312-263-2200

Congress explicitly authorized bankruptcy courts to enter final judgments resolving disputes over fraudulent conveyances in 28 U.S.C. §157(b)(2)(H) which provides that “[b]ankruptcy judges may hear and determine all * * * core proceedings arising under title 11 * * * and may enter appropriate orders and judgments * * * [in] * * * proceedings to determine, avoid, or recover fraudulent conveyances * * * *”).  Since Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), courts have grappled with and come to different conclusions as to whether a bankruptcy court may enter final judgments in fraudulent transfer cases.  See, e.g., Reid v. Wolf (In re Wolf ), 2018 WL 2386813 (Bankr.N.D.Ill. May 24, 2018); Clay v. City of Milwaukee (In re Clay ), 2015 WL 3878454 (Bankr.E.D.Wis. June 19, 2015); Mason v. Ivey, 498 B.R. 540, 546 (M.D.N.C.2013); KHI Liquidation Trust v. Wisenbaker Builder Services, Inc. (In re Kimball Hill, Inc.), 480 B.R. 894 (Bankr.N.D.Ill.2012); Andrews v. RBL, LLC (In re Vista Bella, Inc.), 2012 WL 3778956, at *2 (Bankr.S.D.Ala. Aug. 30, 2012); Gugino v. Canyon Co. (In re Bujak), 2011 WL 5326038, at *4 (Bankr.D.Idaho Nov. 3, 2011); Liberty Mutual Insur. Co. v. Citron (In re Citron), 2011 WL 4711942, at *1 (Bankr.E.D.N.Y. Oct. 6, 2011).

Some courts have concluded that bankruptcy courts do not have the authority to enter final judgments in fraudulent transfer proceedings.  For example, FTI Consulting, Inc. v. Merit Management Group, LP, 476 B.R. 535 (N.D.Ill.2012) ruled that bankruptcy courts, as non-Article III courts, do not have constitutional authority to enter final judgment on fraudulent transfer claim.  See also; Paloian v. American Express Co. (In re Canopy Financial, Inc.), 464 B.R. 770 (N.D.Ill.2011).

This conclusion was also reached in In re Spinlabel Technologies, Inc., 2020 WL 4805475 (Bankr.S.D.Fla. February 6, 2020), where the court noted that while Congress technically included the plaintiff’s fraudulent transfer claim as a core matter, this, in and of itself, was not determinative.  Rather, on the question of whether bankruptcy courts have the power to enter final orders and judgments in fraudulent conveyance actions, the court must determine whether that power is compliant with Article III of the Constitution.  Here, the court noted that the plaintiff’s fraudulent transfer claim sought a money judgment and thus aimed only to augment the estate administered by the plaintiff.  It did not “stem[ ] from the bankruptcy itself” nor would it “necessarily be resolved in the claims allowance process.” (citing Stern, 564 U.S. at 499.  Therefore, although labelled as a core matter, the court concluded that fraudulent transfer claims must be treated as non-core. Id. at *4.

In re Peregrine Financial Group, Inc., 589 B.R. 360 (N.D.Ill.2018), came to a different conclusion.  It noted that that actions under Sections 548 and 550 are claims created by a federal statute – not counterclaims based on state law – that reflects claims that have been part of insolvency proceedings since 1570.  It pointed out that the Supreme Court itself stated in Stern that “the question presented here is a ‘narrow’ one * * * [and that] Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984.” Id. at 365.

A similar conclusion was reached in In re Paragon Offshore PLC, 598 B.R. 761 (Bankr.D.Del.2019). Paragon first noted that in being asked to find that bankruptcy judges may not enter final orders in a subset of fraudulent conveyance actions, the court was being asking to declare that a portion of 28 U.S.C. §157 was unconstitutional as written.  It noted that the general principle of judicial restraint weighs heavily against such a declaration as federal statutes are presumed constitutional.  The court recognized, however, that if the Supreme Court had, as was argued, already ruled on the constitutionality of 28 U.S.C. §157(b)(1) as it is applied to fraudulent transfer actions against parties who have not filed a claim against the estate, then the lower court would be bound by such a ruling. Id. at 770-71.  Referencing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) and Stern, however, Paragon ruled that the Supreme Court did not rule on the constitutionality of 28 U.S.C. §157(b)(1) as it is applied to fraudulent transfer actions and concluded:

Because neither Stern nor Granfinanciera control on this issue, Movants are not asking this Court to apply controlling precedents to the matter at hand. Instead, Movants are asking this Court to extend the holdings of those cases, in order to find that 28 U.S.C. §157(a) is unconstitutional to the extent that it directs bankruptcy judges to enter final orders in fraudulent transfer claims against parties who have not filed claims against the bankruptcy estate. The Court declines to make that leap.

Id. at 775.

 

Matthew T. Gensburg
mgensburg@gcklegal.com