As has been widely publicized, the United States Supreme Court recently provided guidance on a bankruptcy court's jurisdiction to address certain types of claims, but left open issues of whether parties may consent to bankruptcy court jurisdiction (or waive a lack of jurisdiction argument if not raised early enough) to enter final judgments on certain types of matters. See Executive Benefits Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 573 U.S. ___ (June 9, 2014). Under the Bankruptcy Code, Bankruptcy Courts may enter final judgments on "core" matters (those that the Congress has authorized the Bankruptcy Court to enter final judgment upon). Bankruptcy Courts may not enter final judgments on "non-core" matters (those that Bankruptcy Courts must issue findings of facts and conclusions of law for District Court review). The Supreme Court has also previously held that Article III of the U.S. Constitution may preclude a Bankruptcy Court from entering final judgment on certain types of matters, previously considered to be "core" matters. See Stern v. Marshall, 131 S. Ct. 2594 (2011). Under the reasoning set forth in Stern, these types of matters (Stern dealt with a state law counterclaim for tortious interference against a creditor that consented to Bankruptcy Court jurisdiction by filing a proof of claim) did not fall into either category and it was not clear how the Bankruptcy Courts as to how to address them. The Bellingham decision gave guidance as to the proper means - the Bankruptcy Court was to follow the same procedure as non-core claims and issue proposed findings of fact and conclusions of law for the District Court's review. What was not addressed in Bellingham or Stern was whether the Bankruptcy Court may enter a final judgment in a non-core matter (or a matter containing a Stern type of claim, for example, one involving a state law claim or property right) if the parties consented to the Bankruptcy Court's jurisdiction. Before the Stern decision, this was common practice. Since the Stern ruling, it has been a source of confusion for courts and practitioners alike. The Supreme Court has recently granted certiorari in a Seventh Circuit case to perhaps clarify some of these issues, in Wellness International Network, Limited v. Sharif (Docket No. 13-935), according to Scotusblog.com.
The issues raised in the Wellness International case are first, whether the presence of a subsidiary state property law issue in an action brought against a debtor to determine whether property in the debtor's possession is property of the bankruptcy estate means that such action does not "stem from the bankruptcy itself" and therefore, that a Bankruptcy Court does not have the constitutional authority to enter a final order deciding that action and second, whether Article III permits the exercise of the judicial power of the United States by the Bankruptcy Courts on the basis of litigant consent, and if so, whether implied consent based on a litigant's conduct is sufficient to satisfy Article III. Accordingly, there may be some further guidance in the near future on the Bankruptcy Courts' abilities to rule on Stern type matters, including the appropriateness of a litigant's consent to Bankruptcy Court jurisdiction.
Bankruptcy and Commercial Transactions with Foreign Entities: What Law Governs?
As most astute manufacturers know, there is a statutory right under Bankruptcy Code section 503(b)(9) to assert an administrative priority claim (one with the highest priority in payment after secured creditors) for goods delivered to a debtor within 20 days before the debtor commences a bankruptcy case. There are, however, other laws that should be considered when dealing with foreign commercial transactions as illustrated in the recent decision by the Bankruptcy Court in the Eastern District of Pennsylvania in the case of In re World Imports, Ltd. (No. 13-15929 SR). There, the Bankruptcy Court tackled the issue of what law applies to calculate the commencement of the 20 days for purposes of determining whether creditors had the right to assert an administrative priority claim.
In World Imports, two creditors sought allowance and payment of their claims for goods they shipped to the debtor. At issue was when the debtor received the goods for purposes of determining whether they fell within the 20 day period giving rise to an administrative claim. Both creditors shipped the goods from China well outside the 20 day period. The debtor (or its customers) received the goods within the 20 day period. The debtor argued that it received the goods once they were placed on board the shipping vessel destined for the United States, which was outside the 20 days. The creditors countered that the date the debtor took physical possession in the U.S. controlled which would be within the 20 day period. At issue was what law controlled to determine when the debtor received the goods.
The claimants argued that since the Bankruptcy Code was silent as to the definition of the word "receive," the court should follow accepted practice and look to state law - here, the Uniform Commercial Code - to fill in this gap in the federal statute. Under the UCC "receipt" is defined as taking actual possession of goods - which would have been within 20 days of the debtor's bankruptcy filing.
The debtor countered that a treaty existed which acted as an exception to application of the UCC in this instance, specifically, the Convention on Contracts for the International Sale of Goods (CISG) which was signed by China and the U.S., among others. As signatories of the convention, the parties were to be held to the standards widely known and regularly observed by parties to contracts typical of the type involved in the trade. Although the CISG also did not define the term "receipt," it did provide that terms recognized by the International Commerce Commission were incorporated into the CISG. One of these terms was "Free on Board" or FOB which places the risk of loss or damage to goods to the buyer once the goods were placed on a vessel for delivery. Since the contracts at issue stated the shipments were to be FOB China, the debtor argued that under the CISG the goods were transferred to the debtor (or its customers) once they were put on the ship in China, which would make the receipt of the goods outside of the 20 days period.
After conducting an analysis of whether the existence of a treaty would preempt application of state law, Bankruptcy Judge Raslavich concluded that "state law must yield when it is inconsistent with or impairs the policy or provision of a treaty." Since the treaty trumped application of state law, he ruled in favor of the debtor and did not allow the creditors an administrative claim.
Since the parties in World Imports were dealing in international trade, they were subject to application of the CISG as opposed to the UCC, which resulted in the creditors losing an administrative claim. To achieve a different result, the creditors could have agreed to exclude the application of the CISG by stating so in their contracts. Given the volume of trade conducted with foreign entities, those entities need to be aware of this potential pitfall in the bankruptcy context and they should adjust the terms of their contracts to protect themselves so as to take advantage of the narrow statutory 20 day window for administrative priority status.