Elaine Marshall v. J. Marshall, Iii

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN THE MATTER OF: J. HOWARD No. 09-55573

MARSHALL, III and ILENE O.

MARSHALL, D.C. No.

Debtors, 8:03-cv-01354-

DOC

ELAINE T. MARSHALL, as Successor

Trustee of the BETTYE B. MARSHALL

Living Trust, Trustee of the J. OPINION

HOWARD MARSHALL, II Marital

Trust Number Two, and Trustee of

the E. PIERCE MARSHALL Family

Trust Created Under BETTYE B.

MARSHALL Living Trust Indenture

Dated October 30, 1990,

Appellant,

v.

J. HOWARD MARSHALL, III and

ILENE O. MARSHALL,

Appellees.

Appeal from the United States District Court

for the Central District of California

David O. Carter, District Judge, Presiding

Argued and Submitted

October 11, 2012—Pasadena, California

2 IN THE MATTER OF: MARSHALL

Filed June 28, 2013

Before: David M. Ebel,* Kim McLane Wardlaw, and

Jacqueline H. Nguyen, Circuit Judges.

Opinion by Judge Nguyen

SUMMARY**

Bankruptcy

The panel affirmed the district court’s affirmance of

bankruptcy court decisions arising from the dispute over the

estate of J. Howard Marshall, II, who left nearly all of his

assets to his son, E. Pierce Marshall, but excluded his wife,

Vickie Lynn Marshall, also known as Anna Nicole Smith,

and his other son, J. Howard Marshall, III, from receiving any

part of his fortune.

The panel held that non-random assignment of the

Chapter 11 case of Howard III and his wife Ilene (Debtors) to

Bankruptcy Judge Bufford, who presided over Vickie’s

Chapter 11 case, was within the court’s discretion and in the

interests of efficiency. The panel held that Judge Bufford did

not abuse his discretion in denying the motion of Pierce’s

widow, Elaine T. Marshall, for recusal.

*

The Honorable David M. Ebel, Senior Circuit Judge for the U.S. Court

of Appeals for the Tenth Circuit, sitting by designation.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

IN THE MATTER OF: MARSHALL 3

For the reasons outlined in the second amended opinion

of the bankruptcy court filed on October 9, 2003, the panel

concluded that the district court correctly affirmed the

bankruptcy court’s confirmation of the Debtors’ Chapter 11

Plan and denial of Elaine’s motion to dismiss with respect to

the constitutional issues raised in the motion.

The panel held that the “Best Interests of Creditors” test

in 11 U.S.C. § 1129(a)(7)(A) did not apply to Pierce or his

Texas fraud judgment against Howard III, where Pierce never

filed a proof of claim in the Debtors’ Chapter 11 proceedings,

and the deadline for doing so had passed by the time the

bankruptcy court confirmed the Plan.

The panel held that the bankruptcy court’s finding that the

Debtors’ Plan was proposed in good faith was not clearly

erroneous, and that the confirmation of the Plan was not an

abuse of discretion. The panel likewise held that the

bankruptcy court’s finding that the Debtors’ Chapter 11

petition was filed in good faith was not clearly erroneous, and

that the bankruptcy court did not abuse its discretion in

denying Elaine’s motion to dismiss.

COUNSEL

G. Eric Brunstad, Jr. (argued), Matthew Joseph Delude, and

Collin O’Connor Udell, Dechert LLP, Hartford, Connecticut;

Jeffrey W. Chambers, Ware, Snow, Fogel & Jackson, LLP,

Houston, Texas, for Appellant.

4 IN THE MATTER OF: MARSHALL

David L. Neale (argued) and Michelle Sharoni Grimberg,

Levene, Neale, Bender, Yoo & Brill LLP, Los Angeles,

California; Anne Wells, Futter-Wells, PC, Santa Monica,

California, for Appellees.

OPINION

NGUYEN, Circuit Judge:

This case marks the third time we have been asked to

intervene in the infamous feud over the estate of the late

Texas oil magnate and billionaire J. Howard Marshall, II (“J.

Howard”). J. Howard died in 1995, leaving nearly all his

assets to his son, E. Pierce Marshall (“Pierce”), but excluding

his young wife, Vickie Lynn Marshall, also known as Anna

Nicole Smith (“Vickie”), and his other son, J. Howard

Marshall, III (“Howard”), from receiving any part of his

fortune. The ensuing controversy, pitting wife against son

and brothers against each other, has defied resolution for

nearly two decades, and has survived almost all of its original

players.

After J. Howard died, Vickie and Howard each

unsuccessfully challenged his will in Texas probate court. In

addition to losing the will contest, Howard suffered a multi-

million dollar judgment after Pierce successfully

counterclaimed against him on the basis of fraud. Following

this loss, Howard and his wife, Ilene, filed for Chapter 11

bankruptcy in the Central District of California. Their case

was assigned to United States Bankruptcy Judge Samuel

IN THE MATTER OF: MARSHALL 5

Bufford, who had previously presided over Vickie’s Chapter

11 bankruptcy case.1

Pierce moved for random reassignment or recusal of

Judge Bufford, objected to Howard and Ilene’s proposed

Chapter 11 Plan, and moved to dismiss the bankruptcy action.

Judge Bufford published three separate opinions: (1) denying

Pierce’s motion for reassignment or recusal; (2) confirming

the Plan and denying Pierce’s motion to dismiss with respect

to his constitutional arguments; and (3) confirming the Plan

and denying Pierce’s motion to dismiss with respect to his

statutory arguments. Pierce appealed to the district court,

which affirmed the bankruptcy court’s decisions in all

respects on March 18, 2009.

Appellant Elaine T. Marshall (“Elaine”),2 Pierce’s widow,

now appeals the district court’s decision, contending that the

district court erred in affirming the bankruptcy court’s orders

because: (1) there was no basis for non-random assignment

of the case to Judge Bufford, and alternatively, Judge Bufford

should have recused himself on account of apparent bias; (2)

Howard and Ilene’s Chapter 11 petition and proposed Plan

1

Vickie filed for bankruptcy protection in the Central District of

California while her probate claims were still pending in the Texas court.

Pierce filed a proof of claim, and Vickie successfully counterclaimed

against him for tortious interference with an expectancy. Vickie’s case

was extensively litigated, including twice before the Supreme Court, and

is not now before us. W e nevertheless discuss certain aspects of her

bankruptcy case to the extent they are relevant to this appeal.

2

Pierce died in 2006. Elaine appears in her capacity as Successor

Trustee of the Bettye B. M arshall Living Trust, Trustee of the J. Howard

Marshall, II Marital Trust Number Two, and Successor Trustee of the E.

Pierce Marshall Family Trust Created Under the B ettye B. Marshall

Living Trust Indenture Dated October 30, 1990 (collectively “the Trusts”).

6 IN THE MATTER OF: MARSHALL

were unconstitutional; and (3) Howard and Ilene’s Chapter 11

petition and proposed Plan were filed in bad faith. We have

jurisdiction pursuant to 28 U.S.C. § 158(d), and we affirm.

BACKGROUND

I.

THE VICKIE LYNN MARSHALL CASE

In the Texas probate court, Vickie claimed that she was

entitled to a portion of J. Howard’s estate, and that Pierce had

tortiously interfered with her expectancy of a gift from her

husband. While the probate case was pending, she filed for

bankruptcy in California, and the matter was assigned to

Judge Bufford. Pierce filed a proof of claim, arguing that he

held a defamation claim against Vickie that was not subject

to her bankruptcy discharge. Vickie counterclaimed,

contending, as she had in probate court, that Pierce tortiously

interfered with her expectancy of a gift from J. Howard.

Judge Bufford dismissed Pierce’s proof of claim against

Vickie, and proceeded to consider Vickie’s counterclaim

against Pierce. Over the course of the bankruptcy

proceedings, Judge Bufford determined that Pierce had

engaged in various discovery abuses and issued both

monetary and non-monetary sanctions against him.3

In September 1998, Pierce moved to withdraw the case

from bankruptcy court. District Judge William D. Keller

3

Specifically, Judge Bufford found that Pierce (a) destroyed documents;

(b) failed to respond to discovery requests; (c) failed to produce a privilege

log and documents in camera; and (d) failed to produce documents held

by J. Howard’s attorneys.

IN THE MATTER OF: MARSHALL 7

withdrew the bankruptcy reference in part4 in October 1998,

after which Judge Bufford stated his intent to submit a

memorandum to “assist [Judge Keller] in his review of the

matter.” On February 1, 1999, Judge Keller stayed Judge

Bufford’s prior sanctions orders. The next day, Judge

Bufford declared the stay invalid and issued terminating

sanctions against Pierce on Vickie’s tortious interference

counterclaim as a result of Pierce’s purported discovery

abuses. On March 9, 1999, Judge Keller vacated and

remanded Judge Bufford’s initial sanctions order, citing a

lack of evidence. Then, after acknowledging receipt of Judge

Bufford’s memorandum, Judge Keller vacated his order

withdrawing the bankruptcy reference.5 On May 20, 1999,

Judge Bufford entered a final sanctions order, once again

deeming many of Vickie’s allegations established as a

sanction against Pierce.

Judge Bufford then held a five-day hearing on Vickie’s

counterclaim. On the first day, Judge Bufford conducted an

unusual press conference of sorts on the record, where he

responded to reporters’ questions, noted that the case was

related to the Texas probate litigation, and explained the

procedures by which reporters could obtain public records or

court filings. Approximately eleven months later, Judge

4

Judge Keller’s October 21, 1998 minute order granted Pierce’s motion

to withdraw with respect to Pierce’s defamation claim and Vickie’s

counterclaim. Vickie’s Chapter 11 petition, Pierce’s proof of claim, and

aspects of Pierce’s defamation claim that pertained to dischargeability of

debt, as well as all pending discovery matters were to remain before the

bankruptcy court. The minute order also indicated that “[a]ll discovery

matters which the bankruptcy judge determines are necessary to the ‘core’

bankruptcy proceedings . . . shall proceed before the bankruptcy court.”

5

The contents of the memorandum remain undisclosed.

8 IN THE MATTER OF: MARSHALL

Bufford entered judgment in Vickie’s favor and against

Pierce in the amount of $449,000,000, with an additional

punitive damages award of $25,000,000. See Marshall v.

Marshall (In re Marshall), 257 B.R. 35, 39, 40 (Bankr. C.D.

Cal. 2000).6 Judge Bufford acknowledged that the damages

were “mainly based” on facts that were presumed to be true

by virtue of his final sanctions order.7

Several months later, the Texas probate court rendered

judgment in favor of Pierce in the probate case, ordering

Vickie to pay Pierce’s attorneys’ fees in the amount of

$541,000. The Probate Court later modified its order to

specify that the fee award arose solely out of conduct that

occurred after Vickie’s bankruptcy discharge. However,

Judge Bufford overturned the probate court’s fee award,

finding that it violated Vickie’s bankruptcy discharge and was

barred by judicial estoppel. The district court affirmed Judge

Bufford’s decision, but we reversed and remanded, finding

that the attorneys’ fees award did not violate Vickie’s

bankruptcy discharge, as it was based solely on conduct that

occurred after the discharge. Marshall v. Marshall (In re

Marshall), 119 F. App’x 136 (9th Cir. 2004).

6

The Supreme Court ultimately held that the bankruptcy court lacked

constitutional authority to enter a final judgment on Vickie’s common law

tort counterclaim. Stern v. Marshall, 131 S. Ct. 2594, 2601 (2011).

7

Judge Bufford sua sponte withdrew the final sanctions order on

January 18, 2000. However, his October 6, 2000, decision on Vickie’s

tortious interference counterclaim identified a number of factual findings

the court deemed established as discovery sanctions against Pierce.

IN THE MATTER OF: MARSHALL 9

II.

THE J. HOWARD MARSHALL III CASE

Howard also challenged J. Howard’s estate plan, arguing

that, inter alia, Pierce had exerted undue influence over their

father for years, the estate plan had been formulated under

duress, and the will was invalid and unenforceable. In his

capacity as trustee of the Trusts, Pierce filed a fraud

counterclaim against Howard.8 After a lengthy trial, the jury

found in favor of Pierce, and the probate court entered a

Second Modified Final Judgment against Howard (“the Fraud

Judgment”) on December 7, 2001. At the time Howard and

Ilene filed their bankruptcy petition, the Fraud Judgment

exceeded twelve million dollars.9

Howard filed an appeal in the Texas courts, and on

January 31, 2002, moved to stay execution of the Fraud

Judgment, or in the alternative, to lower the amount of

security for a supersedeas bond. As part of that motion,

Howard submitted a sworn affidavit attesting to a total net

worth of $22,413,220. Elaine contends that the parties

engaged in numerous efforts to negotiate a potential

8

Howard claimed that J. Howard had orally promised to divide his

estate equally between his two sons after Howard agreed to sell back to J.

Howard voting shares of Koch Industries. In his fraud counterclaim,

Pierce argued that J. Howard had disinherited Howard in 1980, that no

such oral promise was ever made, and that Howard purposely sold his

shares back to J. Howard in order to later concoct the claim that the sale

was consideration for his father’s oral promise to divide his estate equally

between his sons.

9

The probate court’s modified Fraud Judgment reflects a substantial

reduction from the jury’s original $34 million judgment against Howard.

10 IN THE MATTER OF: MARSHALL

settlement, which eventually resulted in an agreement to stay

enforcement in return for a $10.4 million bond, but that

Howard ultimately reneged on the agreement when he was

unable to finance the bond. Pierce moved to enforce the

Fraud Judgment, and at a July 18, 2002, hearing, the probate

court suggested that Howard voluntarily move assets to Texas

to satisfy the judgment. The probate court scheduled another

hearing for July 25, 2002 to consider whether it would order

Howard to transfer assets to Texas.

On July 23, 2002, Howard and Ilene (collectively, “the

Debtors”) filed a Chapter 11 bankruptcy petition in the

Central District of California. In connection with the petition,

they filed a Statement of Related Cases and an addendum

noting that Vickie’s bankruptcy case involved a similar

factual background and many of the same principal parties as

their case. The Clerk assigned Howard and Ilene’s case to

Judge Bufford.

III.

E. PIERCE MARSHALL ’S MOTION FOR RECUSAL AND

REASSIGNMENT

Several months later, Pierce moved for random

reassignment of the case, or alternatively, recusal of Judge

Bufford, pursuant to 28 U.S.C. § 455(a) and the Due Process

Clause. Judge Bufford denied Pierce’s motion at an October

29, 2002 hearing. He subsequently issued an Order to Show

Cause (“OSC”) why the motion should not be denied on the

basis of standing because Pierce had not filed a proof of claim

in Howard and Ilene’s case. After a hearing on the OSC,

Judge Bufford issued a March 27, 2003 amended written

opinion in which he assumed that Pierce had standing

IN THE MATTER OF: MARSHALL 11

(because the time for filing a proof of claim had not elapsed)

and again denied the recusal motion. Pierce never filed a

proof of claim in the Debtors’ bankruptcy case.10

IV.

PIERCE’S OBJECTION TO THE CHAPTER 11 PLAN AND

MOTION TO DISMISS

The Debtors’ initial plan of reorganization listed total

assets of $8,391,904, personal property valued at $6,084,922,

and identified the Texas Fraud Judgment as a disputed

unsecured debt. Howard and Ilene filed an amended plan of

reorganization on April 16, 2003 (“the Plan”). This time, the

Plan provided for full payment of all debts except the Fraud

Judgment, which the Plan proposed should nevertheless be

discharged.

Pierce objected to the Debtors’ proposed Plan on the

grounds that it was unconstitutional and proposed in bad

faith. Pierce argued that Howard and Ilene had initiated

bankruptcy proceedings for the sole purpose of avoiding

enforcement of the Fraud Judgment, that the Debtors

misrepresented the value of assets and liabilities in their

amended plan, and that Howard and Ilene were solvent and

could easily satisfy their financial obligations without resort

to bankruptcy. Citing similar concerns, Pierce also moved to

dismiss the Debtors’ Chapter 11 petition on the grounds of

unconstitutionality and bad faith.

10

Elaine admits that Pierce deliberately refrained from filing a proof of

claim in the Debtors’ case to avoid potential counterclaims such as those

brought against him in Vickie’s case.

12 IN THE MATTER OF: MARSHALL

Howard and Ilene argued that they had filed their suit and

proposed their Plan in good faith, based not only on their

inability to pay the Fraud Judgment, but also on the threat of

future litigation with Pierce and others which they claimed

could cost them upwards of $100 million.

On August 26, 2003, Judge Bufford issued a written

opinion confirming the Debtors’ Plan and denying Pierce’s

motion to dismiss on bad faith grounds. Then, on October 9,

2003, he issued a second amended opinion rejecting Pierce’s

constitutional challenge. Pierce appealed all three of Judge

Bufford’s decisions to the district court, Judge David O.

Carter, presiding, which affirmed on March 18, 2009.11 This

appeal followed.

DISCUSSION

We review de novo a district court’s decision on appeal

from a bankruptcy court. Greene v. Savage (In re Greene),

583 F.3d 614, 618 (9th Cir. 2009). As to the decision of the

bankruptcy court, we apply the same standard of review

applied by the district court. Id. However, we review the

bankruptcy court decision independently and without

deference to the district court’s decision. Strand v. Neary (In

re Strand), 375 F.3d 854, 857 (9th Cir. 2004).

11

Judge Carter denied Pierce’s request for a stay without bond pending

appeal of the bankruptcy opinions. However, we granted a stay pending

decision of the district court and also pending resolution of Vickie’s case

in the Supreme Court (Stern v. Marshall, 131 S. Ct. 2594 (2011)).

Although both decisions have now been rendered, consummation of the

Plan remains stayed pursuant to the district court’s July 27, 2012 Order.

See Order Granting Appellant’s Motion for Stay at 4, In re Marshall, 8:03-

cv-01354-DOC, Docket no. 127 (C.D. Cal. July 27, 2012), ECF No. 127.

IN THE MATTER OF: MARSHALL 13

I.

MOTION FOR REASSIGNMENT OR RECUSAL

We first address Elaine’s contention that the district court

erred in affirming the bankruptcy court’s denial of her Motion

for Reassignment or Recusal. We review the denial of a

§ 455(a) motion for recusal for abuse of discretion. United

States v. Wilkerson, 208 F.3d 794, 797 (9th Cir. 2000). “A

bankruptcy court abuses its discretion if it applies the law

incorrectly or if it rests its decision on a clearly erroneous

finding of material fact.” Brotby v. Brotby (In re Brotby),

303 B.R. 177, 184 (B.A.P. 9th Cir. 2003). “We examine the

bankruptcy court’s conclusions of law de novo and its factual

findings for clear error.” BCE W., L.P. v. Smith (In re BCE

W., L.P.), 319 F.3d 1166, 1170 (9th Cir. 2003).

“Clear error exists only when the reviewing court is left

with a definite and firm conviction that a mistake has been

committed.” In re Brotby, 303 B.R. at 184. “If two views of

the evidence are possible, the trial judge’s choice between

them cannot be clearly erroneous.” Lehtinen v. Lehtinen (In

re Lehtinen), 332 B.R. 404, 411 (B.A.P. 9th Cir. 2005). De

novo review applies to Elaine’s claim that Judge Bufford’s

partiality violated due process. See In re Victoria Station

Inc., 875 F.2d 1380, 1382 (9th Cir. 1989).

A.

REASSIGNMENT

Pursuant to 28 U.S.C. § 137, cases are to be assigned

among judges in the manner prescribed by local rules and

general orders of the court. In the Central District of

14 IN THE MATTER OF: MARSHALL

California, General Order 08-05 § 1.2 (2008), which applies

equally to bankruptcy courts, directs the Clerk to assign cases

to judges in the district randomly.12 Gen. Order 08-05 § 1.2

(“The assignment of civil cases shall be completely at random

through the Automated Case Assignment System (ACAS).”).

However, where cases are related, the Clerk is directed to

assign the new case to the same judge who presided over the

prior case.13 Gen. Order 08-05 § 5.2 (2008); Bankr. C.D. Cal.

12

At the time the Debtors filed their bankruptcy petition, the operative

provision was General Order 224 § 1.2 (1993). The terms of that

provision have been consolidated and superseded several times, but now

exist in substantially the same form within General Order 08-05 § 1.2

(2008).

13

In bankruptcy cases, the parties must file a 1015-2 statement of related

cases. Under Local Bankruptcy Rule 1015-2(a) (formerly, Rule 1015-2(1))

cases are deemed “related” if the earlier case was filed or pending before

the new petition was filed and the debtors:

(1) Are the same;

(2) Are spouses, former spouses, domestic partners, or

former domestic partners;

(3) Are “affiliates,” as defined in 11 U.S.C. § 101(2),

except that 11 U.S.C. § 101(2)(B) shall not apply;

(4) Are general partners in the same partnership;

(5) Are a partnership and one or more of its general

partners;

(6) Are partnerships that share one or more common

general partners; or

(7) Have, or within 180 days of the commencement of

either of the related cases had, an interest in property

IN THE MATTER OF: MARSHALL 15

Gen. Order 11-01 (2011) (formerly, Gen. Order 99-02

(1999)).

Elaine contends that assignment of the Debtors’

bankruptcy case to Judge Bufford was improper because the

two cases were not related, notwithstanding the Debtors’

listing of the Vickie case in their 1015-2 Statement of Related

Cases. The Debtors concede, and we agree, that the Debtors’

bankruptcy case is not technically related to Vickie’s case

under Local Bankruptcy Rule 1015-2(a).14 However, the

court has “broad discretion” to interpret the requirements of

its General Orders. United States v. DeLuca, 692 F.2d 1277,

1281 (9th Cir. 1982) (“Because general orders and local rules

not only implement due process and other statutory rights but

also promote efficiency, we permit the district court broad

discretion in determining their requirements.”); United States

v. Torbert, 496 F.2d 154, 157 (9th Cir. 1974) (noting that a

general order requiring random reassignment when a case is

returned to the clerk after a judge is disqualified “is a

housekeeping rule for the internal operation of the district

court which has a large measure of discretion in interpreting

and applying it” (internal quotation marks omitted)). While

not technically “related,” the Debtors’ and Vickie’s

bankruptcy cases involved convoluted facts and issues, many

of which had also been heavily litigated in the Texas probate

court. Assignment of the case to Judge Bufford was within

the court’s discretion and was in the interests of efficiency.

that was or is included in the property of another estate

under 11 U.S.C. § 541(a), § 1115, § 1207, a n d / o r

§ 1306.

14

In fact, the Debtors explained that the cases were not technically

related in the very Statement of Related Cases at issue here.

16 IN THE MATTER OF: MARSHALL

Moreover, judges are vested with “inherent” authority to

transfer cases among themselves “for the expeditious

administration of justice.” United States v. Stone, 411 F.2d

597, 598 (5th Cir. 1969) (per curiam); see also Badea v. Cox,

931 F.2d 573, 575 (9th Cir. 1991) (“District court judges have

broad discretion regarding the assignment or reassignment of

cases.” (internal quotation marks omitted)). Had the

Debtors’case been randomly assigned, it is likely that the

assigned judge would have transferred the case to Judge

Bufford, given his superior knowledge of the complex factual

and procedural history of the parties’ dispute in the Texas

probate court.

Finally, a party has no due process right to random case

assignment or to ensure the selection or avoidance of any

particular judge absent a showing of bias or partiality in the

proceedings. See Cruz v. Abbate, 812 F.2d 571, 574 (9th Cir.

1987) (explaining that “a [party] has no right to any particular

procedure for the selection of the judge[,]” so long as the

decision is made “in a manner free from bias or the desire to

influence the outcome of the proceedings”); Torbert,

496 F.2d at 157 (holding that non-random assignment of a

case did not violate due process, particularly because there

was no showing of actual prejudice resulting from the

procedural irregularity). As discussed infra Section I.B.,

Elaine has not established actual or apparent bias on the part

of Judge Bufford, and was therefore not prejudiced by the

non-random assignment.

IN THE MATTER OF: MARSHALL 17

B.

RECUSAL

Elaine contends that Judge Bufford should have recused

himself from the Debtors’ bankruptcy case pursuant to

28 U.S.C. § 455. Section 455(a) requires recusal when “a

reasonable person with knowledge of all the facts would

conclude that the judge’s impartiality might reasonably be

questioned.” F.J. Hanshaw Enters., Inc., v. Emerald River

Dev., Inc., 244 F.3d 1128, 1144 (9th Cir. 2001).

First, Elaine argues that Judge Bufford failed to apply the

correct legal standard in denying recusal. During a hearing

on the recusal motion, Judge Bufford stated that the

“[a]ppearance of impropriety is not a basis for recusal.” This

was undeniably a misstatement of the law. See Liljeberg v.

Health Servs. Acquisition Corp., 486 U.S. 847, 860 (1988)

(“The goal of section 455(a) is to avoid even the appearance

of partiality.” (quoting Health Servs. Acquisition Corp. v.

Liljeberg, 796 F.3d 796, 802 (5th Cir. 1986))). Proof of

actual bias is not required under § 455(a). Instead, bias

should “be evaluated on an objective basis, so that what

matters is not the reality of bias or prejudice but its

appearance.” Liteky v. United States, 510 U.S. 540, 548

(1994). “It is well established that the recusal inquiry must

be made from the perspective of a reasonable observer who

is informed of all surrounding facts and circumstances.”

Cheney v. U.S. Dist. Ct., 541 U.S. 913, 924 (2004) (emphasis

and internal quotation marks omitted).

Nevertheless, Judge Bufford articulated the correct

standard in his subsequent written opinion and specified that

his denial of recusal was based “on the grounds stated in the

18 IN THE MATTER OF: MARSHALL

court’s decision of this date.” Thus, we find that Judge

Bufford ultimately applied the correct legal standard. The

salient inquiry, then, is whether Judge Bufford abused his

discretion in concluding that his conduct in the Vickie case

did not give rise to an appearance of bias against Pierce that

warranted his recusal from the Debtors’ proceedings.

Elaine contends that Judge Bufford’s impartiality may be

reasonably questioned in light of his handling of Vickie’s

case. Specifically, she claims that Judge Bufford’s rulings

demonstrated partiality towards Vickie, that his issuance of

severe discovery sanctions and “critical” statements against

Pierce and Pierce’s attorney throughout the proceedings

indicated prejudice against Pierce, and that his

communications with the press and the district court evinced

an uncommon interest in the case.

As a preliminary matter, we note that Elaine’s examples

of bias emanate exclusively from Judge Bufford’s rulings and

conduct during Vickie’s case. Insofar as Elaine points to

Judge Bufford’s judicial rulings as evidence of bias, such

“rulings alone almost never constitute a valid basis for a bias

or partiality motion.” Liteky, 510 U.S. at 555. “Almost

invariably, they are proper grounds for appeal, not for

recusal.” Id. Moreover, “the judge’s conduct during the

proceedings should not, except in the ‘rarest of

circumstances’ form the sole basis for recusal under

§ 455(a).” United States v. Holland, 519 F.3d 909, 913–14

(9th Cir. 2008) (quoting Liteky, 510 U.S. at 555).

“[O]pinions formed by the judge on the basis of facts

introduced or events occurring in the course of the current

proceedings, or of prior proceedings, do not constitute a basis

for a bias or partiality motion unless they display a deep-

seated favoritism or antagonism that would make fair

IN THE MATTER OF: MARSHALL 19

judgment impossible.” Liteky, 510 U.S. at 555. We find that

Judge Bufford’s conduct in Vickie’s case does not satisfy this

standard.

For example, Elaine contends that Judge Bufford

advocated for Vickie by ruling in her favor on arguments

neither raised nor briefed by the parties. While Judge

Bufford may have erred in basing certain rulings on

arguments not raised by the parties and without giving the

parties an opportunity to respond, doing so several times in

the course of lengthy and complicated litigation does not

reasonably give rise to an inference that he is advocating for

one side or another. Further, Elaine’s argument suffers from

the fact that neither Vickie nor Pierce were parties to Howard

and Ilene’s bankruptcy case.15 Thus, Judge Bufford’s

purported partiality toward Vickie (or antagonism towards

Pierce), even if true, does not reasonably give rise to an

appearance of bias in Howard and Ilene’s case.

Elaine also argues that, after initially denying Pierce’s

recusal motion, Judge Bufford instigated an improper sua

sponte investigation to find additional grounds for denying

the motion. Judge Bufford issued an OSC why the motion

should not be denied for lack of standing, in light of Pierce’s

failure to file a proof of claim. We find nothing unusual or

improper in the bankruptcy court’s effort to determine

15

As a practical matter, Judge Bufford’s purported bias against Pierce

would not spill over into Howard and Ilene’s bankruptcy case unless and

until Pierce injected himself into the case by filing a proof of claim, which

he had not done by the time Judge Bufford ruled on the recusal motion.

This is true notwithstanding the fact that the time in which to file a proof

of claim had not yet elapsed. Section 455(a) cannot reasonably be read to

require recusal based on speculation that a particular party might

subsequently enter in the case.

20 IN THE MATTER OF: MARSHALL

whether a party has standing to litigate; in fact, such

determination is required. See B.C. v. Plumas Unified Sch.

Dist., 192 F.3d 1260, 1264 (9th Cir. 1999) (“[F]ederal courts

are required sua sponte to examine jurisdictional issues such

as standing.”).

As further evidence of bias, Elaine points to Judge

Bufford’s decisions declaring the district court’s stay of his

initial discovery sanctions ineffective and reimposing

virtually the same sanctions in his Final Sanctions Order.

Presumably, Elaine is insinuating that Judge Bufford openly

defied the district court in order to ensure that Pierce would

remain subject to his virtually insurmountable terminating

sanctions. However, not only are judicial rulings rarely a

basis for recusal, Liteky, 510 U.S. at 555, these particular

rulings cannot reasonably be seen as contravening the district

court’s direction. The district court subsequently adopted

Judge Bufford’s Final Sanctions Order, notwithstanding its

similarity to the initial vacated order, and even increased the

damages award against Pierce. In re Marshall, 275 B.R. 5,

58 (C.D. Cal. 2002), rev’d on other grounds, 392 F.3d 1118

(9th Cir. 2004), rev’d and remanded, sub nom. Marshall v.

Marshall, 126 S. Ct. 1735 (2006), rev’d on remand, 600 F.3d

1037 (9th Cir. 2010), aff’d, sub nom. Stern v. Marshall,

131 S. Ct. 2594 (2011).

With respect to the sanctions themselves, the district

court’s decision to increase Judge Bufford’s sanctions

significantly weakens Elaine’s contention that the heavy

sanctions create an appearance of bias on Judge Bufford’s

part. See Offutt v. United States, 348 U.S. 11, 15–16 (1954)

(holding that heavy sanctions, which were later reduced by a

higher court, constituted “compelling proof” of bias).

Moreover, a reasonable person could find, as the district court

IN THE MATTER OF: MARSHALL 21

did, that Judge Bufford’s decision to sanction Pierce was

based on his perception of Pierce’s bad faith. See United

States v. Yagman, 796 F.2d 1165, 1181–82 (9th Cir. 1986)

(“When [a judge imposes sanctions], the judge will obviously

be dissatisfied with some aspect of the offending attorney’s

conduct[,]” but “[w]ithout more, this natural responsive

attitude does not provide reasonable grounds to question the

judge’s impartiality[.]”). Judge Bufford found that Pierce

committed numerous discovery abuses throughout the Vickie

case. His determination was affirmed by the district court,

and Pierce apparently elected not to raise the issue again on

appeal of that decision to this court.16 See In re Marshall,

392 F.3d 1118 (9th Cir. 2004). The record does not indicate

that Judge Bufford’s findings of sanctionable discovery abuse

were erroneous. Thus, neither the existence nor the scope of

the sanctions suggest that Judge Bufford harbored deep-

seated antagonism against Pierce.

Similarly, Judge Bufford’s comments towards Pierce and

his attorney during Vickie’s case might also be reasonably

seen as the product of Judge Bufford’s frustration

with Pierce’s behavior throughout the litigation. See F.J.

Hanshaw Enters., Inc., 244 F.3d at 1144–45

(“[P]redispositions developed during the course of a trial will

[rarely] suffice.” (citing Liteky, 510 U.S. at 544–45)); United

States v. Conforte, 624 F.2d 869, 881 (9th Cir. 1980)

16

Although the Supreme Court ultimately determined that the

bankruptcy court did not have jurisdiction over Vickie’s counterclaims,

the propriety of the Final Sanctions Order was not ultimately decided in

either venue. See In re Marshall, 600 F.3d 1037, 1046 n.17 (9th Cir.

2010) (noting that the Court’s “discussion of these matters” would be

“limited” as “the parties agreed that there [were] no sanctions issues . . .

on appeal” and because “Pierce . . . [was] entitled to judgment in his favor

for other reasons . . .”).

22 IN THE MATTER OF: MARSHALL

(explaining that recusal under § 455(a) requires a finding of

“an animus more active and deep-rooted than an attitude of

disapproval toward certain persons because of their known

conduct”). For example, Judge Bufford referred to Pierce as

“a Defendant with extremely dirty hands,” told Pierce’s

counsel to bring certain documents to court or “bring [his]

toothbrush,” to bring his “checkbook” to a hearing, and that

he had “substantial experience with the way [Pierce’s] side

has handled cases.” These statements, while potentially

indicative of personal bias, are not serious enough to

overcome the high standard set forth in Liteky:

[J]udicial remarks during the course of a trial

that are critical or disapproving of, or even

hostile to, counsel, the parties, or their cases,

ordinarily do not support a bias or partiality

challenge. They may do so if they reveal an

opinion that derives from an extrajudicial

source; and they will do so if they reveal such

a high degree of favoritism or antagonism as

to make fair judgment impossible.

510 U.S. at 555 (emphasis added).

Elaine also contends that Judge Bufford’s

communications with the press gave rise to an appearance of

partiality. Judge Bufford primarily took questions from

reporters about the procedures for obtaining court documents

and records. These procedural comments, themselves, do not

indicate partiality and are not ethically proscribed. See Code

of Judicial Conduct Canon 3(A)(6) (“This proscription [on

judicial speech] does not extend to public statements made in

the course of the judge’s official duties, to the explanation of

court procedures, or to a scholarly presentation made for

IN THE MATTER OF: MARSHALL 23

purposes of legal education.”); see also United States v.

Microsoft Corp., 253 F.3d 34, 112 (D.C. Cir. 2001)

(distinguishing between “purely procedural matters,” which

the district judge may properly discuss in public, and the

judge’s “views on factual and legal matters at the heart of the

case,” upon which the judge may not publicly comment).

However, the fact that Judge Bufford initiated the “press

conference” at all is highly unusual and of some concern. See

In re Boston’s Children First, 244 F.3d 164, 170 (1st Cir.

2001) (noting that, in highly publicized cases, “even

ambiguous comments may create the appearance of

impropriety” and “[i]n fact, the very rarity of such public

statements, and the ease with which they may be avoided,

make it more likely that a reasonable person will interpret

such statements as evidence of bias”); see also United States

v. Cooley, 1 F.3d 985, 995 (10th Cir. 1993) (holding that a

judge’s deliberate choice to express “strong views” on a

pending case in a media forum “conveyed an uncommon

interest . . . in the subject matter” and “created the appearance

that the judge had become an active participant in [the

litigation]”).

Furthermore, in speaking with the press, Judge Bufford

mentioned the interplay between the Texas probate case and

Vickie’s bankruptcy case, explaining that there were some

overlapping issues that might be resolved in either venue.

Given that the bankruptcy court’s jurisdiction over Vickie’s

counterclaim was in dispute, such statements might be

viewed as commentary on the merits of the case. See In re

Boston’s Children First, 244 F.3d at 170 (concluding that a

judge’s comment that one case was more “complex” than

another could be seen as “a preview of a ruling on the merits

of petitioner’s motion for class certification” and called the

24 IN THE MATTER OF: MARSHALL

judge’s impartiality into question). While there is nothing

wrong with a court providing procedural information to the

press in a highly publicized case, an appearance of

impropriety may be created where a judge voluntarily takes

on that role, especially in open court during the course of the

proceedings.

Still, notwithstanding our concerns, Judge Bufford’s

statements to the press are in and of themselves insufficient

to warrant recusal. The lion’s share of his comments dealt

with courtroom procedures and policies, which is

understandable given the strong media interest in Vickie’s

case. That several of his comments might be construed as a

vague reflection on a disputed jurisdictional issue does not,

alone, compel a finding of apparent bias.

In addition, Elaine makes much of a private

communication Judge Bufford shared with Judge Keller

regarding Pierce’s motion to withdraw the bankruptcy

reference. She argues that, by sending Judge Keller a “secret

memorandum,” Judge Bufford injected himself into the case

under the guise of “assisting” Judge Keller’s decision on

whether to withdraw the reference, evincing an “uncommon

interest and degree of personal involvement” in Vickie’s case.

Cooley, 1 F.3d at 995. However, context matters, and the

record here does not support that conclusion.

In October 1998, Judge Keller issued a minute order

withdrawing the bankruptcy reference in part. The minute

order indicated that the bankruptcy judge would determine

which discovery matters were necessary to “core” bankruptcy

proceedings and should therefore remain before the

bankruptcy court. At a January 1999 hearing, Howard and

Ilene’s counsel reminded Judge Bufford that the bankruptcy

IN THE MATTER OF: MARSHALL 25

court “was going to be coming out with an order with respect

to th[e] Court’s belief as to the jurisdictional responsibilities

. . . which Judge Keller[’s] . . . minute order indicated he was

awaiting.” Judge Bufford clarified that his response to Judge

Keller would “not take the form of an order[,]” but would be

“a memorandum to Judge Keller to assist in his review of the

matter.” Judge Bufford then noted that the memo would be

“an internal document not available to the parties.” After

receiving the memo, Judge Keller noted that “as far as the

memorandum that [Judge Bufford] shared with me, he does

have authority to try everything but the MPI case, as far as I

can tell.” Judge Keller acknowledged that he was “not as

deeply into it from a bankruptcy standpoint as [Judge Bufford

was],” and that Judge Bufford was the one who “kn[ew]

what[ was] going on.”

Although we are not privy to the contents of Judge

Bufford’s communication, this context strongly suggests that

Judge Bufford’s memo dealt with legitimate jurisdictional

issues, and that Judge Bufford was merely responding to a

request made by Judge Keller. At any rate, the record does

not suggest that Judge Bufford was actively trying to retain

jurisdiction over Vickie’s case because of antagonism or

favoritism towards the parties, as opposed to, for example, his

understandable reticence to foist a complex case on the

district court unless it was necessary to do so.

Elaine’s examples of bias are almost exclusively based on

Judge Bufford’s conduct during Vickie’s bankruptcy

proceedings. Taken together, Judge Bufford’s actions are not

indicative of a “deep-seated favoritism or antagonism that

would make fair judgment impossible.” Liteky, 510 U.S. at

555. As such, this case is not one of the “rarest of

circumstances” where judicial conduct in prior proceedings

26 IN THE MATTER OF: MARSHALL

should form the sole basis for recusal under § 455(a).

Holland, 519 F.3d at 914. Judge Bufford’s determination—

that under all of the circumstances a reasonable person would

not question his impartiality—does not reflect an incorrect

application of the law and is not based on clearly erroneous

factual findings. Therefore, we cannot say that Judge Bufford

abused his discretion in denying Elaine’s motion to recuse.17

II.

CONSTITUTIONAL ISSUES

For the reasons outlined in the second amended opinion

of the bankruptcy court filed on October 9, 2003, in the

Central District of California, we conclude that the district

court correctly affirmed the bankruptcy court’s confirmation

of Howard and Ilene’s Chapter 11 plan and denial of Elaine’s

motion to dismiss with respect to the constitutional issues

raised in the motion. See In re Marshall, 300 B.R. 507

(Bankr. C.D. Cal. 2003). Therefore, we adopt the bankruptcy

court’s opinion on Elaine’s constitutional claims, and affirm

the district court’s decision as to the issues addressed therein.

See Appendix A.

17

Furthermore, the record does not suggest that “the probability of

actual bias” on Judge Bufford’s part was “too high to be constitutionally

tolerable[,]” so as to mandate his recusal on due process grounds.

Withrow v. Larkin, 421 U.S. 35, 47 (1975).

IN THE MATTER OF: MARSHALL 27

III.

NON -CONSTITUTIONAL ISSUES

Elaine contends that the bankruptcy court erred in

confirming the Debtors’ Chapter 11 Plan because the Plan

does not satisfy the “Best Interests of Creditors” test and was

proposed in bad faith. Elaine also argues that the bankruptcy

case should have been dismissed because it was filed in bad

faith.

We review the bankruptcy court’s decision to confirm the

Debtors’ Chapter 11 Plan for abuse of discretion. In re

Brotby, 303 B.R. at 184. The bankruptcy court’s ruling on a

motion to dismiss for bad faith is also subject to review for

abuse of discretion. Stolrow’s Inc. v. Stolrow’s Inc. (In re

Stolrow’s, Inc.), 84 B.R. 167, 170 (B.A.P. 9th Cir. 1988). In

both cases, “[t]he question of good faith is factual” and we

review for clear error. Id.; Marsch v. Marsch (In re Marsch),

36 F.3d 825, 828 (9th Cir. 1994) (per curiam).

A.

PLAN CONFIRMATION —BEST INTERESTS OF CREDITORS

TEST

The so-called “Best Interest of Creditors” test requires

that:

[w]ith respect to each impaired class of claims

or interests—

(A) each holder of a claim or interest of such

class—

28 IN THE MATTER OF: MARSHALL

(i) has accepted the plan; or

(ii) will receive or retain under the plan on

account of such claim or interest property of

a value, as of the effective date of the plan,

that is not less than the amount that such

holder would so receive or retain if the debtor

were liquidated under chapter 7 of this title on

such date.

11 U.S.C. § 1129(a)(7)(A).

Because the Plan purported to discharge the Texas Fraud

Judgment without any payment, Elaine contends that the Plan

failed to ensure that Pierce would receive at least as much as

he would have under Chapter 7 liquidation. However, Pierce

never filed a proof of claim in the Debtors’ Chapter 11

proceedings, and the deadline for doing so had passed by the

time the bankruptcy court confirmed the Debtors’ Chapter 11

Plan. Thus, § 1129(a)(7)(A) did not apply to Pierce or to the

Fraud Judgment.

That Pierce would not have been foreclosed from filing a

proof of claim under Chapter 7 is of no moment. See

11 U.S.C. § 726(a)(2) (permitting late-filed claims in Chapter

7 cases). We will not extend the “Best Interests of Creditors”

test to individuals who are only hypothetically creditors,

simply because the statute invokes a hypothetical Chapter 7

liquidation as a point of reference. Were we to go that far, a

Chapter 11 Plan would not be confirmable unless it provided

for all individuals who could potentially be entitled to

distribution. Such a result would be untenable in practice and

would eviscerate the proof of claim filing deadline in Chapter

11.

IN THE MATTER OF: MARSHALL 29

B.

PLAN CONFIRMATION —BAD FAITH

Under 11 U.S.C. § 1129(a)(3), a bankruptcy plan must be

“proposed in good faith and not by any means forbidden by

law.” “A plan is proposed in good faith where it achieves a

result consistent with the objectives and purposes of the

Code.” Sylmar Plaza, L.P. v. Sylmar Plaza L.P. (In re Sylmar

Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir. 2002).

Elaine argues that the Plan was not proposed in good faith

because the Debtors (1) were actually solvent; (2)

misrepresented the true value of their assets; and (3) filed the

petition with the primary purpose of avoiding payment of the

Texas Fraud Judgment.

We agree that the Debtors’ claim of potentially costly

future litigation— including a $5 million Louisiana lawsuit in

which Howard was a named defendant and Pierce’s separate

threat of a $100 million lawsuit—was perhaps too speculative

to support a finding that they were “insolvent.” However,

“insolvency is not a prerequisite to a finding of good faith

under § 1129(a).” Id. at 1074–75. The bankruptcy court

reasonably concluded that the Debtors’ technical solvency did

not bespeak bad faith given that they faced the threat of future

litigation, not to mention their very concrete obligation to

satisfy the Texas Fraud Judgment, amounting to nearly $12

million.

With regard to the Debtors’ purported misstatements on

their asset schedule, the chief example cited by Elaine was

the listing of the value of the Eleanor Stevens Gift Trust

Debenture as “contingent,” despite its prior valuation at

30 IN THE MATTER OF: MARSHALL

upwards of $6 million.18 However, the Debtors’

identification and description of the debenture and other stock

holdings were more than sufficient to put creditors on notice

of the assets so they could investigate further. See, e.g.,

Cusano v. Klein, 264 F.3d 936, 946–47 (9th Cir. 2001)

(holding that, while a debtors must “be as particular as is

reasonable under the circumstances[,]” there are “no bright-

line rules for how much itemization and specificity is

required,” and where the value of assets are unknown, “a

simple statement to that effect will suffice” (citations and

internal quotation marks omitted)); In re Weingarten, No. 05-

01091, 2013 WL 309076, at *12 (Bankr. C. D. Cal. Jan. 25,

2013) (“By listing the asset, even one with an unknown value,

[the debtor] has put parties on notice of these assets and they

can investigate further.”). Further, with regard to the

Debtors’ failure to list certain assets, the bankruptcy court did

not clearly err in finding that the omitted assets—200 shares

of stock, worth roughly $175–180 per share, and Citibank

accounts containing $186,458—were de minimis and

unproven, respectively.

Finally, Elaine argues that the Plan was proposed in bad

faith because the Debtors’ primary purpose was to avoid

paying the Texas Fraud Judgment. However, the only reason

consummation of the Debtors’ Plan would frustrate Elaine’s

18

In addition, while the asset schedule stated the value of the Debtors’

stock holdings as “unknown,” Elaine points to Howard’s Probate Affidavit

which valued his stock holdings in the millions of dollars and a monthly

statement from his investment advisor indicating that Howard’s stock

holdings were worth $5,891,141.65. Elaine also claims that the amended

schedules improperly listed the “book value” of certain assets, rather than

market value and “inexplicably” valued various partnership interests at

just one hundred dollars each. According to Elaine, Howard and Ilene’s

assets actually exceeded their stated liabilities by at least $4,000,000.

IN THE MATTER OF: MARSHALL 31

attempt to collect on the Texas Fraud Judgment was because

Pierce never filed a proof of claim. Significantly, the Debtors

initially included the Fraud Judgment in their Plan, and

amended to provide for discharge of the judgment only after

Pierce failed to file a proof of claim. We find no reason to

conclude that the Debtors knew Pierce would not file a proof

of claim and we see nothing that prevented him from doing

so.

In sum, the bankruptcy court’s finding that the Debtors’

Plan was proposed in good faith was not clearly erroneous

under all the circumstances. Therefore, confirmation of the

Debtors’ Plan was not an abuse of discretion.

C.

MOTION TO DISMISS—BAD FAITH

Under 11 U.S.C. § 1112(b), a Chapter 11 bankruptcy case

may be dismissed “for cause.” “Although section 1112(b)

does not explicitly require that cases be filed in ‘good faith,’

courts have overwhelmingly held that a lack of good faith in

filing a Chapter 11 petition establishes cause for dismissal.”

In re Marsch, 36 F.3d at 828. The good faith requirement

does not depend on a debtor’s subjective intent, but rather

“encompasses several, distinct equitable limitations that

courts have placed on Chapter 11 filings.” Id. Generally, a

plan is not filed in good faith if it represents an attempt “to

unreasonably deter and harass creditors” and to “achieve

objectives outside the legitimate scope of the bankruptcy

laws.” Id.

The question of a debtor’s good faith “depends on an

amalgam of factors and not upon a specific fact.” Id.

32 IN THE MATTER OF: MARSHALL

(quoting Idaho Dep’t of Lands v. Arnold (In re Arnold),

806 F.2d 937, 939 (9th Cir. 1986)). “[T]he courts may

consider any factors which evidence ‘an intent to abuse the

judicial process and the purposes of the reorganization

provisions.’” Phoenix Piccadilly, Ltd. v. Life Ins. Co. of Va.

(In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th

Cir. 1988) (quoting Albany Partners, Ltd. v. Westbrook (In re

Albany Partners, Ltd.), 749 F.2d 670, 674 (11th Cir. 1984)).

A “[d]ebtor bears the burden of proving that the petition was

filed in good faith.” Leavitt v. Soto (In re Leavitt), 209 B.R.

935, 940 (B.A.P. 9th Cir. 1997) (citing In re Powers, 135

B.R. 980, 997 (Bankr. C.D. Cal. 1991)).

Elaine argues that the petition was filed in bad faith and

should have been dismissed. First, Elaine contends that the

timing of the filing, within days of the Texas court’s

suggestion that Howard transfer assets to satisfy the Fraud

Judgment, indicated bad faith. We agree that the timing of

Howard and Ilene’s filing may be an indication that the

Debtors initiated bankruptcy proceedings for the purpose of

avoiding or delaying payment of the judgment. See In re

Leavitt, 171 F.3d at 1225 (finding that the timing of debtor’s

bankruptcy petition, filed within two weeks of judgment,

demonstrated that the debtor’s primary motive was avoidance

of the judgment). However, because the Debtors specifically

included the Texas Fraud Judgment in their initial Plan, it

appears just as likely that they filed their petition in order to

“effect a speedy, efficient reorganization,” and not “to

unreasonably deter and harass creditors.” In re Marsch,

36 F.3d at 828.

In addition, Elaine argues that the Debtors’ sole purpose

in filing the petition was to avoid filing a supersedeas bond

pending appeal of the Texas Fraud Judgment. In Marsch, we

IN THE MATTER OF: MARSHALL 33

held that a petition was correctly dismissed for bad faith

where it “was filed solely to delay collection of the judgment

and avoid posting an appeal bond, even though debtor had the

ability to satisfy the judgment with nonbusiness assets.” Id.

at 831; see also In re Boynton, 184 B.R. 580, 581 (Bankr.

S.D. Cal. 1995) (finding bad faith where petition was filed in

order to evade a tax judgment despite the fact that debtors had

“significant assets” and “may have been able” to post a

bond).

Here, unlike in Marsch and Boynton, the record suggests

that Howard and Ilene’s liquid assets were probably

insufficient to satisfy the judgment or cover the cost of a

supersedeas bond. The bankruptcy court found that the Fraud

Judgment amounted to over $12 million plus interest, that the

“custom” in Texas was to set appeal bonds at 150% of the

judgment, and that Howard did not have sufficient liquid

assets to post a bond of that size. Although the record does

not invariably indicate that the Debtors could not finance a

supersedeas bond, we cannot say that the bankruptcy court’s

determination was clearly erroneous. Moreover,

notwithstanding their ability to finance a bond, Howard and

Ilene’s inclusion of the Fraud Judgment in their initial Plan

suggests that they filed their bankruptcy petition for the

proper purpose of reorganization, not as a mere ploy to avoid

posting the bond.

Finally, Elaine contends that the absence of other

unsecured creditors in the Plan shows that the Debtors filed

their petition in order to avoid having to obtain a supersedeas

bond or pay the Texas Fraud Judgment. See, e.g., Chinichian

v. Campalongo (In re Chinichian), 784 F.2d 1440, 1445 (9th

Cir. 1986); Little Creek Dev. Co. v. Common Wealth Mortg.

Corp. (In the Matter of Little Creek), 779 F.2d 1068, 1073

34 IN THE MATTER OF: MARSHALL

(5th Cir. 1986); In re Silberkraus, 253 B.R. 890, 904 (Bankr.

C.D. Cal. 2000). Indeed, Howard and Ilene paid off at least

$89,000 in unsecured debts the day before filing, and the

Texas Fraud Judgment made up roughly 82% of the Debtors’

total scheduled liabilities.

However, notwithstanding their minimal unsecured debt,

the Debtors’ decision to file for bankruptcy does not indicate

bad faith in light of the size of the Texas Fraud Judgment and

the potential cost of obtaining a bond. As the bankruptcy

court noted, all debtors file for bankruptcy in order to delay

creditor action. Thus, although the Debtors’ main motivation

may have been to ameliorate the burden of the judgment,

given that the Plan proposed payment of the judgment, we

cannot say that they filed a Chapter 11 petition in order to

avoid paying it altogether, or to unduly deter or harass

creditors.19

Moreover, we agree with the bankruptcy court that

“[p]erhaps the most compelling grounds for denying a motion

to dismiss grounded on bad faith is the determination that a

reorganization plan qualifies for confirmation.” This is

because “[a] debtor’s showing that a plan of reorganization is

ready for confirmation essentially refutes a contention that

the case is filed or prosecuted in bad faith.” Id. The

bankruptcy court properly considered the viability of the

Debtors’ proposed Plan as weighing heavily against

dismissal.

19

In support of her motion to dismiss based on bad faith filing, Elaine

also relies on the arguments that the Debtors were solvent and

misrepresented the value of their assets. W e reject these arguments for the

same reasons discussed supra section III.B.

IN THE MATTER OF: MARSHALL 35

Viewing the amalgam of factors together, it is not

“obvious that [the Debtors are] attempting unreasonably to

deter and harass creditors[.]” In re Thirtieth Place, Inc., 30

B.R 503, 505 (9th Cir. B.A.P. 1983) (quoting Matter of

Levinsky, 23 B.R. 210, 218 (N.Y. Bankr. 1982)).

Accordingly, the bankruptcy court’s finding of good faith was

not clearly erroneous, and it did not abuse its discretion in

denying the motion to dismiss.

For the foregoing reasons, the district court’s decision is

AFFIRMED.

APPENDIX A

IN RE MARSHALL 507

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

petition or to proceed to confirmation of

In re J. Howard MARSHALL plan of reorganization.

et ux., Debtors.

2. Bankruptcy O2222.1

No. LA 02–30769–SB.

While Congress is not free to define

United States Bankruptcy Court, contours of bankruptcy without any limita-

C.D. California. tion, insolvency, whether in ‘‘balance

sheet’’ or in ‘‘liquidity’’ sense, is not pre-

Oct. 9, 2003. requisite for the constitutional invocation

of federal bankruptcy jurisdiction.

Trustee of family trust filed his oppo- U.S.C.A. Const. Art. 1, § 8, cl. 4.

sition to proposed Chapter 11 plan filed by 3. Bankruptcy O2022

his brother and his brother’s wife and

United States bankruptcy law is de-

moved to dismiss their bankruptcy case on

signed to provide relief from creditor pres-

ground that they were not insolvent, and

sures for debtors with cash flow difficul-

that Congress could not constitutionally

ties, even when they are clearly solvent

provide for reorganization by solvent debt-

under ‘‘balance sheet’’ test.

ors. Amending and superceding prior opin-

ion, the Bankruptcy Court, Samuel L. Buf- 4. Bankruptcy O2222.1

ford, J., held that: (1) bankruptcy law does

Congress has power under the Bank-

not require that debtor be insolvent, either

ruptcy Clause to determine that debtor

in ‘‘balance sheet’’ or in ‘‘liquidity’’ sense,

may invoke rights under the Bankruptcy

in order to file Chapter 11 petition or to

Code to adjust his obligations with credi-

proceed to confirmation; (2) Congress has

tors before debtor becomes insolvent un-

power under the Bankruptcy Clause to

der ‘‘balance sheet’’ test. U.S.C.A. Const.

determine that debtor may invoke rights

Art. 1, § 8, cl. 4; Bankr.Code, 11 U.S.C.A.

under the Bankruptcy Code to adjust his

§ 101 et seq.

obligations before debtor becomes insol-

vent; and (3) allowing debtors who alleged- 5. Constitutional Law O277(1)

ly were not insolvent, in ‘‘balance sheet’’ Eminent Domain O81.1

sense, to file for Chapter 11 relief and to

Property rights enjoy at least a mea-

obtain confirmation of plan providing for

sure of protection in bankruptcy under the

discharge of their debts would not violate

Due Process and Just Compensation

Fifth Amendment economic substantive

Clauses of the Fifth Amendment.

due process rights of judgment creditor.

U.S.C.A. Const.Amend. 5.

Plan confirmed; dismissal motion de-

nied. 6. Bankruptcy O2015

While property rights enjoy at least a

measure of protection in bankruptcy, Con-

1. Bankruptcy O2223, 3548.1 gress is not barred from passing laws that

Bankruptcy law does not require that impair obligation of contracts.

debtor be insolvent, either in ‘‘balance

sheet’’ sense of having liabilities that ex- 7. Bankruptcy O2015

ceed his assets or in ‘‘liquidity’’ sense of Very essence of bankruptcy laws is

being unable to pay his debts as they modification or impairment of contractual

become due, in order to file a Chapter 11 obligations.

508 300 BANKRUPTCY REPORTER

8. Bankruptcy O2013.1 Validity Called into Doubt

Constitutional Law O306(4) Bankr.Code, 11 U.S.C.A. § 106(a).

Protection of property rights in bank- Limitation Recognized

ruptcy is measured, and Congress, acting Bankr.Code, 11 U.S.C.A. § 522(f).

in its bankruptcy power, may authorize

bankruptcy courts to affect such property

rights, as long as limitations of due process

are observed. U.S.C.A. Const. Art. 1, § 8,

cl. 4; U.S.C.A. Const.Amend. 5.

J. Howard Marshall, III, Ilene Marshall,

9. Bankruptcy O2223, 3549 Pasadena.

Constitutional Law O306(4) Bingham McCutchen, LLP, Julia Frost–

Allowing Chapter 11 debtors who al- Davies, Rheba Rutkowski, Andrew J. Gal-

legedly were not insolvent, in sense that lo, Boston, MA.

their liabilities did not exceed their assets, Bingham McCutchen, LLP, G. Eric

to file for Chapter 11 relief and to obtain Brunstad, Jr., Hartford, CT.

confirmation of plan providing for dis-

charge of their debts would not violate the Bingham McClutchen, LLP, Matthew A.

Fifth Amendment economic substantive Lesnick, Los Angeles.

due process rights of judgment creditor David L. Neale/Anne E. Wells, Levene

who had neither property nor contract Neale Bender Rankin et al., Los Angeles.

rights to assert against debtors, and who,

as result of his refusal to file proof of SECOND AMENDED OPINION ON

claim, did not even have claim against PLAN CONFIRMATION AND MO-

estate, but only a Texas state court judg- TION TO DISMISS (CONSTITU-

ment which was on appeal. U.S.C.A. TIONAL ISSUES)

Const.Amend. 5.

SAMUEL L. BUFFORD, Bankruptcy

10. Bankruptcy O2019 Judge.

Congress validly exercised its bank- I. Introduction

ruptcy powers under the Constitution to In this case Pierce Marshall, as trustee

authorize debtors who are solvent, wheth- for three family trusts (collectively re-

er in ‘‘balance sheet’’ or in ‘‘liquidity’’ ferred to as ‘‘Pierce’’) opposes confirmation

sense, to file Chapter 11 cases and obtain of the chapter 11 1 plan proposed by the

confirmation of reorganization plans. debtors, who are his brother J. Howard

U.S.C.A. Const. Art. 1, § 8, cl. 4. Marshall, III (‘‘Howard’’) and Howard’s

wife Ilene O. Marshall. Pierce also moves

West Codenotes to dismiss the case. Pierce supports both

of these positions with the argument that

Recognized as Unconstitutional this case falls outside the bankruptcy juris-

Pub.L. No. 101-650, 101st Cong., 2d diction of the federal courts under the

Sess. § 317(a) (1990). Bankruptcy Clause of the United States

1. Unless otherwise indicated, all chapter, sec- and to the Federal Rules of Bankruptcy Pro-

tion and rule references are to the Bankrupt- cedure, Rules 1001–9036.

cy Code, 11 U.S.C. §§ 101–1330 (West 2003)

IN RE MARSHALL 509

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

Constitution, because the debtors are sol- father, J. Howard, and an interest in the

vent under a balance sheet test. Notably, Eleanor P. Stevens Irrevocable Gift Trust

Pierce has declined to file a claim on be- (which is described in detail in a full-page

half of the trusts (or on his own behalf) in exhibit). In addition to the quantified

this case. debts, the schedules list nonpriority debts

in unknown amounts owing to Wells Fargo

The court finds that the balance sheet

Bank Texas, the City of Pasadena, a Dallas

test for insolvency was unknown in United

law firm and the Marshall Museum &

States bankruptcy law until 1898, when

Trust.

balance sheet insolvency first entered

United States bankruptcy law. Prior In addition to the $12 million judgment,

thereto, insolvency in the bankruptcy con- Howard had been named as a defendant in

text always meant liquidity (or equity) in- a $5 million lawsuit in Louisiana. Fur-

solvency. thermore, Pierce’s lawyer also sent a letter

to Howard’s lawyer on May 20, 2002 pro-

The court further holds that the Bank- viding substantial detail for another claim

ruptcy Clause of the United States Consti- against Howard exceeding $100 million.

tution does not require that a debtor in

The court set a claims bar date of No-

bankruptcy be insolvent under any test,

vember 15, 2002. Pierce declined to file a

and that the debtors in this case may

proof of claim in this case. Pierce has

constitutionally invoke remedies provided

moved to dismiss this case and has object-

under chapter 11.

ed to the confirmation of the debtors’

II. Relevant Facts chapter 11 plan as amended.

The relevant facts in this case are set Pierce makes both statutory and consti-

forth in the court’s recently issued opinion tutional objections to the confirmation of

on the non-constitutional issues involved in the chapter 11 plan proposed by debtors

the pending plan confirmation and motion Howard and Ilene Marshall. The court

to dismiss. See In re Marshall, 298 B.R. has previously found that the statutory

670 (Bankr.C.D.Cal.2003). The filing of requirements for confirmation are satis-

this bankruptcy case was precipitated in fied, and that the case should not be dis-

part by a judgment in favor of Pierce and missed on good faith grounds. See Mar-

against Howard in the Texas probate case shall, 298 B.R. at 675-684.

of their father J. Howard Marshall II (‘‘J. III. Constitutionality of a Chapter

Howard’’). The judgment, which was then 11 Case for a Solvent Debtor

on appeal, was for $11 million plus costs

Pierce contends that the debtors’ assets

and interest at ten percent. By the filing

exceed their liabilities as of the date of

date of the bankruptcy petition, this debt

filing, and that in consequence they were

totaled more than $12 million.

solvent under a balance sheet test. The

As amended, the debtors’ schedules court finds that determining the accuracy

show assets worth $13,138,311.38 and liqui- of this contention would be very difficult

dated debts of $13,914,112.39. In addition and very time consuming in this case.

to the valued assets, the schedules disclose While for some purposes in bankruptcy it

interests in a revocable family trust, claims is necessary to make such a determina-

made in the probate estate of Howard’s tion,2 in this case no such determination is

2. See § 546(c) (reclamation); § 547(b)(3) (preferential transfer); § 548(a)(1)(B)(ii)(I)

510 300 BANKRUPTCY REPORTER

necessary. For the purposes of the consti- tions: the bankruptcy terrain clearly must

tutional analysis, the court assumes with- have some boundaries. See, e.g., Conti-

out deciding that the debtors were solvent, nental Illinois Nat’l Bank & Trust v. Chi-

in the balance sheet sense, when they filed cago, Rock Island & Pac. Ry. Co., 294 U.S.

this case. 648, 669–70, 55 S.Ct. 595, 79 L.Ed. 1110

[1] As a statutory matter, it is clear (1935).

that the bankruptcy law does not require The test, according to Pierce, is that the

that a bankruptcy debtor be insolvent, ei- Constitution must require that a debtor in

ther in the balance sheet sense (more lia- a bankruptcy case be insolvent under a

bilities than assets) or in the liquidity balance sheet test. Insofar as the Bank-

sense (unable to pay the debtor’s debts as ruptcy Code permits a bankruptcy filing

they come due), to file a chapter 11 case or by a debtor who is balance sheet solvent,

proceed to the confirmation of a plan of according to Pierce, the law falls outside

reorganization. The Ninth Circuit firmly the powers granted by the Constitution to

rejected such a view in Sylmar Plaza the federal government. In such a circum-

where it held, ‘‘insolvency is not a prereq- stance, the Constitution, and not the law,

uisite to a finding of good faith under must govern the case. See Marbury v.

§ 1129(a).’’ Platinum Capital, Inc. v. Syl- Madison, 5 U.S. (1 Cranch) 137, 178, 2

mar Plaza, L.P. (In re Sylmar Plaza, L.Ed. 60 (1803) (‘‘If then TTT the constitu-

L.P.), 314 F.3d 1070, 1074–75 (9th Cir. tion is superior to any ordinary act of the

2002); accord, In re James Wilson Associ- legislature; the constitution, and not such

ates, 965 F.2d 160, 170 (7th Cir.1992) (re- ordinary act, must govern the case to

jecting bad faith challenge to confirma- which they both apply.’’)

tion).

[2] The court finds that neither bal-

Pierce concedes that insolvency is not a

ance sheet insolvency nor liquidity insol-

statutory requirement for filing a volun-

vency is required for the constitutional

tary bankruptcy case under chapter 11.

Instead, he argues that the Bankruptcy invocation of federal bankruptcy jurisdic-

Clause of the United States Constitution tion. The limits on the application of the

can only be invoked by a bankruptcy debt- Bankruptcy Clause lie elsewhere, not in

or who is insolvent under a balance sheet balance sheet insolvency.

test. Pierce argues that the constitutional As a preliminary matter, it is necessary

grant of authority to Congress to enact to distinguish the exercise of powers under

‘‘uniform Laws on the subject of Bankrupt- the Bankruptcy Clause from the exercise

cies throughout the United States’’ 3 is lim- of congressional powers under the Com-

ited to regulating the affairs of debtors merce Clause. These two powers are

who are insolvent in this sense. closely related. See Railway Labor Exec-

Pierce argues that there must be some utives’ Ass’n v. Gibbons, 455 U.S. 457,

content to the Bankruptcy Clause in the 465–66, 102 S.Ct. 1169, 71 L.Ed.2d 335

Constitution. In general terms, this court (1982). However, the conditions for invok-

agrees. On this point Pierce is on solid ing the Commerce Clause are different

ground. Congress is not free to define the from those for invoking the Bankruptcy

contours of bankruptcy without any limita- Clause, and each has its own limitations.

(certain fraudulent transfers); § 553(a) (set- 3. U.S. CONST., art. 1, § 8, cl. 4.

off).

IN RE MARSHALL 511

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

As the Supreme Court has explained, Congress has exceeded its Bankruptcy

‘‘[u]nlike the Commerce Clause, the Bank- Powers and has deprived him of property

ruptcy Clause itself contains an affirmative without due process of law.

limitation or restriction upon Congress’ A. Definition of Insolvency

power,’’ and ‘‘if we were to hold that Con-

gress had the power to enact nonuniform Before undertaking this analysis, we

bankruptcy laws pursuant to the Com- must first address what Pierce means by

merce Clause, we would eradicate from the ‘‘insolvency,’’ because this term has two

Constitution a limitation on the power of commonly used definitions in the bank-

Congress to enact bankruptcy laws.’’ Id. ruptcy context.

at 468–69, 102 S.Ct. 1169. For the purposes of this argument,

Setting aside the Commerce Clause, the Pierce urges the court to adopt the balance

powers granted to Congress under the sheet definition of solvency in

Bankruptcy Clause are expanded by art. 1, § 101(32)(A), which states in relevant part:

§ 8, cl. 18, which grants Congress the ‘‘insolvent’’ means TTT with reference to

power ‘‘To make all Laws which shall be an entity other than a partnership and a

necessary and proper for carrying into municipality, financial condition such

Execution the foregoing Powers TTTT’’ that the sum of such entity’s debts is

See Wright v. Union Central Life Ins. Co., greater than all of such entity’s proper-

304 U.S. 502, 513, 58 S.Ct. 1025, 82 L.Ed. ty, at a fair valuation, exclusive of—

1490 (1938). Theoretically, this provision

(i) property transferred, concealed, or

might be invoked to support the use of the

removed with intent to hinder, delay, or

Bankruptcy Clause in doubtful cases.

defraud such entity’s creditors; and

However, the Supreme Court has never in

fact utilized this approach to determine the (ii) property that may be exempted

constitutionality of bankruptcy provisions. from property of the estate TTTT

The court assumes without deciding that Section 101(32)(A) states the Bankruptcy

Congress was not exercising its Commerce Code version of the balance sheet test for

Clause or its Necessary and Proper Clause Insolvency.4 Under the non-bankruptcy

powers in determining the qualifications version, a debtor is insolvent where its

for filing a bankruptcy case. Thus the liabilities exceed its assets as shown on its

court’s constitutional analysis in this case balance sheet. See BLACK’S LAW DICTIO-

is confined to the Bankruptcy Clause. NARY 799 (7th ed.1999).

To analyze Pierce’s argument, we exam- Section 101(32)(A) makes two modifica-

ine the understanding of the framers of tions to the usual balance sheet insolvency

the Constitution at the time of its adoption, test. First, the test requires the revision

the history of bankruptcy law in the Unit- of balance sheet values to their ‘‘fair valua-

ed States and its predecessor English stat- tion.’’ In contrast, a balance sheet pre-

utes, and applicable Supreme Court case pared according to generally accepted ac-

law. We also examine Pierce’s argument counting principles provides asset values

that, insofar as the Bankruptcy Code per- at historical cost less any applicable depre-

mits a solvent chapter 11 debtor to file a ciation or amortization. The ‘‘fair valua-

case and proceed to plan confirmation, tion’’ standard requires an adjustment in

4. The 1898 Act has a similar definition of of the 1898 Act included exempt property in

insolvency. See 1898 Act, § 1(19). Unlike the calculation of insolvency.

§ 101(32)(A) of the Bankruptcy Code, § 1(19)

512 300 BANKRUPTCY REPORTER

balance sheet values from historical cost to these uses sheds any light on the constitu-

present market values. Second, the tional limits of the Bankruptcy Clause.

§ 101(32)(A) definition excludes property The final use of ‘‘insolvency’’ in the

that would otherwise appear on a balance Bankruptcy Code occurs in § 109(c)(3),

sheet, but that is exempt under § 522 (pro- which requires a municipality to be insol-

viding exemptions for individual debtors). vent as a condition of filing a bankruptcy

case. The meaning of ‘‘insolvency’’ in this

The insolvency definition in § 101(32)(A)

provision is entirely different from the bal-

is designed to govern the handful of tech- ance sheet test,5 and is governed by

nical uses of this term in the Bankruptcy § 101(32)(C), which states that ‘‘insolvent’’

Code. In fact, ‘‘insolvent’’ is used only ten means:

times in the entire statute, and in nine of with reference to a municipality, finan-

those it is used to define narrowly drawn cial condition such that the municipality

rights under particular statutory provi- is—

sions. See § 365 (trustee may assume an (i) generally not paying its debts as they

executory contract notwithstanding a de- become due unless such debts are the

fault relating to the debtor’s insolvency); subject of a bona fide dispute; or

§ 525 (protecting a debtor against dis- (ii) unable to pay its debts as they be-

criminatory treatment during prepetition come due TTTT

insolvency); § 541 (forfeiture based on in- This is known as the liquidity test for

solvency does not prevent prepetition insolvency (also known as the ‘‘equity’’ or

property from becoming property of the the ‘‘cash flow’’ test),6 and it is the most

estate); § 543 (court may consider inter- commonly used definition in the bankrupt-

ests of equity holders of solvent debtor in cy context.7 This liquidity definition of

determining whether to require a custodi- insolvency is the only one that has ever

an to turn over property); § 545 (protect- played a role in qualifying a person as a

ing a debtor from statutory liens predicat- debtor under United States bankruptcy

ed upon insolvency); § 546 (authorizing law.

certain reclamation rights to creditors who [3] It is not uncommon for debtors to

have delivered certain goods to a debtor be solvent under the balance sheet test,

while insolvent before the bankruptcy pe- and yet to have severe financial problems.

tition was filed); § 547 (element of cause This court frequently receives cases, filed

of action for preferential transfer); § 548 under both chapter 7 and chapter 11 and

(element of certain causes of action for especially under chapter 13 (a reorganiza-

fraudulent transfers); § 553 (condition for tion chapter for consumers), where the

prohibiting a creditor setoff). None of debtor is clearly solvent under a balance

5. Section 101(32)(B) also has a different defi- such debts become due unless such debts are

nition of insolvency for a partnership, which the subject of a bona fide disputeTTTT’’

is a modified version of the balance sheet test

7. There are other, more sophisticated mea-

that takes into account the partners’ separate

sures of insolvency that are increasingly used

assets. in complex business transactions. See e.g.,

Michael J. Epstein, Director/Manager Liability

6. This definition is also used in § 303(h)(1), and How to Avoid Furthering Insolvency,

which authorizes a court to order relief NABTALK, Summer 2003, at 23, 24. These

against an involuntary debtor if, ‘‘the debtor measures of insolvency have not found their

is generally not paying such debtor’s debts as way into United States bankruptcy statutes.

IN RE MARSHALL 513

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

sheet test, but has substantial cash flow is in fact insolvent. This case is illustra-

problems.8 The United States bankruptcy tive—litigation over the debtors’ solvency

law is designed to provide relief from cred- has consumed a large amount of time and

itor pressures for debtors with cash flow effort, and a determination of the debtors’

difficulties, even where they are clearly insolvency has not yet been made more

solvent under a balance sheet test. than a year after the filing.

As to reorganizations under chapter 11, If a reorganization is held up pending a

there is substantial reason for Congress to determination of balance sheet insolvency,

decide that a debtor should be eligible businesses will rarely be reorganized, and

before the debtor becomes insolvent under at least some of the reorganization value

a balance sheet test. The prospects for (the value of a business as reorganized as

reorganizing a debtor in financial difficulty opposed to its liquidation value) will inevi-

are much better when the debtor is still tably be lost. Indeed, this is the experi-

solvent than after it becomes insolvent. ence in countries that require insolvency,

See generally 1 COLLIER ON BANKRUPTCY according to a balance sheet test, as a

¶ 1.19[1] (James William Moore ed., 14th condition for admission to the bankruptcy

ed.1988) [hereinafter COLLIER] (comment- system—businesses are generally not re-

ing on the reorganization provisions of the organizable, and substantial economic val-

1898 Act, as amended by the Chandler ues are lost.9

Act). If a debtor must wait until it be-

Accordingly, the court finds that the bal-

comes insolvent to invoke the reorganiza-

ance sheet test is not the appropriate test

tion provisions under the bankruptcy law,

for insolvency in evaluating Pierce’s consti-

substantial economic values will often be

tutional challenge in this case. However,

irretrievably lost. Congress certainly

assuming that Pierce has implicitly

could legitimately decide that it is best for

claimed that the liquidity test should also

the economy of the United States to per-

be applied by the court, the court proceeds

mit solvent debtors to reorganize under

to consider Pierce’s constitutional chal-

the bankruptcy law to preserve economic

lenge.

values.

B. United States and English

An additional vice of a balance sheet test

Bankruptcy Laws

as a criterion for admission to the bank-

ruptcy system is that substantial time is The United States Congress has enacted

consumed in determining whether a debtor five bankruptcy laws.10 The first was en-

8. Some bankruptcy courts also frequently see 10. At the time of the framing of the Constitu-

chapter 12 cases where the debtor is quite tion, the terms ‘‘bankruptcy’’ and ‘‘insolven-

solvent under a balance sheet test. However, cy’’ were applied differently and had operated

chapter 12 cases are rare in the Central Dis- in different systems. Bankruptcy meant the

trict of California. action against malingering debtors, while in-

solvency meant relief for the honest but unfor-

9. The World Bank recommends against the tunate debtor. See Sturges v. Crowninshield, 4

use of a balance sheet insolvency test as a Wheat. 122, 17 U.S. 122, 194–195, 4 L.Ed.

qualification for bankruptcy. See WORLD 529 (1819) (‘‘[T]he subject [of bankruptcies] is

BANK, PRINCIPLES AND GUIDELINES FOR EFFECTIVE divisible in its nature into bankrupt and insol-

INSOLVENCY AND CREDITOR RIGHTS SYSTEMS ¶ 90 vent laws TTT [A]lthough the two systems have

(2001). Instead, if an insolvency test is to be existed apart from each other, there is such a

adopted in a country, the World Bank recom- connection between them, as to render it diffi-

mends the liquidity test—the debtor’s ability cult to say how far they may be blended

to pay debts as they come due. See id. together’’); see also CHARLES WARREN, BANK-

514 300 BANKRUPTCY REPORTER

acted in 1800 (‘‘the 1800 Act’’),11 and was revision of English bankruptcy law,19

intended to last only five years. See gen- which remained in force (with amend-

erally Charles Jordan Tabb, The Histori- ments) at the time that the United States

cal Evolution of the Bankruptcy Dis- Constitution was written.

charge, 65 Am. Bankr.L.J. 325, 344–45 C. The Constitutional Convention

(1991); BRUCE H. MANN, REPUBLIC OF DEBT-

ORS (2002) [hereinafter MANN]. This act Before examining the English and Unit-

was repealed in 1803. There was no fur- ed States statutes, we turn to the constitu-

ther federal bankruptcy law until 1841 tional convention in 1789, to see whether

(‘‘the 1841 Act’’).12 See generally Tabb, at there is anything in the records of the

349–51. The 1841 Act lasted for an even convention that might shed light on the

shorter time than the 1800 Act, and was role of insolvency in the meaning of ‘‘bank-

repealed in 1843. The next bankruptcy ruptcies’’ in the Bankruptcy Clause.

law was enacted in 1867 (‘‘the 1867 Act’’) 13 The Bankruptcy Clause received little

to deal with economic dislocations result- discussion in the constitutional convention.

ing from the Civil War. See generally The bankruptcy issue arose in a discussion

Tabb, at 353–55. This law lasted consider- of the Full Faith and Credit clause, and

ably longer than its predecessors, and was drove the constitutional extension of the

repealed in 1878. Full Faith and Credit clause to acts of the

Congress enacted permanent federal legislature as well as judicial decisions.

bankruptcy legislation in 1898 (‘‘the 1898 See MANN, at 183; see generally id. at 182–

Act’’).14 This law was substantially revised 87. Because credit, like commerce, was

and expanded by the Chandler Act of not limited by state boundaries, the dele-

1938.15 It was replaced with the Bank- gates recognized that a national system of

ruptcy Code in 1978 (effective October 1, bankruptcy law was needed to support a

1979).16 national credit system upon which com-

merce depended. See id. at 185–87.

English law has included bankruptcy

law continuously since 1542, when Parlia- The only vote against the Bankruptcy

ment enacted the first bankruptcy law.17 Clause was cast by Roger Sherman of

The next major English bankruptcy law Connecticut. He opposed this provision on

was enacted in 1705.18 In 1732 Parliament the grounds that bankruptcies were pun-

enacted a comprehensive codification and ishable by death in some cases in England,

RUPTCY INUNITED STATES HISTORY 7 (1935) (at the 13. Bankruptcy Act of 1867, ch. 176, 14 Stat.

time of the adoption of the Constitution, only 517 (1867) (repealed 1878).

a few states had laws on either the subject of

bankruptcies or insolvency, Pennsylvania be- 14. Bankruptcy Act of 1898, ch. 541, 30 Stat.

ing the only state that had both—bankruptcy 544 (1898) (repealed 1978).

was releasing traders from debts, insolvency a

15. Chandler Act, ch. 575, 52 Stat. 840 (1938)

discharge of all persons from prison upon (repealed 1978).

surrendering their property to their credi-

tors). 16. Pub.L. No. 95–598, 92 Stat. 2549 (1978).

11. Bankruptcy Act of 1800, ch. 19, 2 Stat. 19 17. An act against such persons as do make

(1800) (repealed 1803). bankrupts, 34 & 35 Hen. 8, c. 4 (1542).

18. 4 Anne, c. 17 (1705).

12. Bankruptcy Act of 1841, ch. 9, 5 Stat. 440

(1841) (repealed 1843). 19. 5 Geo. 2, c. 30 (1732).

IN RE MARSHALL 515

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

and he opposed granting Congress this debts, not insolvency, that distinguishes a

power in the United States. See Railway debtor who is an eligible subject for bank-

Labor Executives’ Ass’n v. Gibbons, 455 ruptcy relief.20

U.S. 457, 472 n. 13, 102 S.Ct. 1169, 71 Thus the constitutional history gives no

L.Ed.2d 335 (1982) (citing 2 M. FARRAND, support to the argument that the founders

RECORDS OF THE CONVENTION OF 1787, at 489 intended that bankruptcy relief be limited

(1911)). to insolvent debtors, or that this meaning

The Federalist Papers, which discuss in was included in the Bankruptcy Clause.

detail virtually every aspect of the Consti- D. History of Insolvency Provisions

tution, make only a single reference to the In Bankruptcy Law

Bankruptcy Clause. In Federalist No. 42,

Having found the evidence from the con-

James Madison wrote:

stitutional convention unhelpful, we now

The power of establishing uniform laws

take a broader look to see what meaning

of bankruptcy is so intimately connected

‘‘bankruptcy’’ was given in relevant legisla-

with the regulation of commerce, and

tion on the subject, both before and after

will prevent so many frauds where the

the writing of the Constitution. As the

parties or their property may lie or be

Supreme Court has told us, ‘‘Probably the

removed into different States, that the

most satisfactory approach to the problem

expediency of it seems not likely to be

of interpretation here involved [the power

drawn into question.

of Congress under the Bankruptcy Clause]

THE FEDERALIST No. 42, at 239 (James is to examine it in the light of the acts, and

Madison) (Clinton Rossiter ed., 1961). the history of the acts, of Congress which

A few decades later Justice Story (then have from time to time been passed on the

a professor at Harvard Law School), in his subjectTTTT’’ Continental Illinois Nat’l

famous Commentaries, stated: Bank & Trust. v. Chicago, Rock Island &

Perhaps, as satisfactory a description of Pac. Ry. Co., 294 U.S. 648, 670, 55 S.Ct.

a bankrupt law as can be framed is, that 595, 79 L.Ed. 1110 (1935).

it is a law for the benefit and relief of Historically, bankruptcy laws have not

creditors and their debtors, in cases in been conceived in the United States or

which the latter are unable or unwilling England for the protection of debtors,

to pay their debts. And a law on the whether honest or dishonest. Bankruptcy

subject of bankruptcies, in the sense of laws were enacted principally for the bene-

the constitution, is a law making provi- fit of trade and for the protection of credi-

sions for cases of persons failing to pay tors, to give them more powers acting in

their debts. concert to collect debts than they pos-

3 JOSEPH STORY, COMMENTARIES ON THE CON- sessed individually. See, e.g., 2 WILLIAM

STITUTION OF THE UNITED STATES § 1108 BLACKSTONE, COMMENTARIES *472 [hereinaf-

n.25. (1833) [hereinafter STORY]. In Jus- ter BLACKSTONE]. Indeed, some of the

tice Story’s view, it is the failure to pay worst abuses were committed by debtors

20. See also STORY, supra, § 1101 (‘‘it may be and, on the other hand, to relieve unfortunate

stated, that the general object of all bankrupt and honest debtors from perpetual bondage to

and insolvent laws is, on the one hand, to their creditors, either in the shape of unlimit-

secure to creditors an appropriation of the ed imprisonment to coerce payment of their

property of their debtors pro tanto to the debts, or of an absolute right to appropriate

discharge of their debts, whenever the latter and monopolize all their future earnings.’’)

are unable to discharge the whole amount;

516 300 BANKRUPTCY REPORTER

who refused to pay their debts even 1. Voluntary Cases

though they were solvent and eminently

The 1841 Act was the first United States

capable of paying. The principal benefit

law to authorize a debtor to file a volun-

to debtors was the avoidance of debtors’

tary bankruptcy petition.22 Neither the

prison or the discharge therefrom. See id.

1800 Act nor the English predecessors

An analysis of the history of bankruptcy permitted a voluntary bankruptcy filing.

laws in the United States, and of their The 1841 Act required that a bankruptcy

predecessors in England, shows that the petition be verified under oath and plead

Bankruptcy Clause has never been tied to that the debtor is ‘‘unable to meet [his or

balance sheet insolvency, or insolvency of her] debts and engagements TTTT’’

any other type. No United States bank- This was only a pleading requirement.

ruptcy act, and none of its English prede- Neither the parties nor the court had the

cessors, has ever required balance sheet authority to inquire into whether a debtor

insolvency as a condition of either volun- was in fact insolvent. See, e.g., Ex parte

tary or involuntary bankruptcy. Of the Hull, 12 F.Cas. 853, 856 (S.D.N.Y.1842).

five United States bankruptcy laws and its Indeed, the court was required to declare

three principal English predecessors, only a voluntary petitioner bankrupt on the

the 1841 and the 1867 Acts required a debtor’s sworn representation of inability

voluntary debtor to plead that the debtor to pay his or her debts, irrespective of the

was insolvent in a liquidity sense, i.e. that debtor’s actual wealth and financial condi-

the debtor was unable to pay his or her tion. See id.

debts as they became due, and such a

pleading was unchallengeable. A debtor filing a voluntary bankruptcy

petition under the 1867 Act was similarly

For involuntary bankruptcy cases, insol- required to ‘‘set forth TTT his inability to

vency began to creep into United States pay all his debts in full TTTT’’ See id. § 11.

bankruptcy law in the 1867 Act as an Immediately upon filing a petition stating

element in one or more ‘‘acts of bankrupt- the debtor’s inability to pay his or her

cy,’’ any one of which would support an debts in full and the debtor’s willingness to

involuntary bankruptcy petition. Howev- surrender his or her estate and effects for

er, insolvency did not become the chief the benefit of creditors and a desire to

basis for an involuntary petition until the obtain the benefits of the bankruptcy law,

adoption of the Bankruptcy Code in 1978. the debtor was entitled to be adjudicated a

Even now, under the Bankruptcy Code, bankrupt. See, e.g., In re Patterson, 18

the insolvency test for an involuntary peti- F.Cas. 1315, 1317 (S.D.N.Y.1867). No fur-

tion is the liquidity test, and not the bal- ther inquiry as to the debtor’s ability to

ance sheet test for insolvency.21 pay was permitted. See id. at 1318.

21. But see Thomas E. Plank, Bankruptcy and at that time. Furthermore, even Professor

Federalism, 71 FORD. L. REV. 1063 (2002), Plank does not contend that bankruptcy

where he argues that ‘‘bankruptcy’’ inherently meant balance sheet insolvency in 1789.

meant insolvency in the eighteenth century.

He bases this conclusion principally on the 22. However, it appears that debtors frequent-

examination of several eighteenth century dic- ly arranged with friendly creditors to file es-

tionaries, and ignores the legal history of sentially voluntary bankruptcy cases under

bankruptcy law. See id. at 1076–77. The the 1800 bankruptcy law. See MANN, supra, at

court finds this approach unpersuasive, in

228–39.

light of the contrary history of bankruptcy law

IN RE MARSHALL 517

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

The 1898 Act provided that a voluntary requisite of taking advantage of bankrupt-

debtor could file a bankruptcy case with no cy. While two of the nineteenth century

requirement of insolvency. See id. § 4(a). acts required a debtor to plead inability to

Unlike the 1841 and 1867 Acts, the 1898 pay his or her debts as they came due, no

Act did not require a debtor to plead ina- creditor was permitted to contest this con-

bility to pay his or her debts as they came tention.

due. Collier explains § 4(a) as follows: 2. Involuntary Cases

A voluntary petitioner may be solvent or

Similarly, insolvency has never been re-

insolvent, and his motive is generally

quired for a debtor to become an involun-

immaterial except that the petition may

tary bankrupt, either under United States

not be filed for purposes of perpetrating

bankruptcy law or under its English pre-

a fraud. There is nothing in the Act

decessors.

which requires the person to be insol-

vent, and there seems to be no reason The English bankruptcy laws prior to

why, if a solvent person cares to have the United States revolution uniformly

his property distributed among his cred- provided only for involuntary bankruptcy.

itors through bankruptcy proceedings, Uniformly, also, these laws made no provi-

he should not be allowed to do so TTTT It sion for insolvency as a condition of the

will not be necessary to allege insolven- filing of a petition in bankruptcy against a

cy in the petition, nor prove it, to pro- debtor. Instead, these statutes based the

cure an adjudication [of bankruptcy]. right to file an involuntary bankruptcy pe-

1 COLLIER ¶ 4.03 (interpreting bankruptcy tition on what became known as a debtor’s

law as it existed before the Bankruptcy ‘‘acts of bankruptcy.’’ Any single act of

Code took effect in 1979); see Caplin v. bankruptcy, under each of these laws, was

Marine Midland Grace Trust Co., 406 sufficient to support an involuntary bank-

U.S. 416, 423, 92 S.Ct. 1678, 32 L.Ed.2d ruptcy petition. The qualifying acts in-

195 (1972) (‘‘Chapter X proceedings [under cluded such conduct as refusing to pay

the 1898 Act as amended in 1938] are not creditors, departing the country, staying in

limited to insolvent corporations but are one’s house (to avoid service of process),

open to those corporations that are solvent taking sanctuary, and permitting himself

in the bankruptcy (asset-liability) sense or herself to be arrested (presumably for

but are unable to meet their obligations as not paying debts). In addition, the credi-

they mature’’) (citing United States v. Key, tor was required to show that the debtor

397 U.S. 322, 329, 90 S.Ct. 1049, 25 took such an action with the intent to

L.Ed.2d 340 (1970)). hinder or delay his or her creditors.

After arising in the 1841 Act as a plead- Blackstone’s COMMENTARIES ON THE LAWS

ing requirement, insolvency of any kind OF ENGLAND, published in 1765 to 1769, are

disappeared entirely in 1878 (the date of in accord with the English laws. Black-

repeal of the 1867 Act) as a condition of stone wrote extensively in his COMMENTAR-

filing a voluntary bankruptcy petition in IES about bankruptcy law. However, like

the United States. the English bankruptcy law of his time,

Thus the statutory history shows that no Blackstone makes no reference to insol-

United States bankruptcy law has ever vency as a qualification for bankruptcy.

required a voluntary debtor to show that See 2 BLACKSTONE, supra, at *471–88.

he or she was in fact insolvent, under a Blackstone’s COMMENTARIES were well

balance sheet test or otherwise, as a pre- known to the writers of the Constitution

518 300 BANKRUPTCY REPORTER

and to early United States judges and See 1898 Act, § 3(a). One act of bankrupt-

lawyers. See Hanover Nat. Bank v. cy under this law was the preferential

Moyses, 186 U.S. 181, 187, 22 S.Ct. 857, 46 transfer, brought forward from the 1867

L.Ed. 1113 (1902); Nelson v. Carland, 42 Act, which continued to require that the

U.S. (1 How.) 265, 270–73, 11 L.Ed. 126 debtor be insolvent. See id. § 3(a)(2).

(1843) (dissenting opinion of Justice Ca- Another act of bankruptcy supporting an

tron). involuntary petition occurred when the

debtor, while insolvent, suffered or permit-

In the United States, the first two bank- ted a creditor to obtain a preference

ruptcy acts, the 1800 Act and 1841 Act through legal proceedings, and who fur-

permitted a creditor to file an involuntary ther failed to discharge the preference at

bankruptcy petition against a debtor only least five days before a sale or final dispo-

if the debtor had committed an act of sition of any property affected by the pref-

bankruptcy. The 1800 Act specified ten erence. See id. § 3(a)(3). In addition, it

qualifying acts of bankruptcy, which large- was an act of bankruptcy to admit in writ-

ly mirrored those in the English statutes. ing the inability to pay debts and being

See 1800 Act, § 1. The 1841 Act reduced to willing to be adjudged a bankrupt. See id.

five the qualifying acts of bankruptcy. See § 3(a)(5). Furthermore, with respect to a

1841 Act, § 1. Like their predecessor En- fraudulent transfer, the debtor was given

glish laws, none of the qualifying acts of an affirmative defense of solvency. See id.

bankruptcy in either the 1800 or the 1841 § 3(c); see generally 1 COLLIER ¶ 1.19[1].

Acts included insolvency as an element or

Congress amended the fourth act of

factor to be considered in making an adju-

bankruptcy (making an assignment for the

dication of bankruptcy.

benefit of creditors) in 1903 to include

The 1867 Act was the first to introduce having a receiver or trustee take charge of

insolvency as an element in any of the acts the debtor’s property while the debtor was

of bankruptcy. Of the nine statutory acts insolvent. See Act of February 5, 1903, 32

of bankruptcy 23 that could support an in- Stat. 797; see also In re Valentine Bohl

voluntary petition under the 1867 Act, one Co., 224 F. 685 (2d Cir.1915) (dismissing

was the granting of a preferential transfer, involuntary petition on three grounds: the

‘‘being bankrupt or insolvent, or in con- debtor was balance sheet solvent when the

templation of bankruptcy or insolvency state court receiver was appointed, it was

TTTTT’’ See 1867 Act, § 39. None of the impossible to determine whether the dis-

other acts of bankruptcy in the 1867 Act trict court receivership was ordered ‘‘be-

involved the insolvency of the debtor. cause of [balance sheet] insolvency’’ (as the

clause required for an involuntary receiv-

In the 1898 Act insolvency began to take ership), and there was no evidence of a

a prominent role in the acts of bankruptcy fraudulent transfer). In 1926, Congress

that could support an involuntary petition. added yet a fifth act of bankruptcy involv-

The original version of the 1898 Act de- ing the debtor’s insolvency to the 1898 Act:

creased to five the number of bankruptcy suffering, while insolvent, a lien that was

acts, three of which involved insolvency. not vacated or discharged within thirty

23. Case law under the 1867 Act treated a King, 108 U.S. 379, 385, 2 S.Ct. 765, 27 L.Ed.

general assignment for the benefit of creditors 760 (1883). This act of bankruptcy also did

as a tenth act of bankruptcy. See Boese v. not require the debtor’s insolvency.

IN RE MARSHALL 519

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

days thereafter. See Act of May 27, 1926, standing a debtor’s solvency. The Code

44 Stat. 662. permits a court to order relief against the

In the 1898 Act (but not previously), debtor if, within 120 days of the filing of

‘‘insolvency’’ was defined. This definition the petition, a custodian, receiver or agent

adopted the modified balance sheet test is appointed or takes possession of less

that now appears in § 101(32)(A). See than substantially all of the debtor’s prop-

1898 Act § 1(19); see also American Nat’l erty to enforce a lien. See § 303(h)(2).

Bank & Trust Co. v. Bone, 333 F.2d 984, However, virtually every involuntary pe-

986–87 (8th Cir.1964) (utilizing a balance tition filed under the Bankruptcy Code

sheet to show insolvency); Syracuse Engi- relies on § 303(h)(1),24 which authorizes an

neering Co. v. Haight, 110 F.2d 468, 471 involuntary case where the debtor ‘‘is gen-

(2d Cir.1940). This definition was a erally not paying such debtor’s debts as

change from the previous understanding of such debts become due unless such debts

solvency for the purposes of bankruptcy are the subject of a bona fide dispute

law. While the previous statutes con- TTTT’’ Thus insolvency is now a major fac-

tained no definition of solvency, it was

tor in an involuntary bankruptcy case.

generally understood that the liquidity test

But it is the liquidity definition of insolven-

applied in the bankruptcy context. See gen-

cy that controls, and not the balance sheet

erally 1 COLLIER ¶ 1.19[1].

definition on which Pierce relies.

The Chandler Act in 1938, which sub-

The court concludes from the foregoing

stantially amended the 1898 Act, expanded

history that, at the time that the Constitu-

the scope of the 1903 addition by applying

it both when the debtor was insolvent (on a tion was written, insolvency of any kind

modified balance sheet basis) and when the was utterly unknown as a requirement for

debtor was unable to pay his or her debts filing a bankruptcy case. Thus it is not

as they matured (the liquidity definition). credible that the framers of the Constitu-

The Chandler Act also revised the various tion thought that a requirement of insol-

reorganization provisions added to the vency was included in the concept of

1898 Act beginning in 1933. For these bankruptcy that found its way into the

provisions (the predecessors of chapter Bankruptcy Clause. Furthermore, insol-

11), the liquidity definition of insolvency vency has never been a statutory require-

was ordinarily invoked. ment for either voluntary or involuntary

bankruptcy under United States bank-

Throughout the career of the 1898 Act

ruptcy law. Finally, balance sheet insol-

(which was repealed effective September

vency was altogether unknown for bank-

30, 1979), making a general assignment for

ruptcy purposes in the United States until

the benefit of creditors was an act of bank-

1898.

ruptcy that did not require the insolvency

of the debtor. See id. § 3(a)(4). E. Watershed Developments

in Bankruptcy Concepts

The Bankruptcy Code, while reducing to

two the acts of bankruptcy that can sup- The development of bankruptcy law did

port an involuntary petition, continues to not end with the writing of the Bankruptcy

permit an involuntary bankruptcy notwith- Clause in the United States Constitution in

24. As a bankruptcy judge for nearly twenty involuntary bankruptcy petitions. I can re-

years, I have handled nearly a hundred thou- call only one that probably was based on

sand bankruptcy cases. Perhaps two hun- § 303(h)(2).

dred of these cases have commenced with

520 300 BANKRUPTCY REPORTER

1787. There are three watershed develop- Each of these provisions constituted a

ments in United States bankruptcy law landmark change in bankruptcy law from

since that date. that known in 1787 when the Bankruptcy

The first major development, which was Clause was written into the Constitution.

introduced in the 1841 Act, was the author- In the words of the Supreme Court itself,

ization for a debtor to file a voluntary these extensions of bankruptcy law were of

bankruptcy case without waiting for a a ‘‘fundamental and radically progressive

creditor to file an involuntary petition nature.’’ Louisville Joint Stock Land

against the debtor. Justice Catron, sitting Bank v. Radford, 295 U.S. 555, 588, 55

on circuit in the district of Missouri, found S.Ct. 854, 79 L.Ed. 1593 (1935) (quoting

this provision constitutional in In re Klein, Continental Illinois, 294 U.S. at 671, 55

42 U.S. 277, 1 How. 277, 11 L.Ed. 275, 14 S.Ct. 595). Nonetheless, the Supreme

F.Cas. 716, 718 (1843), reported in a note Court found that each of these develop-

to Nelson v. Carland, 42 U.S. (1 How.) ments comes within the ambit of the Bank-

265, 277, 11 L.Ed. 126 (1843). The Su- ruptcy Power, and thus is constitutional.

preme Court cited Klein with approval on Radford, 295 U.S. at 587–88, 55 S.Ct. 854;

this issue in Hanover Nat’l Bank v. Moys- Continental Illinois, 294 U.S. at 671, 55

es, 186 U.S. 181, 186, 22 S.Ct. 857, 46 S.Ct. 595.

L.Ed. 1113 (1902).

More generally, the Supreme Court has

The second landmark major develop-

very recently stated that the Constitution

ment, also adopted in the 1841 Act, was

should not be restricted to a particular

the extension of the bankruptcy law to

generation’s interpretation of the Constitu-

individuals who are not traders. The Su-

tion: ‘‘As the Constitution endures, per-

preme Court approved this development

sons in every generation can invoke its

also in Moyses, 186 U.S. at 186, 22 S.Ct.

principles in their own search for greater

857, again relying on Klein.

freedom.’’ Lawrence v. Texas, ––– U.S.

The third major landmark development ––––, 123 S.Ct. 2472, 2484, 156 L.Ed.2d 508

was the addition of reorganization as a (2003) (finding due process violation in

mode of bankruptcy authorized under the Texas statute prohibiting same-sex sod-

Bankruptcy Clause. This first reorganiza- omy).

tion provision appeared in United States

law in the Act of March 3, 1933, which was In contrast to these landmark bankrupt-

signed by President Hoover on his last day cy law changes, the filing of a bankruptcy

in office.25 The Supreme Court validated case by or with respect to a solvent debtor

the constitutionality of reorganization un- has always been permitted under bank-

der the Bankruptcy Clause in Continental ruptcy law, both under every bankruptcy

Illinois Nat. Bank & Trust Co. v. Chicago, law enacted in the United States and un-

R.I. & P. Ry., 294 U.S. 648, 668, 55 S.Ct. der every prior law enacted in England.

595, 79 L.Ed. 1110 (1935) (railroad reorga- F. Supreme Court Case Law

nization under § 77 of the 1898 Act as

amended in 1933); accord, United States Supreme Court case law likewise gives

v. Bekins (In re Lindsay–Strathmore Irri- no support to the thesis that, as a constitu-

gation Dist.), 304 U.S. 27, 47, 58 S.Ct. 811, tional matter, congressional power to pro-

82 L.Ed. 1137 (1938). vide bankruptcy protection must be limited

25. The various reorganization provisions en- were substantially revised in the Chandler Act

acted over several years beginning in 1933 of 1938.

IN RE MARSHALL 521

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

to those who are insolvent, whether under plenary power to Congress over the whole

a balance sheet test or otherwise.26 Even subject of ‘bankruptcies,’ and did not limit

if the English bankruptcy law in effect in it by the language [that they] used.’’)

1787 had limited bankruptcy to debtors The core of the federal bankruptcy pow-

who satisfied an insolvency test, this would er, according to the Supreme Court, is

not be determinative in this case more ‘‘the restructuring of debtor-creditor rela-

than two centuries later. tions TTTT’’ Northern Pipeline Construc-

1. Expansive Supreme tion Co. v. Marathon Pipe Line Co., 458

Court Statements U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598

The United States Supreme Court has (1982) (plurality opinion). Beyond this

consistently taken an expansive view of the core, as a general rule, the Supreme Court

Bankruptcy Powers, to permit their appli- has said, ‘‘the subject of bankruptcies is

cation in the context of the enormous ex- incapable of final definition.’’ Gibbons, 455

pansion of the economy since 1787 and the U.S. at 466, 102 S.Ct. 1169; accord Wright

correspondingly great elaboration of the v. Union Central, 304 U.S. at 513, 58 S.Ct.

legal structures supporting it: 1025; Continental Illinois, 294 U.S. at

[T]he notion that the framers of the 669–70, 55 S.Ct. 595 (‘‘[t]hose limitations

Constitution, by the bankruptcy clause, have never been explicitly defined, and any

intended to limit the power of Congress attempt to do so now would result in little

to the then existing English law and more than a paraphrase of the language of

practice upon the subject long since has the Constitution without advancing far to-

been dispelledTTTT Whether a clause in ward its full meaning.’’). In Gibbons the

the Constitution is to be restricted by Supreme Court stated:

the rules of the English law as they [W]e have previously defined ‘‘bankrupt-

existed when the Constitution was cy’’ as the subject of the relations be-

adopted depends upon the terms or the tween an insolvent or nonpaying or

nature of the particular clause in ques- fraudulent debtor and his creditors, ex-

tion. tending to his and their relief. Con-

Continental Illinois, at 668, 55 S.Ct. 595. gress’ power under the Bankruptcy

The Supreme Court has repeatedly and Clause contemplates an adjustment of a

consistently held that the Bankruptcy failing debtor’s obligations. This power

Powers are not limited to the meaning of extends to all cases where the law

the term ‘‘bankruptcy’’ at the time of the causes to be distributed, the property of

formulation of the Constitution. See, e.g., the debtor among his creditors. It in-

Wright v. Union Central Life Ins. Co., 304 cludes the power to discharge the debtor

U.S. 502, 58 S.Ct. 1025, 82 L.Ed. 1490 from his contracts and legal liabilities, as

(1938); Adair v. Bank of America NTSA, well as to distribute his property. The

303 U.S. 350, 354, 58 S.Ct. 594, 82 L.Ed. grant to Congress involves the power to

889 (1938); Hanover National Bank, at impair the obligation of contracts, and

187, 22 S.Ct. 857 (‘‘The framers of the this the States were forbidden to do.

Constitution were familiar with Black- Gibbons, 455 U.S. at 466, 102 S.Ct. 1169

stone’s Commentaries, and with the bank- (emphasis added, quotations and citations

rupt laws of England, yet they granted omitted).

26. The court has found no relevant case law Bankruptcy Appellate Panel.

from the Ninth Circuit or the Ninth Circuit

522 300 BANKRUPTCY REPORTER

In Moyses, the Court added that the (1991), to state that one Congressional

debtor ‘‘may be, in fact, fraudulent, and purpose of chapter 11 is ‘‘permitting busi-

able and unwilling to pay his debts; but ness debtors to reorganize and restructure

the law takes him at his word, and makes their debts in order to revive the debtors’

effectual provision, not only by civil, but businesses and thereby preserve jobs and

even by criminal, process, to effectuate his protect investors.’’ Id. at 163, 111 S.Ct.

alleged intent of giving up all his proper- 2197. In addition, the Court said in that

ty.’’ Id. at 861. Thus the ‘‘subject of case:

bankruptcies’’ includes the power to dis- Chapter 11 also embodies the general

charge a debtor from contracts and legal Code policy of maximizing the value of

liabilities, and to distribute the debtor’s the bankruptcy estate. Under certain

property to creditors. Id. at 188, 22 S.Ct. circumstances a consumer debtor’s es-

857 (upholding the constitutionality of the tate will be worth more if reorganized

Bankruptcy Act of 1898 insofar as it au- under Chapter 11 than if liquidated un-

thorized the discharge of a judgment on a der Chapter 7. Allowing such a debtor to

promissory note). The Court in Moyses proceed under Chapter 11 serves the

also stated: ‘‘all intermediate legislation, congressional purpose of deriving as

affecting substance and form, but tending much value as possible from the debtor’s

to further the great end of the subject,— estate.

distribution and discharge,—are in the Id. The Court used this rationale in Toibb

competency and discretion of Congress.’’ to hold that individual consumers, like the

Id. at 186, 22 S.Ct. 857 (quoting In re debtors in this case, are entitled to take

Klein, 14 F.Cas. No. 716 (D.Mo.1843), re- advantage of chapter 11 to reorganize

printed in a note to Nelson v. Carland, 42 their financial affairs, even though they

U.S. (1 How.) 265, 277, 11 L.Ed. 126, 130 may have no business to reorganize. See

(1843)). id. at 160–66, 111 S.Ct. 2197.

The Court further stated in Continental Similarly, in Bank of America NTSA v.

Illinois that bankruptcy ‘‘may be con- 203 N. LaSalle St. P’ship, 526 U.S. 434,

strued to include a debtor who, although 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999), the

unable to pay promptly, may be able to Court stated that, ‘‘the two recognized pol-

pay if time to do so be sufficiently extend- icies underlying Chapter 11[are] preserv-

ed,’’ i.e., a solvent debtor. Id. at 668, 55 ing going concerns and maximizing proper-

S.Ct. 595. There is no reason to believe ty available to satisfy creditors TTTT’’ Id. at

that the bankruptcy laws of the nineteenth 453, 119 S.Ct. 1411.

century exhausted congressional power un- The debtors in this case at least qualify

der the Bankruptcy Clause. See id. as ‘‘nonpaying’’ debtors, in the terminology

The Supreme Court has also spoken on of Gibbons, and they certainly appeared to

the essential purposes of chapter 11, under be failing when they filed their case. If

which the debtors filed this case. In they enjoy a bonanza from their chapter 11

NLRB v. Bildisco & Bildisco, 465 U.S. plan, it will result from Pierce’s refusal to

513, 527, 104 S.Ct. 1188, 79 L.Ed.2d 482 file a claim on his $12 million Texas judg-

(1984), the Court stated that the policy of ment.

chapter 11 is to permit the successful reha- Furthermore, the court finds that the

bilitation of debtors. The Court elaborat- chapter 11 plan in this case maximizes the

ed this policy in Toibb v. Radloff, 501 U.S. property available to satisfy creditors. At

157, 111 S.Ct. 2197, 115 L.Ed.2d 145 the time of filing, it was not at all clear

IN RE MARSHALL 523

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

that the debtors could pay their creditors plicitly applying to a single (albeit large)

in full. The plan settles this issue. debtor, and no other similarly situated

2. Cases Finding Bankruptcy debtors, unconstitutionally violated the

Provisions Unconstitutional uniformity requirement of the Bankruptcy

Clause. A bankruptcy law, the Supreme

There are very few Supreme Court

Court held, must at least apply uniformly

cases holding that Congress has exceeded

to a defined class of debtors. See id. at

its constitutional powers in legislating on

473, 102 S.Ct. 1169. But see Regional

the subject of bankruptcy. In light of the

Rail Reorganization Cases, 419 U.S. 102,

foregoing expansive descriptions of Con-

158–60, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974)

gress’ powers under the Bankruptcy

(holding that bankruptcy statute governing

Clause, these cases shed little light on any

railroad reorganization in one region did

relevant limitations on Congress’ Bank-

not violate Uniformity Clause when no

ruptcy Powers.

railroad reorganization was pending out-

Perhaps the best known case holding side that region). Similarly, the Ninth

unconstitutional a provision of bankruptcy Circuit has held that § 317(a) of the Judi-

law is Louisville Joint Stock Land Bank v. cial Improvements Act of 1990, which au-

Radford, 295 U.S. 555, 55 S.Ct. 854, 79 thorizes bankruptcy administrators (em-

L.Ed. 1593 (1935), which invalidated the ployed by the judicial branch) to substitute

Frazier–Lemke addition to the 1898 Act for United States Trustees (employed in

that permitted a farmer to pay rent in- the Department of Justice) in two states

stead of mortgage payments for five years alone (North Carolina and Alabama) vio-

and then retire the mortgage by paying lates the Uniformity Clause. See St. An-

only the (likely reduced) fair market value gelo v. Victoria Farms, Inc., 38 F.3d 1525,

of the property. The principal vice of this 1531–32 (9th Cir.1994).

provision, the Supreme Court found, was In Granfinanciera, S.A. v. Nordberg,

that Congress applied it only to mortgages 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26

existing on the date of enactment, and thus (1989), the Supreme Court held that the

it constituted a taking of existing property bankruptcy power did not permit Congress

rights of mortgage holders in violation of to eliminate a party’s Seventh Amendment

the Just Compensation clause of the Fifth jury trial right by relabeling the cause of

Amendment.27 See id. at 589–602, 55 S.Ct. action and assigning it to a specialized

854. court in equity. Id. at 61, 109 S.Ct. 2782.

In Railway Labor Executives’ Ass’n v. Also well known is Northern Pipeline Con-

Gibbons, 455 U.S. 457, 469–73, 102 S.Ct. struction Co. v. Marathon Pipe Line Co.,

1169, 71 L.Ed.2d 335 (1982), the Supreme 458 U.S. 50, 102 S.Ct. 2858 (1982), where

Court held that bankruptcy legislation ex- the Supreme Court found in 1982 that the

27. See also United States v. Security Industrial actment. See id. at 82, 103 S.Ct. 407. But

Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d see Webber v. Credithrift (In re Webber), 674

235 (1982), where the Supreme Court con- F.2d 796 (9th Cir.1982), in which the Ninth

strued narrowly the provision in § 522(f) that Circuit held that a debtor may take advantage

permits a debtor to avoid the fixing of a lien of § 522(f) to avoid the fixing of a lien on an

on an interest of the debtor in property, to the interest in property that impaired an exemp-

extent that the lien impairs an exemption.

tion, where the lien had been fixed before the

The Court held that, to avoid a likely violation

effective date of the Bankruptcy Code (and

of the Just Compensation Clause of the Fifth

Amendment, this provision must not permit § 522(f)) but after the enactment of the Code.

the avoidance of liens existing before its en- See id. at 803–04.

524 300 BANKRUPTCY REPORTER

Bankruptcy Clause did not authorize Con- G. Substantive Due Process

gress to grant bankruptcy jurisdiction to

Pierce contends that Howard’s bank-

judges lacking Article III tenure.

ruptcy case deprives him of his substantive

There are also very few lower court due process rights, thereby invoking ‘‘dor-

decisions finding a bankruptcy law provi- mant’’ substantive economic due process

sion unconstitutional. There is one con- rights that have disappeared from Su-

temporary example. A battle rages preme Court jurisprudence since the

among lower courts today on whether 1930’s. The Fifth Amendment provides, in

rights clearly legislated under the Bank- relevant part, ‘‘nor shall any person TTT be

ruptcy Clause can be enforced under deprived of life, liberty or property, with-

§ 106(a) in federal court against state gov- out due process of law TTTT’’ Under this

ernments in light of the Eleventh Amend- theory, the Fifth Amendment is a limita-

ment (constitutionalizing state sovereign tion on the scope of ‘‘the subject of bank-

immunity) and case law thereunder. In ruptcies.’’

Hood v. Tennessee Student Assistance Recent Supreme Court decisions make it

Corp. (In re Hood), 319 F.3d 755, 761–68 clear that substantive due process is alive

(6th Cir.), cert. granted, ––– U.S. ––––, 124 and well in its jurisprudence, insofar as it

S.Ct. 45, 156 L.Ed.2d 703 (2003), the Sixth concerns individual rights and liberties.

Circuit held that the Bankruptcy Clause See, e.g., Lawrence v. Texas, ––– U.S.

authorized Congress, notwithstanding the ––––, 123 S.Ct. 2472, 2484, 156 L.Ed.2d 508

Eleventh Amendment, to abrogate state (2003) (finding due process violation in

sovereign immunity in bankruptcy mat- Texas statute prohibiting same-sex sod-

ters. In contrast, the following circuit omy). In contrast, substantive economic

court decisions have held that the Elev- due process remains sound asleep in Su-

enth Amendment prevents Congress from preme Court jurisprudence. Thus, entire-

abrogating state sovereign immunity in ly apart from the particular controversy

bankruptcy matters: Nelson v. La Crosse before this court, Pierce faces a steep up-

County Dist. Attorney (In re Nelson), 301 hill climb to invoke substantive economic

F.3d 820, 832 (7th Cir.2002); Mitchell v. due process.

Franchise Tax Bd. (In re Mitchell), 209

F.3d 1111, 1121 (9th Cir.2000); Sacred Apparently the only Supreme Court

Heart Hosp. v. Pennsylvania (In re Sa- case addressing substantive due process

cred Heart Hosp.), 133 F.3d 237, 243 (3d rights in the bankruptcy context is Canada

Cir.1998); Department of Transportation Southern Ry. v. Gebhard, 109 U.S. 527, 3

and Development v. PNL Asset Mgmt. Co. S.Ct. 363, 27 L.Ed. 1020 (1883), where

LLC (In re Fernandez), 123 F.3d 241, 243 New York bondholders challenged a Cana-

(5th Cir.), amended by 130 F.3d 1138, 1139 dian railroad ‘‘scheme of arrangement’’

(5th Cir.1997); Schlossberg v. Maryland specially authorized by Canadian statute.

(In re Creative Goldsmiths), 119 F.3d The bondholders had not participated in

1140, 1145–46 (4th Cir.1997). the Canadian proceeding. The Court

found that the scheme was ‘‘no more than

This case today does not require the is done in bankruptcy’’ in the United

court to determine the limits of the Bank- States, and thus that the scheme should be

ruptcy Powers granted to the federal gov- enforced in a United States court against

ernment in the Constitution. Accordingly, all creditors. See id. at 537–40, 3 S.Ct.

the court leaves this issue to another day. 363. The Supreme Court rejected the

IN RE MARSHALL 525

Cite as 300 B.R. 507 (Bkrtcy.C.D.Cal. 2003)

substantive due process challenge to the have planted mutual distrust in the breasts

arrangement. See id. at 537, 3 S.Ct. 363. of all classes of citizens, and have occa-

Procedural due process rights under the sioned an almost universal prostration of

Fifth Amendment clearly apply in the morals.’’ The states, because they were

bankruptcy context. In Hanover Nat. sovereign, possessed broad power to dis-

Bank v. Moyses, 186 U.S. 181, 187, 22 charge debts and contractual obligations.

S.Ct. 857, 46 L.Ed. 1113 (1902), for exam- What has happened to this power? The

ple, the Supreme Court found that the grand bargain of 1787 was that states sur-

notice requirements of the Fifth Amend- rendered it to the new federal government

ment Due Process Clause applied and in exchange for the checks and balances of

were satisfied. The Court rejected the a federal system that would restrain the

contention that personal notice of the filing new national legislature from unwise debt

was required. The Court found that bank- forgiveness. Moyses, 186 U.S. at 187, 22

ruptcy proceedings are, generally speak- S.Ct. 857. Thus, the grant of power to

ing, in the nature of proceedings In rem, Congress over the ‘‘subject of bankrupt-

for which notice by publication and mail cies’’ in Article I, Section 8 is balanced

satisfy due process requirements. Pierce with the prohibition in Article I, Section

does not complain of procedural due pro- 10, forbidding states from impairing the

cess violations in this case. obligation of contracts. The power to dis-

[4] The court finds it unnecessary to charge debts and contractual obligations

explore in detail the constitutional conse- was not extinguished: it was surrendered

quences of bankruptcy legislation that falls to the federal government. See id.

outside the Bankruptcy Powers of the [5–7] There is a significant difference,

Constitution. If this case were to fall out- with respect to the Bankruptcy Power,

side the scope of the Bankruptcy Clause, between property interests and contract

the court assumes without deciding that rights. See Webber v. Credithrift (In re

the law would violate some constitutional Webber), 674 F.2d 796, 802 (9th Cir.1982).

provision. However, the court does not In the bankruptcy context, property rights

reach this issue because the court finds enjoy at least a measure of protection un-

that Congress has the power under the der the Due Process and Just Compensa-

Bankruptcy Clause to determine that a tion Clauses of the Fifth Amendment.

debtor may invoke rights under the Bank- See, e.g., Louisville Joint Stock Land

ruptcy Code to adjust obligations with Bank v. Radford, 295 U.S. 555, 55 S.Ct.

creditors before the debtor becomes insol- 854, 79 L.Ed. 1593 (1935) (just compensa-

vent under a balance sheet test. tion); United States v. Security Industrial

The larger constitutional issue concerns Bank, 459 U.S. 70, 103 S.Ct. 407, 74

the power to extinguish debts and cancel L.Ed.2d 235 (1982) (same). On the other

contractual obligations. Under the Arti- hand, Congress is not prohibited from

cles of Confederation, the states possessed passing laws that impair the obligation of

and used this power, to the consternation contracts. See, e.g., Continental Bank v.

of many. See Alexander Hamilton, THE Rock Island Ry., 294 U.S. 648, 680, 55

FEDERALIST NO. 85, praising the new S.Ct. 595, 79 L.Ed. 1110 (1935); Webber,

constitution’s ‘‘precautions against the rep- 674 F.2d at 802. ‘‘In fact, the very essence

etition of those practices on the part of the of bankruptcy laws is the modification or

State governments which have undermined impairment of contractual obligations.’’

the foundations of property and credit, Webber, 674 F.2d at 802.

526 300 BANKRUPTCY REPORTER

[8] The protection of property rights in der the Constitution to authorize a debtor

the bankruptcy context, however, is mea- who is solvent, whether in the balance

sured. The Supreme Court made this sheet sense or in the liquidity sense, to file

clear in Wright v. Union Central Life Ins. a chapter 11 case and to confirm a plan of

Co., 304 U.S. 502, 58 S.Ct. 1025, 82 L.Ed. reorganization.

1490 (1938): The court has previously found against

Property rights do not gain any absolute Pierce on his statutory objections to the

inviolability in the bankruptcy court be- chapter 11 plan and on his motion to dis-

cause created and protected by state miss based on bad faith. Accordingly, the

law. Most property rights are so creat- court finds that the chapter 11 plan should

ed and protected. But if Congress is be confirmed and the motion to dismiss

acting within its bankruptcy power, it should be denied.

may authorize the bankruptcy court to

affect these property rights, provided NOTICE OF FILING SECOND

the limitations of the due process clause AMENDED OPINION

are observed. Pursuant to Dressler v. Seeley Co. (In re

Silberkraus), 336 F.3d 864, 869 (9th Cir.

Id. at 518, 58 S.Ct. 1025.

2003), the court HEREBY GIVES NO-

[9] In this case, Pierce has neither TICE of the filing of its Second Amended

property rights nor contract rights to as- Opinion on Plan Confirmation And Motion

sert against the debtors. He does not To Dismiss (Constitutional Issues) in the

even have a claim against the debtors in above case, a copy of which is attached.

this case, because he refused to file his

,

claim. He has only a Texas state court

judgment that is on appeal. This claim is

in danger of discharge if the debtors’ chap-

ter 11 plan is confirmed. The court finds

that this is an insufficient basis to find a

In re Viola Carolyn LUCAS,

violation of Pierce’s Fifth Amendment eco- also known as Carolyn

nomic substantive due process rights in Lucas, Debtor.

this case.

Orvey R. Cousatte, Administrator of

IV. Conclusion the Estate of Imogene Collier,

The court concludes that Pierce’s consti- Plaintiff–Appellant,

tutional challenge to the debtors’ bank- v.

ruptcy case and their plan of reorganiza- Viola Carolyn Lucas, Defendant–

tion under chapter 11 cannot be sustained. Appellee.

The court finds that the balance sheet test

BAP No. KS–02–088.

for insolvency was unknown in United

Bankruptcy No. 01–12092–7.

States bankruptcy law until 1898, when

Adversary No. 01–5116.

balance sheet insolvency first entered

United States bankruptcy law. Prior United States Bankruptcy Appellate Panel

thereto, insolvency in the bankruptcy con- for the Tenth Circuit.

text always meant liquidity (or equity) in- Oct. 20, 2003.

solvency.

[10] The court finds that Congress val- Judgment creditor brought adversary

idly exercised the Bankruptcy Powers un- proceeding against Chapter 7 debtor, seek-