18, 2000. However, his October 6, 2000, decision on Vickie’s tortious interference counterclaim identified a number of factual findings the court deemed established as discovery sanctions against Pierce. M 9

II.

T HE J. H OWARD ARSHALL III C ASE Howard also challenged J. Howard’s estate plan, arguing

that, inter alia , Pierce had exerted undue influence over their father for years, the estate plan had been formulated under duress, and the will was invalid and unenforceable. In his capacity as trustee of the Trusts, Pierce filed a fraud 8 counterclaim against Howard. After a lengthy trial, the jury found in favor of Pierce, and the probate court entered a Second Modified Final Judgment against Howard (“the Fraud Judgment”) on December 7, 2001. At the time Howard and Ilene filed their bankruptcy petition, the Fraud Judgment exceeded twelve million dollars. 9

Howard filed an appeal in the Texas courts, and on January 31, 2002, moved to stay execution of the Fraud Judgment, or in the alternative, to lower the amount of security for a supersedeas bond. As part of that motion, Howard submitted a sworn affidavit attesting to a total net worth of $22,413,220. Elaine contends that the parties engaged in numerous efforts to negotiate a potential Howard claimed that J. Howard had orally promised to divide his estate equally between his two sons after Howard agreed to sell back to J. Howard voting shares of Koch Industries. In his fraud counterclaim, Pierce argued that J. Howard had disinherited Howard in 1980, that no such oral promise was ever made, and that Howard purposely sold his shares back to J. Howard in order to later concoct the claim that the sale was consideration for his father’s oral promise to divide his estate equally between his sons.

The probate court’s modified Fraud Judgment reflects a substantial reduction from the jury’s original $34 million judgment against Howard. I N THE M ATTER OF : M ARSHALL settlement, which eventually resulted in an agreement to stay enforcement in return for a $10.4 million bond, but that Howard ultimately reneged on the agreement when he was unable to finance the bond. Pierce moved to enforce the Fraud Judgment, and at a July 18, 2002, hearing, the probate court suggested that Howard voluntarily move assets to Texas to satisfy the judgment. The probate court scheduled another hearing for July 25, 2002 to consider whether it would order Howard to transfer assets to Texas.

On July 23, 2002, Howard and Ilene (collectively, “the Debtors”) filed a Chapter 11 bankruptcy petition in the Central District of California. In connection with the petition, they filed a Statement of Related Cases and an addendum noting that Vickie’s bankruptcy case involved a similar factual background and many of the same principal parties as their case. The Clerk assigned Howard and Ilene’s case to Judge Bufford.

III.

E. P IERCE M ARSHALL ’ S M OTION FOR R ECUSAL AND

R EASSIGNMENT

Several months later, Pierce moved for random reassignment of the case, or alternatively, recusal of Judge Bufford, pursuant to 28 U.S.C. § 455(a) and the Due Process Clause. Judge Bufford denied Pierce’s motion at an October 29, 2002 hearing. He subsequently issued an Order to Show Cause (“OSC”) why the motion should not be denied on the basis of standing because Pierce had not filed a proof of claim in Howard and Ilene’s case. After a hearing on the OSC, Judge Bufford issued a March 27, 2003 amended written opinion in which he assumed that Pierce had standing (because the time for filing a proof of claim had not elapsed)

and again denied the recusal motion. Pierce never filed a proof of claim in the Debtors’ bankruptcy case.

IV.

P IERCE ’ S O BJECTION TO THE C HAPTER 11 P LAN AND

M OTION TO D ISMISS

The Debtors’ initial plan of reorganization listed total assets of $8,391,904, personal property valued at $6,084,922, and identified the Texas Fraud Judgment as a disputed unsecured debt. Howard and Ilene filed an amended plan of reorganization on April 16, 2003 (“the Plan”). This time, the Plan provided for full payment of all debts except the Fraud Judgment, which the Plan proposed should nevertheless be discharged.

Pierce objected to the Debtors’ proposed Plan on the grounds that it was unconstitutional and proposed in bad faith. Pierce argued that Howard and Ilene had initiated bankruptcy proceedings for the sole purpose of avoiding enforcement of the Fraud Judgment, that the Debtors misrepresented the value of assets and liabilities in their amended plan, and that Howard and Ilene were solvent and could easily satisfy their financial obligations without resort to bankruptcy. Citing similar concerns, Pierce also moved to dismiss the Debtors’ Chapter 11 petition on the grounds of unconstitutionality and bad faith.

1 0 Elaine admits that Pierce deliberately refrained from filing a proof of claim in the Debtors’ case to avoid potential counterclaims such as those brought against him in Vickie’s case.

Howard and Ilene argued that they had filed their suit and proposed their Plan in good faith, based not only on their inability to pay the Fraud Judgment, but also on the threat of future litigation with Pierce and others which they claimed could cost them upwards of $100 million.

On August 26, 2003, Judge Bufford issued a written opinion confirming the Debtors’ Plan and denying Pierce’s motion to dismiss on bad faith grounds. Then, on October 9, 2003, he issued a second amended opinion rejecting Pierce’s constitutional challenge. Pierce appealed all three of Judge Bufford’s decisions to the district court, Judge David O. Carter, presiding, which affirmed on March 18, 2009. This appeal followed.

D ISCUSSION

We review de novo a district court’s decision on appeal

from a bankruptcy court. Greene v. Savage ( In re Greene ), 583 F.3d 614, 618 (9th Cir. 2009). As to the decision of the bankruptcy court, we apply the same standard of review applied by the district court. Id. However, we review the bankruptcy court decision independently and without deference to the district court’s decision. Strand v. Neary ( In

re Strand ), 375 F.3d 854, 857 (9th Cir. 2004).

1 1 Judge Carter denied Pierce’s request for a stay without bond pending appeal of the bankruptcy opinions. However, we granted a stay pending decision of the district court and also pending resolution of Vickie’s case in the Supreme Court ( Stern v. Marshall , 131 S. Ct. 2594 (2011)). Although both decisions have now been rendered, consummation of the Plan remains stayed pursuant to the district court’s July 27, 2012 Order. See Order Granting Appellant’s Motion for Stay at 4, In re Marshall , 8:03- cv-01354-DOC, Docket no. 127 (C.D. Cal. July 27, 2012), ECF No. 127. M

I. OTION FOR R EASSIGNMENT OR R ECUSAL

We first address Elaine’s contention that the district court erred in affirming the bankruptcy court’s denial of her Motion for Reassignment or Recusal. We review the denial of a § 455(a) motion for recusal for abuse of discretion. United

States v. Wilkerson , 208 F.3d 794, 797 (9th Cir. 2000). “A bankruptcy court abuses its discretion if it applies the law incorrectly or if it rests its decision on a clearly erroneous finding of material fact.” Brotby v. Brotby ( In re Brotby ), 303 B.R. 177, 184 (B.A.P. 9th Cir. 2003). “We examine the bankruptcy court’s conclusions of law de novo and its factual findings for clear error.” BCE W., L.P. v. Smith ( In re BCE

W., L.P. ), 319 F.3d 1166, 1170 (9th Cir. 2003).

“Clear error exists only when the reviewing court is left with a definite and firm conviction that a mistake has been committed.” In re Brotby , 303 B.R. at 184. “If two views of the evidence are possible, the trial judge’s choice between them cannot be clearly erroneous.” Lehtinen v. Lehtinen ( In

re Lehtinen ), 332 B.R. 404, 411 (B.A.P. 9th Cir. 2005). De novo review applies to Elaine’s claim that Judge Bufford’s partiality violated due process. See In re Victoria Station

Inc. , 875 F.2d 1380, 1382 (9th Cir. 1989).

A. R EASSIGNMENT Pursuant to 28 U.S.C. § 137, cases are to be assigned among judges in the manner prescribed by local rules and general orders of the court. In the Central District of 14

California, General Order 08-05 § 1.2 (2008), which applies

equally to bankruptcy courts, directs the Clerk to assign cases to judges in the district randomly. Gen. Order 08-05 § 1.2 (“The assignment of civil cases shall be completely at random through the Automated Case Assignment System (ACAS).”). However, where cases are related, the Clerk is directed to assign the new case to the same judge who presided over the prior case. Gen. Order 08-05 § 5.2 (2008); Bankr. C.D. Cal. 1 2 At the time the Debtors filed their bankruptcy petition, the operative provision was General Order 224 § 1.2 (1993). The terms of that provision have been consolidated and superseded several times, but now exist in substantially the same form within General Order 08-05 § 1.2 (2008).

1 3 In bankruptcy cases, the parties must file a 1015-2 statement of related cases. Under Local Bankruptcy Rule 1015-2(a) (formerly, Rule 1015-2(1)) cases are deemed “related” if the earlier case was filed or pending before the new petition was filed and the debtors:

(1) Are the same;

(2) Are spouses, former spouses, domestic partners, or former domestic partners; (3) Are “affiliates,” as defined in 11 U.S.C. § 101(2), except that 11 U.S.C. § 101(2)(B) shall not apply; (4) Are general partners in the same partnership; (5) Are a partnership and one or more of its general partners;

(6) Are partnerships that share one or more common general partners; or

(7) Have, or within 180 days of the commencement of either of the related cases had, an interest in property I N THE M ATTER OF : M ARSHALL 15 Gen. Order 11-01 (2011) (formerly, Gen. Order 99-02 (1999)).

Elaine contends that assignment of the Debtors’ bankruptcy case to Judge Bufford was improper because the two cases were not related, notwithstanding the Debtors’ listing of the Vickie case in their 1015-2 Statement of Related Cases. The Debtors concede, and we agree, that the Debtors’ bankruptcy case is not technically related to Vickie’s case under Local Bankruptcy Rule 1015-2(a). However, the court has “broad discretion” to interpret the requirements of its General Orders. United States v. DeLuca , 692 F.2d 1277, 1281 (9th Cir. 1982) (“Because general orders and local rules not only implement due process and other statutory rights but also promote efficiency, we permit the district court broad discretion in determining their requirements.”); United States

v. Torbert , 496 F.2d 154, 157 (9th Cir. 1974) (noting that a general order requiring random reassignment when a case is returned to the clerk after a judge is disqualified “is a housekeeping rule for the internal operation of the district court which has a large measure of discretion in interpreting and applying it” (internal quotation marks omitted)). While not technically “related,” the Debtors’ and Vickie’s bankruptcy cases involved convoluted facts and issues, many of which had also been heavily litigated in the Texas probate court. Assignment of the case to Judge Bufford was within the court’s discretion and was in the interests of efficiency. that was or is included in the property of another estate under 11 U.S.C. § 541(a), § 1115, § 1207, a n d / o r § 1306.

1 4 In fact, the Debtors explained that the cases were not technically related in the very Statement of Related Cases at issue here. Moreover, judges are vested with “inherent” authority to transfer cases among themselves “for the expeditious administration of justice.” United States v. Stone , 411 F.2d

597, 598 (5th Cir. 1969) (per curiam); see also Badea v. Cox , 931 F.2d 573, 575 (9th Cir. 1991) (“District court judges have broad discretion regarding the assignment or reassignment of cases.” (internal quotation marks omitted)). Had the Debtors’case been randomly assigned, it is likely that the assigned judge would have transferred the case to Judge Bufford, given his superior knowledge of the complex factual and procedural history of the parties’ dispute in the Texas probate court.

Finally, a party has no due process right to random case assignment or to ensure the selection or avoidance of any particular judge absent a showing of bias or partiality in the proceedings. See Cruz v. Abbate , 812 F.2d 571, 574 (9th Cir. 1987) (explaining that “a [party] has no right to any particular procedure for the selection of the judge[,]” so long as the decision is made “in a manner free from bias or the desire to influence the outcome of the proceedings”); Torbert , 496 F.2d at 157 (holding that non-random assignment of a case did not violate due process, particularly because there was no showing of actual prejudice resulting from the procedural irregularity). As discussed infra Section I.B., Elaine has not established actual or apparent bias on the part of Judge Bufford, and was therefore not prejudiced by the non-random assignment.

B.

R ECUSAL Elaine contends that Judge Bufford should have recused himself from the Debtors’ bankruptcy case pursuant to 28 U.S.C. § 455. Section 455(a) requires recusal when “a reasonable person with knowledge of all the facts would conclude that the judge’s impartiality might reasonably be questioned.” F.J. Hanshaw Enters., Inc., v. Emerald River

Dev., Inc. , 244 F.3d 1128, 1144 (9th Cir. 2001).

First, Elaine argues that Judge Bufford failed to apply the correct legal standard in denying recusal. During a hearing on the recusal motion, Judge Bufford stated that the “[a]ppearance of impropriety is not a basis for recusal.” This was undeniably a misstatement of the law. See Liljeberg v.

Health Servs. Acquisition Corp. , 486 U.S. 847, 860 (1988) (“The goal of section 455(a) is to avoid even the appearance of partiality.” (quoting Health Servs. Acquisition Corp. v.

Liljeberg , 796 F.3d 796, 802 (5th Cir. 1986))). Proof of actual bias is not required under § 455(a). Instead, bias should “be evaluated on an objective basis, so that what matters is not the reality of bias or prejudice but its appearance.” Liteky v. United States , 510 U.S. 540, 548 (1994). “It is well established that the recusal inquiry must be made from the perspective of a reasonable observer who is informed of all surrounding facts and circumstances.” Cheney v. U.S. Dist. Ct. , 541 U.S. 913, 924 (2004) (emphasis and internal quotation marks omitted).

Nevertheless, Judge Bufford articulated the correct standard in his subsequent written opinion and specified that his denial of recusal was based “on the grounds stated in the court’s decision of this date.” Thus, we find that Judge Bufford ultimately applied the correct legal standard. The salient inquiry, then, is whether Judge Bufford abused his discretion in concluding that his conduct in the Vickie case did not give rise to an appearance of bias against Pierce that warranted his recusal from the Debtors’ proceedings.

Elaine contends that Judge Bufford’s impartiality may be reasonably questioned in light of his handling of Vickie’s case. Specifically, she claims that Judge Bufford’s rulings demonstrated partiality towards Vickie, that his issuance of severe discovery sanctions and “critical” statements against Pierce and Pierce’s attorney throughout the proceedings indicated prejudice against Pierce, and that his communications with the press and the district court evinced an uncommon interest in the case.

As a preliminary matter, we note that Elaine’s examples of bias emanate exclusively from Judge Bufford’s rulings and conduct during Vickie’s case. Insofar as Elaine points to Judge Bufford’s judicial rulings as evidence of bias, such “rulings alone almost never constitute a valid basis for a bias or partiality motion.” Liteky , 510 U.S. at 555. “Almost invariably, they are proper grounds for appeal, not for recusal.” Id. Moreover, “the judge’s conduct during the

proceedings should not, except in the ‘rarest of circumstances’ form the sole basis for recusal under § 455(a).” United States v. Holland , 519 F.3d 909, 913–14

(9th Cir. 2008) (quoting Liteky , 510 U.S. at 555). “[O]pinions formed by the judge on the basis of facts introduced or events occurring in the course of the current proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality motion unless they display a deep- seated favoritism or antagonism that would make fair judgment impossible.”

Liteky , 510 U.S. at 555. We find that Judge Bufford’s conduct in Vickie’s case does not satisfy this standard.

For example, Elaine contends that Judge Bufford advocated for Vickie by ruling in her favor on arguments neither raised nor briefed by the parties. While Judge Bufford may have erred in basing certain rulings on arguments not raised by the parties and without giving the parties an opportunity to respond, doing so several times in the course of lengthy and complicated litigation does not reasonably give rise to an inference that he is advocating for one side or another. Further, Elaine’s argument suffers from the fact that neither Vickie nor Pierce were parties to Howard and Ilene’s bankruptcy case. Thus, Judge Bufford’s purported partiality toward Vickie (or antagonism towards Pierce), even if true, does not reasonably give rise to an appearance of bias in Howard and Ilene’s case.

Elaine also argues that, after initially denying Pierce’s recusal motion, Judge Bufford instigated an improper sua

sponte investigation to find additional grounds for denying the motion. Judge Bufford issued an OSC why the motion should not be denied for lack of standing, in light of Pierce’s failure to file a proof of claim. We find nothing unusual or improper in the bankruptcy court’s effort to determine 1 5 As a practical matter, Judge Bufford’s purported bias against Pierce would not spill over into Howard and Ilene’s bankruptcy case unless and until Pierce injected himself into the case by filing a proof of claim, which he had not done by the time Judge Bufford ruled on the recusal motion. This is true notwithstanding the fact that the time in which to file a proof of claim had not yet elapsed. Section 455(a) cannot reasonably be read to require recusal based on speculation that a particular party might subsequently enter in the case. I N THE M ATTER OF : M ARSHALL

whether a party has standing to litigate; in fact, such

determination is required. See B.C. v. Plumas Unified Sch.

Dist. , 192 F.3d 1260, 1264 (9th Cir. 1999) (“[F]ederal courts are required sua sponte to examine jurisdictional issues such as standing.”).

As further evidence of bias, Elaine points to Judge Bufford’s decisions declaring the district court’s stay of his initial discovery sanctions ineffective and reimposing virtually the same sanctions in his Final Sanctions Order. Presumably, Elaine is insinuating that Judge Bufford openly defied the district court in order to ensure that Pierce would remain subject to his virtually insurmountable terminating sanctions. However, not only are judicial rulings rarely a basis for recusal, Liteky , 510 U.S. at 555, these particular rulings cannot reasonably be seen as contravening the district court’s direction. The district court subsequently adopted Judge Bufford’s Final Sanctions Order, notwithstanding its similarity to the initial vacated order, and even increased the

damages award against Pierce. In re Marshall , 275 B.R. 5,

58 (C.D. Cal. 2002), rev’d on other grounds , 392 F.3d 1118

(9th Cir. 2004), rev’d and remanded , sub nom. Marshall v.

Marshall , 126 S. Ct. 1735 (2006), rev’d on remand , 600 F.3d

1037 (9th Cir. 2010), aff’d , sub nom. Stern v. Marshall , 131 S. Ct. 2594 (2011).

With respect to the sanctions themselves, the district court’s decision to increase Judge Bufford’s sanctions significantly weakens Elaine’s contention that the heavy sanctions create an appearance of bias on Judge Bufford’s part. See Offutt v. United States , 348 U.S. 11, 15–16 (1954)

(holding that heavy sanctions, which were later reduced by a higher court, constituted “compelling proof” of bias). Moreover, a reasonable person could find, as the district court did, that Judge Bufford’s decision to sanction Pierce was

based on his perception of Pierce’s bad faith. See United

States v. Yagman , 796 F.2d 1165, 1181–82 (9th Cir. 1986) (“When [a judge imposes sanctions], the judge will obviously be dissatisfied with some aspect of the offending attorney’s conduct[,]” but “[w]ithout more, this natural responsive attitude does not provide reasonable grounds to question the judge’s impartiality[.]”). Judge Bufford found that Pierce committed numerous discovery abuses throughout the Vickie case. His determination was affirmed by the district court, and Pierce apparently elected not to raise the issue again on appeal of that decision to this court. See In re Marshall , 392 F.3d 1118 (9th Cir. 2004). The record does not indicate that Judge Bufford’s findings of sanctionable discovery abuse were erroneous. Thus, neither the existence nor the scope of the sanctions suggest that Judge Bufford harbored deep- seated antagonism against Pierce.

Similarly, Judge Bufford’s comments towards Pierce and his attorney during Vickie’s case might also be reasonably seen as the product of Judge Bufford’s frustration with Pierce’s behavior throughout the litigation. See F.J.

Hanshaw Enters., Inc. , 244 F.3d at 1144–45 (“[P]redispositions developed during the course of a trial will [rarely] suffice.” (citing Liteky , 510 U.S. at 544–45)); United

States v. Conforte , 624 F.2d 869, 881 (9th Cir. 1980) 1 6 Although the Supreme Court ultimately determined that the bankruptcy court did not have jurisdiction over Vickie’s counterclaims, the propriety of the Final Sanctions Order was not ultimately decided in either venue. See In re Marshall , 600 F.3d 1037, 1046 n.17 (9th Cir. 2010) (noting that the Court’s “discussion of these matters” would be “limited” as “the parties agreed that there [were] no sanctions issues . . . on appeal” and because “Pierce . . . [was] entitled to judgment in his favor for other reasons . . .”).

(explaining that recusal under § 455(a) requires a finding of “an animus more active and deep-rooted than an attitude of disapproval toward certain persons because of their known conduct”). For example, Judge Bufford referred to Pierce as “a Defendant with extremely dirty hands,” told Pierce’s counsel to bring certain documents to court or “bring [his] toothbrush,” to bring his “checkbook” to a hearing, and that he had “substantial experience with the way [Pierce’s] side has handled cases.” These statements, while potentially indicative of personal bias, are not serious enough to overcome the high standard set forth in Liteky :

[J]udicial remarks during the course of a trial that are critical or disapproving of, or even hostile to, counsel, the parties, or their cases, ordinarily do not support a bias or partiality challenge. They may do so if they reveal an opinion that derives from an extrajudicial source; and they will do so if they reveal such a high degree of favoritism or antagonism as to make fair judgment impossible .

510 U.S. at 555 (emphasis added).

Elaine also contends that Judge Bufford’s communications with the press gave rise to an appearance of partiality. Judge Bufford primarily took questions from reporters about the procedures for obtaining court documents and records. These procedural comments, themselves, do not indicate partiality and are not ethically proscribed. See Code of Judicial Conduct Canon 3(A)(6) (“This proscription [on judicial speech] does not extend to public statements made in the course of the judge’s official duties, to the explanation of court procedures, or to a scholarly presentation made for purposes of legal education.”);

see also United States v.

Microsoft Corp. , 253 F.3d 34, 112 (D.C. Cir. 2001) (distinguishing between “purely procedural matters,” which the district judge may properly discuss in public, and the judge’s “views on factual and legal matters at the heart of the case,” upon which the judge may not publicly comment).

However, the fact that Judge Bufford initiated the “press conference” at all is highly unusual and of some concern. See

In re Boston’s Children First , 244 F.3d 164, 170 (1st Cir. 2001) (noting that, in highly publicized cases, “even ambiguous comments may create the appearance of impropriety” and “[i]n fact, the very rarity of such public statements, and the ease with which they may be avoided, make it more likely that a reasonable person will interpret such statements as evidence of bias”); see also United States

v. Cooley , 1 F.3d 985, 995 (10th Cir. 1993) (holding that a judge’s deliberate choice to express “strong views” on a pending case in a media forum “conveyed an uncommon interest . . . in the subject matter” and “created the appearance that the judge had become an active participant in [the litigation]”).

Furthermore, in speaking with the press, Judge Bufford mentioned the interplay between the Texas probate case and Vickie’s bankruptcy case, explaining that there were some overlapping issues that might be resolved in either venue. Given that the bankruptcy court’s jurisdiction over Vickie’s counterclaim was in dispute, such statements might be viewed as commentary on the merits of the case. See In re

Boston’s Children First , 244 F.3d at 170 (concluding that a judge’s comment that one case was more “complex” than another could be seen as “a preview of a ruling on the merits of petitioner’s motion for class certification” and called the I N THE M ATTER OF : M ARSHALL judge’s impartiality into question). While there is nothing wrong with a court providing procedural information to the press in a highly publicized case, an appearance of impropriety may be created where a judge voluntarily takes on that role, especially in open court during the course of the proceedings.

Still, notwithstanding our concerns, Judge Bufford’s statements to the press are in and of themselves insufficient to warrant recusal. The lion’s share of his comments dealt with courtroom procedures and policies, which is understandable given the strong media interest in Vickie’s case. That several of his comments might be construed as a vague reflection on a disputed jurisdictional issue does not, alone, compel a finding of apparent bias.

In addition, Elaine makes much of a private communication Judge Bufford shared with Judge Keller regarding Pierce’s motion to withdraw the bankruptcy reference. She argues that, by sending Judge Keller a “secret memorandum,” Judge Bufford injected himself into the case under the guise of “assisting” Judge Keller’s decision on whether to withdraw the reference, evincing an “uncommon interest and degree of personal involvement” in Vickie’s case. Cooley , 1 F.3d at 995. However, context matters, and the record here does not support that conclusion.

In October 1998, Judge Keller issued a minute order withdrawing the bankruptcy reference in part. The minute order indicated that the bankruptcy judge would determine which discovery matters were necessary to “core” bankruptcy proceedings and should therefore remain before the bankruptcy court. At a January 1999 hearing, Howard and Ilene’s counsel reminded Judge Bufford that the bankruptcy court “was going to be coming out with an order with respect to th[e] Court’s belief as to the jurisdictional responsibilities . . . which Judge Keller[’s] . . . minute order indicated he was awaiting.” Judge Bufford clarified that his response to Judge Keller would “not take the form of an order[,]” but would be “a memorandum to Judge Keller to assist in his review of the matter.” Judge Bufford then noted that the memo would be “an internal document not available to the parties.” After receiving the memo, Judge Keller noted that “as far as the memorandum that [Judge Bufford] shared with me, he does have authority to try everything but the MPI case, as far as I can tell.” Judge Keller acknowledged that he was “not as deeply into it from a bankruptcy standpoint as [Judge Bufford was],” and that Judge Bufford was the one who “kn[ew] what[ was] going on.”

Although we are not privy to the contents of Judge Bufford’s communication, this context strongly suggests that Judge Bufford’s memo dealt with legitimate jurisdictional issues, and that Judge Bufford was merely responding to a request made by Judge Keller. At any rate, the record does not suggest that Judge Bufford was actively trying to retain jurisdiction over Vickie’s case because of antagonism or favoritism towards the parties, as opposed to, for example, his understandable reticence to foist a complex case on the district court unless it was necessary to do so.

Elaine’s examples of bias are almost exclusively based on Judge Bufford’s conduct during Vickie’s bankruptcy proceedings. Taken together, Judge Bufford’s actions are not indicative of a “deep-seated favoritism or antagonism that would make fair judgment impossible.” Liteky , 510 U.S. at 555. As such, this case is not one of the “rarest of circumstances” where judicial conduct in prior proceedings I should form the sole basis for recusal under § 455(a).

Holland , 519 F.3d at 914. Judge Bufford’s determination— that under all of the circumstances a reasonable person would not question his impartiality—does not reflect an incorrect application of the law and is not based on clearly erroneous factual findings. Therefore, we cannot say that Judge Bufford abused his discretion in denying Elaine’s motion to recuse.

II.

C ONSTITUTIONAL SSUES For the reasons outlined in the second amended opinion of the bankruptcy court filed on October 9, 2003, in the Central District of California, we conclude that the district court correctly affirmed the bankruptcy court’s confirmation of Howard and Ilene’s Chapter 11 plan and denial of Elaine’s motion to dismiss with respect to the constitutional issues raised in the motion. See In re Marshall , 300 B.R. 507 (Bankr. C.D. Cal. 2003). Therefore, we adopt the bankruptcy court’s opinion on Elaine’s constitutional claims, and affirm the district court’s decision as to the issues addressed therein. See Appendix A.

1 7 Furthermore, the record does not suggest that “the probability of actual bias” on Judge Bufford’s part was “too high to be constitutionally tolerable[,]” so as to mandate his recusal on due process grounds. Withrow v. Larkin , 421 U.S. 35, 47 (1975).

I

III.

N ON -C ONSTITUTIONAL I SSUES Elaine contends that the bankruptcy court erred in confirming the Debtors’ Chapter 11 Plan because the Plan does not satisfy the “Best Interests of Creditors” test and was proposed in bad faith. Elaine also argues that the bankruptcy case should have been dismissed because it was filed in bad faith.

We review the bankruptcy court’s decision to confirm the Debtors’ Chapter 11 Plan for abuse of discretion. In re

Brotby , 303 B.R. at 184. The bankruptcy court’s ruling on a motion to dismiss for bad faith is also subject to review for abuse of discretion. Stolrow’s Inc. v. Stolrow’s Inc. ( In re

Stolrow’s, Inc .), 84 B.R. 167, 170 (B.A.P. 9th Cir. 1988). In both cases, “[t]he question of good faith is factual” and we review for clear error. Id. ; Marsch v. Marsch ( In re Marsch ), 36 F.3d 825, 828 (9th Cir. 1994) (per curiam).

A.

P LAN C ONFIRMATION —B EST NTERESTS OF C REDITORS

T EST

The so-called “Best Interest of Creditors” test requires that:

[w]ith respect to each impaired class of claims or interests—

(A) each holder of a claim or interest of such class—

(i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.

11 U.S.C. § 1129(a)(7)(A).

Because the Plan purported to discharge the Texas Fraud Judgment without any payment, Elaine contends that the Plan failed to ensure that Pierce would receive at least as much as he would have under Chapter 7 liquidation. However, Pierce

never filed a proof of claim in the Debtors’ Chapter 11 proceedings, and the deadline for doing so had passed by the time the bankruptcy court confirmed the Debtors’ Chapter 11 Plan. Thus, § 1129(a)(7)(A) did not apply to Pierce or to the Fraud Judgment.

That Pierce would not have been foreclosed from filing a proof of claim under Chapter 7 is of no moment. See 11 U.S.C. § 726(a)(2) (permitting late-filed claims in Chapter 7 cases). We will not extend the “Best Interests of Creditors” test to individuals who are only hypothetically creditors, simply because the statute invokes a hypothetical Chapter 7 liquidation as a point of reference. Were we to go that far, a Chapter 11 Plan would not be confirmable unless it provided for all individuals who could potentially be entitled to distribution. Such a result would be untenable in practice and would eviscerate the proof of claim filing deadline in Chapter 11.

I N THE M ATTER OF : M ARSHALL 29

B.

P LAN C ONFIRMATION —B AD F AITH Under 11 U.S.C. § 1129(a)(3), a bankruptcy plan must be “proposed in good faith and not by any means forbidden by law.” “A plan is proposed in good faith where it achieves a result consistent with the objectives and purposes of the Code.” Sylmar Plaza, L.P. v. Sylmar Plaza L.P. ( In re Sylmar

Plaza, L.P. ), 314 F.3d 1070, 1074 (9th Cir. 2002).

Elaine argues that the Plan was not proposed in good faith because the Debtors (1) were actually solvent; (2) misrepresented the true value of their assets; and (3) filed the petition with the primary purpose of avoiding payment of the Texas Fraud Judgment.

We agree that the Debtors’ claim of potentially costly future litigation— including a $5 million Louisiana lawsuit in which Howard was a named defendant and Pierce’s separate threat of a $100 million lawsuit—was perhaps too speculative to support a finding that they were “insolvent.” However, “insolvency is not a prerequisite to a finding of good faith under § 1129(a).” Id. at 1074–75. The bankruptcy court reasonably concluded that the Debtors’ technical solvency did not bespeak bad faith given that they faced the threat of future litigation, not to mention their very concrete obligation to satisfy the Texas Fraud Judgment, amounting to nearly $12 million.

With regard to the Debtors’ purported misstatements on their asset schedule, the chief example cited by Elaine was the listing of the value of the Eleanor Stevens Gift Trust Debenture as “contingent,” despite its prior valuation at upwards of $6 million. However, the Debtors’ identification and description of the debenture and other stock holdings were more than sufficient to put creditors on notice of the assets so they could investigate further. See, e.g .,

Cusano v. Klein , 264 F.3d 936, 946–47 (9th Cir. 2001) (holding that, while a debtors must “be as particular as is reasonable under the circumstances[,]” there are “no bright- line rules for how much itemization and specificity is required,” and where the value of assets are unknown, “a simple statement to that effect will suffice” (citations and internal quotation marks omitted)); In re Weingarten , No. 05- 01091, 2013 WL 309076, at *12 (Bankr. C. D. Cal. Jan. 25, 2013) (“By listing the asset, even one with an unknown value, [the debtor] has put parties on notice of these assets and they can investigate further.”). Further, with regard to the Debtors’ failure to list certain assets, the bankruptcy court did not clearly err in finding that the omitted assets—200 shares of stock, worth roughly $175–180 per share, and Citibank accounts containing $186,458—were de minimis and unproven, respectively.

Finally, Elaine argues that the Plan was proposed in bad faith because the Debtors’ primary purpose was to avoid paying the Texas Fraud Judgment. However, the only reason consummation of the Debtors’ Plan would frustrate Elaine’s 1 8 In addition, while the asset schedule stated the value of the Debtors’ stock holdings as “unknown,” Elaine points to Howard’s Probate Affidavit which valued his stock holdings in the millions of dollars and a monthly statement from his investment advisor indicating that Howard’s stock holdings were worth $5,891,141.65. Elaine also claims that the amended schedules improperly listed the “book value” of certain assets, rather than market value and “inexplicably” valued various partnership interests at just one hundred dollars each. According to Elaine, Howard and Ilene’s assets actually exceeded their stated liabilities by at least $4,000,000. attempt to collect on the Texas Fraud Judgment was because Pierce never filed a proof of claim. Significantly, the Debtors initially included the Fraud Judgment in their Plan, and amended to provide for discharge of the judgment only after Pierce failed to file a proof of claim. We find no reason to conclude that the Debtors knew Pierce would not file a proof of claim and we see nothing that prevented him from doing so.

In sum, the bankruptcy court’s finding that the Debtors’ Plan was proposed in good faith was not clearly erroneous under all the circumstances. Therefore, confirmation of the Debtors’ Plan was not an abuse of discretion.

C.

M OTION TO D ISMISS —B AD F AITH Under 11 U.S.C. § 1112(b), a Chapter 11 bankruptcy case may be dismissed “for cause.” “Although section 1112(b) does not explicitly require that cases be filed in ‘good faith,’ courts have overwhelmingly held that a lack of good faith in filing a Chapter 11 petition establishes cause for dismissal.” In re Marsch , 36 F.3d at 828. The good faith requirement does not depend on a debtor’s subjective intent, but rather “encompasses several, distinct equitable limitations that courts have placed on Chapter 11 filings.” Id. Generally, a plan is not filed in good faith if it represents an attempt “to unreasonably deter and harass creditors” and to “achieve objectives outside the legitimate scope of the bankruptcy laws.” Id .

The question of a debtor’s good faith “depends on an amalgam of factors and not upon a specific fact.” Id. (quoting

Idaho Dep’t of Lands v. Arnold ( In re Arnold ), 806 F.2d 937, 939 (9th Cir. 1986)). “[T]he courts may consider any factors which evidence ‘an intent to abuse the judicial process and the purposes of the reorganization provisions.’” Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Va.

( In re Phoenix Piccadilly, Ltd. ), 849 F.2d 1393, 1394 (11th

Cir. 1988) (quoting Albany Partners, Ltd. v. Westbrook ( In re

Albany Partners, Ltd. ), 749 F.2d 670, 674 (11th Cir. 1984)). A “[d]ebtor bears the burden of proving that the petition was filed in good faith.” Leavitt v. Soto ( In re Leavitt ), 209 B.R.

935, 940 (B.A.P. 9th Cir. 1997) (citing In re Powers , 135 B.R. 980, 997 (Bankr. C.D. Cal. 1991)).

Elaine argues that the petition was filed in bad faith and should have been dismissed. First, Elaine contends that the timing of the filing, within days of the Texas court’s suggestion that Howard transfer assets to satisfy the Fraud Judgment, indicated bad faith. We agree that the timing of Howard and Ilene’s filing may be an indication that the Debtors initiated bankruptcy proceedings for the purpose of avoiding or delaying payment of the judgment. See In re

Leavitt , 171 F.3d at 1225 (finding that the timing of debtor’s bankruptcy petition, filed within two weeks of judgment, demonstrated that the debtor’s primary motive was avoidance of the judgment). However, because the Debtors specifically included the Texas Fraud Judgment in their initial Plan, it appears just as likely that they filed their petition in order to “effect a speedy, efficient reorganization,” and not “to unreasonably deter and harass creditors.” In re Marsch , 36 F.3d at 828.

In addition, Elaine argues that the Debtors’ sole purpose in filing the petition was to avoid filing a supersedeas bond pending appeal of the Texas Fraud Judgment. In Marsch , we held that a petition was correctly dismissed for bad faith where it “was filed solely to delay collection of the judgment and avoid posting an appeal bond, even though debtor had the ability to satisfy the judgment with nonbusiness assets.” Id.

at 831; see also In re Boynton , 184 B.R. 580, 581 (Bankr. S.D. Cal. 1995) (finding bad faith where petition was filed in order to evade a tax judgment despite the fact that debtors had “significant assets” and “may have been able” to post a bond).

Here, unlike in Marsch and Boynton , the record suggests that Howard and Ilene’s liquid assets were probably insufficient to satisfy the judgment or cover the cost of a supersedeas bond. The bankruptcy court found that the Fraud Judgment amounted to over $12 million plus interest, that the “custom” in Texas was to set appeal bonds at 150% of the judgment, and that Howard did not have sufficient liquid assets to post a bond of that size. Although the record does not invariably indicate that the Debtors could not finance a supersedeas bond, we cannot say that the bankruptcy court’s determination was clearly erroneous. Moreover, notwithstanding their ability to finance a bond, Howard and Ilene’s inclusion of the Fraud Judgment in their initial Plan suggests that they filed their bankruptcy petition for the proper purpose of reorganization, not as a mere ploy to avoid posting the bond.

Finally, Elaine contends that the absence of other unsecured creditors in the Plan shows that the Debtors filed their petition in order to avoid having to obtain a supersedeas bond or pay the Texas Fraud Judgment. See, e.g. , Chinichian

v. Campalongo ( In re Chinichian ), 784 F.2d 1440, 1445 (9th

Cir. 1986); Little Creek Dev. Co. v. Common Wealth Mortg.

Corp. ( In the Matter of Little Creek ), 779 F.2d 1068, 1073 34 I N THE M ATTER OF : M ARSHALL (5th Cir. 1986);

In re Silberkraus , 253 B.R. 890, 904 (Bankr. C.D. Cal. 2000). Indeed, Howard and Ilene paid off at least $89,000 in unsecured debts the day before filing, and the Texas Fraud Judgment made up roughly 82% of the Debtors’ total scheduled liabilities.

However, notwithstanding their minimal unsecured debt, the Debtors’ decision to file for bankruptcy does not indicate bad faith in light of the size of the Texas Fraud Judgment and the potential cost of obtaining a bond. As the bankruptcy court noted, all debtors file for bankruptcy in order to delay creditor action. Thus, although the Debtors’ main motivation may have been to ameliorate the burden of the judgment, given that the Plan proposed payment of the judgment, we cannot say that they filed a Chapter 11 petition in order to avoid paying it altogether, or to unduly deter or harass creditors.

Moreover, we agree with the bankruptcy court that “[p]erhaps the most compelling grounds for denying a motion to dismiss grounded on bad faith is the determination that a reorganization plan qualifies for confirmation.” This is because “[a] debtor’s showing that a plan of reorganization is ready for confirmation essentially refutes a contention that the case is filed or prosecuted in bad faith.” Id. The bankruptcy court properly considered the viability of the Debtors’ proposed Plan as weighing heavily against dismissal.

1 9 In support of her motion to dismiss based on bad faith filing, Elaine also relies on the arguments that the Debtors were solvent and misrepresented the value of their assets. W e reject these arguments for the same reasons discussed supra section III.B.

Viewing the amalgam of factors together, it is not “obvious that [the Debtors are] attempting unreasonably to deter and harass creditors[.]” In re Thirtieth Place, Inc. , 30

B.R 503, 505 (9th Cir. B.A.P. 1983) (quoting Matter of

Levinsky , 23 B.R. 210, 218 (N.Y. Bankr. 1982)). Accordingly, the bankruptcy court’s finding of good faith was not clearly erroneous, and it did not abuse its discretion in denying the motion to dismiss.

For the foregoing reasons, the district court’s decision is AFFIRMED.

A PPENDIX A IN RE MARSHALL 507 Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) petition or to proceed to confirmation of In re J. Howard MARSHALL plan of reorganization. et ux., Debtors. 2. Bankruptcy O 2222.1 No. LA 02–30769–SB. While Congress is not free to define contours of bankruptcy without any limita- United States Bankruptcy Court, tion, insolvency, whether in ‘‘balance C.D. California. sheet’’ or in ‘‘liquidity’’ sense, is not pre- Oct. 9, 2003. requisite for the constitutional invocation of federal bankruptcy jurisdiction. U.S.C.A. Const. Art. 1, § 8, cl. 4. Trustee of family trust filed his oppo- sition to proposed Chapter 11 plan filed by 3. Bankruptcy O 2022 his brother and his brother’s wife and United States bankruptcy law is de- moved to dismiss their bankruptcy case on signed to provide relief from creditor pres- ground that they were not insolvent, and sures for debtors with cash flow difficul- that Congress could not constitutionally ties, even when they are clearly solvent provide for reorganization by solvent debt- under ‘‘balance sheet’’ test. ors. Amending and superceding prior opin- ion, the Bankruptcy Court, Samuel L. Buf- 4. Bankruptcy O 2222.1 ford, J., held that: (1) bankruptcy law does Congress has power under the Bank- not require that debtor be insolvent, either ruptcy Clause to determine that debtor in ‘‘balance sheet’’ or in ‘‘liquidity’’ sense, may invoke rights under the Bankruptcy in order to file Chapter 11 petition or to Code to adjust his obligations with credi- proceed to confirmation; (2) Congress has tors before debtor becomes insolvent un- power under the Bankruptcy Clause to der ‘‘balance sheet’’ test. U.S.C.A. Const. determine that debtor may invoke rights Art. 1, § 8, cl. 4; Bankr.Code, 11 U.S.C.A. under the Bankruptcy Code to adjust his § 101 et seq. obligations before debtor becomes insol- 5. Constitutional Law O 277(1) vent; and (3) allowing debtors who alleged- ly were not insolvent, in ‘‘balance sheet’’ Eminent Domain O 81.1 sense, to file for Chapter 11 relief and to Property rights enjoy at least a mea- obtain confirmation of plan providing for sure of protection in bankruptcy under the discharge of their debts would not violate Due Process and Just Compensation Fifth Amendment economic substantive Clauses of the Fifth Amendment. due process rights of judgment creditor. U.S.C.A. Const.Amend. 5. Plan confirmed; dismissal motion de- 6. Bankruptcy O nied. While property rights enjoy at least a measure of protection in bankruptcy, Con- 1. Bankruptcy O 2223, 3548.1 gress is not barred from passing laws that Bankruptcy law does not require that impair obligation of contracts. debtor be insolvent, either in ‘‘balance 7. Bankruptcy O sheet’’ sense of having liabilities that ex- ceed his assets or in ‘‘liquidity’’ sense of Very essence of bankruptcy laws is being unable to pay his debts as they modification or impairment of contractual become due, in order to file a Chapter 11 obligations. 300 BANKRUPTCY REPORTER 8. Bankruptcy O 2013.1 Validity Called into Doubt Constitutional Law O 306(4) Bankr.Code, 11 U.S.C.A. § 106(a). Protection of property rights in bank- Limitation Recognized ruptcy is measured, and Congress, acting Bankr.Code, 11 U.S.C.A. § 522(f). in its bankruptcy power, may authorize bankruptcy courts to affect such property rights, as long as limitations of due process are observed. U.S.C.A. Const. Art. 1, § 8, cl. 4; U.S.C.A. Const.Amend. 5. J. Howard Marshall, III, Ilene Marshall, 9. Bankruptcy O 2223, 3549 Pasadena. Constitutional Law O 306(4) Bingham McCutchen, LLP, Julia Frost– Allowing Chapter 11 debtors who al- Davies, Rheba Rutkowski, Andrew J. Gal- legedly were not insolvent, in sense that lo, Boston, MA. their liabilities did not exceed their assets, Bingham McCutchen, LLP, G. Eric to file for Chapter 11 relief and to obtain Brunstad, Jr., Hartford, CT. confirmation of plan providing for dis- Bingham McClutchen, LLP, Matthew A. charge of their debts would not violate the Lesnick, Los Angeles. Fifth Amendment economic substantive due process rights of judgment creditor David L. Neale/Anne E. Wells, Levene who had neither property nor contract Neale Bender Rankin et al., Los Angeles. rights to assert against debtors, and who, as result of his refusal to file proof of SECOND AMENDED OPINION ON claim, did not even have claim against PLAN CONFIRMATION AND MO- estate, but only a Texas state court judg- TION TO DISMISS (CONSTITU- ment which was on appeal. U.S.C.A. TIONAL ISSUES) Const.Amend. 5. SAMUEL L. BUFFORD, Bankruptcy 10. Bankruptcy O Judge. confirmation of reorganization plans. ruptcy powers under the Constitution to authorize debtors who are solvent, wheth- er in ‘‘balance sheet’’ or in ‘‘liquidity’’ Recognized as Unconstitutional sense, to file Chapter 11 cases and obtain Sess. § 317(a) (1990). U.S.C.A. Const. Art. 1, § 8, cl. 4. Congress validly exercised its bank- Pub.L. No. 101-650, 101st Cong., 2d West Codenotes diction of the federal courts under the this case falls outside the bankruptcy juris- of these positions with the argument that to dismiss the case. Pierce supports both wife Ilene O. Marshall. Pierce also moves Bankruptcy Clause of the United States debtors, who are his brother J. Howard plan proposed by the ^[1] of the chapter 11 ferred to as ‘‘Pierce’’) opposes confirmation for three family trusts (collectively re- Marshall, III (‘‘Howard’’) and Howard’s In this case Pierce Marshall, as trustee I. Introduction 1. Unless otherwise indicated, all chapter, sec- and to the Federal Rules of Bankruptcy Pro- tion and rule references are to the Bankrupt- cedure, Rules 1001–9036. cy Code, 11 U.S.C. §§ 101–1330 (West 2003) IN RE MARSHALL

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) Constitution, because the debtors are sol- father, J. Howard, and an interest in the vent under a balance sheet test. Notably, Eleanor P. Stevens Irrevocable Gift Trust Pierce has declined to file a claim on be- (which is described in detail in a full-page half of the trusts (or on his own behalf) in exhibit). In addition to the quantified this case. debts, the schedules list nonpriority debts in unknown amounts owing to Wells Fargo The court finds that the balance sheet Bank Texas, the City of Pasadena, a Dallas test for insolvency was unknown in United law firm and the Marshall Museum & States bankruptcy law until 1898, when Trust. balance sheet insolvency first entered In addition to the $12 million judgment, United States bankruptcy law. Prior Howard had been named as a defendant in thereto, insolvency in the bankruptcy con- a $5 million lawsuit in Louisiana. Fur- text always meant liquidity (or equity) in- thermore, Pierce’s lawyer also sent a letter solvency. to Howard’s lawyer on May 20, 2002 pro- The court further holds that the Bank- viding substantial detail for another claim ruptcy Clause of the United States Consti- against Howard exceeding $100 million. tution does not require that a debtor in The court set a claims bar date of No- bankruptcy be insolvent under any test, vember 15, 2002. Pierce declined to file a and that the debtors in this case may proof of claim in this case. Pierce has constitutionally invoke remedies provided moved to dismiss this case and has object- under chapter 11. ed to the confirmation of the debtors’ II. Relevant Facts chapter 11 plan as amended. made in the probate estate of Howard’s against Howard in the Texas probate case on appeal, was for $11 million plus costs and interest at ten percent. By the filing part by a judgment in favor of Pierce and date of the bankruptcy petition, this debt this bankruptcy case was precipitated in totaled more than $12 million. 670 (Bankr.C.D.Cal.2003). The filing of Howard’’). The judgment, which was then 298 B.R. to dismiss. show assets worth $13,138,311.38 and liqui- the pending plan confirmation and motion dated debts of $13,914,112.39. In addition on the non-constitutional issues involved in to the valued assets, the schedules disclose forth in the court’s recently issued opinion interests in a revocable family trust, claims See In re Marshall, of their father J. Howard Marshall II (‘‘J. As amended, the debtors’ schedules The relevant facts in this case are set in this case no such determination is ^[2] tion, is necessary to make such a determina- While for some purposes in bankruptcy it tutional objections to the confirmation of and very time consuming in this case. the chapter 11 plan proposed by debtors of this contention would be very difficult Howard and Ilene Marshall. The court 298 B.R. at 675-684. court finds that determining the accuracy solvent under a balance sheet test. The requirements for confirmation are satis- filing, and that in consequence they were fied, and that the case should not be dis- exceed their liabilities as of the date of missed on good faith grounds. See Mar- shall, has previously found that the statutory Pierce contends that the debtors’ assets Pierce makes both statutory and consti- III. Constitutionality of a Chapter 11 Case for a Solvent Debtor 2. See § 546(c) (reclamation); § 547(b)(3) (preferential transfer); § 548(a)(1)(B)(ii)(I) 300 BANKRUPTCY REPORTER necessary. For the purposes of the consti- § 1129(a).’’ Platinum Capital, Inc. v. Syl- mar Plaza, L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 1070, 1074–75 (9th Cir. contours of bankruptcy without any limita- accord, In re James Wilson Associ- ates, 965 F.2d 160, 170 (7th Cir.1992) (re- jecting bad faith challenge to confirma- tion). statutory requirement for filing a volun- tary bankruptcy case under chapter 11. Instead, he argues that the Bankruptcy Clause of the United States Constitution can only be invoked by a bankruptcy debt- or who is insolvent under a balance sheet test. Pierce argues that the constitutional grant of authority to Congress to enact ‘‘uniform Laws on the subject of Bankrupt- cies throughout the United States’’ ^[3] is lim- ited to regulating the affairs of debtors who are insolvent in this sense. content to the Bankruptcy Clause in the Constitution. In general terms, this court agrees. On this point Pierce is on solid ground. Congress is not free to define the uisite to a finding of good faith under where it held, ‘‘insolvency is not a prereq- 2002); out deciding that the debtors were solvent, rejected such a view in that the bankruptcy law does not require Sylmar Plaza tutional analysis, the court assumes with- that a bankruptcy debtor be insolvent, ei- reorganization. The Ninth Circuit firmly this case. ther in the balance sheet sense (more lia- proceed to the confirmation of a plan of in the balance sheet sense, when they filed bilities than assets) or in the liquidity sense (unable to pay the debtor’s debts as they come due), to file a chapter 11 case or Pierce concedes that insolvency is not a ^[1] As a statutory matter, it is clear Pierce argues that there must be some closely related. from those for invoking the Bankruptcy (1935). tions: the bankruptcy terrain clearly must 648, 669–70, 55 S.Ct. 595, 79 L.Ed. 1110 ing the Commerce Clause are different to distinguish the exercise of powers under (1982). However, the conditions for invok- the Bankruptcy Clause from the exercise have some boundaries. 294 U.S. cago, Rock Island & Pac. Ry. Co., See, e.g., Conti- 465–66, 102 S.Ct. 1169, 71 L.Ed.2d 335 of congressional powers under the Com- nental Illinois Nat’l Bank & Trust v. Chi- merce Clause. These two powers are 455 U.S. 457, utives’ Ass’n v. Gibbons, See Railway Labor Exec- the federal government. In such a circum- Clause, and each has its own limitations. Bankruptcy Clause lie elsewhere, not in stance, the Constitution, and not the law, the powers granted by the Constitution to must govern the case. See Marbury v. according to Pierce, the law falls outside Madison, 5 U.S. (1 Cranch) 137, 178, 2 L.Ed. 60 (1803) (‘‘If then TTT the constitu- by a debtor who is balance sheet solvent, tion is superior to any ordinary act of the balance sheet insolvency. ruptcy Code permits a bankruptcy filing balance sheet test. Insofar as the Bank- ordinary act, must govern the case to a bankruptcy case be insolvent under a which they both apply.’’) ance sheet insolvency nor liquidity insol- Constitution must require that a debtor in vency is required for the constitutional invocation of federal bankruptcy jurisdic- tion. The limits on the application of the legislature; the constitution, and not such ^[2] The court finds that neither bal- As a preliminary matter, it is necessary The test, according to Pierce, is that the 3. U.S. C ONST. , art. 1, § 8, cl. 4.

(certain fraudulent transfers); § 553(a) (set- off). IN RE MARSHALL Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) As the Supreme Court has explained, powers in determining the qualifications Clause or its Necessary and Proper Clause Congress was not exercising its Commerce powers granted to Congress under the constitutionality of bankruptcy provisions. Bankruptcy Clause are expanded by art. 1, fact utilized this approach to determine the However, the Supreme Court has never in for filing a bankruptcy case. Thus the case and proceed to plan confirmation, power ‘‘To make all Laws which shall be Bankruptcy Clause necessary and proper for carrying into might be invoked to support the use of the Execution the foregoing Powers TTTT ’’ 1490 (1938). Theoretically, this provision § 8, cl. 18, which grants Congress the See Wright v. Union Central Life Ins. Co., court’s constitutional analysis in this case at 468–69, 102 S.Ct. 1169. mits a solvent chapter 11 debtor to file a ‘‘[u]nlike the Commerce Clause, the Bank- that, insofar as the Bankruptcy Code per- ruptcy Clause itself contains an affirmative law. We also examine Pierce’s argument limitation or restriction upon Congress’ utes, and applicable Supreme Court case power,’’ and ‘‘if we were to hold that Con- ed States and its predecessor English stat- gress had the power to enact nonuniform the history of bankruptcy law in the Unit- bankruptcy laws pursuant to the Com- the Constitution at the time of its adoption, merce Clause, we would eradicate from the ine the understanding of the framers of Constitution a limitation on the power of Congress to enact bankruptcy laws.’’ Id. is confined to the Bankruptcy Clause. 304 U.S. 502, 513, 58 S.Ct. 1025, 82 L.Ed. The court assumes without deciding that To analyze Pierce’s argument, we exam- Setting aside the Commerce Clause, the in doubtful cases. LACK ’ S L AW D ICTIO- Pierce urges the court to adopt the balance NARY 799 (7th ed.1999). ruptcy context. tions to the usual balance sheet insolvency B commonly used definitions in the bank- ‘‘insolvency,’’ because this term has two of balance sheet values to their ‘‘fair valua- must first address what Pierce means by tion.’’ In contrast, a balance sheet pre- pared according to generally accepted ac- without due process of law. counting principles provides asset values Powers and has deprived him of property at historical cost less any applicable depre- Congress has exceeded its Bankruptcy ciation or amortization. The ‘‘fair valua- test. First, the test requires the revision See tion’’ standard requires an adjustment in sheet balance sheet. Section 101(32)(A) states the Bankruptcy Code version of the balance sheet test for Insolvency. ^[4] § 101(32)(A), which states in relevant part: version, a debtor is insolvent where its liabilities exceed its assets as shown on its Under the non-bankruptcy (ii) property that may be exempted that the sum of such entity’s debts is (i) property transferred, concealed, or municipality, financial condition such removed with intent to hinder, delay, or an entity other than a partnership and a with reference to defraud such entity’s creditors; and TTT Before undertaking this analysis, we ty, at a fair valuation, exclusive of— from property of the estate TTTT greater than all of such entity’s proper- Section 101(32)(A) makes two modifica- For the purposes of this argument, ‘‘insolvent’’ means A. Definition of Insolvency definition of solvency in 4. The 1898 Act has a similar definition of of the 1898 Act included exempt property in insolvency. See 1898 Act, § 1(19). Unlike the calculation of insolvency. § 101(32)(A) of the Bankruptcy Code, § 1(19) 300 BANKRUPTCY REPORTER balance sheet values from historical cost to sions. See § 365 (trustee may assume an executory contract notwithstanding a de- fault relating to the debtor’s insolvency); § 525 (protecting a debtor against dis- prohibiting a creditor setoff). None of insolvency); § 541 (forfeiture based on in- solvency does not prevent prepetition property from becoming property of the estate); § 543 (court may consider inter- ests of equity holders of solvent debtor in determining whether to require a custodi- an to turn over property); § 545 (protect- ing a debtor from statutory liens predicat- ed upon insolvency); § 546 (authorizing certain reclamation rights to creditors who have delivered certain goods to a debtor while insolvent before the bankruptcy pe- tition was filed); § 547 (element of cause of action for preferential transfer); § 548 (element of certain causes of action for fraudulent transfers); § 553 (condition for rights under particular statutory provi- those it is used to define narrowly drawn criminatory treatment during prepetition § 101(32)(A) definition excludes property sheet, but that is exempt under § 522 (pro- that would otherwise appear on a balance nical uses of this term in the Bankruptcy present market values. is designed to govern the handful of tech- Code. In fact, ‘‘insolvent’’ is used only ten viding exemptions for individual debtors). times in the entire statute, and in nine of The insolvency definition in § 101(32)(A) Second, the insolvency is the only one that has ever debtor under United States bankruptcy Bankruptcy Code occurs in § 109(c)(3), law. which requires a municipality to be insol- played a role in qualifying a person as a cy context. This liquidity definition of and yet to have severe financial problems. tional limits of the Bankruptcy Clause. This court frequently receives cases, filed under both chapter 7 and chapter 11 and especially under chapter 13 (a reorganiza- these uses sheds any light on the constitu- tion chapter for consumers), where the be solvent under the balance sheet test, ^[7] debtor is clearly solvent under a balance vent as a condition of filing a bankruptcy ance sheet test, § 101(32)(C), which states that ‘‘insolvent’’ means: and is governed by provision is entirely different from the bal- This is known as the liquidity test for the ‘‘cash flow’’ test), ^[6] and it is the most case. The meaning of ‘‘insolvency’’ in this commonly used definition in the bankrupt- insolvency (also known as the ‘‘equity’’ or ^[5] is— (i) generally not paying its debts as they become due unless such debts are the The final use of ‘‘insolvency’’ in the (ii) unable to pay its debts as they be- come due with reference to a municipality, finan- It is not uncommon for debtors to ^[3] TTTT subject of a bona fide dispute; or cial condition such that the municipality 5. Section 101(32)(B) also has a different defi- such debts become due unless such debts are the subject of a bona fide dispute TTTT ’’ nition of insolvency for a partnership, which is a modified version of the balance sheet test 7. There are other, more sophisticated mea- that takes into account the partners’ separate sures of insolvency that are increasingly used assets. in complex business transactions. See e.g., Michael J. Epstein, Director/Manager Liability 6. This definition is also used in § 303(h)(1), and How to Avoid Furthering Insolvency, which authorizes a court to order relief NABT ALK , Summer 2003, at 23, 24. These against an involuntary debtor if, ‘‘the debtor measures of insolvency have not found their is generally not paying such debtor’s debts as way into United States bankruptcy statutes. IN RE MARSHALL 513

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) sheet test, but has substantial cash flow problems. ^[8] The United States bankruptcy law is designed to provide relief from cred- itor pressures for debtors with cash flow difficulties, even where they are clearly solvent under a balance sheet test. is in fact insolvent. This case is illustra- tive—litigation over the debtors’ solvency has consumed a large amount of time and effort, and a determination of the debtors’ insolvency has not yet been made more than a year after the filing. consumed in determining whether a debtor comes insolvent to invoke the reorganiza- ing on the reorganization provisions of the tion provisions under the bankruptcy law, ] (comment- OLLIER ed.1988) [hereinafter C substantial economic values will often be ¶ 1.19[1] (James William Moore ed., 14th irretrievably ANKRUPTCY B OLLIER ON 1 C See generally could legitimately decide that it is best for solvent than after it becomes insolvent. the economy of the United States to per- are much better when the debtor is still mit solvent debtors to reorganize under reorganizing a debtor in financial difficulty the bankruptcy law to preserve economic a balance sheet test. The prospects for values. before the debtor becomes insolvent under decide that a debtor should be eligible as a criterion for admission to the bank- there is substantial reason for Congress to ruptcy system is that substantial time is 1898 Act, as amended by the Chandler Act). If a debtor must wait until it be- An additional vice of a balance sheet test As to reorganizations under chapter 11, lost. Congress certainly ues are lost. ^[10] five bankruptcy laws. determination of balance sheet insolvency, businesses will rarely be reorganized, and at least some of the reorganization value lenge. (the value of a business as reorganized as to consider Pierce’s constitutional chal- opposed to its liquidation value) will inevi- be applied by the court, the court proceeds The first was en- claimed that the liquidity test should also tably be lost. Indeed, this is the experi- system—businesses are generally not re- organizable, and substantial economic val- ance sheet test is not the appropriate test ence in countries that require insolvency, for insolvency in evaluating Pierce’s consti- ^[9] tutional challenge in this case. However, according to a balance sheet test, as a assuming condition for admission to the bankruptcy If a reorganization is held up pending a The United States Congress has enacted Accordingly, the court finds that the bal- B. United States and English Bankruptcy Laws that Pierce has implicitly 8. Some bankruptcy courts also frequently see 10. At the time of the framing of the Constitu- chapter 12 cases where the debtor is quite tion, the terms ‘‘bankruptcy’’ and ‘‘insolven- solvent under a balance sheet test. However, cy’’ were applied differently and had operated chapter 12 cases are rare in the Central Dis- in different systems. Bankruptcy meant the trict of California. action against malingering debtors, while in- solvency meant relief for the honest but unfor- 9. The World Bank recommends against the tunate debtor. See Sturges v. Crowninshield, 4 Wheat. 122, 17 U.S. 122, 194–195, 4 L.Ed. use of a balance sheet insolvency test as a 529 (1819) (‘‘[T]he subject [of bankruptcies] is qualification for bankruptcy. See W ORLD B ANK, P RINCIPLES AND G UIDELINES FOR E FFECTIVE divisible in its nature into bankrupt and insol- vent laws TTT [A]lthough the two systems have NSOLVENCY AND C REDITOR R IGHTS S YSTEMS ¶ 90 existed apart from each other, there is such a (2001). Instead, if an insolvency test is to be adopted in a country, the World Bank recom- connection between them, as to render it diffi- mends the liquidity test—the debtor’s ability cult to say how far they may be blended to pay debts as they come due. See id. together’’); see also C HARLES W ARREN, B ANK - 300 BANKRUPTCY REPORTER acted in 1800 (‘‘the 1800 Act’’), law continuously since 1542, when Parlia- ther federal bankruptcy law until 1841 ^{[14] [12]} See generally Tabb, at 349–51. The 1841 Act lasted for an even shorter time than the 1800 Act, and was repealed in 1843. The next bankruptcy law was enacted in 1867 (‘‘the 1867 Act’’) ^[13] to deal with economic dislocations result- enacted a comprehensive codification and ing from the Civil War. See generally ^[16] Tabb, at 353–55. This law lasted consider- 1979). ably longer than its predecessors, and was ruptcy Code in 1978 (effective October 1, repealed in 1878. It was replaced with the Bank- ^[15] 1938. and expanded by the Chandler Act of bankruptcy legislation in 1898 (‘‘the 1898 Act’’). was repealed in 1803. There was no fur- ment enacted the first bankruptcy law. (‘‘the 1841 Act’’). ANN ^[11] and was In 1732 Parliament ^[18] intended to last only five years. See gen- was enacted in 1705. erally Charles Jordan Tabb, The Histori- cal Evolution of the Bankruptcy Dis- ]. This act charge, 65 Am. Bankr.L.J. 325, 344–45 The next major English bankruptcy law This law was substantially revised ^[17] (1991); B EPUBLIC OF R D ANN, EBT- H. M ORS RUCE (2002) [hereinafter M English law has included bankruptcy Congress enacted permanent federal 87. Because credit, like commerce, was not limited by state boundaries, the dele- the grounds that bankruptcies were pun- Clause was cast by Roger Sherman of at 185–87. Connecticut. He opposed this provision on See id. merce depended. national credit system upon which com- gates recognized that a national system of bankruptcy law was needed to support a discussion in the constitutional convention. see generally id. at revision of English bankruptcy which remained in force (with amend- ments) at the time that the United States Constitution was written. ed States statutes, we turn to the constitu- tional convention in 1789, to see whether there is anything in the records of the 182– role of insolvency in the meaning of ‘‘bank- ruptcies’’ in the Bankruptcy Clause. convention that might shed light on the The bankruptcy issue arose in a discussion of the Full Faith and Credit clause, and drove the constitutional extension of the Full Faith and Credit clause to acts of the legislature as well as judicial decisions. See M ANN , at 183; ishable by death in some cases in England, The only vote against the Bankruptcy Before examining the English and Unit- The Bankruptcy Clause received little C. The Constitutional Convention law, 13. Bankruptcy Act of 1867, ch. 176, 14 Stat.

RUPTCY IN U NITED S TATES H ISTORY 7 (1935) (at the time of the adoption of the Constitution, only 517 (1867) (repealed 1878). a few states had laws on either the subject of 14. Bankruptcy Act of 1898, ch. 541, 30 Stat. bankruptcies or insolvency, Pennsylvania be- 544 (1898) (repealed 1978). ing the only state that had both—bankruptcy was releasing traders from debts, insolvency a 15. Chandler Act, ch. 575, 52 Stat. 840 (1938) discharge of all persons from prison upon (repealed 1978). surrendering their property to their credi- 16. Pub.L. No. 95–598, 92 Stat. 2549 (1978). tors). 17. An act against such persons as do make 11. Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 bankrupts, 34 & 35 Hen. 8, c. 4 (1542). (1800) (repealed 1803). 18. 4 Anne, c. 17 (1705). 12. Bankruptcy Act of 1841, ch. 9, 5 Stat. 440 19. 5 Geo. 2, c. 30 (1732). (1841) (repealed 1843). IN RE MARSHALL Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) and he opposed granting Congress this stated: Bankruptcy Clause. In Federalist No. 42, § 1108 James Madison wrote: TATES Commentaries, S famous NITED a professor at Harvard Law School), in his tution, make only a single reference to the U STITUTION OF THE TORY, C OMMENTARIES ON THE tice Story’s view, it is the failure to pay C Madison) (Clinton Rossiter ed., 1961). ON- T HE F S EDERALIST OSEPH 3 J power in the United States. See Railway ]. In Jus- Labor Executives’ Ass’n v. Gibbons, 455 U.S. 457, 472 n. 13, 102 S.Ct. 1169, 71 TORY L.Ed.2d 335 (1982) (citing 2 M. F detail virtually every aspect of the Consti- n.25. (1833) [hereinafter S ARRAND, ECORDS OF THE C ONVENTION OF 1787, at 489 (1911)). R No. 42, at 239 (James creditors and their debtors, in cases in it is a law for the benefit and relief of A few decades later Justice Story (then a bankrupt law as can be framed is, that sions for cases of persons failing to pay which the latter are unable or unwilling their debts. Perhaps, as satisfactory a description of to pay their debts. And a law on the will prevent so many frauds where the drawn into question. The Federalist Papers, which discuss in The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and subject of bankruptcies, in the sense of parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be the constitution, is a law making provi- ]. Indeed, some of the fit of trade and for the protection of credi- LACKSTONE ter B *472 [hereinaf- tors, to give them more powers acting in See, e.g., 2 W concert to collect debts than they pos- sessed individually. LACKSTONE, B ILLIAM OMMENTARIES C have from time to time been passed on the whether honest or dishonest. Bankruptcy debts, not insolvency, that distinguishes a debtor who is an eligible subject for bank- ruptcy relief. support to the argument that the founders intended that bankruptcy relief be limited to insolvent debtors, or that this meaning was included in the Bankruptcy Clause. stitutional convention unhelpful, we now take a broader look to see what meaning ‘‘bankruptcy’’ was given in relevant legisla- tion on the subject, both before and after laws were enacted principally for the bene- Supreme Court has told us, ‘‘Probably the most satisfactory approach to the problem the writing of the Constitution. As the of Congress under the Bankruptcy Clause] England for the protection of debtors, been conceived in the United States or 595, 79 L.Ed. 1110 (1935). 294 U.S. 648, 670, 55 S.Ct. Pac. Ry. Co., Bank & Trust. v. Chicago, Rock Island & of interpretation here involved [the power Continental Illinois Nat’l ’’ TTTT subject the history of the acts, of Congress which is to examine it in the light of the acts, and worst abuses were committed by debtors D. History of Insolvency Provisions Having found the evidence from the con- Thus the constitutional history gives no Historically, bankruptcy laws have not In Bankruptcy Law 20. See also S TORY , supra, § 1101 (‘‘it may be and, on the other hand, to relieve unfortunate stated, that the general object of all bankrupt and honest debtors from perpetual bondage to and insolvent laws is, on the one hand, to their creditors, either in the shape of unlimit- secure to creditors an appropriation of the ed imprisonment to coerce payment of their property of their debtors pro tanto to the debts, or of an absolute right to appropriate discharge of their debts, whenever the latter and monopolize all their future earnings.’’) are unable to discharge the whole amount; 300 BANKRUPTCY REPORTER who refused to pay their debts even insolvency as a condition of either volun- tary or involuntary bankruptcy. Of the five United States bankruptcy laws and its three principal English predecessors, only the 1841 and the 1867 Acts required a voluntary debtor to plead that the debtor the debtor was unable to pay his or her debts as they became due, and such a pleading was unchallengeable. vency began to creep into United States cessors, has ever required balance sheet bankruptcy law in the 1867 Act as an cy,’’ any one of which would support an involuntary bankruptcy petition. Howev- er, insolvency did not become the chief basis for an involuntary petition until the adoption of the Bankruptcy Code in 1978. Even now, under the Bankruptcy Code, the insolvency test for an involuntary peti- tion is the liquidity test, and not the bal- ance sheet test for insolvency. element in one or more ‘‘acts of bankrupt- ruptcy act, and none of its English prede- was insolvent in a liquidity sense, i.e. that balance sheet insolvency, or insolvency of though they were solvent and eminently any other type. No United States bank- capable of paying. The principal benefit predecessors in England, shows that the prison or the discharge therefrom. laws in the United States, and of their See id. Bankruptcy Clause has never been tied to to debtors was the avoidance of debtors’ An analysis of the history of bankruptcy For involuntary bankruptcy cases, insol- debts in full and the debtor’s willingness to pay all his debts in full Immediately upon filing a petition stating 1800 Act nor the English predecessors permitted a voluntary bankruptcy filing. § 11. the debtor’s inability to pay his or her Neither the tary bankruptcy petition. ^[22] the benefit of creditors and a desire to obtain the benefits of the bankruptcy law, the debtor was entitled to be adjudicated a law to authorize a debtor to file a volun- bankrupt. See, e.g., In re Patterson, 18 F.Cas. 1315, 1317 (S.D.N.Y.1867). No fur- ther inquiry as to the debtor’s ability to pay was permitted. surrender his or her estate and effects for See id. at 1318. TTTT Neither the parties nor the court had the ’’ authority to inquire into whether a debtor TTTT was in fact insolvent. See, e.g., Ex parte her] debts and engagements Hull, 12 F.Cas. 853, 856 (S.D.N.Y.1842). Indeed, the court was required to declare that the debtor is ‘‘unable to meet [his or ’’ a voluntary petitioner bankrupt on the petition be verified under oath and plead to pay his or her debts, irrespective of the See id. debtor’s actual wealth and financial condi- tion. See id. The 1841 Act required that a bankruptcy petition under the 1867 Act was similarly required to ‘‘set forth TTT his inability to debtor’s sworn representation of inability A debtor filing a voluntary bankruptcy The 1841 Act was the first United States This was only a pleading requirement. 1. Voluntary Cases 21. But see Thomas E. Plank, Bankruptcy and at that time. Furthermore, even Professor Federalism, 71 F ORD. L. R EV . 1063 (2002), Plank does not contend that bankruptcy where he argues that ‘‘bankruptcy’’ inherently meant balance sheet insolvency in 1789. meant insolvency in the eighteenth century. He bases this conclusion principally on the 22. However, it appears that debtors frequent- examination of several eighteenth century dic- ly arranged with friendly creditors to file es- tionaries, and ignores the legal history of sentially voluntary bankruptcy cases under bankruptcy law. See id. at 1076–77. The the 1800 bankruptcy law. See M ANN , supra, at court finds this approach unpersuasive, in 228–39. light of the contrary history of bankruptcy law IN RE MARSHALL

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) The 1898 Act provided that a voluntary requisite of taking advantage of bankrupt- debtor could file a bankruptcy case with no cy. While two of the nineteenth century requirement of insolvency. See id. § 4(a). acts required a debtor to plead inability to Unlike the 1841 and 1867 Acts, the 1898 pay his or her debts as they came due, no Act did not require a debtor to plead ina- creditor was permitted to contest this con- bility to pay his or her debts as they came tention. due. Collier explains § 4(a) as follows: 2. Involuntary Cases A voluntary petitioner may be solvent or Similarly, insolvency has never been re- insolvent, and his motive is generally quired for a debtor to become an involun- immaterial except that the petition may tary bankrupt, either under United States not be filed for purposes of perpetrating bankruptcy law or under its English pre- a fraud. There is nothing in the Act decessors. which requires the person to be insol- The English bankruptcy laws prior to vent, and there seems to be no reason the United States revolution uniformly why, if a solvent person cares to have provided only for involuntary bankruptcy. his property distributed among his cred- Uniformly, also, these laws made no provi- itors through bankruptcy proceedings, sion for insolvency as a condition of the he should not be allowed to do so TTTT It filing of a petition in bankruptcy against a will not be necessary to allege insolven- debtor. Instead, these statutes based the cy in the petition, nor prove it, to pro- right to file an involuntary bankruptcy pe- cure an adjudication [of bankruptcy]. tition on what became known as a debtor’s 1 C OLLIER ¶ 4.03 (interpreting bankruptcy ‘‘acts of bankruptcy.’’ Any single act of law as it existed before the Bankruptcy bankruptcy, under each of these laws, was Code took effect in 1979); see Caplin v. sufficient to support an involuntary bank- Marine Midland Grace Trust Co., 406 ruptcy petition. The qualifying acts in- U.S. 416, 423, 92 S.Ct. 1678, 32 L.Ed.2d cluded such conduct as refusing to pay 195 (1972) (‘‘Chapter X proceedings [under creditors, departing the country, staying in the 1898 Act as amended in 1938] are not one’s house (to avoid service of process), limited to insolvent corporations but are taking sanctuary, and permitting himself open to those corporations that are solvent or herself to be arrested (presumably for in the bankruptcy (asset-liability) sense not paying debts). In addition, the credi- but are unable to meet their obligations as tor was required to show that the debtor they mature’’) (citing United States v. Key, took such an action with the intent to 397 U.S. 322, 329, 90 S.Ct. 1049, 25 hinder or delay his or her creditors. L.Ed.2d 340 (1970)). Blackstone’s C OMMENTARIES ON THE L AWS After arising in the 1841 Act as a plead- OF E NGLAND , published in 1765 to 1769, are ing requirement, insolvency of any kind in accord with the English laws. Black- disappeared entirely in 1878 (the date of stone wrote extensively in his C OMMENTAR- repeal of the 1867 Act) as a condition of IES about bankruptcy law. However, like filing a voluntary bankruptcy petition in the English bankruptcy law of his time, the United States. Blackstone makes no reference to insol- Thus the statutory history shows that no vency as a qualification for bankruptcy. United States bankruptcy law has ever See 2 B LACKSTONE , supra, at *471–88. required a voluntary debtor to show that he or she was in fact insolvent, under a Blackstone’s C OMMENTARIES were well balance sheet test or otherwise, as a pre- known to the writers of the Constitution 300 BANKRUPTCY REPORTER and to early United States judges and 1867 Act, § 39. None of the insolvency as an element in any of the acts ’’ qualifying acts of bankruptcy, which large- TTTTT ly mirrored those in the English statutes. templation of bankruptcy or insolvency See 1800 Act, § 1. The 1841 Act reduced to ‘‘being bankrupt or insolvent, or in con- five the qualifying acts of bankruptcy. See 1841 Act, § 1. Like their predecessor En- was the granting of a preferential transfer, glish laws, none of the qualifying acts of voluntary petition under the 1867 Act, one bankruptcy in either the 1800 or the 1841 acts, three of which involved insolvency. that could support an in- ^[23] Acts included insolvency as an element or of bankruptcy factor to be considered in making an adju- dication of bankruptcy. of bankruptcy. Of the nine statutory acts bankruptcy. The 1800 Act specified ten if the debtor had committed an act of See 42 The original version of the 1898 Act de- L.Ed. 1113 (1902); Nelson v. Carland, bankruptcy petition against a debtor only that could support an involuntary petition. lawyers. a prominent role in the acts of bankruptcy U.S. (1 How.) 265, 270–73, 11 L.Ed. 126 Moyses, (1843) (dissenting opinion of Justice Ca- creased to five the number of bankruptcy tron). involved the insolvency of the debtor. ruptcy acts, the 1800 Act and 1841 Act permitted a creditor to file an involuntary other acts of bankruptcy in the 1867 Act 186 U.S. 181, 187, 22 S.Ct. 857, 46 In the United States, the first two bank- The 1867 Act was the first to introduce In the 1898 Act insolvency began to take See Hanover Nat. Bank v. Stat. 797; suffering, while insolvent, a lien that was see also In re Valentine Bohl Act of February 5, 1903, 32 ing the debtor’s insolvency to the 1898 Act: trict court receivership was ordered ‘‘be- 224 F. 685 (2d Cir.1915) (dismissing added yet a fifth act of bankruptcy involv- involuntary petition on three grounds: the debtor was balance sheet solvent when the fraudulent transfer). In 1926, Congress state court receiver was appointed, it was ership), and there was no evidence of a clause required for an involuntary receiv- cause of [balance sheet] insolvency’’ (as the impossible to determine whether the dis- Co., See § 3(c); the debtor’s property while the debtor was least five days before a sale or final dispo- ther failed to discharge the preference at through legal proceedings, and who fur- ted a creditor to obtain a preference debtor, while insolvent, suffered or permit- involuntary petition occurred when the Another act of bankruptcy supporting an § 3(a)(2). See id. debtor be insolvent. Act, which continued to require that the transfer, brought forward from the 1867 cy under this law was the preferential 1898 Act, § 3(a). One act of bankrupt- See sition of any property affected by the pref- erence. See id. § 3(a)(3). In addition, it having a receiver or trustee take charge of benefit of creditors) in 1903 to include bankruptcy (making an assignment for the ¶ 1.19[1]. OLLIER 1 C insolvent. see generally an affirmative defense of solvency. fraudulent transfer, the debtor was given § 3(a)(5). Furthermore, with respect to a See id. willing to be adjudged a bankrupt. ing the inability to pay debts and being was an act of bankruptcy to admit in writ- See id. not vacated or discharged within thirty Congress amended the fourth act of 23. Case law under the 1867 Act treated a King, 108 U.S. 379, 385, 2 S.Ct. 765, 27 L.Ed. general assignment for the benefit of creditors 760 (1883). This act of bankruptcy also did as a tenth act of bankruptcy. See Boese v. not require the debtor’s insolvency. IN RE MARSHALL

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) days thereafter. law. While the previous statutes con- tained no definition of solvency, it was generally understood that the liquidity test applied in the bankruptcy context. See gen- permit an involuntary bankruptcy notwith- 1 C OLLIER ¶ 1.19[1]. stantially amended the 1898 Act, expanded the scope of the 1903 addition by applying it both when the debtor was insolvent (on a modified balance sheet basis) and when the debtor was unable to pay his or her debts solvency for the purposes of bankruptcy as they matured (the liquidity definition). reorganization provisions added to the 1898 Act beginning in 1933. For these provisions (the predecessors of chapter 11), the liquidity definition of insolvency was ordinarily invoked. (which was repealed effective September 30, 1979), making a general assignment for the benefit of creditors was an act of bank- ruptcy that did not require the insolvency of the debtor. See id. § 3(a)(4). two the acts of bankruptcy that can sup- port an involuntary petition, continues to The Chandler Act also revised the various change from the previous understanding of erally 986–87 (8th Cir.1964) (utilizing a balance that now appears in § 101(32)(A). (2d Cir.1940). adopted the modified balance sheet test 1898 Act § 1(19); see also American Nat’l Bank & Trust Co. v. Bone, 333 F.2d 984, ‘‘insolvency’’ was defined. This definition sheet to show insolvency); Syracuse Engi- See See Act of May 27, 1926, 110 F.2d 468, 471 neering Co. v. Haight, 44 Stat. 662. In the 1898 Act (but not previously), The Bankruptcy Code, while reducing to Throughout the career of the 1898 Act The Chandler Act in 1938, which sub- This definition was a bankruptcy that found its way into the standing a debtor’s solvency. The Code 1898. vency was altogether unknown for bank- is appointed or takes possession of less permits a court to order relief against the ment for either voluntary or involuntary the petition, a custodian, receiver or agent debtor if, within 120 days of the filing of vency has never been a statutory require- than substantially all of the debtor’s prop- ruptcy purposes in the United States until Bankruptcy Clause. Furthermore, insol- not end with the writing of the Bankruptcy ruptcy law. Finally, balance sheet insol- bankruptcy under United States bank- See erty to enforce a lien. erally not paying such debtor’s debts as involuntary case where the debtor ‘‘is gen- such debts become due unless such debts are the subject of a bona fide dispute TTTT ’’ Thus insolvency is now a major fac- which authorizes an tor in an involuntary bankruptcy case. ^[24] vency was included in the concept of relies on § 303(h)(1), But it is the liquidity definition of insolven- tition filed under the Bankruptcy Code definition on which Pierce relies. history that, at the time that the Constitu- tion was written, insolvency of any kind was utterly unknown as a requirement for filing a bankruptcy case. Thus it is not § 303(h)(2). credible that the framers of the Constitu- tion thought that a requirement of insol- cy that controls, and not the balance sheet Clause in the United States Constitution in However, virtually every involuntary pe- The court concludes from the foregoing The development of bankruptcy law did E. Watershed Developments in Bankruptcy Concepts 24. As a bankruptcy judge for nearly twenty involuntary bankruptcy petitions. I can re- years, I have handled nearly a hundred thou- call only one that probably was based on sand bankruptcy cases. Perhaps two hun- § 303(h)(2). dred of these cases have commenced with 300 BANKRUPTCY REPORTER 1787. There are three watershed develop- mode of bankruptcy authorized under the was the addition of reorganization as a Klein. 857, again relying on 186 U.S. at 186, 22 S.Ct. Moyses, also in preme Court approved this development individuals who are not traders. The Su- 82 L.Ed. 1137 (1938). ment, also adopted in the 1841 Act, was L.Ed. 1113 (1902). 186 U.S. 181, 186, 22 S.Ct. 857, 46 es, Hanover Nat’l Bank v. Moys- Bankruptcy Clause. This first reorganiza- tion provision appeared in United States law in the Act of March 3, 1933, which was signed by President Hoover on his last day 304 U.S. 27, 47, 58 S.Ct. 811, gation Dist.), v. Bekins (In re Lindsay–Strathmore Irri- accord, United States amended in 1933); nization under § 77 of the 1898 Act as 595, 79 L.Ed. 1110 (1935) (railroad reorga- this issue in 294 U.S. 648, 668, 55 S.Ct. Illinois Nat. Bank & Trust Co. v. Chicago, Continental der the Bankruptcy Clause in the constitutionality of reorganization un- The Supreme Court validated ^[25] in office. R.I. & P. Ry., with approval on the extension of the bankruptcy law to on circuit in the district of Missouri, found In re Klein, 42 U.S. 277, 1 How. 277, 11 L.Ed. 275, 14 F.Cas. 716, 718 (1843), reported in a note introduced in the 1841 Act, was the author- to Nelson v. Carland, ization for a debtor to file a voluntary 42 U.S. (1 How.) bankruptcy case without waiting for a since that date. 265, 277, 11 L.Ed. 126 (1843). The Su- creditor to file an involuntary petition Klein ments in United States bankruptcy law preme Court cited against the debtor. Justice Catron, sitting this provision constitutional in The second landmark major develop- The third major landmark development The first major development, which was Louisville Joint Stock Land nature.’’ case by or with respect to a solvent debtor has always been permitted under bank- law enacted in the United States and un- ruptcy law, both under every bankruptcy these extensions of bankruptcy law were of cy law changes, the filing of a bankruptcy In the words of the Supreme Court itself, der every prior law enacted in England. Clause was written into the Constitution. that known in 1787 when the Bankruptcy landmark change in bankruptcy law from no support to the thesis that, as a constitu- tional matter, congressional power to pro- a ‘‘fundamental and radically progressive Bank v. Radford, Radford, omy). 295 U.S. at 587–88, 55 S.Ct. 854; ruptcy Power, and thus is constitutional. Continental Illinois, 294 U.S. at 671, 55 ments comes within the ambit of the Bank- S.Ct. 595. very recently stated that the Constitution should not be restricted to a particular generation’s interpretation of the Constitu- 295 U.S. 555, 588, 55 tion: ‘‘As the Constitution endures, per- sons in every generation can invoke its Court found that each of these develop- 294 U.S. at 671, 55 S.Ct. 854, 79 L.Ed. 1593 (1935) (quoting Texas statute prohibiting same-sex sod- (2003) (finding due process violation in S.Ct. 595). Nonetheless, the Supreme ––– U.S. ––––, 123 S.Ct. 2472, 2484, 156 L.Ed.2d 508 Lawrence v. Texas, freedom.’’ Continental Illinois, principles in their own search for greater vide bankruptcy protection must be limited Supreme Court case law likewise gives Each of these provisions constituted a In contrast to these landmark bankrupt- More generally, the Supreme Court has F. Supreme Court Case Law 25. The various reorganization provisions en- were substantially revised in the Chandler Act acted over several years beginning in 1933 of 1938. IN RE MARSHALL

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) to those who are insolvent, whether under Wright v. Union Central Life Ins. Co., See, e.g., formulation of the Constitution. Powers are not limited to the meaning of consistently held that the Bankruptcy The Supreme Court has repeatedly and consistently taken an expansive view of the at 668, 55 S.Ct. 595. Bankruptcy Powers, to permit their appli- Continental Illinois, cation in the context of the enormous ex- pansion of the economy since 1787 and the correspondingly great elaboration of the rupt laws of England, yet they granted legal structures supporting it: 304 U.S. 502, 58 S.Ct. 1025, 82 L.Ed. 1490 the term ‘‘bankruptcy’’ at the time of the Adair v. Bank of America NTSA, Even a balance sheet test or otherwise. Constitution were familiar with Black- (1938); stone’s Commentaries, and with the bank- if the English bankruptcy law in effect in 187, 22 S.Ct. 857 (‘‘The framers of the 1787 had limited bankruptcy to debtors who satisfied an insolvency test, this would Hanover National Bank, not be determinative in this case more 889 (1938); than two centuries later. 303 U.S. 350, 354, 58 S.Ct. 594, 82 L.Ed. at ^[26] Whether a clause in practice upon the subject long since has been dispelled nature of the particular clause in ques- the rules of the English law as they existed when the Constitution was adopted depends upon the terms or the tion. to the then existing English law and the Constitution is to be restricted by intended to limit the power of Congress TTTT Constitution, by the bankruptcy clause, [T]he notion that the framers of the The United States Supreme Court has 1. Expansive Supreme Court Statements attempt to do so now would result in little core, as a general rule, the Supreme Court (1982) (plurality opinion). Beyond this U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 458 tion Co. v. Marathon Pipe Line Co., Northern Pipeline Construc- ’’ TTTT tions ‘‘the restructuring of debtor-creditor rela- er, according to the Supreme Court, is it by the language [that they] used.’’) subject of ‘bankruptcies,’ and did not limit Gibbons, 455 U.S. at 466, 102 S.Ct. 1169 plenary power to Congress over the whole (emphasis added, quotations and citations has said, ‘‘the subject of bankruptcies is incapable of final definition.’’ omitted). 304 U.S. at 513, 58 S.Ct. Gibbons v. Union Central, ward its full meaning.’’). In 1025; accord Wright the Continental Illinois, U.S. at 466, 102 S.Ct. 1169; 669–70, 55 S.Ct. 595 (‘‘[t]hose limitations the Constitution without advancing far to- more than a paraphrase of the language of have never been explicitly defined, and any 455 Gibbons, 294 U.S. at Supreme Court stated: this the States were forbidden to do. The core of the federal bankruptcy pow- impair the obligation of contracts, and grant to Congress involves the power to gress’ power under the Bankruptcy tending to his and their relief. Con- from his contracts and legal liabilities, as [W]e have previously defined ‘‘bankrupt- cludes the power to discharge the debtor cy’’ as the subject of the relations be- the debtor among his creditors. It in- causes to be distributed, the property of tween an extends to all cases where the law insolvent or nonpaying or fraudulent debtor and his creditors, ex- Clause contemplates an adjustment of a well as to distribute his property. The failing debtor’s obligations. This power 26. The court has found no relevant case law Bankruptcy Appellate Panel. from the Ninth Circuit or the Ninth Circuit 300 BANKRUPTCY REPORTER In Moyses, the Court added that the (1991), to state that one Congressional debtor ‘‘may be, in fact, fraudulent, and purpose of chapter 11 is ‘‘permitting busi- able and unwilling to pay his debts; but ness debtors to reorganize and restructure the law takes him at his word, and makes their debts in order to revive the debtors’ effectual provision, not only by civil, but businesses and thereby preserve jobs and even by criminal, process, to effectuate his protect investors.’’ Id. at 163, 111 S.Ct. alleged intent of giving up all his proper- 2197. In addition, the Court said in that case: ty.’’ Id. at 861. Thus the ‘‘subject of bankruptcies’’ includes the power to dis- Chapter 11 also embodies the general charge a debtor from contracts and legal Code policy of maximizing the value of liabilities, and to distribute the debtor’s the bankruptcy estate. Under certain property to creditors. Id. at 188, 22 S.Ct. circumstances a consumer debtor’s es- 857 (upholding the constitutionality of the tate will be worth more if reorganized Bankruptcy Act of 1898 insofar as it au- under Chapter 11 than if liquidated un- thorized the discharge of a judgment on a der Chapter 7. Allowing such a debtor to proceed under Chapter 11 serves the promissory note). The Court in Moyses also stated: ‘‘all intermediate legislation, congressional purpose of deriving as much value as possible from the debtor’s affecting substance and form, but tending to further the great end of the subject,— estate. distribution and discharge,—are in the Id. The Court used this rationale in Toibb competency and discretion of Congress.’’ to hold that individual consumers, like the Id. at 186, 22 S.Ct. 857 (quoting In re debtors in this case, are entitled to take Klein, 14 F.Cas. No. 716 (D.Mo.1843), re- advantage of chapter 11 to reorganize printed in a note to Nelson v. Carland, 42 their financial affairs, even though they U.S. (1 How.) 265, 277, 11 L.Ed. 126, 130 may have no business to reorganize. See (1843)). id. at 160–66, 111 S.Ct. 2197. The Court further stated in Continental Similarly, in Bank of America NTSA v. 203 N. LaSalle St. P’ship, 526 U.S. 434, Illinois that bankruptcy ‘‘may be con- 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999), the strued to include a debtor who, although Court stated that, ‘‘the two recognized pol- unable to pay promptly, may be able to icies underlying Chapter 11[are] preserv- pay if time to do so be sufficiently extend- ing going concerns and maximizing proper- ed,’’ i.e., a solvent debtor. Id. at 668, 55 ty available to satisfy creditors TTTT ’’ Id. at S.Ct. 595. There is no reason to believe 453, 119 S.Ct. 1411. that the bankruptcy laws of the nineteenth century exhausted congressional power un- The debtors in this case at least qualify der the Bankruptcy Clause. See id. as ‘‘nonpaying’’ debtors, in the terminology of Gibbons, and they certainly appeared to The Supreme Court has also spoken on be failing when they filed their case. If the essential purposes of chapter 11, under they enjoy a bonanza from their chapter 11 which the debtors filed this case. In plan, it will result from Pierce’s refusal to NLRB v. Bildisco & Bildisco, 465 U.S. file a claim on his $12 million Texas judg- 513, 527, 104 S.Ct. 1188, 79 L.Ed.2d 482 ment. (1984), the Court stated that the policy of chapter 11 is to permit the successful reha- Furthermore, the court finds that the bilitation of debtors. The Court elaborat- chapter 11 plan in this case maximizes the ed this policy in Toibb v. Radloff, 501 U.S. property available to satisfy creditors. At 157, 111 S.Ct. 2197, 115 L.Ed.2d 145 the time of filing, it was not at all clear IN RE MARSHALL

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) that the debtors could pay their creditors provision, the Supreme Court found, was ^[27] ruptcy Powers. Amendment. unconstitutional a provision of bankruptcy the Just Compensation clause of the Fifth law is Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 rights of mortgage holders in violation of L.Ed. 1593 (1935), which invalidated the Frazier–Lemke addition to the 1898 Act Court held that bankruptcy legislation ex- that permitted a farmer to pay rent in- it constituted a taking of existing property stead of mortgage payments for five years and then retire the mortgage by paying existing on the date of enactment, and thus only the (likely reduced) fair market value that Congress applied it only to mortgages See id. Clause, these cases shed little light on any relevant limitations on Congress’ Bank- gress’ powers under the Bankruptcy in full. The plan settles this issue. 1169, 71 L.Ed.2d 335 (1982), the Supreme 455 U.S. 457, 469–73, 102 S.Ct. Gibbons, at 589–602, 55 S.Ct. its constitutional powers in legislating on cases holding that Congress has exceeded of the property. The principal vice of this the subject of bankruptcy. In light of the foregoing expansive descriptions of Con- 854. Perhaps the best known case holding In Railway Labor Executives’ Ass’n v. There are very few Supreme Court 2. Cases Finding Bankruptcy Provisions Unconstitutional 458 U.S. 50, 102 S.Ct. 2858 (1982), where action and assigning it to a specialized 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 struction Co. v. Marathon Pipe Line Co., (1989), the Supreme Court held that the Id. bankruptcy power did not permit Congress Northern Pipeline Con- Also well known is to eliminate a party’s Seventh Amendment at 61, 109 S.Ct. 2782. jury trial right by relabeling the cause of court in equity. for United States Trustees (employed in 38 F.3d 1525, plicitly applying to a single (albeit large) debtor, and no other similarly situated debtors, unconstitutionally violated the uniformity requirement of the Bankruptcy Clause. A bankruptcy law, the Supreme Court held, must at least apply uniformly to a defined class of debtors. See id. at 473, 102 S.Ct. 1169. But see Regional Rail Reorganization Cases, 419 U.S. 102, 158–60, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974) 1531–32 (9th Cir.1994). (holding that bankruptcy statute governing not violate Uniformity Clause when no railroad reorganization was pending out- side that region). Similarly, the Ninth Circuit has held that § 317(a) of the Judi- cial Improvements Act of 1990, which au- thorizes bankruptcy administrators (em- ployed by the judicial branch) to substitute the Department of Justice) in two states alone (North Carolina and Alabama) vio- lates the Uniformity Clause. See St. An- gelo v. Victoria Farms, Inc., railroad reorganization in one region did the Supreme Court found in 1982 that the Granfinanciera, S.A. v. Nordberg, In 27. See also United States v. Security Industrial actment. See id. at 82, 103 S.Ct. 407. But Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d see Webber v. Credithrift (In re Webber), 674 235 (1982), where the Supreme Court con- F.2d 796 (9th Cir.1982), in which the Ninth strued narrowly the provision in § 522(f) that Circuit held that a debtor may take advantage permits a debtor to avoid the fixing of a lien of § 522(f) to avoid the fixing of a lien on an on an interest of the debtor in property, to the interest in property that impaired an exemp- extent that the lien impairs an exemption. tion, where the lien had been fixed before the The Court held that, to avoid a likely violation effective date of the Bankruptcy Code (and of the Just Compensation Clause of the Fifth § 522(f)) but after the enactment of the Code. Amendment, this provision must not permit See id. at 803–04. the avoidance of liens existing before its en- 300 BANKRUPTCY REPORTER Bankruptcy Clause did not authorize Con- G. Substantive Due Process gress to grant bankruptcy jurisdiction to Pierce contends that Howard’s bank- judges lacking Article III tenure. ruptcy case deprives him of his substantive due process rights, thereby invoking ‘‘dor- There are also very few lower court mant’’ substantive economic due process decisions finding a bankruptcy law provi- rights that have disappeared from Su- sion unconstitutional. There is one con- preme Court jurisprudence since the temporary example. A battle rages 1930’s. The Fifth Amendment provides, in among lower courts today on whether relevant part, ‘‘nor shall any person TTT be rights clearly legislated under the Bank- deprived of life, liberty or property, with- ruptcy Clause can be enforced under out due process of law TTTT ’’ Under this § 106(a) in federal court against state gov- theory, the Fifth Amendment is a limita- ernments in light of the Eleventh Amend- tion on the scope of ‘‘the subject of bank- ment (constitutionalizing state sovereign ruptcies.’’ immunity) and case law thereunder. In Hood v. Tennessee Student Assistance Recent Supreme Court decisions make it Corp. (In re Hood), 319 F.3d 755, 761–68 clear that substantive due process is alive (6th Cir.), cert. granted, ––– U.S. ––––, 124 and well in its jurisprudence, insofar as it S.Ct. 45, 156 L.Ed.2d 703 (2003), the Sixth concerns individual rights and liberties. Circuit held that the Bankruptcy Clause See, e.g., Lawrence v. Texas, ––– U.S. authorized Congress, notwithstanding the ––––, 123 S.Ct. 2472, 2484, 156 L.Ed.2d 508 Eleventh Amendment, to abrogate state (2003) (finding due process violation in sovereign immunity in bankruptcy mat- Texas statute prohibiting same-sex sod- ters. In contrast, the following circuit omy). In contrast, substantive economic court decisions have held that the Elev- due process remains sound asleep in Su- enth Amendment prevents Congress from preme Court jurisprudence. Thus, entire- abrogating state sovereign immunity in ly apart from the particular controversy bankruptcy matters: Nelson v. La Crosse before this court, Pierce faces a steep up- County Dist. Attorney ( In re Nelson ), 301 hill climb to invoke substantive economic F.3d 820, 832 (7th Cir.2002); Mitchell v. due process. Franchise Tax Bd. ( In re Mitchell ), 209 Apparently the only Supreme Court F.3d 1111, 1121 (9th Cir.2000); Sacred case addressing substantive due process Heart Hosp. v. Pennsylvania ( In re Sa- rights in the bankruptcy context is Canada cred Heart Hosp. ), 133 F.3d 237, 243 (3d Southern Ry. v. Gebhard, 109 U.S. 527, 3 Cir.1998); Department of Transportation S.Ct. 363, 27 L.Ed. 1020 (1883), where and Development v. PNL Asset Mgmt. Co. New York bondholders challenged a Cana- LLC ( In re Fernandez ), 123 F.3d 241, 243 dian railroad ‘‘scheme of arrangement’’ (5th Cir.), amended by 130 F.3d 1138, 1139 specially authorized by Canadian statute. (5th Cir.1997); Schlossberg v. Maryland The bondholders had not participated in (In re Creative Goldsmiths), 119 F.3d the Canadian proceeding. The Court 1140, 1145–46 (4th Cir.1997). found that the scheme was ‘‘no more than This case today does not require the is done in bankruptcy’’ in the United court to determine the limits of the Bank- States, and thus that the scheme should be ruptcy Powers granted to the federal gov- enforced in a United States court against ernment in the Constitution. Accordingly, all creditors. See id. at 537–40, 3 S.Ct. the court leaves this issue to another day. 363. The Supreme Court rejected the IN RE MARSHALL

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003) substantive due process challenge to the for which notice by publication and mail satisfy due process requirements. Pierce does not complain of procedural due pro- cess violations in this case. explore in detail the constitutional conse- quences of bankruptcy legislation that falls outside the Bankruptcy Powers of the side the scope of the Bankruptcy Clause, the court assumes without deciding that the law would violate some constitutional provision. However, the court does not reach this issue because the court finds that Congress has the power under the Bankruptcy Clause to determine that a In rem, debtor may invoke rights under the Bank- creditors before the debtor becomes insol- vent under a balance sheet test. the power to extinguish debts and cancel contractual obligations. Under the Arti- cles of Confederation, the states possessed and used this power, to the consternation of many. See Alexander Hamilton, THE FEDERALIST NO. 85, praising the new constitution’s ‘‘precautions against the rep- etition of those practices on the part of the State governments which have undermined the foundations of property and credit, ruptcy Code to adjust obligations with ing, in the nature of proceedings Constitution. If this case were to fall out- ruptcy proceedings are, generally speak- Fifth Amendment clearly apply in the Hanover Nat. 186 U.S. 181, 187, 22 were satisfied. The Court rejected the notice requirements of the Fifth Amend- contention that personal notice of the filing bankruptcy context. In ple, the Supreme Court found that the ment Due Process Clause applied and at 537, 3 S.Ct. 363. Bank v. Moyses, S.Ct. 857, 46 L.Ed. 1113 (1902), for exam- was required. The Court found that bank- arrangement. See id. Procedural due process rights under the The larger constitutional issue concerns ^[4] The court finds it unnecessary to charge debts and contractual obligations. tion); 854, 79 L.Ed. 1593 (1935) (just compensa- 459 U.S. 70, 103 S.Ct. 407, 74 United States v. Security Industrial L.Ed.2d 235 (1982) (same). On the other Bank, See, e.g., Continental Bank v. sovereign, possessed broad power to dis- passing laws that impair the obligation of contracts. morals.’’ The states, because they were sioned an almost universal prostration of Rock Island Ry., 294 U.S. 648, 680, 55 of all classes of citizens, and have occa- S.Ct. 595, 79 L.Ed. 1110 (1935); Webber, 674 F.2d at 802. ‘‘In fact, the very essence of bankruptcy laws is the modification or impairment of contractual obligations.’’ have planted mutual distrust in the breasts hand, Congress is not prohibited from 295 U.S. 555, 55 S.Ct. tion Clauses of the Fifth Amendment. See, e.g., Louisville Joint Stock Land 186 U.S. at 187, 22 Congress over the ‘‘subject of bankrupt- Moyses, cies’’ in Article I, Section 8 is balanced forgiveness. with the prohibition in Article I, Section 10, forbidding states from impairing the new national legislature from unwise debt obligation of contracts. The power to dis- charge debts and contractual obligations was not extinguished: it was surrendered to the federal government. See id. a federal system that would restrain the Bank v. Radford, 674 F.2d at 802. 674 F.2d 796, 802 (9th Cir.1982). with respect to the Bankruptcy Power, in exchange for the checks and balances of between property interests and contract rights. See Webber v. Credithrift (In re rendered it to the new federal government Webber), Webber, In the bankruptcy context, property rights grand bargain of 1787 was that states sur- enjoy at least a measure of protection un- der the Due Process and Just Compensa- S.Ct. 857. Thus, the grant of power to [5–7] What has happened to this power? The There is a significant difference, 300 BANKRUPTCY REPORTER property rights nor contract rights to as- sert against the debtors. He does not even have a claim against the debtors in this case, because he refused to file his claim. He has only a Texas state court judgment that is on appeal. This claim is in danger of discharge if the debtors’ chap- ter 11 plan is confirmed. The court finds that this is an insufficient basis to find a violation of Pierce’s Fifth Amendment eco- nomic substantive due process rights in this case. tutional challenge to the debtors’ bank- ruptcy case and their plan of reorganiza- tion under chapter 11 cannot be sustained. The court finds that the balance sheet test for insolvency was unknown in United States bankruptcy law until 1898, when balance sheet insolvency first entered United States bankruptcy law. thereto, insolvency in the bankruptcy con- text always meant liquidity (or equity) in- at 518, 58 S.Ct. 1025. Id. solvency. clear in 1490 (1938): 304 U.S. 502, 58 S.Ct. 1025, 82 L.Ed. Co., the bankruptcy context, however, is mea- Wright v. Union Central Life Ins. sured. The Supreme Court made this inviolability in the bankruptcy court be- cause created and protected by state The court concludes that Pierce’s consti- law. Most property rights are so creat- In this case, Pierce has neither ^[9] ed and protected. But if Congress is ^[8] are observed. the limitations of the due process clause affect these property rights, provided The protection of property rights in may authorize the bankruptcy court to acting within its bankruptcy power, it Property rights do not gain any absolute IV. Conclusion Prior who is solvent, whether in the balance United States Bankruptcy Appellate Panel a chapter 11 case and to confirm a plan of reorganization. der the Constitution to authorize a debtor sheet sense or in the liquidity sense, to file should be denied. Pierce on his statutory objections to the Silberkraus), 336 F.3d 864, 869 (9th Cir. be confirmed and the motion to dismiss court finds that the chapter 11 plan should 2003), the court HEREBY GIVES NO- Opinion on Plan Confirmation And Motion To Dismiss (Constitutional Issues) in the TICE of the filing of its Second Amended above case, a copy of which is attached. miss based on bad faith. Accordingly, the chapter 11 plan and on his motion to dis- Orvey R. Cousatte, Administrator of Pursuant to The court has previously found against Dressler v. Seeley Co. (In re Viola Carolyn Lucas, Defendant– NOTICE OF FILING SECOND the Estate of Imogene Collier, In re Viola Carolyn LUCAS, Bankruptcy No. 01–12092–7. also known as Carolyn Adversary No. 01–5116. AMENDED OPINION BAP No. KS–02–088. for the Tenth Circuit. Plaintiff–Appellant, , Lucas, Debtor. Oct. 20, 2003. Appellee. v.

idly exercised the Bankruptcy Powers un- ^[10] The court finds that Congress val- proceeding against Chapter 7 debtor, seek- Judgment creditor brought adversary

Case Details

Case Name: Elaine Marshall v. J. Marshall, Iii

Court Name: Court of Appeals for the Ninth Circuit

Date Published: Jun 28, 2013

Citation: 2013 U.S. App. LEXIS 13398

Docket Number: 09-55573

Court Abbreviation: 9th Cir.