Circuit Split on Whether or Not Bankruptcy Courts Are “Courts of the United States”
Circuit split on whether or not bankruptcy courts are “courts of the United States”. If they are, Bankruptcy Courts can use 28 USC 1927 (as well as 11 USC 105) to order misbehaving debtors, creditors, and their attorneys to pay monetary sanctions. If Bankruptcy Courts are NOT “courts of the United States”, they cannot use 28 USC 1927, but can still use 11 USC 105. This Circuit split is reported in a 2016 not for publication 6th Circuit case, In re Royal Manor Management (6th Cir. 6/15/16), 652 Fed. App. 330, as follows:
There is a split of authority regarding whether a bankruptcy court is a “court of the United States” within the meaning of28 U.S.C. § 1927; the Ninth and Tenth Circuits answering in the negative and the Second, Third, and Seventh Circuits answering in the positive. Compare Miller v. Cardinale (In re Deville), 280 B.R. 483, 494 (B.A.P. 9th Cir. 2002), judgment aff’d, 361 F.3d 539 (9th Cir. 2004) (“the Ninth Circuit does not regard a bankruptcy court as a ‘court of the United States’ “); Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd., Inc.), 40 F.3d 1084, 1086 (10th Cir. 1994) (“bankruptcy courts are not within the contemplation of, with In re Schaefer Salt Recovery, Inc., 542 F.3d 90, 105 (3d Cir. 2008) (bankruptcy court has authority to impose sanctions under § 1927 because it is a unit of the district court, which is a “court of the United States”), Adair v. Sherman, 230 F.3d 890, 895 n.8 (7th Cir. 2000) (bankruptcy courts have authority to sanction attorneys under § 1927); Baker v. Latham Sparrowbush Assoc. (In re Matter of Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 230 (2d Cir. 1991) (bankruptcy courts have authority to impose § 1927 sanctions). No published decision of this court addresses this question, but in Maloof v. Level Propane Gasses, Inc., 316 Fed.Appx. 373, 376 (6th Cir. 2008) (per curiam), this court affirmed a bankruptcy court’s sanctions order under § 1927, observing that federal courts, including bankruptcy courts, have inherent and statutory authority to impose sanctions (citing Rathbun v. Warren City Schs. (In re Ruben), 825 F.2d 977, 982-84 (6th Cir. 1987)). And more recently, in Followell v. Mills, 317 Fed.Appx. 501, 513-14 (6th Cir. 2009), this court vacated the bankruptcy court’s denial of sanctions under § 1927 and remanded for reconsideration of the appropriateness of sanctions without questioning the bankruptcy court’s authority under the statute. ∗342 We find Followell and Maloof persuasive and follow them here.
Does Using a ‘Mere Conduit’ Invoke the 11 USC §546(e)?
US Supreme Court to Decide Whether Using a ‘Mere Conduit’ Invokes the 11 USC §546(e), so called ‘Safe Harbor’, provision of the Bankruptcy Code:
On 5/1/17, the US Supreme Court granted certiorari, to resolve a split of circuits and decide whether the “safe harbor” for securities transactions applies under Section 546(e), of the Bankruptcy Code, when a financial institution acts only as a “mere conduit” with no beneficial interest in the stock being sold in a leveraged buyout.
The Court will review the Seventh Circuit’s decision in FTI Consulting Inc. v. Merit Management Group LP, 830 F.3d 690 (7thCir. July 28, 2016), where “mere conduit” is the only issue.
The justices are yet to act on the certiorari petition in Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, 16-317 (Sup. Ct.), which raises the “mere conduit” question along with several others under Section 546(e).