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Steve Gubner Quoted in Los Angeles and San Francisco Daily Journal on Law v. Siegel

Steve Gubner was quoted in the following article, which appeared in the Los Angeles and San Francisco Daily Journal on March 31, 2014.

U.S. Supreme Court decision could transform bankruptcy litigation

By John Roemer SAN FRANCISCO – A pending U.S. Supreme Court decision on the powers of bankruptcy judges could upend the well-established system that lets them ease federal trial courts’ toils. If the high court further diminishes the bankruptcy bench’s reach, “district courts risk getting a boatload of cases that they would prefer to have us hear,” according to veteran U.S. Bankruptcy Judge Dennis Montali of San Francisco. Lawyers argued Executive Benefits Insurance Agency v. Arkison, S-1200 – which originated at the 9th U.S. Circuit Court of Appeals – in January.

A key issue is whether bankruptcy judges, who are hired by the court, can exercise the same binding authority to rule on disputes that the Constitution’s Article III grants to federal judges commissioned by Congress. The 9th Circuit concluded that although federal law empowers bankruptcy judges to enter some final judgments, the Constitution forbids it. If the high court agrees, bankruptcy judges will have less clout than Congress has granted them and their powers could not be revived even if the parties agreed to it, according to court watcher Lyle Denniston’s commentary on the case. Chief U.S. District Judge Claudia A. Wilken of the Northern District was brief and blunt. “We hope to keep our bankruptcy court independent, in light of pending Supreme Court cases,” she told a federal bar association group here last week. Beyond potential caseload shifts, the upcoming decision could affect fraudulent transfer actions that often arise when law firms go under. Such suits target parties who may wrongfully receive assets from the defunct firm. They can reap funds for large law firm estates such as those of the former Brobeck Phleger & Harrison LLP and Heller Ehrman LLP. Those estates sued firms that recruited their partners on the theory those firms profited from fraudulent transfers by keeping the fees the partners earned at Brobeck or Heller.

Montali oversees both the Brobeck and Heller bankruptcies. One of the issues in Executive Benefits, although it’s not a law firm case, is whether federal judicial authority exercised by bankruptcy judges can remain effective – even if it is not strictly constitutional – because the parties consent to it, even implicitly. “My law firm cases have involved a number of adversarial proceedings against law firms that haven’t consented,” Montali said last week. “If the Supreme Court says there can be no mechanism of consent, what is my role?” Jones Day, a defendant in a fraudulent transfer suit filed by the Heller estate, argued in a friend of the court brief to the 9th Circuit that district judges should have the final say.

Fearing that he and his colleagues will be unable to make binding rulings and instead will be reduced to merely filing recommendations to federal judges, Montali said, “I’ve heard other bankruptcy judges joke that they didn’t take the job to be a law clerk.” Montali traced the decline to 2011, when the Supreme Court questioned in Stern v. Marshall, 131 S.Ct. 2594, whether bankruptcy judges should be authorized to enter final judgments in fraudulent conveyance cases and some other matters. That case, emerging from former Playboy centerfold Anna Nicole Smith’s marriage to an elderly oil baron, held that Congress cannot authorize bankruptcy judges to enter a final judgment on some state law claims. A further negative outcome in Executive Benefits could question the authority of magistrate judges and even of arbitrators, according to reports of questions the justices asked at oral argument. “That celebrated [Marshall] case, if extended in Executive Benefits, could conclude that the parties’ consent is essential. That would be a worst case, doomsday outcome,” Montali said. He pointed out that federal trial judges already have the authority to take cases away from bankruptcy courts. “It’s called withdrawing the mandate, and they don’t want to do it. If you got inside their heads, they’d rather leave it with us.” The high court issued a decision in a third recent bankruptcy case, Law v. Siegel, 12- 5196, on March 4. It reversed the 9th Circuit 9-0 and held that even a debtor’s serious misconduct wasn’t enough to give the bankruptcy judge authority to use the debtor’s exempt assets to pay for expenses the misconduct caused.

Steven T. Gubner of BG Law LLP in Woodland Hills represented the trustee who sought futilely to recover the expenses. “It’s unimaginable to me that bankruptcy courts can’t rule in these matters,” he said last week. “The bankruptcy system is the best way we have to resolve these things. Now, with the uncertainty the Supreme Court has created, lawyers will be asking whether it is malpractice if they don’t go directly to district courts.” And if the caseload burden shifts to federal trial judges, Gubner said, “You’d have to appoint another 18 district judges in Los Angeles alone just to hear bankruptcy cases.” Jeffrey Rosenfeld, a Bingham McCutchen LLP counsel in Santa Monica, has long followed the Executive Benefits case. “I have no doubt that federal judges are up to the task of hearing bankruptcy cases if they have to,” he said, “but they already have very heavy caseloads. Certainly bankruptcy practitioners are watching this case. If the Supreme Court further narrows bankruptcy courts’ authority, there could be broad implications for how long it will take for future cases to be heard.”

Los Angeles Daily Journal

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