Litigation Continues Over Estate of Wealthy Businessman from the Republic of Georgia

In re Fisher Island Investments, No. 12-15595 (Feb. 20, 2015), a consolidation of four separate appeals, is just one part of the global litigation over the estate of Arkadi (“Badri”) Patarkatsishvili, a wealthy businessman and politician from the Republic of Georgia. Two groups, one consisting of Bardi’s immediate family and led by his widow, the other led by Joseph Kay, a distant relative and former employee of Bardi, have contested the division of Bardi’s assets since his death in 2008. The estate is worth billions of dollars. Litigation has occurred across the world in the Republic of Georgia, the United Kingdom, Liechtenstein, the British territory of Gibraltar, and state and federal courts in the United States. In this litigation, the Redmond Group, appellee here, represents the immediate family while the Zeltseer Group, appellant here represents Kay. These groups are named after their lead attorneys.

On appeal to the Eleventh Circuit are several rulings made by the Bankruptcy Court for the Southern District of Florida and affirmed by the District Court for the Southern District of Florida. Six individuals and entities filed three involuntary Chapter 11 bankruptcy petitions against Fisher Island, Little Rest, and Mutual Benefits. The Zeltser Group filed answers on behalf of all three which admitted to the allegations and consented to the relief requested. One day later, the Redmond Group filed an emergency motion to strike that answer in which it claimed to be the true authorized representatives. Through protracted and extensive discovery and litigation, the Bankruptcy Court ultimately held in a motion for summary judgment that the Redmond Group was the owner of Fisher Island and Little Rest. After a bench trial, the Bankruptcy Court entered a final order finding the Redmond Group to also be the owner of Mutual Benefits. Thus, the Redmond Group, not the Zeltser Group, was the authorized representative of the three alleged debtors.

On appeal, the Zeltser Group argues that the Bankruptcy Court did not have authority to enter a final judgment on the issue of ownership, relying on Stern v. Marshall, 131 S. Ct. 2594 (2011) in which the Supreme Court held the Bankruptcy Court did not have “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.” 131 S. Ct. at 2620. Thus, the portion of § 157 of the Judicial Code defining such counterclaims as “core proceedings” was unconstitutional; they were instead “non-core proceedings” that the bankruptcy court may only submit proposed findings of fact and law to the district court which then may enter final judgment after de novo review unless the parties consent to entry of final judgment by the bankruptcy court. 28 U.S.C. § 157(c).

However, the situation here clearly presents a core matter arising under chapter 11, as the Zeltser Group conceded before the district court. Resolution of the matter was critical to the administration of the estates at issue directly affected the debtor-creditor relationship, as required by 28 U.S.C. § 157(b)(2)(A) and (O), since ownership had to be determined before the bankruptcy court could determine which answer was valid and thus whether the claims would be admitted or contested. Additionally, the Zeltser Group consented to final adjudication even if this was a non-core proceeding, especially in light of the fact that the Zeltser Group explicitly invoked the bankruptcy court’s aid when it asked the court to decide the ownership issue.

The Zeltser Group raised on appeal a myriad of procedural errors, many of which the Eleventh Circuit dismissed as meritless without discussion. It also held that its adversary-proceeding and mandatory-joinder arguments were forfeited due to a failure to raise them before the bankruptcy court in a timely manner even though they would also fail on the merits. The determination of ownership was not to determine an interest in the property, so an adversary proceeding was not required; a contested matter was sufficient, especially in light of the procedural protections provided to the parties by the bankruptcy court. Thus, Rule 19’s mandatory joinder requirements, which only apply to adversary proceedings under Federal Rule of Bankruptcy Procedure 7019, are inapplicable.

After dismissing the three non-party appellants for failing to demonstrate they were persons aggrieved by the bankruptcy court’s decision, the Eleventh Circuit found unpersuasive the Zeltser Group’s arguments that the bankruptcy court erred in the proceedings resulting in final judgment on the issue of Mutual Benefits’ ownership after a bench trial. Thus, the Eleventh Circuit affirmed both the district court and the bankruptcy court on all issues, resulting in a decision of ownership in the Redmond Group for Fisher Island, Little Rest, and Mutual Benefits.

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