Wednesday, June 11, 2014

Bankruptcy Judges Can Hear “Stern” Issues! (Sort of): Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agent, Inc.

Bankruptcy Judges Can Hear “Stern” Issues! (Sort of)

Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agent, Inc.

Published on June 11, 2014 by: Ian M. Falcone

On June 10, 2014, the Supreme Court issued its decision in Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agent, Inc. 573 U.S. ___ (2014) that answered the question, “Can a bankruptcy court hear a Stern issue?”  (a “Stern” issue is one that otherwise appears to be a core issue but is based solely on state law rights – a fraudulent conveyance outside the scope of §548 is a good example) The answer is a resounding “sort of.”  

In 1982, Northern Pipeline Constr. Co. Marathon Pipe Line Co., 458 U.S. 50 (1982) the Supreme Court struck down the Bankruptcy Act of 1978 because it attempted to grant certain judicial powers to bankruptcy judges who did not meet the definition of Article III judges (no life tenure, no protection against salary diminution).  Congress subsequently enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984, which attempted to fix this problem by making the bankruptcy courts a division of the district courts (thereby effectively granting Article III powers to the bankruptcy court).

Stern v. Marshall, 131 S.Ct. 2594 (2011) reminded us that Article III of the constitution prohibits Congress from granting bankruptcy courts (non Article III judges) from deciding issues that are not true “core” issues under 11 U.S.C. 157(b).  More importantly, the lack of jurisdiction cannot be cured by legislation.

Since the Stern decision, it has been unclear whether the bankruptcy court has any authority to hear issues such as fraudulent conveyances, that are otherwise “core” issues were it not for the fact that they involve only state law rights. Executive Benefits answers that question.

In Executive Benefits, the trustee asserted that prior to the bankruptcy case, the debtor (Bellingham Insurance Agency, Inc.) had fraudulently conveyed certain assets to Executive Benefits Insurance Agency, Inc. who was not a creditor in the case.  The trustee pursued the fraudulent transfer claims in the bankruptcy court, which ruled in its favor.  Executive Benefits appealed and the district court affirmed (holding that that the bankruptcy court’s decision could be treated as proposed findings of fact and conclusions of law).

The Supreme Court affirmed the district court’s decision stating that although the bankruptcy court could not render a final decision, its decision was reviewed de novo by the district court whose affirmance was sufficient to constitute the final judgment for Article III purposes.  Thus, Executive Benefits confirms that the bankruptcy court can hear Stern issues.   However, their “decisions” are merely findings of fact and conclusions of law that, in compliance with 28 USC 157(b), must be reviewed de novo by the district courts to be considered a final order.

While this is helpful and resolves many concerns, Executive Benefits expressly reserves and does not decide whether litigants can consent to the jurisdiction of the bankruptcy courts subject only to appellate review by the district courts.  We will have to wait for another case to answer that question.

Thursday, January 2, 2014

Mere Judgments - More Of A Problem Than You Think?

Mere Judgments - More Of A Problem Than You Think?

Published on January 2, 2014 by: Ian M. Falcone

O.C.G.A. §9-12-80 states:  "All judgments obtained in the superior courts, magistrate courts, or other courts of this state shall be of equal dignity and shall bind all of the property of the defendant in judgment, both real and personal, from the date of such judgments except as otherwise provided in this Code."  Notice, that the statute says "from the date of such judgments."  It does not say "from the entry of a writ of fieri facias."  Thus, in Georgia, it appears that a mere judgment constitutes a lien on all of the judgment debtor's real and personal property from the date of its rendition.  (See In re Andrews (13-40491 MDGA) discussing In re Tinsley, 421 F. Supp 1007, 1008 (M.D. GA. 1976), aff'd 554 F. 2d 1064 (5th Cir. 1977).

However, the Georgia recordation statute (O.C.G.A. §9-12-86) states, in relevant part, "No judgment . . . shall in any way affect or become a lien upon the title to real property until the judgment is recorded in the office of the clerk of the superior court in which the property is located . . . and is entered in the indexes to the applicable records in the office of the clerk."  This would appear to be in direct contradiction to the Tinsley opinion.  In fact, the Court in In re National Service Direct, Inc. (National Service Direct, Inc. v Anderson 2005 WL 3465716 (Bankr. N.D. Ga 2005) cited Tinsley when it concluded that a "judgment must be recorded in the General Execution Docket in the county where the real property is located to attach to any real property of the debtor."  The Georgia Supreme Court has subsequently explained that the recordation statute protects only third parties acting in good faith and without notice.  National Bank of Georgia v. Morris-Weathers Co, 248 Ga 798 at 799 (1982).

Thus, the correct rule is that "[A]n unrecorded judgment is valid and enforceable between the judgment creditor and the judgment debtor under the effective date statute, O.C.G.A. §9-12-80.  Recordation of the judgment on the general execution docket is the means of perfecting the lien of the judgment against real property, but the lack of recordation "does not mean that the judgment does not exist."  Watkins v. Citizens and Southern National Bank, 163 Ga. App. 468, 294 S.E. 2d 703, 704 (1982) (quoting National Bank of Georgia v. Morris-Weathers Co., 248 Ga. 798, 800, 286 S.E. 2d 17 (9182).  Thus, a lien exists prior to recordation, but it is not perfected until recorded on the general execution docket.  Simply put, the absence of recordation does not eliminate the existence or effect of an unrecorded judgment against the interest of a judgment debtor, as opposed to the interest of third parties, in the property.  See Andrews v. Adcock (In re Andrews) (13-40491  NDGA).

What does this mean to debtor's counsel?  It means that you may need to file a motion to avoid a judgment lien pursuant to 11 USC 522(f) even if no writ of fieri facias has been filed.  This, of course, raises new due diligence concerns.  While most lien searches will reveal the existence of a fi. fa., not all judgments will show up on a credit report.  In fact, even a comprehensive background search (such as those provided by Lexis-Nexis or Westlaw) will only return judgment from participating courts.  Are you entitled to rely on your client's representation that there are no judgments?  Are you required to conduct a search?  Do you have to physically visit all local courthouses if they do not participate in online searches?  There are no easy answers, just questions.  But one thing is for sure, that judgment without a fi. fa. may be more of a problem than you think.