Friday, May 25, 2012

Stern v. Marshall: Second Circuit Finds Holding "Narrow"

The United States Court of Appeals for the Second Circuit recently weighed in on the scope of the United States Supreme Court’s influential opinion in Stern v. Marshall, 564 U.S. 2 (2011).  The case before the Second Circuit, In re Quigley Co., 2012 U.S. App. LEXIS 7167 (2d Cir. Apr. 10, 2012), didn't require the Second Circuit to analyze the "precise contours of Stern."  But, significantly, the Second Circuit observed that Stern's holding was "narrow."

In Stern, the Supreme Court held that bankruptcy courts cannot issue final judgments on compulsory state law counterclaims asserted by debtors where such counterclaims would not necessarily be resolved in the adjudication of a creditor's proof of claim.  The Supreme Court noted that bankruptcy courts have the statutory authority to issue final judgments on such counterclaims pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(C).  The Supreme Court held, however, that bankruptcy courts lack the Constitutional authority to issue final judgments on those counterclaims.  Article III district court judges must issue final judgments, not Article I bankruptcy judges.   

To date, two other Circuit Courts of Appeal have issued decisions that discuss the scope of Stern: In re Ortiz, 665 F.3d 906 (7th Cir. 2011) (applying a broad interpretation of Stern's holding); and Technical Automation Services Corp. v. Liberty Surplus Ins. Corp., 673 F.3d 399 (5th Cir. 2012) (applying a narrow interpretation of Stern's holding).  Application of Stern has also been briefed to the Ninth Circuit, which requested supplemental briefing and amicus briefs on the issue of whether Stern prohibits bankruptcy courts from entering a final, binding judgment on fraudulent conveyance claims, but no decision has yet been rendered.  See Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 661 F.3d 476 (9th Cir. 2011).

In Quigley, lawyer Peter Angelos had sued Pfizer Inc., the former owner of an insulation manufacturer, on behalf of asbestos victims.  In 2004, the manufacturer, Quigley Company, Inc., filed a chapter 11 petition in the Southern District of New York.  Pfizer moved to stay the suit and enjoin claims brought during Quigley's bankruptcy case for asbestos-related injuries against both the estate and Pfizer.  Pfizer’s motion cited Bankruptcy Code section 524(g)(4)(A)(ii)(I)-(IV), which provides, inter alia, that bankruptcy courts may issue post-effective date injunctions to “bar any action directed against a third party who . . . is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor . . . by reason of (I) the third party’s ownership of a financial interest in the debtor . . . [or] (II) the third party’s involvement in the management of the debtor . . . or service as an officer, director or employee of the debtor or a related party.”  11 U.S.C. § 524(g)(4)(A).  Section 524(g) was enacted to enable bankruptcy courts to channel asbestos-related claims brought against debtors to special trusts established in connection with plans of reorganization to provide compensation to both present and future claimants.  In re Quigley, 2012 U.S. App. LEXIS 7167 at *7.

The bankruptcy court had enjoined the suits, ruling that the scope of the injunction covered the plaintiffs’ claims for liability under an “apparent manufacturer” theory.  On appeal, the district court reversed, holding that the section 524(g)(4)(A) injunction protected Pfizer only from liabilities actually arising, as a legal matter, from its ownership of the debtor.  In the Second Circuit, Angelos and an amicus party argued that the bankruptcy court lacked the constitutional and statutory jurisdiction to enjoin the pending state court litigations against a non-debtor.  The Second Circuit rejected these arguments, stating that Stern was a “narrow” decision that did not affect bankruptcy judges' ability to enjoin litigation against debtors during the pendency of bankruptcy proceedings: "[w]hatever Stern's precise contours, (a matter we need not reach) we conclude that Stern has no application to the present case.  The Supreme Court in Stern indicated that its holding was a narrow one. . . .  Its facts, moreover, are far removed from the instant action. . . .   [e]njoining litigation to protect bankruptcy estates during the pendency of bankruptcy proceedings, unlike the entry of the final tort judgment at issue in Stern, has historically been the province of the bankruptcy courts."  Id. at *18-19.  

Even so, the Second Circuit affirmed the district court's decision and allowed the claims against Pfizer to proceed.  The Second Circuit held that although bankruptcy courts have jurisdiction over suits against non-debtors that may have a “direct impact” on a bankruptcy estate, Pfizer’s ownership of Quigley was “legally irrelevant” to the “apparent manufacturer” claims at issue, and, therefore, section 524(g)(4)(A) could not be applied to enjoin the claims.  Id. at *42.  

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP

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