A significant body of literature has developed in the wake of Stern v. Marshall[1] and the evolving roles of the courts. Aside from the incurred costs from dragging a bankruptcy judge’s proposals through the district court for review, the practical significance of mandating these steps depends on the tendency of district courts to adopt the bankruptcy court’s recommendations. However, there is a procedural disconnect with respect to the manner in which some courts carry out their roles that can leave experienced practitioners confused — and pro se litigants in peril.
Stern highlights that core proceedings can present constitutional concerns precluding a bankruptcy judge from entering judgment and requiring the district court’s review.[2] However, what happens when a bankruptcy court enters final judgment on a core issue without any constitutional concerns, but it defers that judgment so that the district court can review a plea to recover the same loss on a different legal theory under which the bankruptcy court cannot enter judgment? This practice is not unheard of.[3] Despite the existence of federal rules, local rules and standing orders addressing the procedure in which litigants should respond to proposed findings for issues on which the bankruptcy court is precluded from entering judgment, there is no guidance for issues on which the bankruptcy court can enter judgment but nonetheless defers judgment, and the result is one procedural pitfall into which both seasoned practitioners and pro se litigants can plummet.
Imperfect Lower Court Direction
This cautionary tale involves two litigants whose counsel were relieved as they shuffled up to the precipice.[4] The comprehensive record contains little that can be used to cobble together a sympathetic argument on the defendants’ behalves: It is full of uncontroverted testimony detailing their many bold and obvious lies.[5]
Beginning in 2003, the debtor, Fine Diamonds LLC, sold a small portion of the company’s precious stones wholesale to Peykar International Co. Inc., which was owned and operated by two brothers, Mitch and Mehran Peykar, out of New York and Tel Aviv.[6] In 2006, Fine Diamonds moved from a traditional credit transaction with Peykar International to consignment “on memo.”[7]
By December 2008, Fine Diamonds had shipped more than $125 million in diamonds to Peykar International and had received less than $87 million.[8] After expressing concerns over the substantial balance and slowed remittance, the debtor was consoled with questionable reassurances by the Peykar brothers that the goods were fully accounted for and available for inspection.[9] Fine Diamonds learned that the Peykar brothers were not holding inventory that they had claimed, and upon inspection, it was immediately apparent that the “fine diamonds” had been swapped for crumbs.[10]
An involuntary petition was filed in the U.S. Bankruptcy Court for the Southern District of New York with an adversary proceeding seeking to recover more than $36 million in diamonds on the debtor’s behalf.[11] The chapter 7 trustee substituted himself as plaintiff.[12] The complaint sought relief on grounds including turnover of estate property under § 542 of the Bankruptcy Code, state and federal fraudulent transfer, and conversion.[13] “The Bankruptcy Court entered [a] Decision [after trial] (the “Decision”) … in which the Bankruptcy Court entered judgment in favor of the Trustee and against the Defendants … [for] $37,593,930.34,” but also “concluded that it possessed the constitutional authority to enter final decisions only with respect to certain claims (the two [federal] fraudulent conveyance claims and the turnover claim).”[14] On review, the U.S. District Court for the Southern District of New York concluded that the bankruptcy court deferred entering final judgment on all matters regarded by the district court only as “non-core”[15] in order to give the district court an opportunity to “entertain objections,” review the proposed findings of fact and conclusions of law (the “proposed findings”), and enter judgment.[16]
At first blush, it appears that a simple typo places such inconsistent statements in juxtaposition; to wit, the entry of “judgment” as opposed to its “deferral.” The balance of the district court opinion is consistent on the premise that the bankruptcy court deferred judgment. However, there are similar inconsistencies in the underlying decision, which calls into question whether it was less of a “typo” and more of a “Freudian slip.” In its decision, the bankruptcy court ruled that:
Turnover, or its equivalent, is plainly required … [and] further finds that Defendant Peykar International is liable to the Trustee as the transferee of a fraudulent transfer, and that each of the Defendants Peykar International, Mitch and Mehran, jointly and severally, is liable to the Trustee for conversion.… Judgment should be entered against Defendant Peykar International … on the turnover, fraudulent transfer and conversion claims. Mitch and Mehran should be liable, jointly and severally with Peykar International, on the conversion claim.[17]
The basis of the bankruptcy court’s authority to enter judgment was addressed in a citation to Koplik-Bankruptcy, which included an analogous mix of issues on which the bankruptcy court could and could not enter judgment, resulting in deferral of all issues for review.[18]
In Koplik-Bankruptcy, as here, the claims with respect to which a bankruptcy judge could enter a final judgment, and those with respect to which it could not do so, were [in] respect to the same loss.… Here, as in Koplik-Bankruptcy, [the bankruptcy court] is deferring entry of judgment on the claims with respect to which it has the constitutional power to enter final judgment, to permit … review similar to that engaged in by [the district court] in Koplik-District. And as in Koplik-Bankruptcy … the [bankruptcy court’s] conclusions should simply be deemed to be proposed with respect to any matters as to which an Article I bankruptcy judge is not constitutionally empowered to issue a final judgment.[19]
Where the bankruptcy court stated that its proposed findings are deemed to be proposed with respect to matters for which a bankruptcy judge is not constitutionally empowered to render judgment, the logical corollary, or at least an apparent implication, is that for any matters on which the bankruptcy judge is empowered to render judgment, it will. However, some of the proposed findings confuse the situation. As to the existence of a consignment relationship, the bankruptcy court held that “[w]ith no basis for a finding that Peykar International can return [the diamonds], judgment must be entered against Peykar International.”[20] Addressing § 550 liability, the bankruptcy court concluded that “[a] judgment … is plainly appropriate. But while the [bankruptcy] Court can and will enter such a judgment with respect to Defendant Peykar International, it cannot do the same with respect to Mitch and Mehran,” citing an evidentiary shortage.[21]
The bankruptcy court concluded that “[j]udgment should be entered in favor of the Trustee and against Peykar International, Mitch, and Mehran, jointly and severally, [for] $37,593,930.34.” In a footnote, the court stated that the “[d]efendants contended the underlying evidence did not support the entire amount claimed by the Trustee. [A] review of the amount due from [the record] supports [that finding] … and the Court enters judgment in that amount.”[22] However, the bankruptcy court then stated that “[t]his is a Decision only, and neither an order, or a judgment.”[23] In light of the contradictory statements, the bankruptcy court’s intention appropriately calls for confirmation.
The bankruptcy court filed an order, with the decision extending the time imposed by Bankruptcy Rule 9033(b) to object to the proposed findings (the “implementation order”).[24] Two weeks later, within the time to object, the Peykar brothers each filed a notice of appeal.[25] A month later, after the time to object had expired, the court entered a memorandum and order with respect to the decision after trial (the “clarification order”).[26]
In the clarification order, the bankruptcy court addressed the litigants’ uncertainty about the procedure following the decision: the plaintiff in obtaining judgment from the district court on the proposed findings; and the Peykar brothers in having filed appeals as opposed to objections.[27] The bankruptcy court attributed the confusion to the evolving roles of the courts, as well as “holes in the procedure, which [Local Rule 9033-1 of the Bankruptcy Court] only partially plug[ged].”[28] The court found “no fault on either side,” as the “uncertainty is understandable,”[29] and directed the clerk to open the matter in the district court for consideration of the proposed findings.[30] The plaintiff could move before the district court for entry of judgment, “and a party who has objections may then be heard.”[31] Despite attributing no fault, the bankruptcy court reserved its view on whether the Peykar brothers’ appeals could be considered objections for purposes of Bankruptcy Rule 9033.[32]
Soon after, the plaintiff motioned the district court for final judgment on the proposed findings and the dismissal of the Peykar brothers’ appeals. The following day, the Peykar brothers filed motions seeking to have their appeals considered objections to the proposed findings[33]. The district court then issued its opinion.[34]
An Imperfect Procedural Patchwork
The district court took no issue with the proposed findings, granted the plaintiff’s motion in all respects and entered judgment consistent with the decision.[35] Furthermore, the district court found that the Peykar brothers waived their rights to de novoreview for failing to file objections to the proposed findings.[36] The district court’s discussion is premised on “[t]he Applicable Standards” of 28 U.S.C. § 157(c), Bankruptcy Rule 9033(d), Local Rule 9033-1 and the district court’s amended standing order of reference regarding title 11, dated Jan. 31, 2012 (collectively, the “rules”).[37] The district court cited the rules for the following general premises, respectively:[38]
§ 157(c): In non-core proceedings, the district court shall enter judgment after a de novo review of those matters to which a party has timely and specifically objected.
Bankruptcy Rule 9033(d): In non-core proceedings, the district court shall make a de novo review of those matters to which [a] specific written objection has been made.
Local Rule 9033-1: If the bankruptcy court determines that it cannot enter a final judgment consistent with the Constitution on a core matter, then Bankruptcy Rules 9033(a), (b) and (c) shall apply as if the matter is non-core.
Standing Order: If the bankruptcy court determines that [the] entry of a final judgment on a core matter would be inconsistent with the Constitution ... the bankruptcy court’s proposed findings shall be submitted to the district court for review.
The district court takes issue with the Peykar brothers’ failure to file an objection pursuant to Bankruptcy Rule 9033(d).[39] Their motions to consider the appeals as “objections” for the purposes of Bankruptcy Rule 9033(d) were dismissed with little more than an uncorrelated anecdote about how litigants typically want to correct an error in a judgment or order, not the caption of their own pleadings.[40] While this might be true, that was not the relief that they had requested.[41] Finally, the Peykar brothers’ pro se status would compel no leniency because they are “sophisticated … international businessmen” who, prior to the decision, had been represented by counsel.[42]
By its plain language,[43] § 157(c) and Bankruptcy Rule 9033(b) and (d) each contain a specificity requirement for objections, but none pertain to core matters. Local Rule 9033-1 only causes Bankruptcy Rules 9033(a), (b) and (c) to apply to core matters when a bankruptcy court finds some constitutional concern that compels district court review. However, even where some constitutional concern regarding a core claim is found, Bankruptcy Rule 9033(d) still does not apply, and the same prerequisite constitutional finding exists for the standing order.
Since § 157(c) is inapplicable to core matters, and the bankruptcy court “has the constitutional power to enter … judgment on the § 542 turnover claim” and “has the power [on the] federal fraudulent claims,”[44] there should be no constitutional concern prohibiting judgment by the bankruptcy court and implicating Local Rule 9033-1. Whether or not a judgment was entered by the bankruptcy court, there is no rule that compels an objection to the proposed findings in a core matter with no constitutional concerns.
The analysis in Koplik-Bankruptcy recommends deferral of such matters “to prevent duplicative recovery,” but while it is clear how choosing not to defer might result in duplicative judgments, it does not explain how a “duplicative recovery” would be obtained (the former an example of judicial inefficiency, the latter a constitutional concern).[45] It is unclear from Koplik-Bankruptcy whether the bankruptcy court’s entry of judgment on the same loss appropriately before the district court for review on different grounds was the “constitutional concern,” which is unlikely given the characterization that it was merely “the best course.”[46] The only other court to cite Koplik-Bankruptcy on this narrow issue did so favorably but was equally silent on the existence of any constitutional concern arising from the bankruptcy court’s refusal to defer where it otherwise has the authority to enter judgment.[47] No case law was found on point.
Alarmingly, it is the incomplete and confusing procedural patchwork on which the district court relies to dismiss the Peykar brothers’ appeals and deny de novo review because the appeals were not objections.[48] Procedurally, the Peykar brothers were not compelled to object to the proposed findings on core matters on which the bankruptcy court could have entered judgment. The district court’s analysis on why the appeals contained insufficient detail to qualify as objections substantially demonstrated how any error in denying those requests might be harmless,[49] but perhaps it would have been appropriate to include an analysis of why the appeals might have been procedurally sufficient to preserve for review a judgment that the bankruptcy court claimed that it had the authority to enter, but opted to defer.
Assuming that the Peykar brothers reasonably believed that the bankruptcy court entered judgment on the core matters on which it had authority to enter judgment, an appeal would be the proper response.[50] Moreover, at the time that the Peykar brothers filed their appeals, the bankruptcy court had not entered the clarifying memo that highlighted the procedural deficiencies that the bankruptcy court knew existed, and confirmed that all matters and judgments were deferred for review and specifically required an objection.
Had the Peykar brothers survived this procedural pitfall, it would have been a short-lived reprieve. Their utter failure to include the requisite detail to identify either the proposed findings to which they took issue, or the alleged legal error, left the district court unable to identify their concerns absent a substantial amount of guesswork.[51] The task was made even more difficult by the fact that the bankruptcy court struck the Peykar brothers’ direct testimony because they failed to appear for cross-examination.[52]
Notwithstanding, the Peykar brothers’ imperfect requests for relief were denied because their appeals were not objections (although they maybe should have been appeals) and because they were savvy-enough businessmen whose pro se status would not serve to absolve them of their obligation to adhere to the rules (no matter how unclear or inapplicable those rules might be).
For litigants facing a cool $38 million judgment, the “easy money” is on the parties who appear for cross-examination and obtain (or retain) competent counsel in preparation for judgment day. If you can do all of that, you will be ahead of the Peykar brothers, but there is no guarantee that you will not still fall victim to an incomplete patchwork of local rules and standing orders that seem outpaced by the ever-changing landscape they are supposed to settle.
[1] 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011) (“Stern”).
[2] Id.
[3] In re Perry H. Koplik & Sons Inc., 476 B.R. 746, 755 (Bankr. S.D.N.Y. 2012); adopted in part, 499 B.R. 276 (S.D.N.Y. 2013); aff’d, 567 F. App’x. 43 (2d Cir. 2014) (“Koplik-Bankruptcy”); In re Fine Diamonds LLC, 501 B.R. 159 (Bankr. S.D.N.Y. 2013); aff’d, appeal dismissed sub nom., Messer v. Peykar Int’l Co., 510 B.R. 31 (S.D.N.Y. 2014) (“Koplik-District”).
[4] In re Fine Diamonds LLC, 501 B.R. 159, 188 (Bankr. S.D.N.Y. 2013); aff’d, appeal dismissed sub nom., Messer v. Peykar Int’l Co., 510 B.R. 31 (S.D.N.Y. 2014) (“Fine Diamonds”).
[5] Id. at 165-76.
[6] Id. at 165-66.
[7] Id. at 166.
[8] Id. at 168.
[9] Id.
[10] Id. at 172.
[11] Messer v. Peykar Int’l Co., 510 B.R. 31, 33 (S.D.N.Y. 2014) (“Peykar Int’l”).
[12] Id.
[13] Id.
[14] Id. (emphasis added).
[15] Id. at 33.
[16] Id. at 34.
[17] Fine Diamonds at 164-65.
[18] Id.
[19] Id. (emphasis added).
[20] Id. at 180.
[21] Id. at 183 (emphasis added).
[22] Id. at 188 (emphasis added).
[23] Id.
[24] Peykar Int’l at 34.
[25] Id.
[26] Id.
[27] Clarification Order, p. 2.
[28] Id.
[29] Id.
[30] Id.
[31] Id. at 5.
[32] Id.
[33] Peykar Int’l at 34.
[34] Id. at 33.
[35] Id. at 42 and 44.
[36] Id. at 38.
[37] Id. at 37.
[38] Id. at 37-38.
[39] Id. at 38.
[40] Id.
[41] Id. at 38.
[42] Id. at 38-39.
[43] See generally 28 U.S.C. § 157(c); Bankruptcy Rule 9033; Local Rule 9033-1; Standing Order.
[44] Fine Diamonds at 165.
[45] Koplik-Bankruptcy at 755.
[46] Id.
[47] In re Allou Distributors Inc., 8-03-82321-ESS, 2012 WL 6012149 (Bankr. E.D.N.Y. Dec. 3, 2012).
[48] Peykar Int’l at 38.
[49] In re Schack Glass Indus. Co. Inc., 20 B.R. 967, 972 (Bankr. S.D.N.Y. 1982) (due-process concerns were disregarded as harmless error where service of process was substantially affected).
50 See generally Bankruptcy Rule 8001.
[50] See generally Bankruptcy Rule 8001.
[51] Peykar Int’l at 40-42.
[52] Fine Diamonds at 176.