No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2011

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1 No IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 2011 IN RE BLOCKBUSTERS, INC., DEBTOR NATALLIE SANTANA, Chapter 11 Trustee v. RACHEL RAY WARNER BAKES, INC. PETITIONER, RESPONDENT. December 9, 2011 THE PETITION FOR A WRIT OF CERTIORARI IS GRANTED, LIMITED TO THE FOLLOWING QUESTIONS: 1. Whether a debtor s unauthorized use of cash collateral permits a bankruptcy trustee to recover funds transferred to a good faith transferee in the ordinary course of business who 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 unauthorized post-petition transfers pursuant to 11 U.S.C. 549 and 550. St. John s University School of Law This problem may not be used or reproduced for any purpose other than the Duberstein Competition without express permission. Contact llm@stjohns.edu or (718) to obtain permission for other uses. 1

2 UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT IN RE BLOCKBUSTERS, INC., DEBTOR Case No RACHEL RAY WARNER BAKES, INC. Appellant, v. NATALLIE SANTANA, Chapter 11 Trustee Appellee. Decided: October 10, 2011 Before Judges LEGGETT, CORNELL, and KHATCHATOURIAN, Circuit Judges CORNELL, Circuit Judge: This appeal requires us to resolve two important questions regarding the powers of a bankruptcy court and the scope of the power to recover post-petition transfers. The District Court, in affirming the Bankruptcy Court, adopted an expansive view of the bankruptcy judge s Constitutional authority to enter final orders and rejected various equitable good faith transferee defenses to the recovery of post-petition transfers under 11 U.S.C We believe that these determinations were in error and accordingly reverse. I. Factual Background and Procedural History Blockbusters, Inc. (the Debtor ) was formed about 15 years ago to capitalize on the enthusiasm Broadway fans appeared to have for the shows of Stephen Sondheim and Andrew 2

3 Lloyd Webber. Blockbusters was patterned after the hugely successful Comic Con conventions, where fans often masquerade as their favorite anime or comic character. Blockbusters obtained licenses from Sondheim and Webber to host conventions that celebrated their beloved musicals. These conventions allowed Broadway fans from all over the world to meet their favorite torch singers and leading men and women, while also making significant purchases of memorabilia from their favorite Broadway shows. Following the debuts of the Broadway shows Wicked and Avenue Q, fans began to clamor for new and edgy shows. The musicals written by Sondheim and Webber could hardly be considered new or edgy, and their more recent works were not particularly well-received. 1 Consequently, attendance at Blockbusters conventions began to decline and the Debtor experienced a drop off in revenue from merchandise and ticket sales. The Debtor s operations were financed by Broadway Bank (the Bank ), which held a perfected security interest in all of the Debtor s assets, including its bank accounts and accounts receivable. A successful convention in the fall of 2008 was critical to the financial stability of the Debtor. Unfortunately, Lehman Brothers collapsed only weeks before the convention was scheduled. In the ensuing atmosphere of financial panic, ticket sales evaporated and Broadway fans who did attend the convention spent little on memorabilia. As a result, Blockbusters was not able to make a scheduled payment on the Bank loan. The Bank threatened to declare a default and accelerate the loan. Following failed negotiations on a refinancing proposal, the Debtor filed for chapter 11 bankruptcy. After filing for bankruptcy, the Debtor still needed additional financing to fund its spring 2009 convention. The Debtor and the Bank negotiated the terms of a cash collateral order which 1 Notably, Webber s song, It s My Time, only achieved fifth place in the 2009 Eurovision song contest, losing to such entries as Fairytale from Norway and Jan Jan from Armenia. 3

4 the bankruptcy court entered as a stipulated cash collateral order. The order, in relevant part, allowed the Debtor to use a total of $1,500,000 of the Bank s cash collateral for expenses related to the spring convention. The stipulated order provided a detailed budget that limited the amounts the Debtor could spend in each category of convention-related expenses, with a $500,000 cap on payments to vendors like the appellant here. The order provided that the Debtor could not exceed the allowance in any particular line item without written consent of the Bank. In addition, the order granted the Bank a lien on all of the Debtor s assets, including assets acquired post-petition. The Debtor s future turned on the success of its spring 2009 convention. Thus, management was determined to create a spectacle at the spring 2009 convention that would generate enough publicity and interest to make it the biggest show ever. After obtaining authority to use cash collateral, the Debtor, in an effort to make the spectacle a reality, contacted Rachel Ray Warner Bakes, Inc. (the Vendor ) to supply a full-scale model of the stage set of West Side Story made entirely of cake. All parties concede that a cake of this type and scale has a market value of at least $250,000, the price that the Vendor quoted for building the cake for Blockbusters. The Vendor was nervous about committing to a project of this size for a company that was in bankruptcy. The Debtor s counsel supplied the Vendor with a copy of the cash collateral order. After reviewing it and determining that the $500,000 vendor allowance was sufficient to cover the cost of the cake, the Vendor agreed to produce the cake for the spring 2009 convention on the condition that the Debtor pay $100,000 in advance and pay the $150,000 balance in cash before delivery. The Debtor wire transferred $100,000 of the Bank s cash collateral to the Vendor as the advance and the Vendor began to build the cake. The day before the convention was scheduled to open the Debtor wire transferred the $150,000 balance to the 4

5 Vendor, again using the Bank s cash collateral. Later that day, the Vendor delivered the cake to the convention site and assembled the pieces into a perfect replica of the West Side Story set. Unbeknownst to either the Vendor or the Bank at that time, the Debtor had already paid out the entirety of the $500,000 vendor line item of its budget. Although it is undisputed that the $100,000 initial deposit was made at a time when there were available budgeted funds in the vendor line item, the Debtor subsequently made payments to vendors supplying Follies memorabilia that had completely exhausted the line. Further, by the time of the $150,000 wire transfer to the Vendor, the debtor had already made payments for convention-related expenses that exceeded the entire $1,500,000 authority to use cash collateral for the convention. As a result, the Debtor used $150,000 of the Bank s cash collateral to pay the Vendor even though those funds were earmarked for other purposes. It is undisputed that the Vendor did not monitor the Debtor s use of cash collateral. The Vendor had no pre-petition contact or relationship with the Debtor and did not file a proof of claim in the bankruptcy case. Fortunately, the public brought an appetite for cake and classic Broadway musicals to the spring 2009 convention, and the convention turned a profit. The cake was a major reason for the convention s success. The local press featured the cake prominently and many attendees at the convention stated that they came primarily because of the news coverage of the cake. The success of the spring convention was short lived, however, since the Debtor s misbehavior quickly came to light and ended its brief revival. Within weeks after the convention the Bank discovered that the Debtor had exceeded its budget and improperly used cash collateral. Due to this misuse of cash collateral, the Bank moved for, and obtained, the appointment of a chapter 11 trustee. At the insistence of the Bank, the chapter 11 trustee brought this action as a core proceeding in the bankruptcy court to 5

6 recover the $150,000 transfer to the Vendor as an unauthorized post-petition transfer under Bankruptcy Code 549(a) and 550(a)(1). The Honorable Ivy Grey, Bankruptcy Judge for the District of Moot, conducted a bench trial at which both sides presented evidence. Judge Grey found that the $150,000 payment was made from funds that were property of the estate. Further, she found that the funds constituted the Bank s cash collateral, that the payment was not authorized by the cash collateral order, and that the Bank had not consented to such a use of its cash collateral. The Vendor attempted to raise a variety of defenses and offered to present evidence establishing its good faith, showing that the cake had generated new revenues in excess of the diverted cash collateral, and showing that the Bank s cash collateral position was actually enhanced as a result of its post-petition liens on the revenue generated by the profitable convention. The Judge did not allow the Vendor to present the tendered evidence, holding that the plain language of the statute required avoidance and rendered the Vendor strictly liable. The Vendor also objected to the bankruptcy court s authority to hear and determine the adversary proceeding and argued that the bankruptcy court lacked constitutional authority to enter a final order avoiding the transfer and imposing liability on it. Judge Grey orally held, Bankruptcy courts can issue orders for actions arising under the Bankruptcy Code. Accordingly, the bankruptcy court entered an order avoiding the transfer and awarding judgment against the Vendor for $150,000. On appeal, The Honorable Mary-Tipton Thalheimer, United States District Judge for the District of Moot, summarily affirmed the decision of the bankruptcy court on both the avoidance and judicial authority issues. This appeal followed. 6

7 II. Discussion In civil appeals, a lower court s findings of fact are accorded special deference, and will not be disturbed on appeal unless clearly erroneous. Hirschfeld v. Spanakos, 104 F.3d 16, 19 (2d Cir. 1997) (citation omitted). However, conclusions of law are reviewed de novo, and an appellate court need not give any deference to a lower court s conclusions of law. Keach v. United States Trust Co., 419 F.3d 626, 634 (7th Cir. 2005) (citation omitted). Since neither party challenges the lower court s factual determinations, the findings of fact will be accepted for the purposes of deciding this appeal. This Court is faced with two issues: (1) Whether the transfer to the Vendor can be avoided under section 549; and (2) Whether a bankruptcy court has authority to enter a final order avoiding a transfer under section 549 and granting judgment under section 550. For the reasons set forth below, we reverse. We hold that the estate s power to avoid postpetition transfers under section 549 is subject to equitable defenses. Alternatively, we find that the bankruptcy court lacked the power to enter as a final order, the judgment appealed from in this action. A. Avoidance of the Transfer Under Section 549 Bankruptcy Code section 549 provides in relevant part: (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) (B) that is not authorized under this title or by the court. 11 U.S.C. 549(a). This section permits a trustee to avoid post-petition transfers that are not authorized by the Bankruptcy Code or the bankruptcy court. The section contains exceptions for 7

8 certain transfers in involuntary bankruptcy cases and certain good faith purchasers of real property, neither of which is applicable here. See 11 U.S.C. 549(b & c). A simplistic application of section 549 to these facts may perhaps allow the trustee to avoid the payment to the Vendor. The trustee argues that the $150,000 was property of the estate that was transferred post-petition and that the transfer was not authorized by the cash collateral order or by any Code provision. Therefore, according to the trustee, the transfer can be avoided under section 549(a) and the Vendor is liable to the estate for $150,000 under section 550(a)(1) because it was the initial transferee of those funds. While this argument has a certain appeal, the outcome sought by the trustee produces absurd and inequitable results. The trustee relies upon Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil, Inc.), 599 F.3d 1255 (11th Cir. 2010). In Delco, the debtor-in-possession used a secured lender s cash collateral to purchase oil without the secured creditor s consent or a cash collateral order. The oil vendor received almost $2,000,000 in post-petition payments for the oil it provided to the debtor. After the case was converted to chapter 7, the trustee sought to recover the payments from the vendor. The Eleventh Circuit held that [t]o avoid a transfer under Section 549(a) a trustee need only demonstrate: (1) a post-petition transfer (2) of estate property (3) which was not authorized by the Bankruptcy Code or the court. Id. at The Delco court further rejected the vendor s arguments that there should be an exception to section 549 for harmless error or for innocent vendors dealing with a debtor-in-possession in good faith and in the ordinary course of business. Id. at We disagree. The critical inquiry here is whether this transfer was authorized by the bankruptcy court or the Bankruptcy Code. The transfer in this case was nothing more than an exchange of $150,000 for a cake of at least equal value that was made in the ordinary course of 8

9 the Debtor s convention business. This was authorized by section 1108 of the Bankruptcy Code, which authorized the Debtor to operate its business, and section 363(c)(1), which authorized the Debtor to use property of the estate in the ordinary course of business. Instead of focusing on the transfer aspect of the transaction, as section 549 commands, the Delco Court erroneous focused on the source of the funds the Debtor chose to use to make the transfer. While we do not condone the Debtor s violation of the cash collateral order, that is an internal matter between the Debtor, the Bank and the bankruptcy court; it need not concern a post-petition C.O.D. vendor who in good faith engages in an ordinary course transaction with a chapter 11 debtor in possession. The fundamental goal of chapter 11 is to reorganize viable businesses. Sections 1108 and 363(c) are central to that goal by encouraging vendors to deal with the chapter 11 debtor in possession on an ordinary course basis. The trustee s tortured reading of section 549 undermines this policy and produces an absurd and unworkable system where each employee, vendor and customer of a chapter 11 debtor must engage in a sophisticated tracing analysis through a debtor s bank accounts before it can be confident that it may retain funds remitted by a debtor in the ordinary course of business. From its earliest days, our commercial law has provided special protection to the good faith recipient of money. This principle is carried forward into Article 9 of the Uniform Commercial Code and applies in this case to provide that a good faith transferee of funds from a deposit account takes the funds free of a security interest in the deposit account. See UCC 9-332(b). There are two sides to every transfer. While the funds used here constituted the Bank s cash collateral before this transaction, the act of transferring them to the Vendor stripped the Bank s lien. Thus, at the instant of the Vendor s receipt of the funds, they were no longer cash collateral. This creates an anomalous situation of a transfer that is both authorized and not 9

10 authorized. We do not contend that one must view the transaction from the Vendor s side, but merely that the ambiguity created by this anomaly provides ample interpretive license for us to preserve that ancient harmony between the commercial law embodied in section of the Uniform Commercial Code and sections 1108 and 363 of the Bankruptcy Code. Cf. BFP v. Resolution Trust Corporation, 511 U.S. 531, 542 (1994) (overriding plain language of section 548 to preserve the ancient harmony between foreclosure law and fraudulent transfer law). Bankruptcy courts are courts of equity, Pepper v. Litton, 308 U.S. 295 (1939), and judicially-created exceptions to bankruptcy provisions are not without precedent. See, e.g., Bank of Marin v. England, 385 U.S. 99 (1966). Thus, even if section 549 applies to the instant transfer, the equitable principles underlying bankruptcy require recognition of equitable defenses for innocent vendors dealing with a debtor-in-possession in good faith and for situations where the estate is not harmed by the transfer. Acceptance of the dissent s view would produce an inequitable windfall and result in unjust enrichment to either the estate or the Bank. Even if the Vendor received a $150,000 transfer that was not authorized, the Bank received a replacement lien on the cake, and later on the revenues generated by the cake, that fully compensated it for any harm resulting from the Debtor s improper use of its cash collateral. The estate was not diminished and no one was harmed. Cf., In re Indian Capitol Distributing, Inc., 2011 WL , *11 (Bankr. D.N.M. Oct. 5, 2011) (holding that the lack of injury deprives the estate of standing). If the estate now recovers the $150,000 payment from the Vendor, it will have profited from the violation of the cash collateral order at the expense of an innocent vendor. This is no different from the wellrecognized judicially-created earmarking defense that bars a section 547 preference recovery where the estate is not diminished. See, e.g., McCuskey v. Nat l Bank of Waterloo (In re Bohen 10

11 Enters.), 859 F.2d 561, 566 (8 th Cir. 1988). To borrow a phrase, equity does not permit the trustee to have his cake and eat it too. Even the Eleventh Circuit, which blindly applied section 549 and claimed to lack the power to protect an innocent transferee in Delco, has recognized that the equitable principles of bankruptcy require creation of equitable exceptions. In a case decided several months after Delco, the Eleventh Circuit crafted an equitable good faith exception to the same section 550(a)(1) initial transferee provision that is being used here to impose liability on the Vendor. See Martinez v. Hutton (In re Harwell), 628 F.3d 1312, (11 th Cir. 2010). The Court created that equitable exception to protect transferees who were innocent of wrongdoing and deserving of protection just like the Vendor here. Id. Finally, allowing recovery in this case would create a conflict between Bankruptcy Code sections 503(b) and 502(h). Had the Vendor not been paid, section 503(b) would give it an administrative priority claim for providing services necessary and beneficial to the bankruptcy estate. However, if forced to return the payment, section 502(h), which applies to claims resulting from amounts recovered under section 550, would replace its priority claim with a mere pre-petition unsecured claim. Given that post-petition vendors continue to do business with bankruptcy debtors on the expectation that they will be paid in full for any post-petition goods and services, the better result would be to hold that there is an exception to section 549 for harmless errors and innocent vendors. B. The Bankruptcy Court Lacked Authority to Enter a Final Order Having ruled in favor of the Vendor on its section 549 argument, normally we would simply remand. However, since it is clear that the bankruptcy court lacks authority to enter a final order in this matter under the principles announced in Stern v. Marshall, U.S.,

12 S.Ct (2011), we also reverse the order on Stern grounds and direct that this matter be heard and determined by the District Court on remand. The dissent views Stern as a minor decision that changes very little. Nothing could be farther from the truth. Article III is an inseparable element of the constitutional system of checks and balances that both defines the power and protects the independence of the Judicial Branch. Stern, 131 S.Ct. at 2608 (citing Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 58). It commands that the judicial Power of the United States be vested in judges who enjoy salary protection and life tenure during good behavior. 2 Bankruptcy judges enjoy neither. These protections are not trivial, but rather are fundamental to the preservation of individual liberty. The Framers knew well that liberty could not depend upon judges appointed by the King and dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries. Stern, 131 S.Ct. at Prior to Stern, there would be little question but that a bankruptcy judge could enter a final judgment in this action. Previously the Supreme Court appeared to adopt a pragmatic approach that invalidated delegation of adjudicative authority to non-article III tribunals only if it posed a genuine and serious threat to the independence of the judiciary. See Stern, 131 S.Ct. at 2624 (Breyer, J., dissenting). Fortunately, the days of a relativistic interpretation of our fundamental constitutional protections of liberty are over. The Roberts Court in Stern issued a clarion call for judicial independence based not on an uncertain weighing test, but rather on a strict and formalist interpretation of Article III that is true to the original intention of the Framers and that permits Article III to serve as the guardian of individual liberty and separation of powers they envisioned. See Stern, 131 S.Ct. at As the Court made clear, Slight encroachments 2 Article III, 1 of the Constitution provides that the judicial power may only be exercised by judges whose salaries are protected from diminution and whose appointment is for life. 12

13 create new boundaries from which legions of power can seek new territory to capture. Stern, 131 S.Ct. at 2620 (quoting Reid v. Covert, 354 U.S. 1, 39 (1957)). While the bankruptcy court s issuance of a final judgment here may seem an innocuous incursion, we cannot compromise the integrity of the Judiciary by overlooking the intrusion. What we have here is a simple lawsuit between two private, non-governmental parties seeking a monetary recovery based on a federal statutory cause of action. How can adjudication of that action not involve the exercise of federal judicial power? If there is an answer supporting the bankruptcy court s exercise of adjudicatory power here, it comes from the public rights doctrine, which recognizes that there are some types of seemingly private rights that may be susceptible to delegation to administrative agencies or non- Article III judges. However, this is a very limited exception and has never been recognized by the Court to extend to bankruptcy matters. 3 Even if the restructuring of debtor-creditor relations is a public right that may constitutionally be delegated to the non-article III bankruptcy judges, Stern makes clear that the category of delegable matters is a narrow one limited to case administration 4 and those matters that would necessarily be resolved in the claims allowance process. See Stern, 131 S.Ct. at 20. Since the Vendor required payment in advance, there never was a debtor-creditor relationship and this action in no way involves the claims allowance process. Instead, like the claim asserted 3 Although Stern uses the public rights analysis to invalidate the delegation at issue, the Court goes to great lengths to emphasize that it is not suggesting that the restructuring of debtor-creditor relations is a public right. Stern, 131 S.Ct. at 2614 n We reject the dissent s broad view of what is encompassed by case administration. Entry of the cash collateral order was case administration. A lawsuit asserting a cause of action and seeking to deprive a non-debtor of its property is not case administration, even if the cause of action may depend upon some administrative action taken during the case. The money judgment entered here is no different from that entered in any garden variety lawsuit, and it is the exercise of the judicial power to deprive citizens of their property that triggers the Article III right to an Article III judge. 13

14 in Stern, this is an action to augment the estate by recovering property of the estate. 5 Stern makes clear that simply is not enough. See Stern, 131 S.Ct. at 2618 (distinguishing actions that augment the estate from those that seek a share of the res). Ignoring the clear thrust of Stern, the dissent argues that the public rights determination turns on the fact that this cause of action is based on federal bankruptcy law because it therefore stems from the bankruptcy case. Although the Supreme Court s jurisprudence in this area has emphasized that state law claims are not public rights that Congress is free to delegate to non- Article III tribunals, 6 that does not mean that the natural corollary is that a bankruptcy court may adjudicate any federal claim, or even any federal bankruptcy law claim. While the Stern Court devoted significant discussion to causes of action arising under federal bankruptcy law, it is clear that is not sufficient to permit delegation. For example, the section 547 preference power is a quintessential bankruptcy cause of action that stems from the bankruptcy case and is not merely a federalized version of some state law analogue (unlike the section 548 fraudulent transfer power that mimics the similar state law rules). Yet the Court in Katchen v. Landy, 382 U.S. 323 (1966), did not rest its inquiry on the federal-ness or bankruptcy-ness of the preference action in that case. Instead, Katchen turned on the necessity of determining whether there was a preference in order to determine whether the claim would be allowed or disallowed. As Stern s analysis of Katchen makes clear, the critical question was whether the preference issues arose as part of the claims allowance process. 7 To take the federal source of the cause of action as 5 In Stern, the estate s claim against Marshall was property of the estate. See 11 U.S.C Here the trustee is not seeking to recover the actual dollars wired to the Vendor that were estate property, but is merely asserting liability for that amount against the Vendor because it was an initial transferee of those funds. See 11 U.S.C. 550(a)(1). 6 See e.g. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 52, 87 (1982) (plurality opinion). 7 Stern states, [A] preferential transfer claim can be heard in bankruptcy when the allegedly favored creditor has filed a claim, because then the ensuing preference action by the trustee become[s] integral to the restructuring of the debtor-creditor relationship. 131 S.Ct. at 2617 (quoting Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (per curiam)) (emphasis in original). 14

15 dispositive would give Congress free reign to take any matter away from Article III judges and place it in the hands of jurists who receive neither salary protection nor life tenure. III. Conclusion For the foregoing reasons, we reverse the judgment remand for further proceedings consistent with this opinion. 15

16 SOLOW, Circuit Judge, dissenting: I respectfully dissent from both conclusions reached by the majority. My colleagues both give too broad a reading to Stern v. Marshall, U.S., 131 S.Ct (2011), and too narrow a reading to Bankruptcy Code section 549. Section 549 by its terms clearly applies to the transfer at issue here. The analysis is simple. All that need be shown is that there was (1) a post-petition transfer (2) of estate property (3) which was not authorized by the Bankruptcy Code or the court. Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil, Inc.), 599 F.3d 1255, 1258 (11th Cir. 2010). Here the Vendor received a post-petition transfer of estate property that was not authorized by the bankruptcy court or the Bankruptcy Code. There was no ambiguity in the cash collateral order. The Debtor was authorized to spend only $500,000 of cash collateral on payments to vendors and only $1.5 million on convention-related expenses in total. Once the Debtor exceeded that budget, the court s authorization terminated and further payments were not authorized. Where the statute is clear and the facts are clear, our duty is to apply the statute according to its terms. Lamie v. United States, 540 U.S. 526, 534 (2004); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000). The majority attempts to avoid the clear command of the statute by creating an Alice in Wonderland world where the transfer both is and is not authorized at the same instant. Neither the statutory language nor the facts support the majority s contorted analysis. The majority attempts to create ambiguity by splitting this transaction into two separate transactions and then arguing that the transfer of funds to the Vendor is governed by the general section 363(c)(1) authority to engage in ordinary course transactions, leaving the section 363(c)(2) cash collateral exception to apply only to the Debtor s use of cash collateral for that 16

17 purpose. This argument might be plausible if we were dealing with two unrelated statutory provisions lacking internal cross-references. We are not. Instead, the cash collateral provision carves cash collateral out of the scope of property subject to the general ordinary course provision. That subsection begins as follows, The trustee may not use cash collateral under paragraph (1) of this subsection unless. 11 U.S.C. 363(c)(2). Thus, there is no source of authority in the Bankruptcy Code to use cash collateral, even in the ordinary course, other than subsection 363(c)(2). Further the transfer cannot be severed from the nature of the funds used for the transfer because the applicability of subsections 363(c)(1) and 363(c)(2) turns on the nature of the funds used. Had the Debtor first purchased a gold bar with cash collateral and then given the gold bar to the Vendor, we might have a case suitable for the majority s analysis. But here all of the Debtor s funds were cash collateral and the transfer was nothing more than a use of that cash collateral. The majority s attempt to disaggregate the transfer into a send-side transfer and a receiveside transfer is similarly refuted by the statutory language. Section 549 allows the trustee to avoid a transfer of property of the estate if unauthorized. Fortunately, the Bankruptcy Code does not leave us wandering in the majority s metaphysical limbo as to which side of the transfer is relevant. Section 101(54) defines transfer to mean, inter alia, each mode of disposing of or parting with property. Thus, section 549 focuses on whether the Bankruptcy Code or a court order authorizes the Debtor to part with the subject property; not whether the law permits the recipient to receive that property. As Delco correctly notes, To determine whether the funds constitute cash collateral, we examine the status of the funds while they were in the Debtor s hands before the disputed transfer, not at the moment after the funds left the Debtor s control. Delco, 559 F.3d at Further, whether the funds remain subject to the Bank s lien 17

18 in the recipient s hands is irrelevant. The Vendor s liability here is not posited on the presence or absence of a lien on the funds it holds. Rather, it is imposed by section 550(a)(1) based on the Vendor s status as the initial transferee of estate property. The majority argues for a variety of equitable exceptions to section 549. Interestingly, it fails to cite section 105 as the source of this equitable power. See 11 U.S.C. 105(a). Had it focused on that section, it would have recognized that the bankruptcy courts do not have a roving commission to do equity, but rather a limited equitable authority that may be invoked only if, and to the extent that, the equitable remedy dispensed by the court is necessary to preserve an identifiable right conferred elsewhere in the Bankruptcy Code. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) (explaining that a bankruptcy court's equitable powers "can only be exercised within the confines of the Bankruptcy Code"). The majority turns that principle on its head and uses the excuse of equity to override the express terms of sections 363(c)(2), 549, and 550. I might be inclined to join my colleagues if it appeared that Congress had failed to consider the possible impact of section 549 on good faith transferees, but that is not the case. Even a cursory reading of section 549 shows that Congress carefully considered this issue and chose to create only two very limited transferee exceptions. In subsection 549(b), Congress provided a transferee for value exception that is almost identical to the majority s no diminution of the estate exception. 1 However, Congress limited that exception to transactions occurring during the involuntary gap period between the filing of an involuntary petition in bankruptcy and the entry of the order for relief. The majority s defense abrogates that limitation. Section 549(c) 1 The majority also misconstrues the earmarking doctrine. It does not reflect a general equitable requirement of estate diminution, but rather reflects the reality that a true earmarking case involves nothing more than the substitution of one creditor for another. Contrary to the majority s suggestion, the lack of diminution of the estate is not the reason for the earmarking doctrine, but rather is a limitation on its applicability. See, e.g., Parks v. FIA Card Services (In re Marshall), 550 F. 3d 1251, 1257 (10 th Cir. 2008) (holding that doctrine does not apply unless the debtor is required to use the funds from one creditor to pay another). 18

19 provides an even stronger refutation of the majority s equitable defenses. That subsection provides protection to a good faith purchaser who acts without knowledge of the bankruptcy to the extent of any present value given, but is limited to transfers of real estate and cases where no notice of the bankruptcy has been filed in the appropriate real estate records. See 11 U.S.C. 549(c). Even if this defense applied to this transfer, the Vendor would not qualify for protection because it knew Blockbusters was in bankruptcy. Analysis of these exceptions demonstrates that acting in good faith, proceeding in the ordinary course of business, and providing present value in exchange simply are not defenses to a section 549(a) action. Further, the recovery here is sought under section 550(a)(1) based on the Vendor s initial transferee status. It is clear that the state of mind of the initial transferee is no defense. Compare 11 U.S.C. 550(b)(1) (limiting the good faith transferee for value without notice defense to subsequent transferees). Thus, the majority s good faith transferee defenses do not fill in statutory gaps; they wreck havoc on a carefully constructed Congressional scheme. Why did Congress include ordinary course, new value, and good faith defenses for other avoiding powers like sections 547 and 548, but not for section 549? Because those sections serve completely different purposes. Sections 547 and 548 are focused on augmenting the estate by recovering pre-bankruptcy transfers that diminish the pool of assets available for distribution to creditors. Thus, value-based defenses and defenses that honor settled commercial expectations make sense. In contrast, section 549 is not designed to augment the estate. Instead, it is designed to enforce the bankruptcy court s authority to supervise and control the bankruptcy res over which it has custody and exclusive jurisdiction. See 28 U.S.C. 1334(e)(1) (providing exclusive jurisdiction of all property of the estate ). A no harm, no foul approach might 19

20 be appropriate for rules designed to address economic harms, but it is not appropriate where the foul is contempt of a court order. 2 This is also the reason why the majority s constitutional analysis is flawed. The instant action is not the equivalent of a preference or fraudulent transfer action brought to augment the estate. Rather it is a core administrative proceeding enforcing a court order and exercising the bankruptcy court s in rem exclusive jurisdiction over the bankruptcy res. The exercise by a bankruptcy judge of the power to supervise and control the assets that constitute the bankruptcy estate is not merely an action that stems from the bankruptcy; 3 it is the bankruptcy. Using the terminology of an earlier era, the section 549 determination whether this transfer was an unauthorized post-petition transfer would fall within the bankruptcy court s summary jurisdiction over the assets of the estate and could be finally adjudicated by a bankruptcy judge. Cf. Katchen v. Landy, 382 U.S. 323 (1966). The majority acknowledges that this action clearly could have been heard and determined by a non-article III bankruptcy judge prior to the Supreme Court s decision in Stern. But it chooses to treat Stern as a fundamental paradigm shift in constitutional analysis, ignoring the Court s own characterization of the decision as one that does not change all that much. See Stern, 131 S.Ct. at I prefer to take the Court at its word, rather than distort stray phrases to construct some broad new constitutional doctrine that furthers a conservative political agenda based on an original intent principle that is nowhere articulated in the Stern opinion. 2 Relief may be available in those cases where the violation is technical and can be corrected through a proper exercise of the bankruptcy court s nunc pro tunc power to issue a retroactive order approving the transfer. However, that relief is not available here because the court could not have authorized this use of cash collateral over the Bank s objection. The Debtor had no unencumbered assets with which it could provide adequate protection to the Bank and the hope that the convention would succeed would not have been enough to meet the adequate protection standard set out in section 361. See 11 U.S.C See Stern, 131 S.Ct. at 2618 (stating the question is whether the action at issue stems from the bankruptcy itself. ). 20

21 In fact, Stern stands for the very limited proposition that Congress, in one isolated respect, exceeded the limitations imposed by Article III. See Id. (emphasis added). In 28 U.S.C. 157(b)(1) Congress delegated authority to the bankruptcy courts to hear and determine core proceedings arising under title 11 or arising in a case under title 11. In what isolated respect is that grant unconstitutional? Only to the extent that it grants bankruptcy courts 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. Stern, 131 S.Ct. at This action does not involve a counterclaim to a proof of claim under section 157(b)(2)(C), but rather is a matter concerning the administration of the estate under section 157(b)(2)(A). The bankruptcy court suffers from no constitutional infirmity when it exercises its power to hear and determine such matters. In re Safety Harbor Resort & Spa, 456 B.R. 703, 715 (Bankr. M.D. Fla. 2011) (holding that nothing in Stern limits a bankruptcy court s authority to adjudicate other core proceedings identified in section 157(b)). Even if Stern has some application beyond counterclaims to proofs of claim, the Court made clear that proceedings based on federal bankruptcy-specific causes of action, like this section 549 action, can be heard and determined by the bankruptcy court. Contrary to the majority s assertion, I do not contend that federal causes of action are excluded from the federal judicial power. Instead, the federal bankruptcy-specific nature of these claims brings them within the ambit of matters that can be considered public rights. This is not because state law claims occupy a special protected status under Article III. Rather it is because the public rights doctrine gives Congress some freedom to create new federal rights in a particularized area of the law that are integral to a federal regulatory scheme and to assign those rights to a non-article III tribunal for adjudication. See Stern, 131 S.Ct. at & Here, the federal regulatory 21

22 scheme is the bankruptcy scheme of restructuring debtor-creditor relations. Judicial supervision of the estate is a critical component of that scheme, and the section 549 power to recover assets that were improperly removed from the court s custody is integral to the bankruptcy regulatory scheme. Finally, the bankruptcy-specific nature of section 549 demonstrates that Congress has created a new federal right that would have no existence but for the bankruptcy process. Consequently, Congress can delegate adjudication of section 549 claims to the bankruptcy courts, subject to the close supervision of the Article III courts that is embodied in section For the aforementioned reasons, I cannot join the majority s opinion and must respectfully dissent. 4 These features include, inter alia, the district court s discretion to refer or not to refer these matters to the bankruptcy courts and its authority to withdraw the reference at any time on its own motion. See 28 U.S.C. 157(a & d). 22