IN T SUPREME COURT OF THE UNITED STATES OCTOBER TERM · PDF fileThe claims at issue in this...

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No. 11-628 ______________________________________________________________________

IN THE

SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2011

_____________________________________

IN RE BLOCKBUSTERS, INC., Debtor

NATALLIE SANTANA,

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

_____________________________________

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Counsel for Respondent

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QUESTIONS PRESENTED

1. Whether a debtor’s transfer of funds that exceeded a dollar limit imposed by an

authorized cash collateral order is sufficient to permit a bankruptcy trustee to recover

those funds from a good faith transferee who, in the ordinary course of business, provided

reasonably equivalent value in exchange for the transfer.

2. Whether Article III of the Constitution permits a bankruptcy judge to hear and determine

an action to recover allegedly unauthorized post-petition transfers pursuant to 11 U.S.C.

§§ 549 and 550.

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TABLE OF CONTENTS

QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

OPINIONS BELOW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi

STATEMENT OF JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED. . . . . . . . . . . . . . . . vi

STATEMENT OF THE CASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

SUMMARY OF THE ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

ARGUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

I. The bankruptcy court could hear the case but not enter final judgment where the

judge did not meet the requirements of Article III and the claim at issue does not

involve a recognized public right. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A. Bankruptcy judges are not Article III judges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

B. A bankruptcy court may not enter a final judgment in a non-core proceeding

or where a public right is not involved. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

C. The claims at issue in this case do not fall into one of the exceptions

of the public rights doctrine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

D. A bankruptcy court does not have the authority to enter final judgments

where a private right is involved. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

II. A bankruptcy trustee may not use 11 U.S.C. § 549 to avoid a debtor’s transfer of

funds simply because the transaction exceeded a dollar limit imposed by an

authorized cash collateral order. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

A. The estate is without standing because it has not suffered an injury. . . . . . . . . . .17

B. The estate’s power to avoid transfers under § 549 is subject to equitable defenses

when the initial transferee acts in good faith and the estate is not harmed . . . . . .18

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C. Avoiding the transfer under § 549 would create conflict within the

Bankruptcy code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

D. A trustee cannot avoid a Chapter 11 debtor’s transfer of funds, conducted in

the ordinary course of business, because the Bankruptcy Code authorizes the

transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

1. Blockbuster’s transfer of funds to Rachel Ray was authorized by 11

U.S.C. §1108. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22


U.S.C. § 363(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

3. The trustee’s reliance on Delco is misplaced. . . . . . . . . . . . . . . . . . . . . . .25

E. Blockbuster’s post-petition transfer of funds to Rachel Ray should not be avoided

because it would result in disruption of the harmony between the U.C.C., § 1108

and § 363(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I

APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II

APPENDIX C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .III

APPENDIX D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV

APPENDIX E. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XI

APPENDIX F. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIV

APPENDIX G. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XV

APPENDIX H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XVII

APPENDIX I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XVIII

APPENDIX J. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XIX

APPENDIX K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XXVII

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TABLE OF AUTHORITIES

United States Supreme Court Cases

Crowell v. Benson, 285 U.S. 22 (1932). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). . . . . . . . . . . . . . . . . . . . . . . . . . .7

Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). . . . . . . . . . . . . . . . . . . . . . . . . . .11, 12, 14

Local Loan Co. v. Hunt, 292 U.S. 234 (1934). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). . . 7, 10, 11, 12, 14,

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Pepper v. Litton, 308 U.S. 295 (1939). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15, 18

Stern v. Marshall, 131 S.Ct. 2594, 2609 (2011). . . . . . . . . . . . . . . . . . . . . . . 7, 8, 9, 10, 11, 12, 14

Whitmore v. Arkansas, 495 U.S. 149 (1990). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

United States Court of Appeals Cases

In re Acequia, Inc., 34 F.3d 800 (9th Cir. 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

In re Delco Oil, Inc., 599 F.3d 1255 (11th Cir. 2010). . . . . . . . . . . . . . . . . . . . . .16, 20, 21, 22, 25

In re Harwell, 628 F.3d 1312 (11th Cir. 2010). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

In re Integra Realty Res., Inc., 354 F.3d 1246 (10th Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . 19

In re Res. Tech. Corp., 624 F.3d 376 (7th Cir. 2010). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

In re Straightline Inv. Inc., 525 F.3d 870 (9th Cir. 2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

United States Bankruptcy Court Cases

In re Colonial Realty Co., 226 B.R. 513 (Bankr. D. Conn. 1998). . . . . . . . . . . . . . . . . . . . . . . . .19

In re Git-N-Go, Inc., 322 B.R. 164 (Bankr. N.D. Okla. 2004). . . . . . . . . . . . . . . . . . . . . . . . 23, 24

In re Indian Capitol Distrib., Inc., 2011 WL 4711895, *11 (Bankr. D.N.M. Oct. 5, 2011). . 17, 18

In re Leslie Fay Cos., 168 B.R. 294 (Bankr. S.D.N.Y 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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In re USDigital, Inc., 2011 WL 6382551 (Bankr. D.Del. Dec. 20, 2011). . . . . . . . . . . . . . . . . . . 8

State Cases

Hartford Accident & Indem. Co. v. Am. Express Co., 74 N.Y.2d 153 (N.Y. 1989). . . . . . . . . . .26

In re Classic Drywall, Inc., 127 B.R. 874 (D.Kan. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Constitutional Provisions

U.S. Const. amend. III, § 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Federal Statues

11 U.S.C. § 1107 (1984). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

11 U.S.C. § 1108 (1984). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 20, 21, 22, 23, 26, 27, 28

11 U.S.C. § 363 (1984). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 20, 22, 23, 24, 25, 26, 27, 28

11 U.S.C. § 502 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

11 U.S.C. § 503 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

11 U.S.C. § 549 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 18, 19, 20, 21, 22, 23, 25, 26, 28

11 U.S.C. § 550 (1984). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 19, 20, 21, 28

28 U.S.C. § 152 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

28 U.S.C. § 157 (2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Uniform Codes

U.C.C. § 9-332(b) (2000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 28

Secondary Authorities

David M. Holliday, Cause of Action under 11 U.S.C.A. § 549 for Avoidance of Postpetition

Transaction in Bankruptcy Case, 32 CAUSES OF ACTION 2D 185 (2011). . . . . . . . . . . . . . . 16

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OPINIONS BELOW

The Bankruptcy Court for the District of Moot entered an order avoiding the transfer of

Blockbuster Inc., the Petitioner, and awarding judgment against Rachel Ray Warner Bakes, Inc.,

the Respondent, for $150,000. (R. at 6). The United States District Court for the District of

Moot affirmed without opinion. (R. at 6). On October 10, 2011, the United States Court of

Appeals for the Thirteenth Circuit reversed the decision of the District Court in full in Case No.

11-4080. (R. at 7).

STATEMENT OF JURISDICTION

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

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED

The following federal statutes are relevant and set forth in the appendices: U.S. Const.

art. III, § 1; U.C.C. § 9-332 (2000); 11 U.S.C. § 363 (1984); 11 U.S.C. § 502 (2005); 11 U.S.C. §

503 (2005); 11 U.S.C. § 549 (2005); 11 U.S.C. § 550 (1984); 11 U.S.C. § 1107 (1984); 11

U.S.C. § 1108 (1984); 28 U.S.C. § 152 (2005); and 28 U.S.C. § 157 (2005), which are

reproduced in Appendices A through K.

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STATEMENT OF THE CASE

Blockbusters, Inc. (“Blockbuster”), the debtor in the present case, hosts conventions with

a The Bank musical theme. (R. at 2-3.) Specifically, Blockbuster’s conventions are themed after

the musicals of Andrew Lloyd Weber and Stephen Sondheim. (Id.) After approximately 15

years of operation, Blockbuster began to see a decline in convention attendance. (R. at 3.)

Consequently, Blockbuster also began to see a decline in revenue from ticket and merchandise

sales. (Id.) Blockbuster’s financial stability was dependent on a successful convention in 2008.

(Id.) However, the financial collapse of Lehman Brothers led to diminished ticket sales and a

significant decrease in the sale of convention merchandise. (Id.) Due to an unsuccessful

convention, Blockbuster was unable to make a payment on a loan held by Broadway (“the

Bank”). (Id.)

Prior to the default, the Bank financed all of Blockbuster’s operations. (Id.) After

default, Blockbuster and the Bank attempted to negotiate a refinancing proposal. (Id.)

Blockbuster filed for Chapter 11 bankruptcy after the negotiations with the Bank failed to

produce a favorable result. (Id.) However, the Bank did agree to assist Blockbuster in financing

a convention for 2009. (R. at 3-4.) The two parties agreed to a cash collateral order, and the

bankruptcy court subsequently entered the order as a stipulated cash collateral order. (Id.) The

order permitted Blockbuster to use $1.5 million of the Bank’s cash collateral to finance the 2009

convention. (R. at 4.) However, the order limited Blockbuster’s spending by placing a cap of

$500,000 on vendor payments. (Id.) The order further required that the Bank give written

consent before Blockbuster could exceed the cap. (Id.)

Once again Blockbuster needed a successful convention to continue operating. (Id.)

Blockbuster realized that they needed something that could draw a large crowd and generate

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publicity for the convention. (Id.) Blockbuster decided to commission a full-size replica of the

set of “West Side Story.” (Id.) They further wished to have the replica made entirely of cake.

(Id.)

Knowing the future of the business hinged on the convention and the publicity the cake

would draw, Blockbuster contacted Rachel Ray Warner Bakes, Inc. (“Rachel Ray”) to create the

cake. (Id.) Rachel Ray agreed to make the cake for the convention despite Blockbuster’s

bankruptcy. (Id.) The project was a large undertaking, so Rachel Ray needed further assurances

from Blockbuster. (Id.) Rachel Ray conditioned the project on receiving an advance of

$100,000 with the remaining $150,000 to be paid prior to delivery. (Id.) Rachel Ray also

reviewed the cash collateral order and saw that the cap on vendor’s expenses was well above the

cost of her cake. (Id.) Blockbuster sent Rachel Ray the $100,000 advance from the Bank’s cash

collateral, and work on the cake began. (Id.) Blockbuster then paid the remaining $150,000

owed to Rachel Ray prior to delivery. (Id.) The stipulated order also granted the Bank a lien on

all of Blockbuster’s assets, including assets acquired post-petition. (Id.)

The 2009 convention was a success due in large part to the cake Rachel Ray had made

for the convention. (R. at 5.) However, the Bank later discovered that Blockbuster had exceeded

the $1.5 million cap on expenses prior to paying Rachel Ray for the service she performed. (Id.)

Blockbuster had not disclosed to Rachel Ray or the Bank that the cap had already been exceeded

prior to the $150,000 payment on the cake. (Id.) Blockbuster had spent the allotted money on

vendors supplying the convention with Follies memorabilia and had not informed Rachel Ray of

their spending. (Id.) Rachel Ray did not monitor the use of Blockbuster’s cash collateral, she

had no pre-petition relationship with Blockbuster, and she did not file a proof of claim in the

bankruptcy proceedings. (Id.)

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After discovering Blockbuster’s misuse of funds, the Bank obtained a chapter 11 trustee

to manage the estate. (Id.) The Bank then convinced the trustee to bring an action to recover the

$150,000 that Blockbuster paid Rachel Ray in return for her cake. (R. at 5-6.) The trustee

asserts his claim as a core proceeding under the Bankruptcy Code and further asserts that the

transfer to Rachel Ray was an unauthorized post-petition transfer under §§ 549(a) and 550(a)(1).

(Id.)

The Bankruptcy Court for the District of Moot conducted a bench trial. (R. at 6.) The

bankruptcy judge held that the funds used to pay Rachel Ray for her cake were in fact the cash

collateral of the Bank. (Id.) Further, the judge found that the neither the Bank nor the cash

collateral order gave consent to Blockbuster to use the funds. (Id.) Rachel Ray had evidence of

her good faith in dealing with Blockbuster. (Id.) She also had evidence that the cake had

generated revenue in excess of the cash collateral used to purchase her cake, and that the Bank

was in a better position after the convention as a result of the Bank’s post-petition liens on the

profits from the convention. (Id.) However, the bankruptcy judge did not allow Rachel Ray to

present her evidence on a theory that the applicable statutes rendered Rachel Ray strictly liable.

(Id.) Rachel Ray further objected to the authority of the bankruptcy court to hear and enter

judgment on the case. (Id.) Rachel Ray objected because the bankruptcy court lacked

constitutional authority to enter a final order in the case. (Id.) The bankruptcy court ultimately

entered an order avoiding the transfer to Rachel Ray and awarded the $150,000 to the trustee.

(Id.) The district judge affirmed the bankruptcy court’s decision on both grounds and this appeal

followed. (Id.) The Court of Appeals for the Thirteenth Circuit held that Rachel Ray was

entitled to equitable defenses and that the bankruptcy court lacked the authority to enter a final

appeal in this case. (R. at 7.)

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SUMMARY OF THE ARGUMENT

This case presents the Court with two issues: 1) whether a bankruptcy court has the

authority to enter a final order avoiding a transfer under § 549 and granting judgment under §

550; and 2) whether the transfer of $150,000 by Blockbuster to Rachel Ray can be avoided under

§ 549.

The bankruptcy judge did not have the authority to enter a final judgment in the instant

case. Here, the claim involves a private right. Private rights require that an independent

judiciary, meeting the requirements of Article III, enter a final determination. The bankruptcy

judge did not meet the requirements of Article III. A non-Article III judge may hear a case

concerning a private right but may not enter a final judgment. Under the Public Rights doctrine,

Congress may allow a non-Article III judge to enter final judgment where a private right is not

being considered. However, the Public Rights doctrine is only allowed in limited circumstances

in the bankruptcy context. The Public Rights doctrine does not apply in the instant case.

Therefore, the bankruptcy judge did not have the authority to enter a final judgment in regards to

the avoidance transfer.

The petitioners do not have the standing to bring this action. To establish standing under

Article III, a party first must clearly demonstrate that he has suffered an injury in fact. A lack of

injury will deprive an estate of standing. Since the estate has already been fully compensated for

any harm that resulted from the Blockbuster’s improper use of cash collateral, the estate is

unable to show that it has suffered an injury. Without an injury, there is no issue for this Court to

redress. Thus, the estate does not have standing.

If granted standing, the equitable powers inherently possessed by the Court require

recognition of equitable defenses. If the transfer is avoided under § 549 and a judgment granted

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under § 550, the inevitable result would be unjust enrichment to either the estate or the Bank.

This result will seriously discourage future vendors from doing business with debtors in

possession, which will ultimately cause chapter 11 debtors to face added hardship in making

their business viable again. Therefore, this Court must use its equitable powers in order to

protect deserving vendors such as Rachel Ray who are innocent of wrongdoing and cause no

harm to the estate.

Blockbuster's transfer of funds to Rachel Ray was authorized by 11 U.S.C. § 1108 and 11

U.S.C. § 363(c)(1). Section 1107 of the bankruptcy code allows a debtor to step into the shoes of

a trustee, thereby allowing the debtor to operate its business pursuant to § 1108 and enter into

transactions in the ordinary course of business pursuant to § 363(c)(1). Blockbuster's final

payment for the West Side Story cake was a transaction made in the ordinary course of business

because it satisfied the vertical and horizontal tests used to determine when a transaction is made

in the ordinary course of business.

Furthermore, avoidance of the transfer would disrupt the existing harmony between

U.C.C. § 9-332(b) and bankruptcy code sections 1108 and 363(c)(1). Article 9 of the Uniform

Commercial Code governs secured transactions that are an essential aspect of Bankruptcy Law.

U.C.C. § 9-332(b) protects transferees of funds from deposit accounts. Rachel Ray, a recipient

of funds from a deposit account, is protected by this U.C.C. provision and takes the funds free of

a security interest in the account. Thus, avoiding Blockbuster's transfer of funds to Rachel Ray

would not only be contrary to bankruptcy code provisions 1108 and 363(c)(1), but it would also

render U.C.C. § 9-332(b) meaningless.

In addition, allowing recovery in this case would create an apparent conflict between §§

502(h) and 503(b). If pursuant to § 550, Rachel Ray is forced to return the payment, § 503(b)

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would give Rachel Ray a claim for administrative expense against the estate that is entitled to

priority treatment. However, § 502(h) which is directly applicable to amounts recoverable under

§ 550, would supplant Rachel Ray’s priority claim with a mere pre-petition unsecured claim.

The transformation of a priority administrative expense claim to an unsecured pre-petition claim

will cause both parties to expend even more effort, time, and money in litigation. Therefore, it is

better to resolve this matter now and affirm the Thirteenth Circuit’s ruling.

This Court should affirm the Thirteenth Circuit Court of Appeals and hold that the

bankruptcy judge did not have the authority to enter a final judgment and the estate’s power to

avoid post-petition transfers under § 549 is subject to equitable defenses.

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ARGUMENTS

In a civil appeal, this Court engages in a de novo review on questions of law and accepts

findings of fact that are not clearly erroneous. First Options of Chicago, Inc. v. Kaplan, 514 U.S.

938, 939 (1995).

I. The bankruptcy court could hear the case but not enter final judgment where the

judge did not meet the requirements of Article III and the claim at issue does not

involve a recognized public right.

The bankruptcy judge did not have the authority to enter a final judgment in the instant

case. The claim in the instant case involves a private right. Private rights require that an

independent judiciary, meeting the requirements of Article III, enter a final determination. The

bankruptcy judge did not meet the requirements of Article III. A non-Article III judge may hear

a case concerning a private right but may not enter a final judgment. Under the Public Rights

doctrine, Congress may allow a non-Article III judge to enter final judgment where a private

right is not being considered. However, the Public Rights doctrine is only allowed in limited

circumstances in the bankruptcy context. The Public Rights doctrine does not apply in the

instant case. Therefore, the bankruptcy judge did not have the authority to enter a final judgment

in regards to the avoidance transfer.

A. Bankruptcy judges are not Article III judges.

Judges appointed under Article III of the U.S. Constitution have life tenure and receive

compensations that are not subject to diminution during their tenure. U.S. Const. amend. III, § 1.

Article III is “an inseparable element of the constitutional system of checks and balances”.

Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 58 (1982). Judicial power

of the United States must be exercised by courts having the attributes set forth in Article III.

Northern Pipeline, 458 U.S. at 59. Article III could not serve to protect the system of checks and

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balances if other branches where allowed to grant judicial power to non-Article III entities. Stern

v. Marshall, 131 S.Ct. 2594, 2609 (2011). With few exceptions, Congress may not “withdraw

from judicial cognizance any matter which, from its nature, is the subject of a suit at common

law, or in equity, or admiralty.” Id. Suits that would have traditionally been viewed as an action

at common law and that are brought within the bounds of federal jurisdiction, are the

responsibility of Article III judges in Article III courts. Id. Bankruptcy judges are appointed to

14 year terms. 28 U.S.C. § 152(a)(1) (2005). A bankruptcy judges is subject to impeachment for

incompetence, misconduct, neglect of duty, physical disability, or mental disability. 28 U.S.C. §

152(e) (2005).

In the instant case, the bankruptcy judge that entered a final judgment on the transfer

avoidance claim did not meet the requirements of an Article III judge. Under Article III, a judge

must have life tenure and receive compensations not subject to reduction during their tenure.

Only a judge meeting the requirements of Article III can exercise the judicial power of the

United States. This is to allow the federal judiciary and their power to remain independent of the

influence of the other branches. In other words, the independence of the judiciary maintains the

checks and balances of our governmental system. Bankruptcy judges do not receive life

appointments and they can be removed from office. Therefore, bankruptcy judges are not Article

III judges and Congress is not free to delegate matters to them that must be decided in an Article

III court.

B. A bankruptcy court may not enter a final judgment in a non-core proceeding

or where a public right is not involved.

A non-Article III bankruptcy court may enter final judgments only on those matters

considered “core proceedings” under the bankruptcy code. Stern, 131 S.Ct. at 2603; see also In

re USDigital, Inc., 2011 WL 6382551, 1 (Bankr. D.Del. Dec. 20, 2011) (stating that nothing in

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Stern eliminates the distinction between core and non-core proceedings). Core proceeding are

those cases arising under Title 11 of the bankruptcy code. Stern, 131 S.Ct. at 2603. A

bankruptcy court may hear a suit that is related to a Title 11 case but that is not a core

proceeding. 28 U.S.C. 157(c)(1) (2005). In a non-core proceeding, the bankruptcy court may

only enter proposed findings of fact and law for determination by a district court. Id. A core

proceeding is found where the matters at issue concern the administration of the estate. 28

U.S.C. 157(b)(2)(a) (2005). However, a non-Article III judge may not enter a final judgment

where a private right is involved even if the proceeding is labeled as core under the bankruptcy

statutes. See Stern, 131 S.Ct. at 2601, 2604.

Although a proceeding may meet the definition of core, it must also meet the

requirements of Article III where a public right is not involved. In Stern, the Court held a state

counterclaim for tortious interference in a bankruptcy proceeding to be a core proceeding under §

157(b) (2005). Id. at 2604. The statute allowed the bankruptcy court to enter a final judgment

on a claim that arose in a Title 11 case. Id. The Court, however, found that the statutory grant of

authority to enter a final judgment violated Article III. Id. at 2608. The Court ruled that a claim

at common law attempting to augment a bankruptcy estate had to be decided by a court meeting

the requirements of Article III. Id. at 2616. A public right is not involved where there is a state

law claim based on the common law and between two private parties. Id. at 2614. The Court

further reasoned that a state common law cause of action is an example of Article III judicial

power where the action is not closely intertwined with a federal regulatory agency or regime. Id.

at 2615. Therefore, the final judgment on the claim had to be decided by an Article III court. Id.

Article III limits the bankruptcy court to proposed findings of fact and law. Id. at 2620.

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The transfer avoidance in the present case is not a core proceeding. A non-core

proceeding limits the bankruptcy court to proposed findings of fact and law. The case before us

involves the avoidance of a transfer given to a non-debtor outside the original bankruptcy

proceedings. An argument may be made that the avoidance transfer deals with case

administration and would under that rationale constitute a core proceeding. However, this is not

a situation dealing with case administration. The trustee in the present case is attempting to

recover $150,000 from Rachel Ray, property given to Rachel Ray in return for her services. The

estate has already recovered the $150,000 through the post-petition liens placed on the

convention’s revenues. The trustee is simply trying to augment the bankruptcy estate by adding

$150,000 to the estates worth. This goes beyond simple case administration such as restructuring

the creditor-debtor relationship, allowing or disallowing a matter in the claims allowance

process, or dealing with the ordered claims to a pro rata share of the bankruptcy res.

Even if the transfer avoidance could be considered case administration, Article III

prevents the bankruptcy court from entering a final judgment in the case at hand where a public

right is not involved. The claim at issue involves a private right and the public rights doctrine is

not available. The bankruptcy court may only make proposed findings of fact and law where a

public right is not involved. Thus, the bankruptcy judge exceeded her authority when she

entered a final judgment in the present case.

C. The claims at issue in this case do not fall into one of the exceptions

of the public rights doctrine.

Public rights are matters that Congress may or may not bring within the cognizance of the

courts of the United States, as it may deem proper. Stern, 131 S.Ct. at 2612. A matter of public

rights may be delegated to a non-Article III court. Northern Pipeline, 458 U.S. at 69-70. It is not

necessary for the Government to be a party to the suit in order to invoke the public rights

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doctrine. Stern, 131 S.Ct. at 2613. However, the class of cases where the public rights exception

may be used is limited to “cases in which the claim at issue derives from a federal regulatory

scheme, or in which resolution of the claim by an expert government agency is deemed essential

to a limited regulatory objective within the agency’s authority.” Id. Even where a matter may

arguably fall within the public rights exception, the presumption is in favor that the matter

belongs in an Article III court. Id. at 2618 (quoting Northern Pipeline, 458 U.S. at 69, n. 23). “If

a statutory right is not closely intertwined with a federal regulatory program, Congress has power

to enact, and if that right neither belongs to nor exists against the federal government, then it

must be adjudicated by an Article III court.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 54-

55 (1989). A cause of action that resembles a state-law contract claim brought to augment the

bankruptcy estate, rather than a claim by a creditor to a pro rata share of the bankruptcy res, is

more properly classified as a private right. See id. at 2798. A Constitutional requirement may

not be divested by Congress where the claim does not arise as part of the disallowance or

allowance of claims, the restructuring of debtor-creditor relations, or is otherwise closely

intertwined with a federal regulatory program. See id. at 54-55, 58-59. The right to recover

contract damages is not considered a public right. Northern Pipeline, 458 U.S. at 71. Property

interests are created and defined by state law, and there is no reason why those property interests

should be analyzed any differently where an interested party is involved in a bankruptcy

proceeding. Stern, 131 S.Ct. at 2616.

In Stern, the Court looked to whether a bankruptcy judge, a non-Article III judge, had the

authority to enter final judgment on a counterclaim based on a state law. Id. at 2600-01. Under

§ 157(b)(2)(c), the counterclaim in Stern was labeled as a core proceeding. Id. at 2602.

Generally, a bankruptcy court has authority to enter final judgment on a core proceeding. Id. at

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2601-02. However, the Court held that the statute granting authority to enter final judgment was

in conflict with Article III. Id. at 2608. The Court’s reasoning turned on the state law nature of

the counter claim and the public rights doctrine. Id. at 2611. The Stern Court noted that a public

right exception is found in limited circumstances, such as where the court is restructuring the

debtor-creditor relationship, a situation dealing with case administration, or those matters that

would necessarily be resolved in the allowance or disallowance of the claims process. See id. at

2611, 2613, 2617.

Ultimately the Stern Court held that the bankruptcy judge did not have the authority to

enter final judgment on the state law counterclaim as it was not a public right that could be

delegated to a non-Article III judge. Id. at 2611. The Court based this reasoning on the fact that

ruling on the bankruptcy action would not resolve the state counter claim, so the state

counterclaim could not be resolved in the claims allowance process. Id. at 2617. The court also

found that the state counterclaim more closely resembled a claim at common law to recover a

property interest between two private parties. See id. at 2614, 2616. State common law claims

are not rights closely intertwined with a federal regulator scheme. Id. at 2614. The claim also

sought to augment the estate by which is a private right. Id.

The transfer avoidance in the present case is also not a public right that can be delegated

to a non-Article III judge for final judgment. This is not a case where the court is restructuring

the debtor-creditor relationship. Blockbuster is not the debtor of Rachel Ray Warner. Rachel

Ray Warner has been paid in full and payment was received on delivery of the cake. Even if this

could be argued to be a restructuring of the debtor-creditor relationship, the Supreme Court has

never stated restructuring to be a public right. They have stated that it “may well be a public

right,” in Northern Pipeline; while noting in Granfinanciera that they were not intending to

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suggest that the restructuring is in fact a public right. Northern Pipeline, 458 U.S. at 71;

Granfinanciera, 492 U.S. at 55-56, n. 11.

The transfer avoidance cannot be determined in the allowance or disallowance of the

claims process. In Stern, the Court found that ruling on the bankruptcy matter would not resolve

the state law counterclaim. Even if the court determined all the bankruptcy matters, the state law

counterclaim would not be resolved. The state law counterclaim could still be brought outside of

the bankruptcy proceeding. Similarly, the claim in our case will not be resolved in the claims

process. However, if the bankruptcy court’s final judgment on the transfer avoidance is upheld,

then Rachel Ray will be left without having received full compensation for a service she

provided to Blockbuster in good faith. In other words, Rachel Ray will be left with an

unresolved claim for the $150,000 she earned in substantial service she provided for the

convention.

Nor is the transfer avoidance a situation dealing purely with case administration. The

trustee is effectively attempting to obtain a property interest from Rachel Ray. Property law is

generally the domain of the states and is not a statutory right closely entwined with a federal

regulatory scheme. The Stern Court found the state law counterclaim to be more like a common

law claim between two parties arguing over a property interest. Similarly, the transfer avoidance

is more closely related to a common law claim between two private parties than to a public right

that is closely intertwined with a federal regulatory scheme. The trustee’s attempt to recover

money, property of Rachel Ray, is not one of the limited circumstances in which the public rights

doctrine applies. The presumption in favor of Article III courts should be upheld in the instant

case.

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D. A bankruptcy court does not have the authority to enter final judgments

where a private right is involved.

A private right may be defined as the liability of one individual to another under the law

as defined. Crowell v. Benson, 285 U.S. 22, 51 (1932). A private rights dispute lies at the core

of the historically recognized judicial power and may not be removed from an Article III court.

Northern Pipeline, 458 U.S. at 69-70. Property interests are created and defined by state law,

and there is no reason why those property interests should be analyzed any differently where an

interested party is involved in a bankruptcy proceeding. Stern, 131 S.Ct. at 2616. The public

rights doctrine does not apply where a state law claim is brought by a debtor against a party that

has not filed a claim against the bankruptcy estate. See id. at 2611; Northern Pipeline, 458 U.S.

at 69. The right to recover contract damages is not considered a public right. Id. at 71. A cause

of action that resembles a state-law contract claim brought to augment the bankruptcy estate is

more properly classified as a private right. See Granfinanciera, 492 U.S. at 2798. The right to

recover contract damages in order to augment a bankruptcy estate is a private right because it

concerns the liability of an individual to another. See Northern Pipeline, 458 U.S. at 71-72.

A non-Article III bankruptcy judge does not have the authority to enter final judgment on

a claim that involves a private right. In Northern Pipeline, the bankrupt debtor brought suit

against a company for an alleged breach of contract. Id. at 56. The company had not filed a

claim against the estate. See id. at 90. The bankrupt debtor was still able to bring the creditor

into the bankruptcy court under a provision of the Bankruptcy Act of 1978 that allowed claims to

be heard that were related to a case under Title 11. Id. at 53-55. The company sought dismissal

of the suit on Article III grounds that the bankruptcy court denied. Id. at 56-57. The Court held

that the Act was an unconstitutional grant of authority to a non-Article III judge. Id. at 76. The

Court reasoned that the claim to recover damages on a breach of contract claim was a private

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right and, therefore, belonged in an Article III court. Id. at 71-72. The Court further found that

the debtor was seeking to recover the damages in order to augment the estate. Id. The debtor

was essentially placing liability on an individual which is a private right dispute. Id. Disputes

involving private rights cannot be delegated to a non-Article III court for final determination. Id.

Similarly, in the instant case the bankruptcy court does not have authority to enter a final

judgment on the transfer avoidance claim because a private right is involved. The trustee’s

attempt to avoid the transfer in the instant case is similar to the debtor’s attempt to recover

money damages in Northern Pipeline. In both cases a party outside the bankruptcy proceedings

was brought into the bankruptcy court by virtue of a claim that is only related to the bankruptcy

proceeding. In Northern Pipeline the claim was for breach of contract and in the instant case the

claim is for an avoidance transfer. The avoidance transfer is similar to the breach of contract

action as both seek to recover monetary damages. The transfer avoidance is more like a state

contract claim seeking to augment the estate. Further, the trustee in this case in avoiding the

transfer is imposing a liability onto another individual. The transfer avoidance is imposing a

liability on Rachel Ray. If the avoidance is upheld she will be liable to the trustee for the

$150,000 paid to her by Blockbuster.

The imposition of liability and the transfer avoidance’s resemblance to a state- law-

contract claim are both characteristics of a dispute involving a private right. A private right may

not be delegated to a court that does not meet the requirement of an independent judiciary under

Article III. Thus, the bankruptcy court does not have the authority to enter a final judgment on

the current case.

II. A bankruptcy trustee may not use 11 U.S.C. § 549 to avoid a debtor’s transfer of

funds simply because the transaction exceeded a dollar limit imposed by an

authorized cash collateral order.

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Bankruptcy courts are courts of equity. Pepper v. Litton, 308 U.S. 295 (1939). The

fundamental goal of Chapter 11 bankruptcy is to reorganize viable businesses. Section 1107 of

the bankruptcy code affords a debtor in possession all of the rights and powers of a trustee. 11

U.S.C. § 1107 (1984). A debtor in possession acquires the right of a trustee to operate its

business pursuant to § 1108 and to engage in transactions in the ordinary course of business

pursuant to § 363(c)(1). 11 U.S.C. § 1108 (1984); 11 U.S.C. § 363(c)(1) (1984). Additionally,

pursuant to § 549, a trustee may avoid a transfer, but he must first demonstrate: 1) a post petition

transfer; 2) of the estate’s property; 3) which neither the Bankruptcy code nor the court

authorized. In re Delco Oil, Inc., 599 F.3d 1255, 1258 (11th Cir. 2010). If the trustee is able to

establish these three elements, § 550 provides that the trustee may recover the property

transferred or the value of such property from the initial transferee. 11 U.S.C. § 550(a) (1984).

While the Code provides two defenses to the estate’s power of avoiding unauthorized

post-petition transfers, it is necessary that the equitable powers of the Court be used to recognize

a third defense that is applicable to an innocent transferee who acted in good faith with

knowledge of the debtor’s bankruptcy. See David M. Holliday, Cause of Action under 11

U.S.C.A. § 549 for Avoidance of Postpetition Transaction in Bankruptcy Case, 32 CAUSES OF

ACTION 2D 185 (2011). The lack of an equitable defense for the good faith transferee who

intends to engage in business with a Chapter 11 debtor thwarts a bankruptcy’s fundamental goal

of reorganization. A business owner who runs the risk of being forced to return payment for

goods or services already provided to the debtor through the trustee’s invocation of § 549 is

rightfully discouraged from entering into the transaction. Without condoning debtors’

unauthorized post-petition transfers, the business relationships between good faith transferees

and debtors require preservation through judicially created equitable defenses to § 549.

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Equitable defenses will foster an agreement between Code provisions §§ 549, 1108, 363(c)(1),

UCC principles, and the primary goal of Chapter 11 bankruptcies.

A. The estate is without standing because it has not suffered an injury.

“Article III’s standing requirements apply to proceedings in bankruptcy courts just as

they do to proceedings in district courts.” In re Res. Tech. Corp., 624 F.3d 376, 382 (7th Cir.

2010). To establish standing under Article III, a party first must clearly demonstrate that he has

suffered an injury in fact. Whitmore v. Arkansas, 495 U.S. 149, 155 (1990). A lack of injury

will deprive an estate of standing. In re Indian Capitol Distrib., Inc., 2011 WL 4711895, *11

(Bankr. D.N.M. Oct. 5, 2011).

For example, in In re Indian, the Court found that the estate lacked standing because it

could not establish that it had suffered an injury. Id. In In re Indian, the debtor operated an oil

sales and distributing business. Id. at 1. Shortly after the debtor filed for Chapter 11 bankruptcy

protection, the court authorized the debtor to use cash collateral. Id. at 4. The cash collateral

agreement granted the bank a continuing security interest in all assets of the debtor in which it

had a lien. Id. The debtor then purchased petroleum products from the vendor. Id. The vendor

received payment for the petroleum after the court had issued an order prohibiting further use of

cash collateral. Id. The estate sought the return of the payment solely because the payment was

not authorized. Id. at 9. The undisputed material facts showed, however, that the amount

transferred to the vendor was the reasonably equivalent value of the gasoline that the vendor

delivered to the estate. Id. The court held that the estate was without standing because it could

not demonstrate that it had suffered an actual economic loss. Id. Thus, the court dismissed the

case. Id.

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The similarities between the estate in In re Indian, and the estate in the instant case are

undeniable. In the instant case, the Bank possessed a security interest in all of Blockbuster’s

assets including its bank accounts and accounts receivable. The day before the convention,

Rachel Ray delivered a cake that all parties conceded had a market value of $250,000. In

exchange for the cake, Blockbuster paid $100,000 in advance and paid the remaining $150,000

balance a day before delivery. By the time Rachel Ray received the remaining balance of

$150,000, Blockbuster had already paid out the entirety of the $500,000 vendor line item of its

budget. However, the immense amount of publicity generated by the cake caused the convention

to turn a profit. That profit enabled Blockbuster to fully compensate the Bank for any harm that

resulted from Blockbuster’s improper use of cash collateral. Additionally, since Rachel Ray’s

cake had a market value of $250,000, once the transfer occurred, the value of the Bank’s security

interest in Blockbuster’s assets remained unchanged. As a result, no harm came to any of the

parties. The trustee is unable to establish or even allege that the estate has suffered an injury.

Absent an injury, there is no issue for this Court to redress. Thus, similar to In re Indian, the

estate’s lack of injury deprives it of standing.

B. The estate’s power to avoid transfers under § 549 is subject to equitable

defenses when the initial transferee acts in good faith and the estate is not

harmed.

Bankruptcy courts are courts of equity and their proceedings are inherently proceedings

in equity. Pepper v. Litton, 308 U.S. 295 (1939); Local Loan Co. v. Hunt, 292 U.S. 234, 240

(1934). A bankruptcy court’s equitable powers are in place so that “substance will not give way

to form, that technical considerations will not prevent substantial justice from being done”.

Pepper, 308 U.S. at 305.

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Even if § 549 applies to the instant transfer, the equitable powers inherently possessed by

the court require recognition of equitable defenses. See Pepper v. Litton, 308 U.S. 295, 305

(1939) (noting that equitable powers are in place so that “substance will not give way to form,

that technical considerations will not prevent substantial justice from being done.”) This Court

should adopt the same reasoning and hold that the Rachel Ray’s innocent, good faith actions will

not give way to the form of § 549 when no harm has occurred. Moreover, the technical

considerations of § 549 should not promote the unjust enrichment of the estate, but should rather

ensure substantial justice for Rachel Ray. Any decision to the contrary would inevitably award

the petitioners an inequitable windfall profit.

In the instant case, avoidance under § 549 became improper as soon as Blockbuster

generated profits that compensated the Bank for any harm resulting from Blockbuster’s improper

use of cash collateral. Without depletion of the estate, avoidance of the transfer would go against

the primary purpose of § 549. See In re Straightline Inv. Inc., 525 F.3d 870, 878 (9th Cir. 2008)

(noting “The primary purpose of § 549 is to allow the trustee to avoid post-petition transfers of

property which deplete the estate”). Additionally, recovery under § 550 would be equally

improper. See In re Integra Realty Res., Inc., 354 F.3d 1246, 1267 (10th Cir. 2004) (“[T]he

proper focus in § 550 actions is not on what the transferee gained by the transaction, but rather

on what the bankruptcy estate lost as a result of the transfer.” (quoting In re Colonial Realty Co.,

226 B.R. 513, 525 (Bankr. D. Conn. 1998)). Since the estate has already been fully reimbursed

for its initial $150,000 loss, the estate’s claim for avoidance under § 549 and recovery under

§550 is without merit. Thus, this Court should affirm the Thirteenth Court of Appeals’ ruling

and hold that the estate’s power to avoid post petition transfers under § 549 is subject to Rachel

Ray’s equitable defenses.

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The blind application of § 549 suggested by the petitioners is insufficient to adhere to the

Supreme Court’s obligation to justice. The fundamental goal of a chapter 11 bankruptcy is to

reorganize viable businesses. Encouraging vendors to continue to engage in business with

chapter 11 debtors is essential to the overall fundamental goal of reorganizing businesses. If a

judgment is awarded against a good-faith vendor who was without notice of the end of the

debtor’s cash collateral authority, it might seriously discourage future vendors from doing

business with debtors in possession. Without a willing supply of vendors who are ready to

engage in business, debtors currently involved in bankruptcy proceedings would face added

hardship in making their business viable again. Prevention of this type of scenario is one of the

fundamental reasons why the Court’s equitable powers should be used in this matter.

Any reliance on Delco is misplaced. In Delco, the debtor, without authorization from the

court, used its cash collateral to purchase $1.9 million in oil products from an oil vendor. In re

Delco, 599 F.3d at 1257. The transaction took place before the bankruptcy court decided not to

grant the debtor permission to use its cash collateral. Id. After the court converted the case to a

Chapter 7, the trustee initiated an action against the oil vendor to recover the $1.9 million. Id.

The Eleventh Circuit ruled in favor of the petitioner without addressing whether there was an

actual harm incurred by the estate, which would give it standing. Id. at 1263. The court

reasoned that § 549 did not require any analysis of a harmless error or innocent vendor defense

because Congress had not expressly created those exceptions. Id. at 1262-63.

Blockbuster’s use of their cash collateral is significantly different from the debtor in

Delco. Unlike the debtor in Delco, the court granted Blockbuster permission to use cash

collateral. Additionally, Blockbuster was authorized to make the $150,000 transfer by § 1108

and § 363(c)(1) of the Bankruptcy Code. Since Blockbuster had authorization from both the

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bankruptcy court and Bankruptcy Code, the petitioners cannot satisfy the third element of

transfer avoidance under § 549. Thus, § 549 does not apply in the instant case. Section 550 is

equally improper if applied in the instant case. The primary purpose of § 550 is “to restore the

estate to the financial condition it would have enjoyed if the transfer had not occurred.” In re

Acequia, Inc., 34 F.3d 800, 812 (9th Cir. 1994) (quoting In re Classic Drywall, Inc., 127 B.R.

874, 876 (D.Kan. 1991)). Since the estate has already been restored to the financial condition it

was in before the improper transaction, the petitioners should not be able to recover the payment

under § 550. Moreover, shortly after Delco, the Eleventh Circuit created a good faith exception

to § 550. See In re Harwell, 628 F.3d 1312, 1322-23 (11th Cir. 2010) (reasoning that the

exception was needed to “prevent the unjust or inequitable result of holding an innocent

transferee liable). Thus, this Court should affirm the Thirteenth Court of Appeals’ ruling and

hold that the estate’s power to avoid post petition transfers under § 549 is subject to Rachel

Ray’s equitable defenses.

C. Avoiding the transfer under § 549 would create conflict within the

Bankruptcy code.

Allowing recovery in this case would create an apparent conflict between §§ 502(h) and

503(b). If pursuant to § 550, Rachel Ray is forced to return the payment, § 503(b) would give

Rachel Ray a claim for administrative expense against the estate that is entitled to priority

treatment. However, § 502(h) which is directly applicable to amounts recoverable under § 550,

would supplant Rachel Ray’s priority claim with a mere pre-petition unsecured claim. The

transformation of a priority administrative expense claim to an unsecured pre-petition claim will

cause both parties to expend even more effort, time, and money in litigation. Therefore, it is

better to resolve this matter now and affirm the Thirteenth Circuit’s ruling.

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D. A trustee cannot avoid a Chapter 11 debtor’s transfer of funds, conducted in

the ordinary course of business, because the Bankruptcy Code authorizes the

transfer.

Rachel Ray did not violate the Bankruptcy Code when she accepted payment for her

services from Blockbuster. When read together, §§ 1108 and 363(c)(1) prove that the transfer

was in fact authorized. The bankruptcy court authorized Blockbuster to continue to operate their

business, and Blockbuster used Rachel Ray’s services in the furtherance of their business.

Section 363 permits a bankrupt debtor to enter into transactions that occur in the ordinary course

of business. The purchase of the cake meets both tests used in determining whether a matter

occurred in the ordinary course of business. Lastly, reliance on Delco would not only be

misplaced, but would lead to an undue burden on Rachel Ray and other future vendors. To allow

the trustee to avoid the transfer would have the effect of discouraging other vendors from

entering into business transactions with bankrupt debtors. This is inapposite to the purpose and

policy of the bankruptcy code.

1. Blockbuster’s transfer of funds to Rachel Ray was authorized

by 11 U.S.C. §1108.

Section 549 commands that the key determination to be made when analyzing a contested

transaction is whether the Bankruptcy Code or court authorized the transfer itself. 11 U.S.C. §

549(a) (1984). Section 549 makes no mention of a required focus on the source of the funds

used in the transaction. See id. Moreover, § 1108 expressly provides a debtor with the authority

to operate its business. 11 U.S.C. § 1108 (1984).

In the present case, § 1108 authorized Blockbuster’s $150,000 wire transfer to Rachel

Ray as final payment for the highly publicized West Side Story cake. Id. Section 1108

expressly provides a debtor with the authority to operate its business, which is exactly what

Blockbuster was doing when it paid Rachel Ray for her services. Id. After filing for bankruptcy,

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the court was fully aware and authorized Blockbuster to continue operating its business as a

debtor-in-possession. Blockbuster specifically employed Rachel Ray to create the West Side

Story cake in order to create a “spectacle” that would make the 2009 convention the “biggest

show ever.” Blockbuster’s future was dependent on the success of the convention, and payment

to Rachel Ray was a well-planned transaction in the operation of Blockbuster’s business that

would ensure the business’s future viability. Thus, the post-petition transfer was authorized by §

1108 and cannot be avoided by the trustee pursuant to § 549.


U.S.C. § 363(c)(1).

Section 363(c)(1) allows businesses that are authorized to operate under § 1108 to enter

into transactions and use property of the estate in the ordinary course of business without notice

or a hearing. 11 U.S.C. § 363(c)(1) (1984). There are two tests courts have applied to determine

whether a transaction was made in the ordinary course of business pursuant to § 363(c)(1). In re

Git-N-Go, Inc., 322 B.R. 164, 174 (Bankr. N.D. Okla. 2004)(quoting In re Leslie Fay Cos., 168

B.R. 294, 304 (Bankr. S.D.N.Y 1994)). Under the horizontal test, the question regarding the

post-petition transaction is whether, from an industry-wide perspective, the transaction is

common to businesses in that industry. Git-N-Go, Inc. at 172. The vertical test or creditor’s

expectation test inquires whether the challenged transaction “subjects a creditor to economic

risks of a different nature from those he accepted when he decided to extend credit.” Id. at 172.

Git-N-Go, Inc. proves that Blockbuster’s transfer of funds to Rachel Ray was also

authorized by § 363(c)(1). In Git-N-Go, Inc. the court held that the post-petition transaction

between debtor, a convenience store chain, and a security service provider was made within the

ordinary course of business. Id. at 174. The transaction in question was a contract debtor

entered into with a security service provider. Id. at 167. Debtor had engaged in business with

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the security service provider for over fifteen years, and debtor employed other companies to

conduct the same type of service. Id. at 172. Additionally, the terms of the contested transaction

did not differ from the terms of prior similar transactions debtor had entered into with the same

security service provider and other companies. Id. at 173.

The court held that the challenged transaction was made within the ordinary course of

business because it satisfied the horizontal and vertical tests. Id. at 174. The court reasoned that

the horizontal test was satisfied because, viewing the transaction from an industry-wide

perspective, convenience stores commonly employ security service providers. Id. at 172. The

court went on to reason that the vertical test was satisfied because the terms of the transaction did

not subject a hypothetical pre-petition creditor to economic risks of a nature different than those

accepted when the creditor decided to extend credit. Id. at 173.

Similar to the transaction in Git-N-Go, Inc., Blockbuster’s transaction with Rachel Ray

was authorized by § 363(c)(1) because it was made in the ordinary course of business. In Git-N-

Go, Inc., the transaction satisfied the horizontal test because convenience stores commonly

employ security service providers just as convention organizers commonly employ vendors.

Blockbuster employed Rachel Ray as a vendor just as it employed other vendors for

memorabilia. It is common that the operation of a convention would require the employment of

several vendors when viewing Blockbuster’s business from an industry-wide perspective. Thus,

Blockbuster’s transfer of funds to Rachel Ray satisfied the horizontal test.

Additionally, similar to the transaction in Git-N-Go, Inc. which satisfied the vertical test,

so did Blockbuster’s payment to Rachel Ray. In Git-N-Go, Inc., the transaction satisfied the

vertical test because the terms of the contract did not subject a hypothetical pre-petition creditor

to economic risks of a nature different from those accepted when the creditor decided to extend

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credit. Similarly, Blockbuster’s transfer of funds to Rachel Ray for the West Side Story cake did

not subject the Bank to any economic risks different from the risks the Bank accepted when it

decided to allow Blockbuster use of its cash collateral. The Bank was fully aware of

Blockbuster’s transactions with vendors because the Bank specifically allotted Blockbuster funds

for the 2009 convention’s vendor expenses. Moreover, while Blockbuster’s violation of the cash

collateral order is frowned upon, the risk of improper use of the cash collateral was a risk the

Bank took by merely allowing debtor access to the funds. Blockbuster’s transaction with Rachel

Ray did not subject the Bank to any risk it should not have anticipated. Thus, the trustee cannot

avoid the transfer of funds to Rachel Ray because the transaction was made in the ordinary

course of business as authorized by § 363(c)(1).

3. The trustee’s reliance on Delco is misplaced.

The trustee contends that Blockbuster’s violation of the cash collateral order allows him

to avoid the transfer, but this simplistic application of the facts to § 549 are unwarranted. More

importantly, the trustee’s reliance on Delco is misplaced. In Delco, the court held that in order

for a trustee to avoid a transfer under § 549(a), he must demonstrate: 1) a post petition transfer;

2) of the estate’s property; 3) which neither the Bankruptcy code nor the court authorized. In re

Delco Oil, Inc., 599 F.3d 1255, 1258 (11th Cir. 2010). The debtor in Delco, without

authorization, used the secured creditor’s cash collateral to purchase petroleum from transferee,

and the trustee sought to avoid the post-petition payments under § 549. Id. The court held the

trustee was able to seek recovery of the petroleum payments from the transferee. Id. The court

reasoned that the debtor’s unauthorized use of the secured creditor’s cash collateral satisfied the

third element needed for the trustee to avoid the transfers. Id.

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The trustee’s argument fails because the court erroneously focused on the source of the

funds the debtor used to make the transfer instead of focusing on the transfer aspect of the

transaction as § 549 commands. Unauthorized use of funds does not invalidate the transaction

for which those funds are used. It is undisputed that Blockbuster violated the cash collateral

order as did the debtor in Delco; however, violation of the order is a separate matter that need not

interfere with Rachel Ray or code sections §§ 1108 and 363(c)(1). In fact, Blockbuster’s

violation of the cash collateral order is a matter that the bankruptcy court, the Bank, and

Blockbuster need to deal with amongst themselves.

Blockbuster violated the cash collateral order; yet, the trustee seeks to avoid the transfer

and punish Rachel Ray as if she had violated the order. If the Court allows the trustee to avoid

the transfer, hesitant vendors who miraculously decide to engage in business with debtors in

possession will be forced to engage in a sophisticated tracing analysis through a debtor’s bank

account before confidently accepting debtor’s payments. The vendor should not bear this burden

when the debtor and secured creditor are in the best positions to avoid a potential cash collateral

violation. See Hartford Accident & Indem. Co. v. Am. Express Co., 74 N.Y.2d 153, 165 (N.Y.

1989) (holding that plaintiff could not recover funds from defendant because plaintiff was the

party best able to prevent the losses and protect itself by being attentive). When Blockbuster

made the $150,000 wire transfer to Rachel Ray, Blockbuster had already exceeded their entire

authority under the cash collateral order. Rachel Ray had no way of knowing this information,

but the Bank had time to stop Blockbuster from making any more transfers that would further

violate the order.

Sections 1108 and 363(1) are central to the fundamental goal of Chapter 11’s

reorganization of viable businesses by encouraging vendors to deal with debtors in possession

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on a regular basis. The trustee should not be allowed to destroy the unity that is encouraged

between debtors in possession and vendors through his tortured reading of § 549. Sections 1108

and 363(c)(1) authorized Blockbuster’s transfer of funds to Rachel Ray while maintaining the

debtor/vendor relationship that is encouraged by Chapter 11 bankruptcies.

E. Blockbuster’s post-petition transfer of funds to Rachel Ray should not be

avoided because it would result in disruption of the harmony between the

UCC, § 1108, and § 363(c)(1).

A harmony exists between Uniform Commercial Code Article 9 and the Bankruptcy

Code. Article 9 governs secured transactions, and the concepts from Article 9 are central to the

understanding of bankruptcy. U.C.C. § 9-332(b) provides that a good faith “transferee of funds

from a deposit account takes the funds free of a security interest in the deposit account…”

U.C.C. § 9-332(b) (2000). This provision affords transferees broad protection to help ensure that

security interests in the deposit accounts do not interrupt the free flow of funds. Id. The policy

behind U.C.C. § 9-332(b) is to minimize a secured party’s claim to whatever the transferee

purchases with the funds. Id. Additionally, “the opportunity to upset a completed transaction, or

even to place a completed transaction in jeopardy by bringing suit against the transferee of funds,

should be severely limited.” Id.

The Bank held a security interest in the deposit account used by Blockbuster to pay for

the West Side Story cake because the funds constituted the Bank’s cash collateral. However,

U.C.C. § 9-332(b) clearly states that Rachel Ray takes the funds free of the Bank’s security

interest in the deposit account. U.C.C. §9-332(b) has the effect of stripping the Bank’s lien

through Blockbuster’s act of wire transferring the funds to Rachel Ray. Blockbuster’s violation

of the cash collateral order is in no way being condoned, but Rachel Ray should not be harmed

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by avoidance of the transfer when U.C.C. sections such as §9-332(b) were specifically created to

protect transferees from suits against secured creditors.

The trustee’s attempt at avoiding the transfer to Rachel Ray disrupts that harmony that

exists between the U.C.C. §9-332(b) and Code sections §§ 1108 and 363(c)(1). Pursuant to

U.C.C. § 9-332(b), once Rachel Ray received the funds from Blockbuster, the Bank no longer

had a security interest in the funds. Without a security interest in the funds, the trustee cannot

invoke § 549 because, as mentioned above, the transfer was authorized by sections 1108 and §

363(c). Moreover, U.C.C. § 9-332(b) encourages the free flow of funds which is important to

the continued operation of debtors’ businesses. If the trustee is allowed to avoid the transfer to

Rachel Ray, U.C.C. § 9-332(b) is rendered meaningless, and vendors’ security in accepting

deposit transfers from debtors will lessen. This disrupts the very business transactions that §§

1108 and 363(c)(1) authorize. Thus, Blockbuster’s post-petition transfer of funds to Rachel Ray

should not be avoided because it would result in disruption of the harmony between the UCC,

§1108, and §363(c)(1).

CONCLUSION

For the foregoing reasons, Respondent, Rachel Ray Warner Bakes, Inc., respectfully

requests that this court affirm the judgment of the Court of Appeals for the Thirteenth Circuit and

hold that: (1) a debtor’s transfer of funds that exceeded a dollar limit imposed by an authorized

cash collateral order does not permit a bankruptcy trustee to recover funds transferred to a good

faith transferee in the ordinary course of business who provided reasonable equivalent value in

exchange for the transfer; and (2) that Article III of the Constitution does not permit a

bankruptcy judge to hear and determine an action to recover allegedly unauthorized post-petition

transfers pursuant to 11 U.S.C. §§ 549 and 550.

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APPENDIX A

U.S. Const. art. III, § 1

Section 1. Judicial Power, Tenure and Compensation

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 Behavior, and shall,

at stated Times, receive for their Services, a Compensation, which shall not be diminished during

their Continuance in Office.

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APPENDIX B

U.C.C. § 9-332 (2000)

Section 9-332. Transfer of Money; Transfer of Funds from Deposit Account.

(a) [Transferee of money.] A transferee of money takes the money free of a security interest

unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

(b) [Transferee of funds from deposit account.] A transferee of funds from a deposit account

takes the funds free of a security interest in the deposit account unless the transferee acts in

collusion with the debtor in violating the rights of the secured party.

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III

APPENDIX C

11 U.S.C. § 363 (1984)

Section 363. Use, sale, or lease of property

(a) In this section, “cash collateral” means cash, negotiable instruments, documents of title,

securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and

an entity other than the estate have an interest and includes the proceeds, products, offspring,

rents, or profits of property and the fees, charges, accounts or other payments for the use or

occupancy of rooms and other public facilities in hotels, motels, or other lodging properties

subject to a security interest as provided in section 552(b) of this title, whether existing before or

after the commencement of a case under this title.

(b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary

course of business, property of the estate, except that if the debtor in connection with offering a

product or a service discloses to an individual a policy prohibiting the transfer of personally

identifiable information about individuals to persons that are not affiliated with the debtor and if

such policy is in effect on the date of the commencement of the case, then the trustee may not

sell or lease personally identifiable information to any person unless--

(A) such sale or such lease is consistent with such policy; or

(B) after appointment of a consumer privacy ombudsman in accordance with section 332, and

after notice and a hearing, the court approves such sale or such lease--

(i) giving due consideration to the facts, circumstances, and conditions of such sale or such lease;

and

(ii) finding that no showing was made that such sale or such lease would violate applicable

nonbankruptcy law.

(2) If notification is required under subsection (a) of section 7A of the Clayton Act in the case of

a transaction under this subsection, then--

(A) notwithstanding subsection (a) of such section, the notification required by such subsection

to be given by the debtor shall be given by the trustee; and

(B) notwithstanding subsection (b) of such section, the required waiting period shall end on the

15th day after the date of the receipt, by the Federal Trade Commission and the Assistant

Attorney General in charge of the Antitrust Division of the Department of Justice, of the

notification required under such subsection (a), unless such waiting period is extended--

(i) pursuant to subsection (e)(2) of such section, in the same manner as such subsection (e)(2)

applies to a cash tender offer;

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(ii) pursuant to subsection (g)(2) of such section; or

(iii) by the court after notice and a hearing.

(c)(1) If the business of the debtor is authorized to be operated under section 721, 1108, 1203,

1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into

transactions, including the sale or lease of property of the estate, in the ordinary course of

business, without notice or a hearing, and may use property of the estate in the ordinary course of

business without notice or a hearing.

(2) The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection

unless--

(A) each entity that has an interest in such cash collateral consents; or

(B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the

provisions of this section.

(3) Any hearing under paragraph (2)(B) of this subsection may be a preliminary hearing or may

be consolidated with a hearing under subsection (e) of this section, but shall be scheduled in

accordance with the needs of the debtor. If the hearing under paragraph (2)(B) of this subsection

is a preliminary hearing, the court may authorize such use, sale, or lease only if there is a

reasonable likelihood that the trustee will prevail at the final hearing under subsection (e) of this

section. The court shall act promptly on any request for authorization under paragraph (2)(B) of

this subsection.

(4) Except as provided in paragraph (2) of this subsection, the trustee shall segregate and account

for any cash collateral in the trustee's possession, custody, or control.

(d) The trustee may use, sell, or lease property under subsection (b) or (c) of this section--

(1) in the case of a debtor that is a corporation or trust that is not a moneyed business,

commercial corporation, or trust, only in accordance with non-bankruptcy law applicable to the

transfer of property by a debtor that is such a corporation or trust; and

(2) only to the extent not inconsistent with any relief granted under subsection (c), (d), (e), or (f)

of section 362.

(e) Notwithstanding any other provision of this section, at any time, on request of an entity that

has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the

trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as

is necessary to provide adequate protection of such interest. This subsection also applies to

property that is subject to any unexpired lease of personal property (to the exclusion of such

property being subject to an order to grant relief from the stay under section 362).

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(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any

interest in such property of an entity other than the estate, only if--

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;

(3) such interest is a lien and the price at which such property is to be sold is greater than the

aggregate value of all liens on such property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money

satisfaction of such interest.

(g) Notwithstanding subsection (f) of this section, the trustee may sell property under subsection

(b) or (c) of this section free and clear of any vested or contingent right in the nature of dower or

curtesy.

(h) Notwithstanding subsection (f) of this section, the trustee may sell both the estate's interest,

under subsection (b) or (c) of this section, and the interest of any co-owner in property in which

the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in

common, joint tenant, or tenant by the entirety, only if--

(1) partition in kind of such property among the estate and such co-owners is impracticable;

(2) sale of the estate's undivided interest in such property would realize significantly less for the

estate than sale of such property free of the interests of such co-owners;

(3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs

the detriment, if any, to such co-owners; and

(4) such property is not used in the production, transmission, or distribution, for sale, of electric

energy or of natural or synthetic gas for heat, light, or power.

(i) Before the consummation of a sale of property to which subsection (g) or (h) of this section

applies, or of property of the estate that was community property of the debtor and the debtor's

spouse immediately before the commencement of the case, the debtor's spouse, or a co-owner of

such property, as the case may be, may purchase such property at the price at which such sale is

to be consummated.

(j) After a sale of property to which subsection (g) or (h) of this section applies, the trustee shall

distribute to the debtor's spouse or the co-owners of such property, as the case may be, and to the

estate, the proceeds of such sale, less the costs and expenses, not including any compensation of

the trustee, of such sale, according to the interests of such spouse or co-owners, and of the estate.

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(k) At a sale under subsection (b) of this section of property that is subject to a lien that secures

an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at

such sale, and, if the holder of such claim purchases such property, such holder may offset such

claim against the purchase price of such property.

(l) Subject to the provisions of section 365, the trustee may use, sell, or lease property under

subsection (b) or (c) of this section, or a plan under chapter 11, 12, or 13 of this title may provide

for the use, sale, or lease of property, notwithstanding any provision in a contract, a lease, or

applicable law that is conditioned on the insolvency or financial condition of the debtor, on the

commencement of a case under this title concerning the debtor, or on the appointment of or the

taking possession by a trustee in a case under this title or a custodian, and that effects, or gives an

option to effect, a forfeiture, modification, or termination of the debtor's interest in such

property.

(m) The reversal or modification on appeal of an authorization under subsection (b) or (c) of this

section of a sale or lease of property does not affect the validity of a sale or lease under such

authorization to an entity that purchased or leased such property in good faith, whether or not

such entity knew of the pendency of the appeal, unless such authorization and such sale or lease

were stayed pending appeal.

(n) The trustee may avoid a sale under this section if the sale price was controlled by an

agreement among potential bidders at such sale, or may recover from a party to such agreement

any amount by which the value of the property sold exceeds the price at which such sale was

consummated, and may recover any costs, attorneys' fees, or expenses incurred in avoiding such

sale or recovering such amount. In addition to any recovery under the preceding sentence, the

court may grant judgment for punitive damages in favor of the estate and against any such party

that entered into such an agreement in willful disregard of this subsection.

(o) Notwithstanding subsection (f), if a person purchases any interest in a consumer credit

transaction that is subject to the Truth in Lending Act or any interest in a consumer credit

contract (as defined in section 433.1 of title 16 of the Code of Federal Regulations (January 1,

2004), as amended from time to time), and if such interest is purchased through a sale under this

section, then such person shall remain subject to all claims and defenses that are related to such

consumer credit transaction or such consumer credit contract, to the same extent as such person

would be subject to such claims and defenses of the consumer had such interest been purchased

at a sale not under this section.

(p) In any hearing under this section--

(1) the trustee has the burden of proof on the issue of adequate protection; and

(2) the entity asserting an interest in property has the burden of proof on the issue of the validity,

priority, or extent of such interest.

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VII

APPENDIX D

11 U.S.C. § 502 (2005)

Section 502. Allowance of claims or interests

(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed,

unless a party in interest, including a creditor of a general partner in a partnership that is a debtor

in a case under chapter 7 of this title, objects.

(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection

to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim

in lawful currency of the United States as of the date of the filing of the petition, and shall allow

such claim in such amount, except to the extent that--

(1) such claim is unenforceable against the debtor and property of the debtor, under any

agreement or applicable law for a reason other than because such claim is contingent or

unmatured;

(2) such claim is for unmatured interest;

(3) if such claim is for a tax assessed against property of the estate, such claim exceeds the value

of the interest of the estate in such property;

(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the

reasonable value of such services;

(5) such claim is for a debt that is unmatured on the date of the filing of the petition and that is

excepted from discharge under section 523(a)(5) of this title;

(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of

real property, such claim exceeds--

(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15

percent, not to exceed three years, of the remaining term of such lease, following the earlier of--

(i) the date of the filing of the petition; and

(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus

(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates;

(7) if such claim is the claim of an employee for damages resulting from the termination of an

employment contract, such claim exceeds--

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(A) the compensation provided by such contract, without acceleration, for one year following the

earlier of--

(i) the date of the filing of the petition; or

(ii) the date on which the employer directed the employee to terminate, or such employee

terminated, performance under such contract; plus

(B) any unpaid compensation due under such contract, without acceleration, on the earlier of

such dates;

(8) such claim results from a reduction, due to late payment, in the amount of an otherwise

applicable credit available to the debtor in connection with an employment tax on wages,

salaries, or commissions earned from the debtor; or

(9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under

paragraph (1), (2), or (3) of section 726(a) of this title or under the Federal Rules of Bankruptcy

Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180

days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy

Procedure may provide, and except that in a case under chapter 13, a claim of a governmental

unit for a tax with respect to a return filed under section 1308 shall be timely if the claim is filed

on or before the date that is 60 days after the date on which such return was filed as required.

(c) There shall be estimated for purpose of allowance under this section--

(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be,

would unduly delay the administration of the case; or

(2) any right to payment arising from a right to an equitable remedy for breach of performance.

(d) Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of

any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or

that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549,

or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any

such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or

553 of this title.

(e)(1) Notwithstanding subsections (a), (b), and (c) of this section and paragraph (2) of this

subsection, the court shall disallow any claim for reimbursement or contribution of an entity that

is liable with the debtor on or has secured the claim of a creditor, to the extent that--

(A) such creditor's claim against the estate is disallowed;

(B) such claim for reimbursement or contribution is contingent as of the time of allowance or

disallowance of such claim for reimbursement or contribution; or

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(C) such entity asserts a right of subrogation to the rights of such creditor under section 509 of

this title.

(2) A claim for reimbursement or contribution of such an entity that becomes fixed after the

commencement of the case shall be determined, and shall be allowed under subsection (a), (b), or

(c) of this section, or disallowed under subsection (d) of this section, the same as if such claim

had become fixed before the date of the filing of the petition.

(f) In an involuntary case, a claim arising in the ordinary course of the debtor's business or

financial affairs after the commencement of the case but before the earlier of the appointment of

a trustee and the order for relief shall be determined as of the date such claim arises, and shall be

allowed under subsection (a), (b), or (c) of this section or disallowed under subsection (d) or (e)

of this section, the same as if such claim had arisen before the date of the filing of the petition.

(g)(1) A claim arising from the rejection, under section 365 of this title or under a plan under

chapter 9, 11, 12, or 13 of this title, of an executory contract or unexpired lease of the debtor that

has not been assumed shall be determined, and shall be allowed under subsection (a), (b), or (c)

of this section or disallowed under subsection (d) or (e) of this section, the same as if such claim

had arisen before the date of the filing of the petition.

(2) A claim for damages calculated in accordance with section 562 shall be allowed under

subsection (a), (b), or (c), or disallowed under subsection (d) or (e), as if such claim had arisen

before the date of the filing of the petition.

(h) A claim arising from the recovery of property under section 522, 550, or 553 of this title shall

be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed

under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of

the filing of the petition.

(i) A claim that does not arise until after the commencement of the case for a tax entitled to

priority under section 507(a)(8) of this title shall be determined, and shall be allowed under

subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section,

the same as if such claim had arisen before the date of the filing of the petition.

(j) A claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered

claim may be allowed or disallowed according to the equities of the case. Reconsideration of a

claim under this subsection does not affect the validity of any payment or transfer from the estate

made to a holder of an allowed claim on account of such allowed claim that is not reconsidered,

but if a reconsidered claim is allowed and is of the same class as such holder's claim, such holder

may not receive any additional payment or transfer from the estate on account of such holder's

allowed claim until the holder of such reconsidered and allowed claim receives payment on

account of such claim proportionate in value to that already received by such other holder. This

subsection does not alter or modify the trustee's right to recover from a creditor any excess

payment or transfer made to such creditor.

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(k)(1) The court, on the motion of the debtor and after a hearing, may reduce a claim filed under

this section based in whole on an unsecured consumer debt by not more than 20 percent of the

claim, if--

(A) the claim was filed by a creditor who unreasonably refused to negotiate a reasonable

alternative repayment schedule proposed on behalf of the debtor by an approved nonprofit

budget and credit counseling agency described in section 111;

(B) the offer of the debtor under subparagraph (A)--

(i) was made at least 60 days before the date of the filing of the petition; and

(ii) provided for payment of at least 60 percent of the amount of the debt over a period not to

exceed the repayment period of the loan, or a reasonable extension thereof; and

(C) no part of the debt under the alternative repayment schedule is nondischargeable.

(2) The debtor shall have the burden of proving, by clear and convincing evidence, that--

(A) the creditor unreasonably refused to consider the debtor's proposal; and

(B) the proposed alternative repayment schedule was made prior to expiration of the 60-day

period specified in paragraph (1)(B)(i).

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APPENDIX E

11 U.S.C. § 503 (2005)

Section 503. Allowance of administrative expenses

(a) An entity may timely file a request for payment of an administrative expense, or may tardily

file such request if permitted by the court for cause.

(b) After notice and a hearing, there shall be allowed administrative expenses, other than claims

allowed under section 502(f) of this title, including--

(1)(A) the actual, necessary costs and expenses of preserving the estate including--

(i) wages, salaries, and commissions for services rendered after the commencement of the case;

and

(ii) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National

Labor Relations Board as back pay attributable to any period of time occurring after

commencement of the case under this title, as a result of a violation of Federal or State law by

the debtor, without regard to the time of the occurrence of unlawful conduct on which such

award is based or to whether any services were rendered, if the court determines that payment of

wages and benefits by reason of the operation of this clause will not substantially increase the

probability of layoff or termination of current employees, or of nonpayment of domestic support

obligations, during the case under this title;

(B) any tax--

(i) incurred by the estate, whether secured or unsecured, including property taxes for which

liability is in rem, in personam, or both, except a tax of a kind specified in section 507(a)(8) of

this title; or

(ii) attributable to an excessive allowance of a tentative carryback adjustment that the estate

received, whether the taxable year to which such adjustment relates ended before or after the

commencement of the case;

(C) any fine, penalty, or reduction in credit relating to a tax of a kind specified in subparagraph

(B) of this paragraph; and

(D) notwithstanding the requirements of subsection (a), a governmental unit shall not be required

to file a request for the payment of an expense described in subparagraph (B) or (C), as a

condition of its being an allowed administrative expense;

(2) compensation and reimbursement awarded under section 330(a) of this title;

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(3) the actual, necessary expenses, other than compensation and reimbursement specified in

paragraph (4) of this subsection, incurred by--

(A) a creditor that files a petition under section 303 of this title;

(B) a creditor that recovers, after the court's approval, for the benefit of the estate any property

transferred or concealed by the debtor;

(C) a creditor in connection with the prosecution of a criminal offense relating to the case or to

the business or property of the debtor;

(D) a creditor, an indenture trustee, an equity security holder, or a committee representing

creditors or equity security holders other than a committee appointed under section 1102 of this

title, in making a substantial contribution in a case under chapter 9 or 11 of this title;

(E) a custodian superseded under section 543 of this title, and compensation for the services of

such custodian; or

(F) a member of a committee appointed under section 1102 of this title, if such expenses are

incurred in the performance of the duties of such committee;

(4) reasonable compensation for professional services rendered by an attorney or an accountant

of an entity whose expense is allowable under subparagraph (A), (B), (C), (D), or (E) of

paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such

services, and the cost of comparable services other than in a case under this title, and

reimbursement for actual, necessary expenses incurred by such attorney or accountant;

(5) reasonable compensation for services rendered by an indenture trustee in making a

substantial contribution in a case under chapter 9 or 11 of this title, based on the time, the nature,

the extent, and the value of such services, and the cost of comparable services other than in a

case under this title;

(6) the fees and mileage payable under chapter 119 of title 28;

(7) with respect to a nonresidential real property lease previously assumed under section 365,

and subsequently rejected, a sum equal to all monetary obligations due, excluding those arising

from or relating to a failure to operate or a penalty provision, for the period of 2 years following

the later of the rejection date or the date of actual turnover of the premises, without reduction or

setoff for any reason whatsoever except for sums actually received or to be received from an

entity other than the debtor, and the claim for remaining sums due for the balance of the term of

the lease shall be a claim under section 502(b)(6);

(8) the actual, necessary costs and expenses of closing a health care business incurred by a

trustee or by a Federal agency (as defined in section 551(1) of title 5) or a department or agency

of a State or political subdivision thereof, including any cost or expense incurred--

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(A) in disposing of patient records in accordance with section 351; or

(B) in connection with transferring patients from the health care business that is in the process of

being closed to another health care business; and

(9) the value of any goods received by the debtor within 20 days before the date of

commencement of a case under this title in which the goods have been sold to the debtor in the

ordinary course of such debtor's business.

(c) Notwithstanding subsection (b), there shall neither be allowed, nor paid--

(1) a transfer made to, or an obligation incurred for the benefit of, an insider of the debtor for the

purpose of inducing such person to remain with the debtor's business, absent a finding by the

court based on evidence in the record that--

(A) the transfer or obligation is essential to retention of the person because the individual has a

bona fide job offer from another business at the same or greater rate of compensation;

(B) the services provided by the person are essential to the survival of the business; and

(C) either--

(i) the amount of the transfer made to, or obligation incurred for the benefit of, the person is not

greater than an amount equal to 10 times the amount of the mean transfer or obligation of a

similar kind given to nonmanagement employees for any purpose during the calendar year in

which the transfer is made or the obligation is incurred; or

(ii) if no such similar transfers were made to, or obligations were incurred for the benefit of, such

nonmanagement employees during such calendar year, the amount of the transfer or obligation is

not greater than an amount equal to 25 percent of the amount of any similar transfer or obligation

made to or incurred for the benefit of such insider for any purpose during the calendar year

before the year in which such transfer is made or obligation is incurred;

(2) a severance payment to an insider of the debtor, unless--

(A) the payment is part of a program that is generally applicable to all full-time employees; and

(B) the amount of the payment is not greater than 10 times the amount of the mean severance pay

given to nonmanagement employees during the calendar year in which the payment is made; or

(3) other transfers or obligations that are outside the ordinary course of business and not justified

by the facts and circumstances of the case, including transfers made to, or obligations incurred

for the benefit of, officers, managers, or consultants hired after the date of the filing of the

petition.

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APPENDIX F

11 U.S.C. § 549 (2005)

Section 549. Postpetition transactions

(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 G

11 U.S.C. § 550 (1984)

Section 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

(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;

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(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.

(f) 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 H

11 U.S.C. § 1107 (1984)

Section 1107. Rights, powers, and duties of debtor in possession

(a) Subject to any limitations on a trustee serving in a case under this chapter, and to such

limitations or conditions as the court prescribes, a debtor in possession shall have all the rights,

other than the right to compensation under section 330 of this title, and powers, and shall

perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and

(4) of this title, of a trustee serving in a case under this chapter.

(b) Notwithstanding section 327(a) of this title, a person is not disqualified for employment

under section 327 of this title by a debtor in possession solely because of such person's

employment by or representation of the debtor before the commencement of the case.

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APPENDIX I

11 U.S.C. § 1108 (1984)

Section 1108. Authorization to operate business

Unless the court, on request of a party in interest and after notice and a hearing, orders otherwise,

the trustee may operate the debtor's business.

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APPENDIX J

28 U.S.C. § 152 (2005)

Section 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.

(2) The bankruptcy judges appointed pursuant to this section shall be appointed for the several

judicial districts as follows:

Districts Judges

Alabama:

Northern 5

Middle 2

Southern 2

Alaska 2

Arizona 7

Arkansas:

Eastern and Western 3

California:

Northern 9

Eastern 6

Central 21

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Southern 4

Colorado 5

Connecticut 3

Delaware 1

District of Columbia 1

Florida:

Northern 1

Middle 8

Southern 5

Georgia:

Northern 8

Middle 3

Southern 2

Hawaii 1

Idaho 2

Illinois:

Northern 10

Central 3

Southern 1

Indiana:

Northern 3

Southern 4

Iowa:

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Northern 2

Southern 2

Kansas 4

Kentucky:

Eastern 2

Western 3

Louisiana:

Eastern 2

Middle 1

Western 3

Maine 2

Maryland 4

Massachusetts 5

Michigan:

Eastern 4

Western 3

Minnesota 4

Mississippi:

Northern 1

Southern 2

Missouri:

Eastern 3

Western 3

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Montana 1

Nebraska 2

Nevada 3

New Hampshire 1

New Jersey 8

New Mexico 2

New York:

Northern 2

Southern 9

Eastern 6

Western 3

North Carolina:

Eastern 2

Middle 2

Western 2

North Dakota 1

Ohio:

Northern 8

Southern 7

Oklahoma:

Northern 2

Eastern 1

Western 3

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Oregon 5

Pennsylvania:

Eastern 5

Middle 2

Western 4

Puerto Rico 2

Rhode Island 1

South Carolina 2

South Dakota 2

Tennessee:

Eastern 3

Middle 3

Western 4

Texas:

Northern 6

Eastern 2

Southern 6

Western 4

Utah 3

Vermont 1

Virginia:

Eastern 5

Western 3

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Washington:

Eastern 2

Western 5

West Virginia:

Northern 1

Southern 1

Wisconsin:

Eastern 4

Western 2

Wyoming 1

(3) Whenever a majority of the judges of any court of appeals cannot agree upon the appointment

of a bankruptcy judge, the chief judge of such court shall make such appointment.

(4) The judges of the district courts for the territories shall serve as the bankruptcy judges for

such courts. The United States court of appeals for the circuit within which such a territorial

district court is located may appoint bankruptcy judges under this chapter for such district if

authorized to do so by the Congress of the United States under this section.

(b)(1) The Judicial Conference of the United States shall, from time to time, and after

considering the recommendations submitted by the Director of the Administrative Office of the

United States Courts after such Director has consulted with the judicial council of the circuit

involved, determine the official duty stations of bankruptcy judges and places of holding court.

(2) The Judicial Conference shall, from time to time, submit recommendations to the Congress

regarding the number of bankruptcy judges needed and the districts in which such judges are

needed.

(3) Not later than December 31, 1994, and not later than the end of each 2-year period thereafter,

the Judicial Conference of the United States shall conduct a comprehensive review of all judicial

districts to assess the continuing need for the bankruptcy judges authorized by this section, and

shall report to the Congress its findings and any recommendations for the elimination of any

authorized position which can be eliminated when a vacancy exists by reason of resignation,

retirement, removal, or death.

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(c)(1) Each bankruptcy judge may hold court at such places within the judicial district, in

addition to the official duty station of such judge, as the business of the court may require.

(2)(A) Bankruptcy judges may hold court at such places within the United States outside the

judicial district as the nature of the business of the court may require, and upon such notice as the

court orders, upon a finding by either the chief judge of the bankruptcy court (or, if the chief

judge is unavailable, the most senior available bankruptcy judge) or by the judicial council of the

circuit that, because of emergency conditions, no location within the district is reasonably

available where the bankruptcy judges could hold court.

(B) Bankruptcy judges may transact any business at special sessions of court held outside the

district pursuant to this paragraph that might be transacted at a regular session.

(C) If a bankruptcy court issues an order exercising its authority under subparagraph (A), the

court--

(i) through the Administrative Office of the United States Courts, shall--

(I) send notice of such order, including the reasons for the issuance of such order, to the

Committee on the Judiciary of the Senate and the Committee on the Judiciary of the House of

Representatives; and

(II) not later than 180 days after the expiration of such court order submit a brief report to the

Committee on the Judiciary of the Senate and the Committee on the Judiciary of the House of

Representatives describing the impact of such order, including--

(aa) the reasons for the issuance of such order;

(bb) the duration of such order;

(cc) the impact of such order on litigants; and

(dd) the costs to the judiciary resulting from such order; and

(ii) shall provide reasonable notice to the United States Marshals Service before the

commencement of any special session held pursuant to such order.

(d) With the approval of the Judicial Conference and of each of the judicial councils involved, a

bankruptcy judge may be designated to serve in any district adjacent to or near the district for

which such bankruptcy judge was appointed.

(e) A bankruptcy judge may be removed during the term for which such bankruptcy judge is

appointed, only for incompetence, misconduct, neglect of duty, or physical or mental disability

and only by the judicial council of the circuit in which the judge's official duty station is located.

Removal may not occur unless a majority of all of the judges of such council concur in the order

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of removal. Before any order of removal may be entered, a full specification of charges shall be

furnished to such bankruptcy judge who shall be accorded an opportunity to be heard on such

charges.

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APPENDIX K

28 U.S.C. § 157 (2005)

Section 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.

(2) 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;

(C) counterclaims by the estate against persons filing claims against the estate;

(D) orders in respect to obtaining credit;

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

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

(G) motions to terminate, annul, or modify the automatic stay;

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

(I) determinations as to the dischargeability of particular debts;

(J) objections to discharges;

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

(L) confirmations of plans;

(M) orders approving the use or lease of property, including the use of cash collateral;

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(N) 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;

(O) 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

(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.

(3) 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.

(4) 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).

(5) 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.

(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.

(d) 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.

(e) 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 o

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