Bankruptcy Court Has Jurisdiction To Enter Final Judgment On Fraudul...

06/16/13

In a 28 page opinion, Judge Sacca of the Northern District of Georgia held that Bankruptcy Courts have jurisdiction to enter final orders in some cases involving fraudulent transfer claims. Mitchell v. Banks, Adv. Proc. No. 12-0562, 2013 Bankr. LEXIS 2384 (Bankr. N.D. Ga. June 5, 2013) (click here for opinion).  Judge Sacca based his opinion on the majority and other opinions in Stern v. Marshall, 131 S. Ct. 2594 (2011), reh’g denied, 132 S. Ct. 56 (2011), as well as prior cases on which the holding in Stern was based.   Judge Sacca also review subsequent decisions of courts that have addressed the issue since Stern was decided, including those that follow a narrow view of Stern and those that follow a more expansive view.  I will not attempt to summarize the thorough opinion in detail, as it is important to read the decision.  While the other Judges in the District are free to take a different view, I would expect Judge Sacca’s opinion to be followed by the other Judges until and unless the Supreme Court or Eleventh Circuit rules otherwise.

While Judge Sacca supports a narrow interpretation of Stern, and thus a broader view of Bankruptcy Court jurisdiction, it is important to note the scope of the ruling and relevent facts of the case.  The proceeding was brought  by a Chapter 13 Debtor to contest and avoid a pre-petition foreclosure of real property as a fraudulent transfer based less than reasonably equivalent value (see 11 U.S.C. §548).  The Defendants, who were purchasers, alleged that the Court did not have jurisdiction over the claims and that the Debtor did not have standing.  Judge Sacca ruled in favor of the Debtor on these issues.

In Stern, the Supreme Court held that Bankruptcy Courts do not have Constitutional authority to enter a final judgment on a counterclaim based purely on state law (a tortuous interference claim) and not resolved in the process of ruling on the creditor’s proof of claim.  While Justice Roberts, in the majority opinion, emphasized that the opinion was limited, Justice Scalia in his concurring opinion pointed out that the majority had laid out at least seven different reasons the Bankruptcy Court could not enter final judgment in such cases.  This has led to a split between courts that follow the narrow view of the holding and those that follow the more expansive reasoning of the opinion.

Judge Sacca, based in large part upon the express comments of Justice Roberts in Stern, and the authority in the Eleventh Circuit,

The Eleventh Circuit has recognized that the Stern Court “made clear that it did not intend its decision in Stern to have broad implications.” In re Sundale, Ltd., 499 F. App’x 887, 891 (11th Cir. 2012). According to the Eleventh Circuit, the Stern Court’s limited holding was that “bankruptcy courts lack ‘the 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.’”  In re Sundale, Ltd., 499 F. App’x at 892-93 (emphasis removed) (citing Stern, 131 S.Ct. at 2620). Chief Bankruptcy Judge Collins for the Northern District of Iowa has summed up the reasoning underlying the narrow view well:

“Stern did not strike the entire structure in 28 U.S.C. § 157 allocating the division of authority into core and non-core proceedings. Similarly, Stern did not strike down or even address the other enumerated examples of core proceedings in § 157(b)(2)–other than the one it ad-dressed– § 157(b)(2)(C). [citation omitted]. Stern did not even strike down § 157(b)(2)(C) or otherwise state that counter-claims filed by the estate against a person filing claims against the estate are never core proceedings. Instead, Stern simply provided guidance on how broadly § 157(b)(2)(C) could reach without exceeding constitutional limits . . .”

In re Agriprocessors, Inc., 479 B.R. 835, 839-40 (Bankr. N.D. Iowa 2012).

After considering the merits of both the broad view and the narrow view, this Court concludes that the narrow view is the correct view and that this Court thus has authority to enter final orders in fraudulent transfer proceedings, including this one. Had the Stern majority intended to make a sweeping proclamation striking down a broad swath of bankruptcy court authority, it would have done so explicitly. Instead, the majority repeatedly emphasized the limited effect of its holding. The majority’s explicit desire for its holding to be construed narrowly is consistent with prior cases in this area of law… In sum, this Court agrees with the Eight Circuit Bankruptcy Appellate Panel, which stated that “[u]nless and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is constitutional.” Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 547-48 (B.A.P. 8th Cir. 2012).

Based on the above analysis, Judge Sacca held that the Court did have subject matter jurisdiction over the case and could enter a final order.  The Debtor’s fraudulent transfer claim would clearly have an affect on the estate if he prevailed as it would expand the estate and creditors may get a higher payout.

Stern reinforces this conclusion. In Stern, the majority suggested that bankruptcy courts are not barred from hearing all counterclaims and that they may still propose findings of fact and conclusions of law in those proceedings. Stern, 131 S. Ct. at 2620 (“[Respondent] has not argued that the bankruptcy courts are barred from hearing all counterclaims or proposing findings of fact and conclusions of law on these matters, but rather that it must be the district court that finally decides them.”). The majority explained that subject matter jurisdiction was not at issue: “Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court” and “[t]hat allocation does not implicate questions of subject matter jurisdiction.” Id. at 2607. In fact, nothing in Stern changes anything regarding whether a bankruptcy court has subject matter jurisdiction to hear a proceeding–only whether that court has constitutional power to enter a final order in it.

Almost every court to consider the matter has come to the same conclusion. See Cifelli v. Blue Star Residential, LLC (In re Miles), 477 B.R. 266, 271 (Bankr. N.D. Ga. 2012)(J. Murphy) (“[T]he idea that Stern has left a category of claims–core proceedings not subject to constitutional decision by the bankruptcy court–in “limbo” and fit only for dismissal, has been generally rejected.”)

With respect to the Defendant’s argument that the Debtor did not have standing to pursue the fraudulent transfer claims, as the claims rightfully belonged to a trustee, the Court held that the Debtor had express authority pursuant to 11 U.S.C. §522(e).

 

 

 

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