Douglas A. Kelley, in His Capacity as the Trustee of the BMO Litigation Trust v. BMO Harris Bank National Association, as Successor to M&I Marshall and Ilsley Bank
ERISA Securities JusticiabilityDoctri
Whether the Eighth Circuit should have certified the controlling question of Minnesota law to the Minnesota Supreme Court, rather than fashion a novel rule that is foreign to Minnesota law and antithetical to important federal bankruptcy policy
Under the Bankruptcy Code, the property held by a debtor’s estate is determ ined according to state law as of the moment of entering bankruptcy. See Butner v. United States , 440 U.S. 48 (1979). For the Code to work properly, it is essential that federal courts overseeing bankruptcy proceedings get state law right. Here, both the bankruptcy court and the district court judge (a former Minnesota Supreme Court justice) understood that, under long-established Minnesota law, a receiver bringing claims on behalf of an insolvent company is not subject to the in-paridelicto (“equal fault”) defense based on the misconduct of the former management, because appointment of the receiver replaces the corrupt former management and thus alters the balance of equities. The Eighth Circuit, however, disagreed with both of those Minnesota-based jurists and fashioned its own novel version of Minnesota law, holding that, while the receiver is free from the in-pari-delicto defense, the company that he represents is not, and the company is the debtor in bankruptcy. Under that entirely unprecedented holding, the receiver can recover for the benefit of innocent creditors freed from the in-paridelicto defense as long as he keeps the company outside of bankruptcy, but not if he seeks to take advantage of the tools avail able in bankruptcy. That decision not only wiped ou t a billion-dollar judgment here, but forces receivers going forward to choose between the protections of the Code and preserving valuable state-law claims free from in pari delicto . The question presented is: Whether the Eighth Circuit should have certified the controlling question ii of Minnesota law to the Minnesota Supreme Court, rather than fashion a novel rule that is foreign to Minnesota law and antithetical to important federal bankruptcy policy.