On July 24, 2013, Judge Steven W. Rhodes of the Bankruptcy Court for the Eastern District of Michigan approved the City of Detroit’s motion to extend the automatic stay to various non-debtor parties, including certain state officials. The Court’s ruling effectively stays all pending litigation against the City, allows the City to continue to move forward with its chapter 9 case, and paves the way for a dispute over the City’s eligibility to file for chapter 9.

The Chapter 9 Filing and the State Court Litigation

On June 23, 2011, the Supreme Court ruled 5-4, in an opinion by Chief Justice Roberts, that a Bankruptcy Judge lacked constitutional authority to issue a final ruling on state law counterclaims by a debtor against a claimant. This is the latest round of a well-known case involving the estate of former model Anna Nicole Smith and the estate of her late husband, wealthy oil magnate J. Howard Marshall.  

On February 6, 2015, Judge Francisco Besosa of the U.S. District Court for the District of Puerto Rico held that the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) is expressly preempted by section 903 of the Bankruptcy Code and is therefore unconstitutional.

The United States Supreme Court recently ruled in Stern v. Marshall1 that a bankruptcy court lacks constitutional authority to render a final judgment on a bankruptcy estate’s counterclaim against a creditor based on state common law, despite an express statutory grant of jurisdiction. This ruling is the most significant decision regarding bankruptcy court jurisdiction since the Court’s 1982 decision in Northern Pipeline v. Marathon2 and it could significantly affect the administration of bankruptcy cases.

Root of the Constitutional Problem

The United States Supreme Court recently narrowed the scope of the authority of bankruptcy courts, with potential far-reaching implications on past, present and future bankruptcy matters. The case, Stern v. Marshall, 131 S.Ct. 2594 (2011), began as a dispute between Anna Nicole Smith and the son of her late husband. After several years of litigation and one previous trip to the U.S. Supreme Court, the Court ruled bankruptcy courts lack the authority to enter judgments on counterclaims against a debtor that are based on state law.

On 2 September 2014 the Constitutional Court heard an appeal against a final order of sequestration granted by the High Court of South Africa (Western Cape High Court) on 14 August 2013 sequestrating the joint estate of Mr Ivor Charles Stratford, the former chairman of the Pinnacle Point Group, and his wife Mrs Sheila Margaret Stratford (the Stratfords). 

Dispute Resolution Beijing/Hong Kong/Shanghai Client Alert Creditors Petitioning for Bankruptcy Beware: Absconding Bankrupts May Walk Free After Staying Away from Hong Kong for 4 Years Recent developments The Hong Kong Court of Final Appeal (“CFA”)1 has ruled unconstitutional a provision under the Bankruptcy Ordinance (“Ordinance”) that prevents the period of bankruptcy from commencing when a bankrupt is not in Hong Kong.

In the recent decision of Re Rieger Printing Ink Co., Justice Pepall of the Ontario Superior Court of Justice (Commercial List) considered the right to protection against selfincrimination in a Section 163 examination conducted under the Bankruptcy and Insolvency Act (the "BIA").

On May 18th, the Second Circuit, applying the Supreme Court's holding in Milavetz, Gallop & Milavetz, P.A. v. U.S., 130 S.Ct. 1324 (2010), reversed a trial court order finding that provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act that prohibit debt relief agencies from advising clients to incur more debt were overbroad and unconstitutional when applied to attorneys.

The Supreme Court of Delaware recently held that creditors of insolvent Delaware limited liability companies (LLCs) lack standing to bring derivative suits on behalf of the LLCs.

In March 2010, CML V brought both derivative and direct claims against the present and former managers of JetDirect Aviation Holdings LLC in the Court of Chancery after JetDirect defaulted on its loan obligations to CML. The Vice Chancellor dismissed all the claims, finding that, as a creditor, CML lacked standing to bring derivative claims on behalf of JetDirect, and CML appealed.