The Bottom Line:
In Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 2011 WL 5244463 (S.D.N.Y. Nov. 2, 2011) (“DSI”), the United States District Court for the Southern District of New York had the occasion to adopt and harmonize the Second Circuit Court of Appeals decision in In re Orion Pictures Corp., 4 F.3d 1095 (2d Cir. 1993) (“Orion”) (articulating factors for determining whether to withdraw the reference under 28 U.S.C. § 157(d)), with the lessons of the recent Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594 (2011) (“Stern”) (narrowing bankruptcy courts’ final adjudicative authority to only “core” matters that implicate public – not private – rights). In DSI, the District Court held that post- Stern, the Orion test – which focused primarily on whether the matter at hand is “core” under 28 U.S.C. § 157(b) – can still be applied. However, the inquiry needs to be expanded to whether the bankruptcy court has the power to finally adjudicate the matter under Stern.
What Happened:
Development Specialists Inc. (“Administrator”), the plan administrator for the bankrupt law firm Coudert Brothers LLP (“Coudert”), commenced an adversary proceeding in the Bankruptcy Court for the Southern District of New York against ten law firms (the “Firms”). The Administrator asserted that the Firms were liable to Coudert for professional fees related to “unfinished business” that former Coudert partners took with them to the Firms. In addition, the Administrator asserted fraudulent conveyance claims against one of the Firms. The legal underpinnings for the Administrator’s claims were New York State partnership, contract, and debtor and creditor law.
Prior to the issuance of the Stern decision in June 2011, the Bankruptcy Court had denied the Firms’ motions to dismiss, as well as their request for direct certification to the Second Circuit. Also prior to the Stern decision, the District Court had denied the Firms’ motions for leave to appeal the Bankruptcy Court’s denial of their motions to dismiss.
Shortly after the Stern decision was issued, the Firms filed a request with the District Court to withdraw the reference and abstain from hearing the case in favor of the New York state courts, or in the alternative, to review the merits of the Bankruptcy Court case de novo. Under 28 U.S.C. § 157(d), a “district court may withdraw… any case or proceeding referred [to the Bankruptcy Court] on its own motion or on a timely motion of any party, for cause shown.” (emphasis added). In deciding whether to grant the Firms’ request, the District Court relied on the 1993 Second Circuit decision in Orion, which laid out a number of factors for courts to consider in determining whether “cause” exists to withdraw the reference. These Orion factors include “whether the claim or proceeding is core or non-core … considerations of efficiency, preferential forum shopping, and uniformity in the administration of bankruptcy law.” In re Orion Pictures Corp., 4 F.3d at 1011. Prior to Stern, the Second Circuit (as well as other courts) concluded that a bankruptcy court’s power to finally adjudicate a matter was premised on whether or not such a matter is “core” under 28 U.S.C. § 157. Following this line of reasoning, Orion’s threshold issue of whether a matter in question is “core” was, in fact, a test of whether the bankruptcy court has jurisdiction to adjudicate the matter.
However, in Stern, the Supreme Court upturned Orion’s premise that a bankruptcy court may adjudicate all matters that are “core” under 28 U.S.C. § 157, holding that a bankruptcy court cannot adjudicate “core” matters that implicate only private rights that will not be necessarily determined in ruling on a proof of claim filed against a debtor’s estate. Stern, 131 S. Ct. at 2594. As with non-core matters, a bankruptcy court may only issue a recommendation for “core” matters implicating private rights, subject to de novo review. Unless parties consent otherwise, only an Article III court can make a final adjudication on core, private matters.
Now comes DSI, in which the District Court reconciled the Stern and Orion decisions, holding that post-Stern, courts may still apply the Orion factors. However, courts must not only determine whether a matter is “core,” but also whether the matter implicates private or public rights. If the matter is core but implicates private rights, the other Orion factors can sway in favor of withdrawal, given that (i) the bankruptcy court does not have final adjudicative authority over such matters and (ii) the district court will in any case need to review the bankruptcy court’s determination de novo.
Applying the revised Orion factors to the facts at hand, as a threshold matter, the District Court held that, although the fee dispute and fraudulent conveyance claims at issue were core, they were premised on application and interpretation of state laws. Thus, under Stern, the Bankruptcy Court did not have constitutional authority to determine these claims. Moreover, prior to the issuance of Stern, the Firms reasonably assumed that they could not challenge adjudicative powers of the bankruptcy court over a dispute that was clearly “core.” As such, the Firms did not knowingly and meaningfully consent to the Bankruptcy Court’s jurisdiction. Applying the remaining Orion factors, the District Court concluded that withdrawal (i) was necessary, (ii) would promote efficiency and would not encourage forum shopping (because the Bankruptcy Court’s determination would have to be reviewed de novo anyway) and (iii) would not interfere with the uniform administration of bankruptcy law (given that the claims in question implicate state law only).
Why the Case Is Interesting:
The extent to which Stern curtails a bankruptcy court’s “core” jurisdiction excites much debate. DSI represents another variant of that debate – the extent to which existing precedent that relies upon “core” versus “non-core” distinctions – continues to apply. DSI allows for the harmonization of existing precedent, albeit as “reimagined” by Stern. In the end, the court applied the Orion factors for withdrawal as supplemented by a Stern inquiry on whether the matter implicates private or public rights.