Plaintiffs Memorandum Addressing the Effect of the Supreme Courts Decision in Stern v. Marshall on the Bankruptcy Courts Ability to Render Final Judgment on the Common Law Claims filed in the Lehman Commercial Paper Inc. Adversary Proceedings by JPMorgan Chase Bank, N.A. before U.S. Bankruptcy Judge James M. Peck in the Southern District of New York (Manhattan) filed by  Curtis Mallet-Prevost Colt & Mosle LLP (New York, NY) attorneys Joseph D. Pizzurro; L. P. Harrison 3rd; Michael J. Moscato; Nancy E. Delaney; Peter J. Behmke; and Cindi Eilbott Giglio; and Quinn Emanuel Urquhart & Sullivan LLP attorneys John B. Quinn and Erica Taggart as Special Counsel to Plaintiff Intervenor, the Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc., et al.

Lehman Brothers Holdings Inc. and Official Committee of Unsecured Creditors of Lehman Brothers Holdings Inc. (“Plaintiff”) argues that, despite the United States Supreme Court holding in Stern v. Marshall, 131 S. Ct. 2594 (2011), the Court has the power to enter final orders with respect to the 49 counts asserted in the First Amended Complaint (the “Amended Complaint”) — including the common law counts — and the eight counts asserted in JPMorgan Chase Bank, N.A.’s (“JPMorgan”) counterclaim. This brief is Plaintiff’s half of a duet of briefing requested by U.S. Bankruptcy Judge James M. Peck. Reading the 2 briefs side by side, two things are clear: the meaning of Stern is subject to broad and conflicting interpretation; and the U.S. Bankruptcy Courts are left with an task of conducting an initial evaluation of the issues that will entail much of the legal issue analysis that formerly could wait until a motion for summary judgment or even trial. Registered users click here to see a copy of this brief.

This brief and its counterpart from Defendant deserve careful reading and study. Together the briefs provide a comprehensive review of the U.S. Bankrutpcy Court’s authority to decide both preferential transfer avoidance actions and common law claims, both with and without the filing of proof of claim by the non-debtor party to the proceedings. Below are two portions of the Plaintiff’s brief – its summary of the argument and Plainff’s claim that JPMorgan consented to the final adjudication of all claims regardless of Stern. Footnote 2 of Plaintiff’s brief provides a seemingly comprehensive review of court decisions discussing Stern to date.

Plaintiff’s Preliminary Statement

While the Stern decision has engendered questions among courts and litigants, Plaintiffs submit that its application to the Adversary Proceeding is straightforward. This Court retains the power to enter final orders with respect to the 49 counts asserted in the First Amended Complaint (the “Amended Complaint”) — including the common law counts — and the eight counts asserted in JPMorgan Chase Bank, N.A.’s (“JPMorgan”) Amended Counterclaims (the “Amended Counterclaims”)

Nothing in Stern imposes a blanket prohibition against bankruptcy courts deciding common law claims on a final basis. To the contrary, in affirming the constitutional parameters of core proceedings, the Stern Court left untouched the bankruptcy courts’ authority to enter final judgments on common law claims and claims arising under the Bankruptcy Code if those claims stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process. Stern, 131 S. Ct. at 2618.¹

Recent decisions reviewing Stern and prior Supreme Court precedent confirm this conclusion.² For example, Judge Morris of the Bankruptcy Court for the Southern District of New York recently explained:

Nowhere in Marathon, Granfinanciera, or Stern does the Supreme Court rule that the bankruptcy court may not rule with respect to state law when determining a proof of claim in the bankruptcy, or when deciding a matter directly and conclusively related to the bankruptcy. As noted, Stern repeatedly emphasizes that it addresses only the constitutionality of the bankruptcy court making a final ruling on a state-law counterclaim that would not be finally resolved in the process of allowing or disallowing a proof of claim. The Granfinanciera Court interpreted previous cases as holding that the creditor’s right to a jury trial turned on whether it submitted a claim against the estate. The Marathon plurality emphasized the difference between restructuring of debtor-creditor relations and enforcement of a purely private right. The thread that binds these cases is the concept that when the jurisdiction of the bankruptcy court is at issue, the adjudication of a proof of claim — a request for payment from the estate — is of paramount concern.

Salander O’Reilly Galleries, 2011 WL 2837494 at *7 (internal citations omitted) (emphasis supplied). As discussed herein, the Stern decision made clear that a bankruptcy court has the authority to make final judgments on claims asserted by the bankruptcy estate where those claims will necessarily be resolved in the claims reconciliation process. All counts in the Amended Complaint satisfy this test.

The proof of claim filed by JPMorgan against LBHI (the “Proof of Claim”) is based on the Guaranty dated as of August 26, 2008 (the “August Guaranty”), the Security Agreement dated as of August 26, 2008 (the “August Security Agreement” and together with the August Guaranty, the “August Agreements”), the Guaranty dated as of September 9, 2008 (the “September Guaranty”), the Security Agreement dated as of September 9, 2008 (the “September Security Agreement”) and the Account Control Agreement dated as of September 9, 2008 (the “Account Control Agreement” and together with the September Guaranty and the September Security Agreement, the “September Agreements”). JPMorgan has further asserted that each of its claims against LBHI is secured by LBHI collateral transferred to JPMorgan under color of those agreements.

In the Adversary Proceeding, Plaintiffs pleaded 49 counts (including 18 counts predicated on common law) seeking to invalidate the August Agreements and September Agreements, as well as JPMorgan’s taking or withholding of collateral in connection with those agreements.  The adjudication of the claims asserted in the Adversary Proceeding, including the common law claims, is necessary to determine whether to allow JPMorgan’s claims against LBHI, firmly anchoring final adjudication of the Adversary Proceeding to the claims resolution process. Accordingly, under Stern, this Court can issue final orders regarding every count asserted in the Amended Complaint.

Moreover, Stern does not disturb the long-recognized principle that parties may consent to the bankruptcy court’s issuance of a final judgment even in actions that do not meet the test articulated by Stern. As explained below, JPMorgan’s conduct throughout this case constitutes its consent to have this Court enter a final judgment with respect to all of the claims asserted in the Amended Complaint and the Amended Counterclaims.

¹We understand that the Court’s concern was focused on its ability to issue a final judgment with respect to the common law claims. However, for the reasons discussed herein, LBHI submits that the distinction between bankruptcy claims and common law claims in this Adversary Proceeding is not relevant to the inquiry. All claims pleaded in the First Amended Complaint are inextricably linked to the claims resolution process and thus meet the Stern test.

² To date, a majority of the courts that have substantively discussed the Stern decision have concluded that the Court’s holding was narrow, and that non-Article III courts may still enter final judgments on claims integral to the claims resolution process. See In re Salander O’Reilly Galleries, Case No. 07-30005, 2011 WL 2837494, at *6-8 (Bankr. S.D.N.Y. Jul. 18, 2011) (finding that the Stern decision “does not remove from the bankruptcy court its jurisdiction over matters directly related to the estate that can be finally decided in connection with restructuring debtor and creditor relations” and that “the Bankruptcy Court is empowered to apply state law when so doing would finally resolve a claim”); see also Schmidt v. Klein Bank (In re Schmidt), Case No. 11-6028, 2011 WL 3300693, at *4 (B.A.P. 8th Cir. Aug. 3, 2011) (holding that if defendant bank had filed proof of claim in the debtor’s bankruptcy cases based on guaranties, the resolution of those claims would be core, “inasmuch as the allowance or disallowance of claims against a debtor’s bankruptcy estate is a matter that arises under the Bankruptcy Code”); Stoebner v. PNY Techs., Inc. (In re Polaroid Corp.), Case No. 10-4595, 2011 WL 2694316, at *2 n.4 (Bankr. D. Minn. Jul. 7, 2011) (finding that the Stern “opinion’s bottom line, at its very conclusion [is that] . . . [t]he Bankruptcy Court [in Stern] . . . lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim); Turner v. First Cmty. Credit Union (In re Turner), Case No. 10­03300, 2011 Vsa. 2708907, at *5 (Bankr. S.D. Tex. Jul. 11, 2011) (citing Stern for the proposition that “[d]isputes that are integrally bound up in the claims adjudication process—and thus involve the exercise of the Bankruptcy Court’s in rem jurisdiction over the estate—are part of the ‘public rights’ exception”). But see Samson v. Blixseth (In re Blixseth), Case No. 09-60452­7, 2011 WL 3274042 (Bankr. D. Mont. Aug. 1, 2011) (construing Stern as creating a distinction between fraudulent conveyance claims on one hand, which must be adjudicated in an Article III court, and preference and equitable subordination claims on the other).

Plaintiff’s Plan B Argument – “JPMorgan has Consented to the Bankruptcy Court’s Final Adjudication of the Amended Complaint and Amended Counterclaims”

As discussed above, the Stern decision affirmed the concept that a party’s conduct can constitute an implied waiver of its right under Article III. JPMorgan’s conduct during the pendency of the Adversary Proceeding demonstrates that it has impliedly consented to the complete adjudication by this Court of all counts contained within the Amended Complaint and the Amended Counterclaims.

Significantly, JPMorgan filed its Amended Counterclaims asserting eight state common law claims in this Court — even though it could have filed them in state court after having obtained relief from the automatic stay. By consciously (and perhaps strategically) making this choice, JPMorgan consented to this Court’s issuance of a final judgment with respect to its Amended Counterclaims.^I4 Much like the customer in Schor, by choosing the bankruptcy court as its desired forum to adjudicate its Amended Counterclaims, JPMorgan also consented to the bankruptcy court’s adjudication of all claims in the Adversary Proceeding, including the common law causes of action brought by Plaintiffs in the Amended Complaint. Thus, consistent with Schor, JPMorgan’s election to forgo its right to proceed in state or federal court on its Amended Counterclaims and its decision to seek relief instead from this Court constitutes implied consent to final adjudication of the entire controversy by this Court. See Schor, 478 U.S. at 850.

Furthermore, when JPMorgan filed its Amended Counterclaims, it specifically acknowledged that the entire Adversary Proceeding was a core proceeding. In its Amended Counterclaims, JPMorgan states that “[t]he Court has jurisdiction over these counterclaims under 28 U.S.C. § 1334(a) and 28 U.S.C. § 959(a). This is a core proceeding within the meaning of 28 U.S.C. § 157(b).” Amended Counterclaims, at l 17 (emphasis supplied). This concession contained in its own pleading constitutes consent to have this Court enter a final judgment, certainly with respect to all counts asserted in its Amended Counterclaims, and arguably on all counts asserted in the entire Adversary Proceeding. See Valentine v. Elliott (In re Valentine), 357 B.R. 744, 751 (Bankr. E.D. Va. 2007) (explaining that an assertion that a claim is “core” can be deemed implied consent to the bankruptcy court’s exercise of final adjudicative authority). –page–

¹⁴ Courts have found a defendant’s filing of a counterclaim in an adversary proceeding to be a significant factor in determining whether a party has impliedly consented to a bankruptcy court’s entry of a final judgment. See Slagter v. Stonecraft LLC (In re Stonecraft LLC), 260 Fed. Appx. 656, 658 (5th Cir. 2007); Pisgah Contractors, Inc. v. Rosen (In re Pisgah Contractors, Inc.), 215 B.R. 679, 682 (W.D.N.C. 1995).