Restructuring

Contributed by Doron P. Kenter.
Earlier this month, we lost Judge Joseph E. Irenas, Senior United States District Judge for the District of New Jersey.  He is remembered as a thoughtful jurist, a dedicated teacher, and a valued mentor.  This blogger had the pleasure of meeting Judge Irenas only briefly, but his dignity and charm were immediately apparent. 
As we extend our condolences to Judge Irenas’s family and to his students, clerks, and colleagues, we at the Stern Files (Wellness Records?) cannot think of a better tribute than to consider one of Judge Irenas’s under-appreciated bankruptcy decisions in Michaelson v. Golden Gate Private Equity, Inc. (In re Appleseed’s Intermediate Holdings, LLC).  Indeed, just last month, that very decision was – finally – reexamined and discussed in Nortel’s chapter 11 case.  Let’s take a look, shall we?
In Appleseed’s, the trustee for the debtors’ post-confirmation litigation trust brought a complaint against thirty-three named nondebtor defendants.  Among the claims were several claims for fraudulent transfer and one for breach of fiduciary duty.  Certain defendants then filed a demand for a jury trial and moved to (i) withdraw the reference and (ii) determine the core/non-core status of the trustee’s claims, arguing that the administration of the bankruptcy case and the adversary proceeding would be compromised if the reference were not immediately withdrawn.  All parties agreed that the four fraudulent transfer claims were core and within the bankruptcy court’s authority to enter a final judgment.  However, a number of the other claims asserted in the trustee’s complaint (both against the moving defendants and against other defendants) were outside the bankruptcy court’s ability to enter a final judgment without the parties’ consent.
Judge Irenas, sitting in the United States District Court for the District of Delaware, appeared to admit that the situation was a challenging one.  Indeed, his “immediate reaction [was] that withdrawing the reference would not promote uniformity because bankruptcy cases are generally handled by bankruptcy judges.”  In considering the implications of leaving the adversary proceeding in the bankruptcy court, however, Judge Irenas recognized that a failure to withdraw the reference could result in a lack of uniformity in administering the bankruptcy case.  If the bankruptcy court were to issue judgments on both types of claims, the district court would be forced to review certain facts de novo (i.e., those that pertained to the non-core claims), while it would apply the more lenient “clearly erroneous” standard to the core claims as to which the bankruptcy court had authority to enter a final judgment.
The challenge, therefore, related to facts that were relevant to both core and non-core (and, presumably, Stern) claims, which could result in the application of different factual findings for the different claims asserted in the same case.  If, for example, a fact was relevant to both core and non-core claims, and the district court found that fact to be “erroneous, though not clearly erroneous,” the district court would be forced to accept that fact as true for the core claim, but reject the very same fact as it pertained to the non-core claim.  Consequently, Judge Irenas withdrew the reference regarding all claims to avoid the potentially strange review that he might otherwise be forced to apply in the event that the bankruptcy court issued a judgment on both core and non-core claims.
It was not until fairly recently that Judge Irenas’s decision was reexamined and considered at any length. (This is not to say that others have not raised similar concerns – Appleseed’s, however, remains largely un-cited.)  In SNMP Research, Inc. v. Nortel Networks, Inc. (In re Nortel Networks, Inc.), SNMP filed suit in Nortel’s bankruptcy case against Nortel and a number of third party nondebtor defendants, alleging that Nortel had engaged in the unauthorized postpetition use, distribution, license, and sale of SNMP’s intellectual property.  SNMP subsequently moved the Delaware district court to withdraw the reference.  After concluding that withdrawal of the reference was not mandatory, Judge Stark considered whether permissive withdrawal was warranted, in light of SNMP’s demand for a jury trial (in particular, against the nondebtors) and in light of the mixed core and non-core claims.
Specifically, Judge Stark recognized that the bankruptcy court had already concluded that SNMP’s claims against the debtors were core, while its claims against Avaya (a nondebtor defendant) were non-core.  Addressing SNMP’s argument that immediate withdrawal would be more efficient for the courts, Judge Stark noted that Judge Irenas’s concern in Appleseed’s “is only pertinent if the core and non-core claims rely on the same issues of fact.”  In SNMP’s action, however, SNMP could only identify one common factual issue among the core and non-core claims – namely, whether the debtors had transferred software to Avaya that contained SNMP’s protected intellectual property.  Judge Stark concluded that even though the “inconsistency described in In re Appleseed’s” could conceivably arise in this case, SNMP’s concern was overstated, speculative, and affected only a small subset of the relevant facts in the case.
It was clear that the reference would have to be withdrawn at some point prior to the jury trial that SNMP had demanded.  Judge Stark, however, declined to withdraw the reference at this early stage in the litigation, deferring withdrawal of the reference until the case was ready for trial (if the matter ever came to that point) because judicial efficiency would be promoted by allowing the case to remain with the bankruptcy court for pretrial matters.  Interestingly, Judge Stark specifically noted that his decision was a “close call”:

The Court recognizes that this resolution is not without its drawbacks. Procedurally, the Bankruptcy Court will be able to enter final judgment on SNMP’s claims against the Debtors, but only issue proposed findings of fact and conclusions of law on its claims against Avaya. See 28 U.S.C. § 157(c). Though such a scenario is not ideal, the Court notes that the complex framework of bankruptcy jurisdiction and the accompanying constitutional limitations make this difficult to avoid in some cases.

Judge Stark’s mild ambivalence regarding withdrawal of the reference points to the difficulty that Judge Irenas and others have identified regarding the ultimate disposition of “mixed” core, non-core, and Stern matters.  As we’ve noted before, there has been no shortage of debate on the issue, and there are any number of solutions.  But even in the wake of Arkison and Wellness, the central question in Appleseed’s remains unsolved – what is the proper disposition of appeals that require mixed standards of review?  Should those challenges at the appellate level guide ex ante decisions in the bankruptcy courts and the corresponding district courts that are asked to withdraw the reference?  What perspectives would truly create the most fair and efficient regime for judicial administration?  Although we may not have the answer, we continue to “nerd out” on these questions, which never cease to fascinate us.  Perhaps that’s the beauty of our common law system; any number of potential outcomes and decisions can be rendered.  And, more importantly, many more important questions remain to be asked.
We continue to appreciate Judge Irenas’s insightful contributions to the discussion, among his many other contributions to the bench and to the bar.  May his memory be for a blessing.