In a 12 page decision released June 2, 2015, Judge Gross of the Delaware Bankruptcy Court gives us our first Delaware specific insight into how the U.S. Supreme Court’s Wellness opinion will be interpreted. Judge Gross’ opinion is available here (the “Opinion”). The Opinion was issued in the adversary proceeding SNMP Research Int’l. v. Nortel Networks Inc., Case No. 11-53454. For a review of the Supreme Court’s Wellness Opinion, please take a look at this blog post authored by Carl Neff: United States Supreme Court Expands Power of Bankruptcy Courts- Wellness Int’l v. Sharif.
In this Opinion, the Court addressed the “narrow but complex issue” of whether it has “authority to enter judgments or orders with respect to the claims of the plaintiff, a non-debtor, against a non-debtor defendant for what are clearly non-core claims…” Opinion at *1.
On January 14, 2009, Debtors filed petitions for relief pursuant to Chapter 11 of the Bankruptcy Code. On November 2, 2011, SNMP filed its original complaint against Debtors, Avaya and others. Over the last few years, SNMP filed both an amended complaint and a second amended complaint. Each of the Complaints demanded a jury trial and further state: This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. The causes of action against Nortel are core. The causes of action against Avaya are not core within the meaning of 28 U.S. § 157(b), and SNMP Research does not consent to the entry of final orders by the Bankruptcy Judge in this proceeding as to causes of action against Avaya. Opinion at *4. At the same time, however, the complaints “contain 12 prayers for relief from ‘this Court,’ i.e., the Bankruptcy Court.” Opinion at *5.
Judge Gross’ Opinion
Judge Gross begins his analysis by providing that all parties agree the claims against Avaya are non-core, which “might have ended the inquiry in SNMP’s favor had the United States Supreme Court not fortuitously issued a ruling only two days before oral argument in this matter which turned the focus from the nature of the claims solely to whether SNMP had consented to the Court’s jurisdiction and its authority to issue final orders and judgments.” Opinion at *5-6.
Judge Gross included the following quote from the Supreme Court’s Wellness decision: “This case presents the question whether Article III allows bankruptcy judges to adjudicate such claims with the parties’ consent. We hold that Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.” Opinion at *6 (citing Wellness International Network, Ltd. v. Sharif, No. 13-935, 2015 WL 2436619, *3 (May 26, 2015)).
Avaya argues that SNMP has implicitly consented to the Bankruptcy Court’s authority by virtue of its action and failure to act in a timely manner. Opinion at *6. While Judge Gross did determine that Avaya made a “strong case for a finding that SNMP consented,” Opinion at *8, he ultimately held that SNMP made its intentions known and reserved its rights sufficiently, such that the requirement provided in the Wellness opinion was not met. “[T]he Supreme Court’s emphasis on consent being ‘knowing and voluntary’ reinforces deliberation.” Opinion at *9.
Judge Gross was not “willing to base a finding of implied consent on the filing of the Complaints in this Court when … SNMP expressly gave notice in the Complaints that … it was not submitting itself to the Court’s authority to enter final orders.” Opinion at *9.
While in this instance the Court held it did not have authority to rule based on implied consent, parties need to proactively reserve their rights, as bankruptcy courts don’t always make this finding. The Opinion provides two examples of such situations: Schubert v. Lucent Technologies Inc. (In re Winstar Communications, Inc.), 348 B. R. 234, 251 (Bankr. D. Del. 2005) (party impliedly consented to bankruptcy judge’s final determination having sought judgment from the bankruptcy court); In re River Entertainment Co., 467 B.R. 808, 822-24 (Bankr. W.D. Pa. 2012) (party found to have consented to bankruptcy court’s adjudication of its claims after removing case to bankruptcy court and failing to timely move to withdraw the reference). Opinion at *8-9.
If you or a client are ever in a situation when you don’t consent to the authority of the Bankruptcy Court, make sure you repeat your reservation of rights and denial of consent every chance you get. And don’t wait too long if you are going to move to withdraw the reference.