Bankruptcy Spurred By Court Judgment May Proceed For The Proper Purpose Of Reorganization; Judge's Adversarial Rulings And Remarks Do Not Show Bias

July 19, 2013 | Bulletin No. 1032299.1

In In Re J. Howard Marshall (--- F.3d ----, C.A.9 (Cal.), June 28, 2013), the United States Court of Appeals considered the validity of a Chapter 11 bankruptcy filing.  The bankruptcy had been challenged because it was allegedly facilitated in order to avoid the payment of a debt arising from a fraud judgment.  Additionally, the judge who administered the bankruptcy had previously issued adversarial rulings and comments to one of the challengers of the bankruptcy in a separate, but related matter.  The court ruled that adversarial rulings by a judge do not give rise to a finding of bias, and that while the bankruptcy may have been spurred by the fraud judgment, that act alone does not indicate that it was not filed for the proper purpose of reorganization.


Billionaire oil magnate J. Howard Marshall II ("J. Howard") died in 1995.  He left nearly all of his assets to his son, E. Pierce Marshall ("Pierce").  He entirely excluded his other son, J. Howard Marshall III ("Howard"), and his much younger wife of one year, Vickie Lynn Marshall ("Vickie"), who was more famously known as model and actress Anna Nicole Smith.

Howard and Vickie both challenged J. Howard's will in Texas probate court and both were unsuccessful.  Pierce then successfully countersued Howard for fraud actions related to the challenge of the will and won a multimillion dollar judgment against Howard.  Following that judgment, Howard and his wife, Ilene, filed for Chapter 11 bankruptcy.  Their case was assigned to United States Bankruptcy Judge Samuel Bufford, who had previously presided over a Chapter 11 bankruptcy case filed by Vickie.

During those proceedings, Judge Bufford had made various rulings favorable to Vickie and he had been critical of Pierce's attorneys.  Pierce moved for reassignment or recusal of Judge Bufford because of his involvement in Vickie's case and he also moved to dismiss Howard and Ilene's proposed bankruptcy plan.  Judge Bufford denied Pierce's motion for reassignment or recusal and denied his motion to dismiss the bankruptcy.  Pierce appealed to federal district court, which affirmed the bankruptcy court's judgments.  Following Pierce's death, his widow Elaine Marshall ("Elaine"), appealed his case to the United States Court of Appeals. 


The question of whether Judge Bufford should be recused or the case reassigned hinged on whether his adversarial rulings to Pierce in Vickie's case gave rise to an appearance of bias against Pierce, and later, Elaine.  Citing case law, the court noted that "rulings alone almost never constitute a valid basis for a bias or partiality motion."  Further, Vickie was not a party to Howard and Ilene's bankruptcy case, and any purported partiality to Vickie did not give rise to an appearance of bias in Howard and Ilene's case, the court said.  Taken collectively, Judge Bufford's actions were not indicative of a "deep-seated favoritism or antagonism that would make fair judgment impossible."  Therefore, Judge Bufford did not abuse his discretion in denying the motion to recuse and the district court's ruling to that effect was affirmed.

The court then turned to the question of whether Howard and Ilene's bankruptcy should be dismissed because it was filed in bad faith for the purpose of avoiding paying the fraud judgment.  Relevantly, the court found, in Howard and Ilene's original filing they included a plan to pay the fraud judgment.  However, the court added, Pierce failed to file a proof of claim.  Howard and Ilene amended their plan to provide for discharge of the judgment only after that failure.  Moreover, the court found that Howard and Ilene's inclusion of the fraud judgment in their initial plan suggested that they filed bankruptcy for the proper purpose of reorganization, not for the improper purposes of evading a specific debt or unduly deterring or harassing creditors. 

The appellate court held that the bankruptcy court did not abuse its discretion in denying the motion to dismiss Howard and Ilene's bankruptcy and the district court's judgment to that effect was affirmed. 


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