January 5, 2012

The relationship between a bank and a depositor is one of debtor and creditor. When the FDIC took over a failed bank as receiver, it had a right of setoff with respect to an account in which the parent of the bank's parent was the depositor. Subsequently, the FDIC transferred the bank's assets, including the parent's account, to a third party bank. The bankruptcy court erred in holding that this transfer extinguished the mutuality necessary for setoff.

A debtor (the FDIC) cannot unilaterally extinguish its debt (to the parent). The parent's claim against the FDIC was not, and could not be, addressed in the transfer agreement between the FDIC and the third party bank, since the parent was not a party to that agreement. Basic principles of contract law compel the conclusion that even after the transfer, the FDIC remained liable to the parent. Since the FDIC's liability on the account was not terminated by the transfer, "mutuality" continued to exist post-transfer.

January 3, 2012

If a bankruptcy court lacks Constitutional authority to finally adjudicate a proceeding per Stern v. Marshall, the court may not enter final summary judgment or any other type of final judgment, absent consent of the parties.

Stern held that Article III prohibited Congress from giving bankruptcy courts authority to adjudicate claims that went beyond the claims allowance process.

The mere fact that claims arise from a party's conduct toward another party during a bankruptcy case does not make the claims adjudicable by the bankruptcy judge. Although Article III courts have inherent authority to resolve disputes claiming that the way one party acted in the course of the court's proceedings violated another party's rights, bankruptcy courts are not Article III courts. Where claims arising from conduct in a bankruptcy case are in the nature of claims between private parties defined by State law, Stern holds that the bankruptcy court lacks Constitutional authority to finally adjudicate those claims.

Here, a health care provider filed thousands of proofs of claim in consumer bankruptcy cases. The proofs of claim contained consumers' health care treatment information, which was alleged to be a violation of Wisconsin law. Some of the affected debtors filed class action cases against the health care provider. The bankruptcy judge granted summary judgment in favor of the health care provider. This adjudication violated Stern. Just as Pierce's filing of a proof of claim in Vickie's bankruptcy did not give the bankruptcy judge authority to adjudicate her counterclaim, the health care provider's act of filing proofs of claim in the debtors' bankruptcies did not give the bankruptcy judge authority to adjudicate the debtors' state-law claims. The fact that the circumstances giving rise to the claims involved procedures in the debtors' bankruptcies is insufficient to bypass Article III's requirements.

The bankruptcy court erred in awarding attorneys fees from a failed involuntary case to the debtor's attorney rather than the debtor. The statute requires "judgment in favor of the debtor," not its attorney.

The bankruptcy court did not err in awarding fees where the debtor's attorney was also the debtor's sole manager and member. When a member of an entity who is also an attorney represents the entity, he is in an attorney-client relationship with the entity.