Team R12

No. 11-4080

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 2011

In re Blockbusters, Inc., Debtor

Natallie SANTANA, Chapter 11 Trustee for the Estate of Blockbusters, Inc.,

Petitioner, v.

RACHEL RAY WARNER BAKES, INC.,

Respondent.

On Writ of Certiorari to the United States Court of Appeals

For the Thirteenth Circuit

BRIEF FOR RESPONDENT

ORAL ARGUMENT REQUESTED

Team R12 COUNSEL FOR RESPONDENT

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QUESTIONS PRESENTED FOR REVIEW

I. Whether a debtor’s unauthorized use of cash collateral permits a bankruptcy trustee to avoid and recover funds when the funds were transferred to a good-faith transferee.

II. Whether Article III of the Constitution permits a bankruptcy judge to enter an order and issue final judgment in an action to recover post-petition transfers when the action is a traditionally-legal action and not a public right.

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TABLE OF CONTENTS

QUESTIONS PRESENTED ................................................................................................ i TABLE OF CONTENTS .................................................................................................... ii TABLE OF AUTHORITIES ...............................................................................................v OPINIONS AND ORDERS BELOW ............................................................................... ix JURISDICTIONAL STATEMENT .................................................................................. ix CONSTITUTIONAL AND STATUTORY PROVISIONS .............................................. ix STATEMENT OF THE CASE ............................................................................................1 SUMMARY OF THE ARGUMENT ..................................................................................3 ARGUMENT .......................................................................................................................6

I. A DEBTOR’S UNAUTHORIZED USE OF CASH COLLATERAL DOES NOT PERMIT A BANKRUPTCY TRUSTEE TO RECOVER FUNDS TRANSFERRED TO A GOOD-FAITH TRANSFEREE. ...................................................................6 A. Under Article III of the Constitution, the Trustee does not have

standing because the misuse of cash collateral did not harm the Estate or the bank. ....................................................................................6

B. Even if the Trustee can avoid the transfer under section 549, section 550 does not permit recovery. ...................................................10 1. There can be no recovery because there was no benefit

to the Estate. .........................................................................................10

2. Section 550 does not permit inequitable recovery. .............................13

C. Using avoidance and recovery as a remedy for unauthorized use of cash collateral undermines the goals of Chapter 11 bankruptcy proceedings. ........................................................................14

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1. The legislative history of section 549 reflects congressional

intent to protect innocent vendors like Rachel Ray Warner Bakes. ..................................................................................................15

2. Alternative available remedies for misuse of cash collateral are superior to avoidance and recovery because they do not result in inequity. ................................................................................16

II. ARTICLE III OF THE CONSTITUTION DOES NOT PERMIT A BANKRUPTCY JUDGE TO HEAR OR DETERMINE AN ACTION TO RECOVER POST PETITION TRANSFERS. ...................18 A. A bankruptcy court cannot issue final judgment on

transfer avoidance because transfer avoidance is historically an action at law that constitutionally mandates a jury trial. .............................................................................19 1. A bankruptcy court’s jurisdiction is limited to issues

arising from core bankruptcy proceedings with equitable solutions. .............................................................................20

2. Congress’s designation of an action as a core proceedings under 11 U.S.C. § 157 does not revoke Rachel Ray Warner Bakes’ right to a jury trial. ..................................................................22

B. The Public Rights Doctrine does not apply to this action. ..................24

1. Rachel Ray Warner Bakes is not a creditor. .......................................24

2. A noncore proceeding brought against a non-creditor

does not qualify as a public right. .......................................................26 C. Even if this Court finds that this action qualifies as a

public right, a bankruptcy court still does not have jurisdiction because the suit does not stem from case administration. ........................................................................................28

CONCLUSION ..................................................................................................................29 APPENDIX A ...................................................................................................................... I

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APPENDIX B ....................................................................................................................III APPENDIX C ................................................................................................................... IV APPENDIX D ..................................................................................................................... V APPENDIX E ................................................................................................................... VI APPENDIX F................................................................................................................... VII APPENDIX G ................................................................................................................. VIII APPENDIX H ................................................................................................................... IX APPENDIX I .................................................................................................................... XI APPENDIX J ................................................................................................................... XII APPENDIX K ................................................................................................................. XIII APPENDIX L ................................................................................................................ XVI

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TABLE OF AUTHORITIES CASES Allen v. Wright,

468 U.S. 737 (1984) ................................................................................................... 7, 8, 9 Bank of Marin v. England,

385 U.S. 99 (1996) ............................................................................................................ 14 Blum v. Stenson,

465 U.S. 886 (1984) .......................................................................................................... 15 Celotex Corp. v. Edwards,

514 U.S. 300, 320 (1995) .................................................................................................. 29 Crowell v. Benson,

285 U.S 22 (1932) ............................................................................................................. 24 Curtis v. Loether,

415 U.S. 189 (1974) .............................................................................................. 19, 20, 22 Dairy Queen, Inc. v. Wood,

369 U.S. 469 (1962) .......................................................................................................... 23 Dunes Hotel Assocs. v. Hyatt Corp.,

245 B.R. 492 (Bankr. D.S.C. 2000) ...................................................................... 11, 12, 13 Gladstone Realtors v. Vill. of Bellwood,

441 U.S. 91 (1979) .............................................................................................................. 7 Granfinanciera, S.A. v. Nordberg,

492 U.S. 33 (1989) ..................................................................................................... passim In re Aerosmith Denton Corp., 36 B.R. 116 (Bankr. N.D. Tex. 1995) ............................................................................... 16 In re Bean, 251 B.R. 196 (Bankr. E.D.N.Y. 2000) ........................................................................ 10, 11 In re C-L Cartage Co., Inc.,

899 F.2d 1490, 1493 (6th Cir. 1990) ................................................................................ 25 In re Chase & Sanborn Corp.,

848 F.2d 1196 (11th Cir. 1988) .................................................................................. 14, 15

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In re Delco Oil, Inc., 599 F.3d 1255 (11th Cir. 2010) ........................................................................................ 17

In re Farmland Indus., Inc.,

639 F.3d 402 (8th Cir. 2011) .............................................................................................. 7 In re Finn,

909 F.2d 903 (6th Cir. 1990) ............................................................................................ 25 In re Graham,

747 F.2d 1383 (11th Cir. 1984) ........................................................................................ 21 In re Indian Capitol Distrib., Inc.,

No. 09-11558-s7, 2011 WL 4711895 (Bankr. D.N.M Oct. 5, 2011) .............................. 7, 8 In re Kelvin Publ’g,

72 F.3d 129 (6th Cir. 1995) .............................................................................................. 17 In re Laughlin,

18 B.R. 778 (Bankr. W.D. Mo. 1982) .............................................................................. 10

In re R.A. Beck Builder, Inc., 34 B.R. 888 (Bankr. W.D. Penn. 1983) ............................................................................ 13

In re Resource Tech. Corp. Inc.,

624 F.3d 376 (7th Cir. 2010) .............................................................................................. 7 In re Verdi,

241 B.R. 851 (Bankr. E.D. Pa. 1999) ............................................................................... 11 Katchen v. Landy,

382 U.S. 323 (1966) .......................................................................................................... 24 Local Loan Co. v. Hunt,

292 U.S. 234 (1934) .......................................................................................................... 20 Murray’s Lessee v. Hoboken Land & Imp. Co.,

59 U.S. 272 (1992) ............................................................................................................ 26 N. Pipeline Const. Co. v. Marathon Pipeline Co.,

458 U.S. 50 (1982) ...................................................................................................... 24, 26

Pepper v. Litton, 308 U.S. 295 (1939) .......................................................................................................... 20

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Ross v. Bernhard, 396 U.S. 531 (1970) .................................................................................................... 19, 22

Schoenthal v. Irving Trust Co., 287 U.S. 92 (1932) ................................................................................................ 21, 22, 23 Simon v. E. Ky. Welfare Rights Org.,

426 U.S. 26 (1976) .......................................................................................................... 7, 8 Steel Co. v. Citizens for a Better Env’t,

523 U.S. 83 (1998) .............................................................................................................. 7 Stern v. Marshall, 131 S. Ct. 2594 (2011) ............................................................................................... passim Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568 (1985) .................................................................................................... 24, 26 Tull v. United States,

481 U.S. 412 (1987) .................................................................................................... 19, 20 United States v. Haggar Apparel Co.,

526 U.S. 380 (1999) ............................................................................................................ 6 Whitmore v. Arkansas,

495 U.S. 149 (1990) ............................................................................................................ 7 STATUTORY PROVISIONS U.S. Const. art. I............................................................................................................................ 18 U.S. Const. art. III .................................................................................................................. passim U.S. Const. amend. VII ................................................................................................................. 19 11 U.S.C. § 101 (2006) ................................................................................................................. 25 11 U.S.C. § 105 (2006) .......................................................................................................... passim 11 U.S.C. § 547 (2006) ................................................................................................................. 25 11 U.S.C. § 549 (2006) .......................................................................................................... passim 11 U.S.C. § 550 (2006) ................................................................................................................. 10 28 U.S.C. § 152 (2006) ................................................................................................................. 20

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28 U.S.C. § 157 (2006) ................................................................................................................. 20 28 U.S.C. § 158 (2006) ................................................................................................................. 20 LEGISLATIVE MATERIALS H.R. Rep. No. 93-137 (1973) ........................................................................................................ 15

OTHER AUTHORITIES UCC § 9-332 ................................................................................................................................ 17

Fed. R. Bankr. P. 8013 ................................................................................................................. 20

4 Collier on Bankruptcy § 547.04 (1987) ..................................................................................... 24

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OPINIONS AND ORDERS BELOW

The United States Bankruptcy Court for the District of Moot entered an order

pursuant to 11 U.S.C. §§ 549 and 550, rejecting various equitable good-faith transferee

defenses to the recovery of post-petition transfers, holding that the Bankruptcy Court had

authority to enter final orders, and granting final judgment. R. at 6. The United States

District Court for the District of Moot affirmed the Bankruptcy Court’s constitutional

authority to enter final orders and affirmed the Bankruptcy Court’s judgment. R. at 6.

On October 10, 2011, the United States Court of Appeals for the Thirteenth Circuit

reversed the decision of the District Court and held there is an exception to 11 U.S.C. §

549 for harmless errors and innocent vendors. Further, the Thirteenth Circuit held that a

bankruptcy court does not have the authority to either enter a final order avoiding a

transfer under 11 U.S.C. § 549 or grant judgment under 11 U.S.C. § 550. R. at 2, 11.

JURISDICTIONAL STATEMENT

The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.

CONSTITUTIONAL AND STATUTORY PROVISIONS The following constitutional and statutory provisions are relevant to the facts of

this case and are set forth in Appendices A-L: U.S. Const. art. I, § 8; U.S. Const. art. III,

§§ 1,2; U.S. Const. amend. VII; 11 U.S.C. § 101; 11 U.S.C. § 105; 11 U.S.C. § 547; 11

U.S.C. § 549; 11 U.S.C. § 550; 28 U.S.C. § 152; 28 U.S.C. § 157; 28 U.S.C. § 158.

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STATEMENT OF THE CASE

Rachel Ray Warner Bakes, Inc. (“Warner Bakes”) provides lavish cakes for

specialized events. R. at 4. Blockbusters, Inc. (the “Debtor”) is a company that hosts

conventions celebrating Broadway musicals. R. at 2-3. Prior to this action, Warner

Bakes had no pre-petition contact with the Debtor. R. at 5.

In 2008, after a failed convention season, the Debtor failed to make a scheduled

payment on its loan from Broadway Bank (the “Bank”). The Bank held a perfected

security interest over all of the Debtor’s assets including its bank accounts and accounts

receivable. R. at 3. Despite attempted negotiations between the Debtor and the Bank, the

Debtor was forced to file for Chapter 11 Bankruptcy. R. at 3.

The following season, the Debtor required additional funding to sponsor its 2009

convention. R. at 3. As such, the Bank and the Debtor negotiated a cash collateral order,

which was approved by the Bankruptcy Court as a stipulated cash collateral order. R. at

3-4. Specifically, the order permitted the Debtor to use $1.5 million of the Bank’s cash

collateral for expenses related to the 2009 convention while limiting the Debtor’s

spending in each convention-related category. R. at 4. The budget placed a $500,000

ceiling on payments to vendors and required Bank approval for any spending in excess of

the ceiling. R. at 4. Furthermore, the order granted the Bank a lien on all of the Debtor’s

assets, including assets acquired post-petition. R. at 4.

Once the Debtor received permission to use cash collateral, it contacted Warner

Bakes to create a full-scale model of the stage set of “West Side Story” out of cake,

which has a market value of at least $250,000. R. at 4. Warner Bakes quoted the Debtor

a price of $250,000 for the cake but requested and received a copy of the cash collateral

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order out of concern about undertaking such a large project for a company in bankruptcy.

R. at 4. Warner Bakes committed to producing the cake for the 2009 convention after

confirming that the spending ceiling of $500,000 was sufficient to cover the cost of the

cake. R. at 4. Although Warner Bakes did not continuously monitor the Debtor’s use of

cash collateral, Warner Bakes did require a $100,000 deposit and the remaining $150,000

paid prior to delivery. R. at 4-5.

The Debtor wire transferred $100,000 of the Bank’s cash collateral to Warner

Bakes as a deposit. R. at 4. Before the 2009 convention, the Debtor wire transferred the

remaining $150,000 from the Bank’s cash collateral, and subsequently, Warner Bakes

delivered the cake. R. at 4-5. The cake was a major reason for the conventions success

and many of the attendees stated that they attended the convention because of the news

coverage of the cake. R. at 5. Without ever informing Warner Bakes or the Bank, the

Debtor was already operating over the budgeted $500,000 ceiling for vendor payments.

R. at 5. Moreover, the Debtor exceeded its entire $1.5 million budget due to

irresponsible budget management. R. at 5.

Weeks after Warner Bakes received its final payment, the Bank realized that the

Debtor had exceeded its budget and used excessive cash collateral. R. at 5. Based on the

Debtor’s misuse of funds, the Bank obtained the appointment of a Chapter 11 trustee (the

“Trustee”). R. at 5. The Trustee initiated the original action to recover the $150,000

transfer to Warner Bakes as a “core proceeding” in bankruptcy court claiming the transfer

was an unauthorized post-petition transfer. R. at 5-6. However, because Warner Bakes

received full payment, it never filed a proof of claim in the bankruptcy case. R. at 5.

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SUMMARY OF THE ARGUMENT

The protections and incentives afforded those who deal in good faith with a

Chapter 11 debtor are fundamental to successful reorganization under Chapter 11. The

equitable principles underlying the Bankruptcy Code mandate balancing: (1) the needs of

the trustee for the benefit of the estate; (2) the needs of the debtor for the continued

operation of his business; and (3) the needs of Chapter 11 for the protection of the good-

faith third party. Thus, when a trustee seeks to avoid and recover a transfer of cash

collateral from a good-faith vendor, operation of the bankruptcy code prohibits such

action when the transfer does not harm the estate and recovery would give the secured

party a windfall.

In addition, constitutional standing requirements mandate that a party bringing

suit suffer injury in fact, trace the injury to conduct of the defendant, and show

redressability by the court. While statutory enactments may limit a cause of action to

certain individuals, they may not abrogate the Constitution’s Article III standing

requirements. Therefore, a trustee bringing an action under a provision of the Bankruptcy

Code must still satisfy the standing requirements for justiciability.

Here, the Debtor’s use of cash collateral in excess of the cash collateral order did

not result in injury to either the bankruptcy estate (the “Estate”) or Bank, thus the Trustee

lacks an injury in fact. However, assuming arguendo that an injury to either the Estate or

Bank did result from the use of cash collateral, Warner Bakes’ receipt of cash collateral

was not the cause of the injury. Accordingly, the underlying equitable considerations

prevent a bankruptcy court from giving the estate a windfall at the expense of an innocent

third party. The absence of an injury, culpable conduct traceable to Warner Bakes, and

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any equitable remedy prevent the Trustees’ satisfaction of constitutional standing

requirements.

Even if the court could permit the Trustee’s avoidance under section 549,

recovery of transfered property must meet the requirements of section 550. Section 550

requires a showing that the recovery of the property will benefit the estate and, if

recovery is permitted, will not produce inequitable results. As such, although an estate

might benefit from the recovery, section 550 permits a court to prevent recovery if the

recovery would result in inequity. Moreover, recovery from an innocent vendor rather

than the offending debtor prevents equitable recovery. Thus, the Trustee has failed to

satisfy the requirements of section 550 to permit recovery in this case.

A trustee also undermines the rehabilitative goals of Chapter 11 when a trustee

avoids a transfer and recovers cash assets from a vendor that engaged in a good-faith

transaction. Not only did neither the Estate nor the Bank suffer an injury from the

transaction, but the goods and services provided by Warner Bakes allowed the debtor to

realize a profit and enhanced the value of both the Estate and the interest of the Bank.

Chapter 11 seeks to protect and encourage businesses such as Warner Bakes to continue

dealing with Chapter 11 debtor in their business operations, not punish them.

Article III of the Constitution also protects Warner Bakes. Article III judges are a

vital component of the separation of powers. Because of the importance of the separation

of powers, Article III judges are provided with salary and tenure protections to ensure the

legitimacy of the judicial process. Although Article I does grant Congress the power to

create bankruptcy law and bankruptcy courts, that empowerment does not extend

Congress additional authority to deny any person the constitutional right to an Article III

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tribunal where appropriate. As such, the bankruptcy courts sit within federal districts,

and federal district courts remain the primary courts presiding over bankruptcy.

In matters outside of the “core proceedings” enumerated in the Bankruptcy Code,

bankruptcy courts do not have appropriate jurisdictional authority to enter final

judgments based on this Courts decisions in Stern v. Marshall, 131 S. Ct. 2594 (2011)

and Granfinanciera v. Nordberg, 492 U.S. 33 (1989). Specifically, Congress cannot

extend bankruptcy courts the power to adjudicate matters that could not have been

resolved by traditional courts of equity instead of traditional courts of law or matters that

mandate Seventh Amendment rights to a jury. Furthermore, Article III requirements do

not permit bankruptcy courts to determine actions that are private rights instead of public

rights nor actions that are unrelated to case administration.

Depriving Warner Bakes of its constitutional right to an Article III tribunal is

contrary to the Framers’ intent in their construction of the Constitution. Furthermore, a

finding that Warner Bakes is not entitled to a jury trial in a basic private contract dispute

unrelated to the administration of the bankruptcy estate could have devastating effects on

the separation of powers that is at the core of American jurisprudence.

Warner Bakes asks this Court to affirm the ruling of the Thirteenth Circuit and

hold that (a) the Trustee is not permitted to avoid and recover the cash collateral from

Warner Bakes and (b) this action is more akin to a traditional private contract matter;

therefore, Article III of the Constitution ensures Warner Bakes access to an Article III

tribunal.

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ARGUMENT

Neither party challenges the lower court’s findings of fact; therefore, this appeal

strictly concerns statutory interpretation. Matters of statutory interpretation are questions

of law, and are reviewed de novo. United States. v. Haggar Apparel Co., 526 U.S. 380,

391 (1999).

I. A DEBTOR’S UNAUTHORIZED USE OF CASH COLLATERAL DOES NOT PERMIT A BANKRUPTCY TRUSTEE TO RECOVER FUNDS TRANSFERRED TO A GOOD-FAITH TRANSFEREE.

A rule which penalizes vendors that deal with a debtor-in-possession acting in

good faith undermines the objectives of Chapter 11. That is not in the interest of proper

administration of bankruptcy proceedings. In the current case, it is unfair to recover from

Warner Bakes who supplied valuable goods and services to the debtor-in-possession in

for a price equivalent to their value. Without Warner Bakes’ cake and the media

attention that the cake created, the Debtor would remain insolvent. Without a successful

convention in 2009, the insolvent Debtor’s ability to successfully emerge from Chapter

11 would be impossible. The Trustee’s use of avoidance and recovery to punish the

misuse of cash collateral is not permitted because the Trustee lacks standing, fails to meet

the recovery requirements of section 550, and such action undermines the goals of

Chapter 11.

A. Under Article III of the Constitution, the Trustee does not have standing because the misuse of cash collateral did not harm the Estate or the bank.

Adversarial proceedings in bankruptcy courts are subject to Article III’s “case or

controversy” requirement. Congress can pass statutes that grant certain rights to persons,

such as 11 U.S.C. Section 549 (empowering a bankruptcy trustee to recover unauthorized

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post-petition transfers), but it may not “abrogate the Article III minima.” Gladstone

Realtors v. Vill. of Bellwood, 441 U.S. 91, 100 (1979); In re Resource Tech. Corp. Inc.,

624 F.3d 376, 382 (7th Cir. 2010) (“There is no question that the limits imposed by

Article III on federal jurisdiction apply equally in bankruptcy.”). Bankruptcy courts have

a duty to raise jurisdiction sua sponte before reaching the merits of a case. In re

Farmland Indus., Inc., 639 F.3d 402, 405 (8th Cir. 2011).

Article III, section 2 limits a federal court’s jurisdiction to cases and

controversies. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 102 (1998). Standing

to sue “is part of the common understanding of what it takes to make a justiciable case.”

Id. (citing Whitmore v. Arkansas, 495 U.S. 149, 155 (1990)). There are three

requirements of standing. First, the plaintiff must have suffered an “injury in fact”-an

invasion of a legally-protected interest which is (a) concrete and particularized and (b)

“actual or imminent, not ‘conjectural’ or ‘hypothetical.’ In re Indian Capitol Distrib.,

Inc., No. 09-11558-s7, 2011 WL 4711895 (Bankr. N.M. Oct. 5, 2011) (citing Allen v.

Wright, 468 U.S. 737, 756 (1984)). Second, the plaintiff must show a causal connection

between the injury and the triggering conduct such that the injury is, “fairly . . . traceable

to the challenged action of the defendant, and not the result of the independent action of

some third party not before the court.” Simon v. Eastern Ky. Welfare Rights Org., 426

U.S. 26, 41-42 (1976). Third, it must be likely, as opposed to merely speculative, that the

injury will be “redressed by a favorable decision.” Id. at 38, 43.

Trustees do not have standing to avoid and recover cash collateral when the value

of the debtor’s estate has not decreased as the result of an unauthorized transfer. In

Indian Capitol, the United States Bankruptcy Court for the District of New Mexico

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examined, sua sponte, whether a trustee had standing to avoid and recover cash collateral

that was used without consent of the secured party or authorization by the court. 2011

WL at *8-9. The debtor used cash collateral to purchase petroleum from a vendor for use

in the debtor’s business. Id. at *9. When the trustee sought to avoid the transfer and

recover the cash collateral from the vendor, the court found the trustee did not have

standing. Id. The court found that neither the estate nor the bank, which held a perfected

lien over the cash assets, suffered injury as a result of the transfer. Id. Specifically, the

value of cash collateral transferred to the vendor was equivalent to the value of petroleum

delivered to the debtor and became part of the estate. Id. at *9-10. Because the price of

gas was equal to its value, there was no decrease in value of estate property, thus there

was no injury. Id. at *10. From the bank’s perspective, it’s security interest in collateral

remained unchanged by the use of cash collateral because it held a perfected lien on both

cash and inventory. Id. Thus, where the use of cash collateral is for the purchase of

equally valued products, the estate does not suffer an injury. Further, when the products

purchased with cash collateral remain subject to a secured party’s lien, the secured party

has not suffered an injury. Id. Without injury to either the estate or a secured party’s

security interest, a Chapter 11 Trustee will not have the requisite injury to have standing.

Additionally, the second and third standing requirements require that the

plaintiff’s injury be the result of conduct traceable to the defendant and that there is

likelihood that a remedy from the court will redress the alleged injury. See Allen, 468

U.S. at 757. However, the likelihood that a remedy will redress the injury becomes

virtually impossible when the conduct of the defendant was not the cause of the injury.

Simon, 426 U.S. at 41-42. In Allen, this Court held that the link between IRS tax

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exemptions to racially discriminatory private schools and the injury suffered by

deprivation of education in a racially integrated school prevented standing. Allen, 468

U.S. at 754. First, the Court found it unlikely that a judgment against the IRS would

resolve the injury that stems from segregated education. Id. at 758. Secondly, the court

found that the injury was the result of actions by third parties, i.e. the private schools that

refused to integrate, whose conduct bore a direct connection the injury alleged. Id. Thus,

where the actions of the party being sued are were not the direct causes of the injury, this

Court found it unlikely that judgment against the defendant would remedy the injury. Id.

at 759.

In the present case, the Estate received not only the cake but also the profits

derived from the convention’s success. The price of the cake was equivalent to the value

of the property received by the estate in exchange for cash collateral. This is similar to

Indian Capital where the value of the gasoline was equivalent to the price paid for the

gasoline; here, the value of the cake was equivalent to the price paid for it. Therefore, the

Estate’s property was not devalued. As the Thirteenth Circuit recognized, the Bank in

turn received a replacement lien on the proceeds from the cake. The transaction replaced

$250,000 in cash with $250,000 worth of cake. The only injury resulting from Debtor’s

exceeding the cash collateral order was to the integrity of the Bankruptcy Code’s rules

and provisions. However, as the Indian Capitol Court held, such harm is to the Court and

not plaintiff and thus might warrant sanctions against the offending party but not the good

faith transferee of the cash assets.

Even if the Estate or the Bank suffered an injury, the Trustee still failed to meet

the second and third requirements of standing. By filing suit to recover the unauthorized

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cash from Warner Bakes, the Trustee failed to show how Warner Bakes in receiving the

cash caused an injury. If an injury did result from the transfer, the Debtor, not the Warner

Bakes, was the cause of the injury because it was the Debtor that violated the cash

collateral order. Receipt of cash collateral did not cause an injury because the Trustee’s

claim is based on the notion that the Debtor was not allowed to use the cash. To show a

causal link under the facts of this case the Trustee would have to show the absence of

permission caused the injury. Thus, a judgment will not redress the injury because

recovery is sought from the wrong party.

B. Even if the Trustee could avoid the transfer under section 549, section 550 does not permit recovery.

In addition to a lack of standing, operation of the Bankruptcy Code prohibits

avoidance and recovery by the Trustee. Successful recovery of unauthorized cash

collateral requires that a Trustee establish that the transfer is avoidable under section 549

and that recovery is permitted under section 550. In re Bean, 251 B.R. 196, 203 (Bankr.

E.D.N.Y. 2000). Even if a transfer is voidable under section 549, section 550 requires

additional showing by a Trustee to warrant recovery. Id. Section 550 requires first, that

the transfer be avoidable under sections 544, 545, 547, 548, 549, 553(b), or 724(a);

second, that recovery be made by a Trustee; and third, that the recovery benefit the estate.

11 U.S.C. § 550(a). Further, section 550 prohibits an inequitable recovery even when the

benefit to the estate requirement is met.

1. There can be no recovery because there was no benefit to the Estate.

A benefit to the estate is the estate’s resulting equity in recovered property. The

benefit is calculated by value of recovered property less any encumbrances. In re Bean,

251 B.R. at 205 (citing In re Laughlin, 18 B.R. at 778, 781 (Bankr. W.D. Mo. 1982)).

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Encumbrances include both the perfected liens of a secured party existing at the time of

the trustee’s recovery, as well as the liens previously perfected by possession of collateral

that became unperfected upon transfer of the collateral. See Dunes Hotel Assocs. v. Hyatt

Corp., 245 B.R. at 492, 500 (Bankr. D.S.C. 2000) (holding that the nullification effect of

the avoidance of a transfer retroactively renders the transfer ineffective such that the

transferee legally acquires nothing through it). Where an estate is subject to a blanket

lien over all of a debtor’s assets, there can be no recovery that would benefit the estate.

In re Bean, 251 B.R. at 205.

In Bean, the court concluded that a Chapter 7 trustee's pursuit of an avoidance

proceeding, which could not financially benefit the bankruptcy estate, was not permitted

by section 550 and was a gross abuse of the trustee's discretion. Id. There, the trustee

sought to recover a house sold by the debtor on grounds that it was an unauthorized post-

petition transfer under section 549. Id. at 199. The debtor had received fair market value

for the property and had turned over the net proceeds (representing his prepetition equity)

to the trustee. Id. at 200-01. The court found because the property was encumbered by

perfected liens of a creditor, the trustee would not benefit the estate by recovery even

though avoidance was permissible under section 549. Id. at 205. The court held that it

“is the purpose of the criminal law, not the Bankruptcy Code” to punish debtors, or other

parties, for punishment’s sake. Id. at 203. (citing In re Verdi, 241 B. R. 851, 850 (Bankr.

E.D. Pa. 1999)). The perfected security interests of other parties over recovered property

prevented the estate from realizing any benefit. Thus, section 550 prohibited the

recovery. Id.

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In Dunes Hotel, the court held that equitable principles underlying of the

Bankruptcy Code precluded the debtor-in-possession’s use of avoidance when the result

would be grossly inequitable. 245 B.R. at 497. The court considered whether a solvent

debtor-in-possession could avoid an unrecorded leasehold interest under section 544(a)

and gain full title free and clear of all encumbrances. Id. The court sought to determine

whether the debtor could avoid without ever triggering the “benefit of the estate” analysis

of section 550(a) when the debtor and the debtor's equity holder were the only entities

that would benefit from the avoidance of the lease. Id. The court found that the literal

application of certain Bankruptcy Code provisions would result in an outcome at odds

with the purposes and goals of the Bankruptcy Code.” Id. Therefore, because avoidance

would result in recovery of full title, the court held that section 550’s “benefit to the

estate” analysis was not required. Id. at 499. However, the court found that the fiduciary

duties of the debtor-in-possession prohibited the court from avoiding inequity to a

creditor despite the fact that the lessee was only a potential creditor and not a current

creditor.

Here, there is no benefit to the Estate. The $150,000 sought by the Trustee is

subject to the Bank’s security interest over all cash assets of the debtor. Even though the

transfer of cash unperfected the Bank’s lien, avoidance under 549, with its nullifying

effect on the transfer, re-prefects the Bank’s lien. Because the Trustee can only recover

once, the initial recovery would be subject to the Bank’s lien thus requiring a second

recovery from the Bank before the Estate can realize any benefit. As the Bean court

recognized, the single recovery rule of section 550 prevents the benefit to the estate

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requirement from being met under such conditions. Thus, the Trustee will not be able to

satisfy the benefit to the estate requirement of section 550 to permit recovery.

2. Section 550 does not permit inequitable recovery.

Even if a trustee meets all of the necessary requirements, recovery is still not

warranted if the initial transferee is an innocent party otherwise deserving of protection.

In re R.A. Beck Builder, 34 B.R. at 893. If a court allows a debtor-in-possession to obtain

a windfall at the expense of harm to a non-creditor, the resulting inequity precludes

recovery even when all technical requirements of sections 549 and 550 are met. See

Dunes Hotel, 245 B.R. at 512 (“[T]he Bankruptcy Code does not permit a [trustee] to

avoid an interest to provide a windfall for debtor and it equity holder.”).

The Bankruptcy Court for the Western District of Pennsylvania analyzed whether

to allow recovery of avoidable preferential and unauthorized post-petition transfers. R.A.

Beck Builder, Inc., 34 B.R. at 891. The Court held that even though the bank was an

initial transferee for purposes of section 550, the bank did not benefit from the transfer;

rather, the party that benefited was a guarantor of the bank’s loan. Id. Because allowing

recovery from the bank would be inequitable, the court held that “in the absence of

mandatory language, the Court does not favor a literal application of § 550(a)(1) to the

facts at bar when such an application would lead to an inequitable result.” Id.

In the present case, neither party disputes that the debtor received fair market

value for the “West Side Story” cake. The major reason for the success of the convention

was because of the cake produced by Warner Bakes. Thus, to allow the Trustee to

recover would punish the debtor for a violation of the Code, as the court in Bean decided

was impermissible. As the courts in Dunes Hotel and R.A. Beck Builder decided, if this

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court allows recovery, the outcome would be at odds with the purpose of the Bankruptcy

Code and would be inequitable. Warner Bakes is a good-faith vendor who provided a

good to the Debtor. That good significantly contributed to the overall success of the

event, which resulted in a profit for the estate. Forcing Warner Bakes to return the funds

paid to Warner Bakes would be inequitable and contrary to the purpose of the Bankruptcy

Code.

Warner Bakes provided a good, whose price was equivalent to its value, in good

faith to the Debtor. Prior to this proceeding Warner Bakes was paid in full. If the trustee

were permitted to recover in this case, Warner Bakes would be left with no more than an

unsecured claim. However, as recognized by the court in Beck, the Trustee’s fiduciary

duties extends to Warner Bakes as a potential creditor even though it is not a current

creditor. To invalidate a transfer to a vendor who is paid in full ends in an inequitable

result impermissible under section 550.

C. Using avoidance and recovery as a remedy for unauthorized use of cash collateral undermines the goals of Chapter 11 bankruptcy proceedings.

There is an overriding consideration that equitable principles govern the exercise

of bankruptcy jurisdiction. Bank of Marin v. England, 385 U.S. 99, 103 (1996).

Bankruptcy Courts are required, by equitable concepts underlying bankruptcy law, to step

back and evaluate a transaction in its entirety to ensure that their conclusions are logical

and equitable. In re Chase and Sanborn Corp., 848 F.2d 1196 (11th Cir. 1988). A court

can look to the legislative intent of section 549 to find that Congress intended to

harmonize the protection of innocent parties with the goals of maximizing the bankruptcy

estate. Id. In recognition of the equitable mandates underlying bankruptcy the legal

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remedies used by other courts demonstrate that avoidance and recovery are not the proper

remedy. Id. Remedies used by other courts reflect the requisite balance of the competing

interests of the parties while avoiding the inequities of allowing a trustee to avoid and

recover from an innocent vendor such as Warner Bakes.

1. The legislative history of section 549 reflects congressional intent to protect innocent vendors like Rachel Ray Warner Bakes.

When federal law incorporates congressional intent, this Court looks to the

legislative history if the statutory language is unclear. Blum v. Stenson, 465 U.S. 886,

896 (1984). With respect to section 549, the legislative history explains, “the general

thrust of the Commission’s recommendation is to protect those dealing with the debtor in

good faith.” H.R. at Rep. No. 93-137 at 191 (1973). The house report recognized the

need to ensure the estate’s protection while also protecting third parties dealing with the

debtor. Id. Thus, the resulting section 549 protects transactions in the ordinary course of

business after the filing of an involuntary petition and prior to the determination that

relief is appropriate. Id. According to the house report, “the recommendation is for the

Commission to eliminate the disparate treatment of transferees of real property and

transferees of property other than real property. The nature of the property is no longer

important.” Id. at 191.

In enacting section 549, Congress specifically recognized certain enumerated

protections for vendors who do business with the debtor in good faith and in the ordinary

course of business. Even though the explicit exceptions of section 549 are not applicable

to prevent avoidance under the facts of this case, the application of sections 549 and 550

create a de facto harmless exception where without harm to the estate or secured party

there can be no grounds for recovery. As the court below found, the Trustee’s reading of

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section 549 undermines this the equitable goals of Chapter 11. Use of avoidance and

recovery under the circumstances of this case “produce an absurd and unworkable system

where each employee, vendor and customer of a Chapter 11 debtor must engage in a

sophisticated tracing analysis through a debtors bank accounts before it can be confident

that it may retain funds remitted by a debtor in the ordinary course of business.” R. at 9.

Further, avoidance and recovery in the absence of requisite harm that results in inequity

is specifically prohibited. To hold Warner Bakes liable is not is fully consistent with the

congressional intent of section 549.

2. Alternative available remedies for misuse of cash collateral are superior to avoidance and recovery because they do not result in inequity.

Avoidance and recovery are not the proper remedy for misuse use of cash

collateral in light of the alternative legal remedies available. The available alternative

remedies strike the appropriate balance between a debtor-in-possession’s continued

operations and protecting the assets of the bankruptcy estate. Remedies such as:

injunctive relief, relief from automatic stay, replacement liens, damages from the debtor,

or a contempt order, all allow a secured party to recover from the offending debtor-in-

possession who used cash collateral without authorization while maintaining the balance

of equity.

The Northern District of Texas held in In re Aerosmith Denton Corp., 36 B.R. 116

(Bankr. N.D. Tex. 1995), that while no specific remedies were enumerated in section 363

for misuse of cash collateral, the court had equitable powers to enforce its provisions.

Section 105(a) of the Code gives the court power to “issue any order, process, or

judgment that is necessary or appropriate to carry out the provisions of this title.” Id. at

119. The court gave the secured creditor a replacement lien on the debtor’s post-petition

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accounts receivable and to the extent a replacement lien did not fully protect the creditor,

it was also given a priority administrative claim. Id.

Courts have also awarded damages payable by a debtor to a secured party for the

misuse of cash collateral. See In re Kelvin Publishing, 72 F.3d 129, 129 (6th Cir. 1995).

In Kelvin, the court held that damages against the offending party were an appropriate

remedy against a debtor that is still solvent when the misuse of cash collateral is

discovered. Id. at 6.

Before the Eleventh Circuit’s In re Delco Oil, Inc., 599 F.3d 1255 (11th Cir.

2010), decision no previous court had found a vendor liable for providing valuable goods

and services in exchange for cash to a debtor-in-possession merely on the grounds that

the use of cash was unauthorized. Id. at 1258. Prior to Delco Oil, vendors who received

payments, though unauthorized cash collateral, were not subject to avoidance. Id. The

drafters of the Uniform Commercial Code (“UCC”) carried this protection forward.

Comment 3 to section 9-332 provides, “[b]road protection for transferees helps to ensure

that security interests in deposit accounts do not impair the free flow of funds. It also

minimizes the likelihood that a secured party will enjoy a claim to whatever the

transferee purchases with the funds.” UCC § 9-332 (comment 3). Consequently, the

Delco Oil ruling created a dangerous precedent, which exposed any vendor who trades

with a debtor-in-possession to being disgorged of cash it received in an arm’s-length

commercial or contractual setting.

In the instant case, this Court could enjoin the Debtor from further use of the cash

collateral, give the Bank a replacement lien to the extent that it suffered injury to its

security interest, award damages to the Bank payable by the Debtor, or for the most

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egregious violations, issue sanctions or contempt orders. Any of these alternative

remedies would have provided results that are both equitable and in line with the

rehabilitative goals of Chapter 11. Therefore, avoidance and recovery is not warranted

when there are a number of other remedies available for this court to choose from.

Hence, this Court should affirm the Thirteenth Circuit’s decision and find that a

debtor’s unauthorized use of cash collateral does not permit a bankruptcy trustee to

recover funds transferred to a good faith transferee.

II. ARTICLE III OF THE CONSITUTION DOES NOT PERMIT A BANKRUPTCY JUDGE TO HEAR OR DETERMINE AN ACTION TO RECOVER POST-PETITION TRANSFERS.

The Constitution defines the judicial power of the United States in Article III and

provides federal judges with important salary and tenure protections designed to prevent

the political branches from encroaching on the power of the judicial branch. Stern v.

Marshall, 131 S. Ct. 2594, 2602 (2011). The Constitution also confers unto Congress,

through Article I, the power to “establish . . . uniform [l]aws on the subject of

Bankruptcies throughout the United States.” U.S. Const. art. I, § 8. The bankruptcy

judges appointed pursuant to Article I lack the constitutionally-imposed salary and tenure

protections held by their Article III colleagues.

Recently, this Court held that even if the Bankruptcy Code does permit the

Bankruptcy Court to enter final judgment, Article III could override that permission.

Stern, 131 S. Ct. at 2608. This Court recognized that although section 157(b)(2)(c) of the

Bankruptcy Code authorized the Court to enter a final judgment; Article III does not.

Rather, an Article III judge must make final judgments on state law claims that cannot be

resolved in the claims allowance process. Id. at 2620.

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Notwithstanding the related constitutional requirements, both the Bankruptcy

Court and the District Court for the District of Moot held that the Bankruptcy Court had

the jurisdiction to preside over the present case. This case involves a simple contract

between Warner Bakes and the Debtor. As such, Warner Bakes is not a creditor and a

proceeding against it should be decided in the proper Article III tribunal.

A. A bankruptcy court cannot issue final judgment on transfer avoidance because transfer avoidance is historically an action at law that constitutionally mandates a jury trial.

Congress may not transform a trustee’s historically-legal cause of action into an

equitable one or deprive petitioners of constitutional rights by assigning the trial and

determination of a legal action to a specialized court of equity. The nature of an action

sought by a bankruptcy trustee, such as the recovery of money payments of ascertained

and definite amounts, conclusively demonstrates that the cause of action was properly

characterized as legal rather than equitable. Granfinanciera v. Nordberg, 492 U.S. 33, 43

(1989). This Court affirmed its long-standing position in Granfinanciera, that “legal

claims are not magically converted into equitable issues by their presentation to a court of

equity.” Id. at 52 (quoting Ross v. Bernhard, 396 U.S. 531, 538 (1970)).

Furthermore, the Seventh Amendment provides that “in Suits [sp] at common

law, where the value in controversy shall exceed twenty dollars, the right of trial by jury

shall be preserved . . . .” U.S. Const. amend. VII. A jury trial is likewise required for

statutory causes of action if the cause of action is “analogous . . . [to a] [s]uit[] at

common law.” Tull v. United States, 481 U.S. 412, 416-17 (1987). This Court uses a

two-step process to determine whether a contemporary statutory cause of action is

analogous to a suit at common law. Id. First, a court must compare the cause of action

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“to 18th-century actions brought in the courts of England prior to the merger of the courts

of law and equity . . . .” Id. Second, a court must examine the sought-after relief “to

determine whether it is legal or equitable in nature.” Id. Of the two steps,

“characterizing the relief sought is more important than finding a precisely analogous

common law cause of action . . . .” Curtis v. Loether, 415 U.S. 189, 196 (1974).

1. A Bankruptcy Court’s jurisdiction is limited to issues arising from core bankruptcy proceedings with equitable solutions.

This Court has held that “courts of bankruptcy are essentially courts of equity, and

their proceedings inherently proceedings in equity.” Pepper v. Litton, 308 U.S. 295, 304

(1939) (citing Local Loan Co. v. Hunt, 292 U.S. 234 (1934)). Bankruptcy laws also

acknowledge a bankruptcy court is a court of equity. Id. In the exercise of the

jurisdiction conferred upon the bankruptcy court by the Bankruptcy Act, the court applies

the principles and rules of equity jurisprudence. Pepper, 306 U.S. at 304; 28 U.S.C. §

152(a)(1) (2006).

Furthermore, the manner in which a bankruptcy judge may act on a referred

matter depends on the type of proceeding involved. Bankruptcy judges may hear and

enter final judgments in “all core proceedings arising under Chapter 11. 11 U.S.C. §

157(b)(1) (2006). Parties may appeal final judgments of a bankruptcy court in core

proceedings to the supervising district court, which reviews them under traditional

appellate standards. See 11 U.S.C. § 158(a) (2006); Fed. R. Bankr. P. 8013.

However, when a trustee is seeking a definite amount of money, there is a

conclusive demonstration that the cause of action is properly characterized as legal versus

equitable. Granfinanciera, 492 U.S. at 43. This Court in Granfinanciera held that “‘an

action by a creditor or trustee-in-bankruptcy seeking money damages is an action at

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law.’” Id. at 46 n.5 (quoting In re Graham, 747 F.2d 1383, 1387 (11th Cir. at 1984)).

Granfinanciera involved a core bankruptcy proceeding in the form of a fraudulent

transfer against an entity that had not filed a claim against the bankruptcy estate.

Granfinanciera, 492 U.S. at 42. This Court based its decision on the common law

approach from eighteenth- and nineteenth-century England where a fraudulent transfer

proceeding seeking return of a specific amount of money would have been a suit at

common law. Id. at 43. Such a suit, the equivalent of a suit where legal rights are to be

ascertained and determined, is in sharp contrast with a suit where equitable rights alone

are to be recognized and equitable remedies are administered. Id. The action for

monetary relief “would not have sounded in equity 200 years ago in England.” Id. In

addition, this Court upheld the reasoning from Schoenthal v. Irving Trust Co., 287 U.S.

92, 94 (1932), where this Court held that the suit had to proceed at law, because of the

long settled rule that “suits in equity will not be sustained where a complete remedy

exists at law.”

In the present case, the trustee is seeking a definite amount of money, $150,000.

Applying the reasoning from Granfinanciera, this action for monetary relief can correctly

be characterized as an action at law. This Court should continue the tradition rooted in

the common law because the relief sought by the trustee in seeking monetary relief is an

action that asks the court to determine the legal rights of the parties. As the court below

stated, this lawsuit is not between governmental parties, but is a simple lawsuit based on

a federal statutory cause of action; therefore, the proper venue to resolve this action is

within an Article III court.

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2. Congress’s designation of an action as a bankruptcy core proceeding under 11 U.S.C. § 157 does not revoke Warner Bakes’ right to a jury trial.

The Seventh Amendment provides for a jury trial notwithstanding Congress’s

designation of certain actions as “core proceedings” that non-Article III bankruptcy

judges may adjudicate.” Although this Court regards bankruptcy courts as a type of

specialty equity court, legal rights and remedies do not lose their Seventh Amendment

identity merely because a claimant raises those rights and remedies in an equitable forum.

Curtis, 415 U.S. at 195.

A court’s adjudication of a Seventh Amendment question “depends on the nature

of the issue to be tried rather than the character of the overall action.” Ross, 96 U.S. at

538. In Ross, this Court was dealing with a legal claim within an equitable derivative

action. Id. Although this Court recognized the validity of the equitable action, it still

found that the legal claim could not be transformed into an equitable claim simply

because the petitioner presented the legal claim in a court of equity. Id.

Additionally, in Schoenthal, the bankruptcy trustee sued in equity to recover

preferential payments. 287 U.S. at 94. The judge denied the defendants a trial and a

transfer to the law side of the court. Id. This Court, citing several English cases,

observed “in England long prior to the enactment of our first Judiciary Act, common-law

actions of trover and money had and received were resorted to for the recovery of

preferential payments by bankrupts.” Id. The English tradition of the right to a jury was

preserved by the Seventh Amendment. Id. Specifically, that “suits in equity shall not be

sustained in any court of the United States in any case where a plain, adequate, and

complete remedy may be had at law.” Id. Since the facts stated in the trustee’s request

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and the monetary relief he demanded would have afforded him an adequate remedy at

law, this Court held that the defendants were entitled to a transfer to the law side of the

court and a jury trial. Id at 96.

This Court subsequently affirmed the holding in Schoenthal in Granfinanciera

clarifying that when a trustee is seeking a definitive amount in a bankruptcy core

proceeding, the trustee’s cause of action is conclusively characterized as legal.

Granfinanciera, 492 U.S. at 42. As Schoenthal and Granfiniciera clearly illustrate, this

Court accords significant weight in a Seventh Amendment analysis when the relief the

trustee seeks is purely monetary. See also Dairy Queen Inc. v. Wood, 369 U.S. 469, 476

(1962) (“Petitioner's contention . . . is that insofar as the complaint requests a money

judgment it presents a claim which is unquestionably legal. We agree with that

contention.”).

This Court should follow its precedent from Schoenthal and Granfiniciera and

apply the same logic to the claim against Warner Bakes. Just as this Court discussed in

Schoenthal, the Trustee here has filed a legal claim. Additionally, as in Schoenthal, a

legal remedy is available for the Trustee at law. Furthermore, the Trustee is seeking a

definite amount of money. As the Thirteenth Circuit stated, that is a simple lawsuit

between two private, non-governmental parties seeking monetary recovery. There is no

evidence that the transaction was anything but a simple contract dispute between the two

parties. Therefore, the Trustee’s action, under these circumstances, maintains its

common law identity and Seventh Amendment right to jury trial in any tribunal to which

it is assigned.

B. The Public Rights Doctrine does not apply to this action.

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Public rights are historically matters that “could be conclusively determined by

the Executive and Legislative Branches,” as distinguished from those matters that are

inherently judicial. Northern Pipeline Const. Co. v. Marathon Pipeline Co., 458 U.S. 50,

68 (1982); Thomas v. Union Carbide Agric. Products Co., 473 U.S. 568, 589 (1985).

Article I tribunals traditionally handle matters related to public rights. Northern Pipeline,

458 U.S. at 71. Public rights may become intertwined with private rights if a litigant

voluntarily submits them for disposition to a non-Article III forum. See Katchen v. Landy,

382 U.S. 323, 322 n.9 (1966). Alternatively, private rights are those concerning liability

of one individual to another under the law as defined. Crowell v. Benson, 285 U.S 22, 51

(1932). Warner Bakes did not submit voluntarily to the jurisdiction of the Bankruptcy

Court, thus this suit at its core concerns the liability of one individual to another. Even

considering the dissent’s explanation of the Public Rights Doctrine as giving Congress

some freedom to create new federal rights in a particularized area of the law that are

integral to a federal regulatory scheme and to assign those to a non-Article III tribunal for

adjudication,” the instant case does not involve a public right. R. at 21. The instant case

is more likened to a contract case; therefore the Public Rights Doctrine does not apply to

this action.

1. Warner Bakes is not a creditor.

Section 101(9)(A) of the Bankruptcy Code defines a creditor as “an entity that has a

claim against the debtor that arose at the time of or before the order for relief concerning

the debtor.” 11 U.S.C. § 101(9)(A). Further, the Code requires that a “preferential”

transfer be to or for the benefit of a creditor. 11 U.S.C. § 547(b)(2). This Court

recognizes that an entity is a “‘creditor’ by virtue of his right to reimbursement.” In re

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Finn, 909 F.2d 903, 904 (6th Cir. 1990) (citing 11 U.S.C. § 101(9)(A); 4 Collier on

Bankruptcy § 547.04 (1987)). An entity is also a “creditor” when it has “a real or

contingent ‘claim’ . . . .” In re C-L Cartage Co., Inc., 899 F.2d 1490, 1493 (6th Cir.

1990).

In C-L Cartage, this Court recognized that a bank is a creditor when the bank

extends a good or service with an expectation of repayment in the future. Id. Further,

this Court stated that the expectation of repayment would result in a claim against the

bankruptcy estate when the creditor exhibits a “right to payment, whether or not such

right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,

unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” Id. Because

the bank had extended a loan to the Respondent, the bank had a claim as a creditor

against the bankruptcy estate. Id. at 1495.

Here, Warner Bakes is not a creditor because the Debtor paid it in full. As such,

Warner Bakes did not bring a claim against the Estate. Unlike the bank in C-L Cartage,

Warner Bakes has no expectation of repayment in the future. Additionally, Warner

Bakes does not maintain a right to additional payment or a claim against the Estate. To

subject Warner Bakes to any decision that is contrary to that of the Thirteenth Circuit

would turn it into a creditor and would result in an inequitable result both to Warner

Bakes and also to all innocent vendors doing business with Chapter 11 debtors alike.

Thus, this Court should find that Warner Bakes is not a creditor in this action.

2. A noncore proceeding brought against a non-creditor does not qualify a public right.

In Northern Pipeline, the appellants argued that a discharge in bankruptcy was a

“public right” similar to such congressionally-created benefits as “radio station licenses,

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pilot licenses, or certificates for common carriers” granted by administrative agencies.

458 U.S. at 71. The plurality in Northern Pipeline recognized that there was a category

of cases involving “public rights” that Congress could constitutionally assign to

legislative courts for resolution. Northern Pipeline, 458 U.S. at 83.

A full majority of the Court, while not agreeing on the scope of that exception,

concluded that the doctrine did not encompass adjudication of the state law claim. Id. at

97. This Court also rejected the debtor’s argument that the Bankruptcy Court's exercise

of jurisdiction was constitutional because the bankruptcy judge was acting merely as an

adjunct of the district court or court of appeals. Id. The restructuring of debtor-creditor

relations, which is at the core of the federal bankruptcy power, has to be distinguished

from the adjudication of state-created private rights, such as the right to recover contract

damages. Id. Therefore, Northern Pipeline’s right to recover contract damages to

augment its estate was one “one of private right, that is, of the liability of one individual

to another under the law as defined. Id. at 80.

In Granfinanciera, the most recent case considering the public rights exception,

this Court rejected a bankruptcy trustee’s argument that a fraudulent conveyance action

on behalf of a bankruptcy estate against a non-creditor in a bankruptcy proceeding fell

within the public rights exception. Granfinanciera, 492 U.S. at 56-57. See also

Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272, 284 (1855);

Thomas, 473 U.S. at 570 (finding that public rights flow from a federal statutory scheme).

In this Court’s recent Stern decision, this Court held that “the Bankruptcy Code

simply does not provide a proceeding that is simultaneously core and yet only related to

the bankruptcy estate.” 131 S. Ct. at 2605. In Stern, this Court found that section

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157(b)(2) of the Bankruptcy Amendments and Federal Judgeship Act of 1984 was

unconstitutional, at least in part. Id. This Court held that the statute grants jurisdiction to

bankruptcy courts over “core proceedings,” which are the types of proceedings

commonly associated with bankruptcy courts. Id. Because bankruptcy courts derive

their authority from Article I and not Article III, the Constitution prohibits bankruptcy

judges from entering a final judgment on a state law counterclaim asserted by a debtor.

Id. Chief Justice Roberts, for the majority, noted that the Constitution requires that an

Article III judge enter final judgment. Id. at 2611. As the Thirteenth Circuit stated, if

such an exercise of judicial power may nevertheless be taken from the Article III courts

simply by deeming it part of some vague “public right,” then Article III would be

transformed from being the guardian of individual liberty and separation of powers as

envisioned by the founding fathers into a mere dream. R. at 14 (citing Stern, 131 S. Ct. at

2617).

The substantive legal rights at issue in the present action cannot be deemed

“public rights,” much like the legal rights at issue in Northern Pipeline were not deemed

“public rights.” Rather, this dispute is one of private rights and an Article III tribunal is

vested with jurisdiction to adjudicate. The claim against Warner Bakes is similar to the

claim in Stern. It does not flow strictly from a federal statutory scheme as this Court

described in Thomas. Nor does the claim against Warner Bakes satisfy this Court’s “core

proceeding” requirement as discussed in Stern. This suit involves a classic exercise of

judicial power: the entry of a final, binding judgment by a court with broad substantive

jurisdiction, on a common law contractual cause of action. Just as this Court discussed in

Stern, while this proceeding may be related to the bankruptcy case, that relation is not

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sufficient to turn it into a “core proceeding.” Since Warner Bakes is not a creditor and

this proceeding is not a “core proceeding” under the Bankruptcy Code, no public right is

at issue. As such, this Court should confirm the Thirteenth Circuit’s statement that the

public right doctrine is not applicable.

C. Even if this Court finds that this action qualifies as a public right, a Bankruptcy Court still does not have jurisdiction because the suit does not stem from case administration.

Even if this Court decides the action against Warner Bakes qualifies as a public

right, a Bankruptcy Court still would not be entitled to adjudicate this matter because the

suit does not stem from case administration. Both this Court in Stern and the Thirteenth

Circuit make clear that bankruptcy courts may only legislate in a particular category. R.

at 13 (citing Stern, 131 S. Ct. at 2610.). The category “is a narrow one limited to case

administration and those matters ‘that would necessarily be resolved by the claims

allowance process.’” Id.

The Thirteenth Circuit explained its understanding in the decision below:

Entry of the Cash Collateral order was case administration. A lawsuit asserting a cause of action and seeking to deprive a non debtor if its property is not case administration, even if the cause of action may depend upon some administrative action taken during the case. The money judgment entered here is no different from that entered in any garden variety lawsuit, and it is the exercise of judicial power to deprive citizens of their property that triggers the Article right to an Article III judge.

R. at 13 n.4. Similarly, Justice Stevens discussed case administration in his dissent in Celotex

Corp. v. Edwards, 514 U.S. 300, 320 (1995) (Stevens, J., dissenting). Justice Stevens

labeled suits by creditors as “related proceedings . . . involv[ing] litigation between third

parties, which could have some effect on the [case] administration . . . .” Id. at 320-21.

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Since the respondent in Edwards was a creditor with litigation that was resolved through

the claims allowance process, Justice Stevens deemed the issue to be related to case

administration. Id. at 325.

There is no reason to depart from the logic used by this Court in Stern, Justice

Stevens in Edwards, and the Thirteenth Circuit below. Warner Bakes was not a creditor,

and this action did not involve the claims-allowance process. Warner Bakes had already

been paid for its services, so Warner Bakes could not engage in a proceeding that would

materially affect the administration of the Debtor’s case. Additionally, the claims

allowance process could not satisfy the Debtor’s duty to Warner Bakes because Warner

Bakes never submitted a claim against the Estate.

Warner Bakes satisfied a contractual obligation to the Debtor that should be

categorized as a private right that warrants Article III adjudication. Because Warner

Bakes did not file a claim against the bankruptcy estate and is therefore not a creditor, the

Debtor could not have satisfied its obligation to Warner Bakes through case

administration; therefore, this Court should affirm the decision of the Thirteenth Circuit

and find that bankruptcy courts cannot issue final judgment on transfer avoidance actions.

CONCLUSION

THEREFORE, Respondent respectfully moves this Court to affirm the decision of

the Thirteenth Circuit Court of Appeals.

Respectfully Submitted, /s/ Team R12 COUNSEL FOR RESPONDENT Rachel Ray Warner Bakes, Inc.

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APPENDIX A U.S. Const. art. I, § 8: The Legislative Branch

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; To borrow Money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States; To establish Post Offices and Post Roads; To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries; To constitute Tribunals inferior to the Supreme Court; To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations; To declare War, grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water; To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years; To provide and maintain a Navy; To make Rules for the Government and Regulation of the land and naval Forces; To provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions;

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To provide for organizing, arming, and disciplining, the Militia, and for governing such Part of them as may be employed in the Service of the United States, reserving to the States respectively, the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress; To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings; And

To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

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APPENDIX B U.S. Const. art. III, § 1, 2: The Judicial Branch

Section 1. The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office. Section 2. The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;--to all Cases affecting Ambassadors, other public Ministers and Consuls;--to all Cases of admiralty and maritime Jurisdiction;--to Controversies to which the United States shall be a Party;--to Controversies between two or more States;--between a State and Citizens of another State;--between Citizens of different States;--between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects. In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make. The Trial of all Crimes, except in Cases of Impeachment, shall be by Jury; and such Trial shall be held in the State where the said Crimes shall have been committed; but when not committed within any State, the Trial shall be at such Place or Places as the Congress may by Law have directed.

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APPENDIX C U.S. Const. amend. VII: Trial By Jury in Civil Cases In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

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APPENDIX D 11 U.S.C. § 101(10)(A):

Definitions The term “creditor” means-- (A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor;

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APPENDIX E 11 U.S.C. § 105(a): Power of the Court

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

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APPENDIX F 11 U.S.C. § 547(b)(2): Preferences

Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property— (2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

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APPENDIX G 11 U.S.C. § 549: Post Petition Transfers

(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a transfer of property of the estate—

(1) that occurs after the commencement of the case; and (2)(A) that is authorized only under section 303(f) or 542(c) of this

title; or

(B) that is not authorized under this title or by the court.

(b) In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has.

(c) The trustee may not avoid under subsection (a) of this section a

transfer of an interest in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed, where a transfer of an interest in such real property may be recorded to perfect such transfer, before such transfer is so perfected that a bona fide purchaser of such real property, against whom applicable law permits such transfer to be perfected, could not acquire an interest that is superior to such interest of such good faith purchaser. A good faith purchaser without knowledge of the commencement of the case and for less than present fair equivalent value has a lien on the property transferred to the extent of any present value given, unless a copy or notice of the petition was so filed before such transfer was so perfected.

(d) An action or proceeding under this section may not be commenced

after the earlier of—

(1) two years after the date of the transfer sought to be avoided; or (2) the time the case is closed or dismissed.

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APPENDIX H 11 U.S.C. § 550: Liability of transferee of avoided transfer

(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—

(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or

(2) any immediate or mediate transferee of such initial transferee. (b) The trustee may not recover under section1 (a)(2) of this section from--

(1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided; or (2) any immediate or mediate good faith transferee of such

transferee.

(c) If a transfer made between 90 days and one year before the filing of the petition—

(1) is avoided under section 547(b) of this title; and

(2) was made for the benefit of a creditor that at the time of such transfer was an insider; the trustee may not recover under subsection (a) from a transferee that is not an insider.

(d) The trustee is entitled to only a single satisfaction under subsection (a) of this section.

(e)(1) A good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of—

(A) the cost, to such transferee, of any improvement made after the transfer, less the amount of any profit realized by or accruing to such transferee from such property; and

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(B) any increase in the value of such property as a result of such improvement, of the property transferred.

(2) In this subsection, “improvement” includes— (A) physical additions or changes to the property

transferred; (B) repairs to such property; (C) payment of any tax on such property; (D) payment of any debt secured by a lien on such

property that is superior or equal to the rights of the trustee; and

(E) preservation of such property.

(e) An action or proceeding under this section may not be commenced after the earlier of—

(1) one year after the avoidance of the transfer on account of which recovery under this section is sought; or

(2) the time the case is closed or dismissed.

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APPENDIX I 28 U.S.C. § 152: Appointment of Bankruptcy Judges

(a)(1) Each bankruptcy judge to be appointed for a judicial district, as provided in paragraph (2), shall be appointed by the court of appeals of the United States for the circuit in which such district is located. Such appointments shall be made after considering the recommendations of the Judicial Conference submitted pursuant to subsection (b). Each bankruptcy judge shall be appointed for a term of fourteen years, subject to the provisions of subsection (e). However, upon the expiration of the term, a bankruptcy judge may, with the approval of the judicial council of the circuit, continue to perform the duties of the office until the earlier of the date which is 180 days after the expiration of the term or the date of the appointment of a successor. Bankruptcy judges shall serve as judicial officers of the United States district court established under Article III of the Constitution.

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APPENDIX J 28 U.S.C. § 158(a): Appeals

The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees; (2) from interlocutory orders and decrees issued under section 1121(d) of title 11 increasing or reducing the time periods referred to in section 1121 of such title; and (3) with leave of the court, from other interlocutory orders and decrees; and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An appeal under this subsection shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving.

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APPENDIX K 28 U.S.C. § 157: Procedures

(a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

(b) (1) Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.

(3) Core proceedings include, but are not limited to—

(A) matters concerning the administration of the estate;

(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;

(B) counterclaims by the estate against persons filing

claims against the estate;

(C) orders in respect to obtaining credit;

(D) orders to turn over property of the estate;

(E) proceedings to determine, avoid, or recover preferences;

(F) motions to terminate, annul, or modify the automatic

stay;

(G) proceedings to determine, avoid, or recover fraudulent conveyances;

(H) determinations as to the dischargeability of particular

debts;

(I) objections to discharges;

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(J) determinations of the validity, extent, or priority of liens;

(K) confirmations of plans;

(L) orders approving the use or lease of property,

including the use of cash collateral;

(M) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate;

(N) other proceedings affecting the liquidation of the assets

of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and

(O) recognition of foreign proceedings and other matters

under chapter 15 of title 11.

(4) The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. A determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law.

(5) Non-core proceedings under section 157(b)(2)(B) of title 28, United States Code, shall not be subject to the mandatory abstention provisions of section 1334(c)(2).

(6) The district court shall order that personal injury tort and wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or in the district court in the district in which the claim arose, as determined by the district court in which the bankruptcy case is pending.

(c)(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

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(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.

(c) The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.

(d) If the right to a jury trial applies in a proceeding that may be heard under this section by a bankruptcy judge, the bankruptcy judge may conduct the jury trial if specially designated to exercise such jurisdiction by the district court and with the express consent of all the parties.

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APPENDIX L Federal Rules of Bankruptcy Procedure, Rule 8013: Disposition of Appeal; Weight Accorded Bankruptcy Judge's Findings of Fact

On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.