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Of particular importance in litigating
fraudulent transfer cases are the many questions raised with respect to
the proper court to hear, and the procedures to be followed in deciding,
such claims. Fraudulent transfer claims have long been a key tool
available to bankruptcy estates, trustees and receivers to recover assets:
(a) transferred by debtors to hinder, delay, or defraud creditors; or (b)
transferred for insufficient consideration at a time when the transferor
was insolvent. In a bankruptcy case, fraudulent transfer claims can be
brought based on transfers that are actually fraudulent under Section
548(a)(1)(A) of the Bankruptcy Code,1 for transfers that are
constructively fraudulent under Section 548(a)(1)(B), and under state law
fraudulent transfer provisions through the authority provided by Section
544(b)(1).
The Supreme Court's decision in Stern
v. Marshall held that Article III of the Constitution prohibits a
bankruptcy court from exercising the authority to finally adjudicate a
"state law counterclaim that is not resolved in the process of ruling on a
creditor's proof of claim."2 Since then, fraudulent transfer defendants
frequently attempted to remove such claims from the bankruptcy court to
the district court in light of the uncertain scope of the Stern decision.
The Supreme Court's recent decision last term in Wellness Intern. Network,
Ltd. v. Sharif 3 upheld the authority of bankruptcy courts to enter final
judgments in actions where the parties consent, and its 2014 decision in
Executive Benefits Ins. Agency v. Arkison4
confirmed that bankruptcy courts can hear and make proposed findings of
fact and conclusions of law as to so-called "Stern claims" ("unconstitutional core claims").5 With
those two decisions, it is now far more certain how to determine the
proper forum to hear fraudulent transfer claims and the procedures to be
followed.
The Stern/Executive Benefits/Wellness trilogy of cases provide a solid
framework for deciding where fraudulent transfer claims should be heard
and how such decisions should be reviewed. This article will discuss key
factors that play a role, such as whether a party has or has not filed a
claim in the bankruptcy case.
-
Claims Brought Against a Creditor Who Has Filed a Proof of Claim
In Executive Benefits, the Supreme Court left undisturbed the Ninth
Circuit's holding below that "Article III does not permit a bankruptcy
court to enter final judgment on a fraudulent conveyance claim against a
noncreditor unless the parties consent.6
The Ninth Circuit's holding (and
presumably the Supreme Court's decision) was based on the conclusion that
Stern, taken together with the Supreme Court's 1989 decision in
Granfinanciera, S.A. v. Nordberg, compelled categorizing fraudulent
transfer claims against noncreditors as outside the claims allowance
process and thus beyond the constitutional limits where bankruptcy courts
can enter final judgments.7 In
Granfinanciera, the Supreme Court held that
a noncreditor retains a Seventh Amendment right to a jury trial on
fraudulent transfer claim, reasoning that fraudulent transfer claims
seeking a money judgment "are quintessentially suits at common law" when
brought against a noncreditor and therefore outside the claims allowance
process.8 Thus, because bankruptcy courts lack the power to conduct a jury
trial absent the parties' consent,9 without such consent they cannot
preside over a trial on a fraudulent transfer claim involving a
noncreditor when there is a jury demand.
At first blush, the holdings in Executive Benefits and
Granfinanciera seem
to leave a question as to whether a bankruptcy court properly can exercise
authority and enter a final judgment in a fraudulent transfer claim
against a creditor who has filed a claim. Those cases hold that: (1) a
bankruptcy court lacks constitutional authority to enter a final judgment
in a fraudulent transfer case against a noncreditor; and (2) that such a
claim gives rise to a constitutional right to a jury trial. Indeed,
creditor-defendants in fraudulent transfer claims have vigorously pressed
such arguments.10 The issue is highlighted since fraudulent transfer
claims involving tens of millions (or more) are often brought in
bankruptcy court against creditor-defendants, some of whom may have
relatively small claims. Upon close examination, however, because
fraudulent transfer claims are necessary to resolve as part of the claims
allowance process, the bankruptcy court is well within its authority to
enter a final judgment on fraudulent transfer claims against
creditor-defendants. For the same reason, there is no constitutional right
to a jury trial on such claims.
- The Bankruptcy Court's Authority to Enter a Final Judgment Against
Creditor Defendants
Once a creditor files a claim in a bankruptcy proceeding, the claim
becomes part of the claims allowance process governed by, among other
provisions, Section 502. As to fraudulent transfer claims in particular,
"the court shall disallow any claim from any entity from which property is
recoverable" as a fraudulent transfer.11 Thus, a creditor's claim cannot
be resolved until after the fraudulent transfer claim is determined first.
Despite the questions initially raised by Stern, its holding explicitly
was intended to be "narrow." In Stern, the Court held that "Congress, in
one isolated respect" ran afoul of the constitutional separation of powers
principles under Article III by attempting to give bankruptcy courts "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."12
In essence, the separation of powers concern at issue in Stern boils down
to the following: "the question is whether the action at issue stems from
the bankruptcy itself or would necessarily be resolved in the claims
allowance process."13 The state law claims at issue in
Stern did not
satisfy this standard. In particular, the Supreme Court observed: "there
was never any reason to believe that the process of adjudicating [the]
proof of claim [at issue in Stern] would necessarily resolve [the
bankruptcy estate's] counterclaim [for tortious interference]," and the
bankruptcy estate's "claim [for tortious interference] is in no way
derived from or dependent upon bankruptcy law; it is a state tort
action that exists without regard to any bankruptcy proceeding."14
The state law counterclaim was, therefore, fundamentally different than
the claims at issue in the Court's earlier decisions in Katchen v. Landy15
and Langenkamp v. Culp.16 In those cases, the Supreme Court held that
where a creditor filed a claim, no right to a jury trial attached on
fraudulent transfer and preferential transfer claims filed against the
creditor-defendants. As noted by Stern, the Supreme Court's key principle
underpinning the Katchen and Langenkamp decisions was that the bankruptcy
court's exercise of power was proper over avoidance claims that would
"necessarily be resolved in the claims allowance process."17
Langenkamp
was decided after Granfinanciera and therefore confirmed that,
post-Granfinanciera, the distinction continues between claims resolved in
the claims allowance process and those that are not.
The Ninth Circuit, as well, in its comprehensive treatment of the issues
in Executive Benefits, focused extensively on the fundamental difference
between (a) Katchen and Langenkamp, where no jury trial right was held to
apply to the fraudulent transfer claim at issue, and (b) Granfinanciera,
where the jury trial right did attach, and Stern, where Article III was
applicable. The Ninth Circuit expressly stated: "the dispositive
distinction between the claims in Stern [(and Granfinanciera)] and
Katchen
is that in Katchen, the trustee's [] action ‘would necessarily be
resolved in the claims allowance process."18
Although Stern does not specifically elaborate on the meaning of the
phrase "necessarily be resolved in the claims allowance process,"
fraudulent transfer claims under Sections 544 and 548 should satisfy this
standard in light of the plain text of 11 U.S.C. § 502(d). As held in one
bankruptcy case, "The mandatory language ‘shall' [in section 502(d)] makes
it necessary to resolve the issues referred to in the statute unless
the party filing a proof of claim either turns over the property or
pays for it."19 In other words, issues regarding a creditor's liability for
fraudulent transfers necessarily must be decided before or in connection
with a bankruptcy court's ruling on whether to disallow that creditor's
claim under Section 502(d). Even post-Stern, therefore, a bankruptcy court
may fully and finally adjudicate fraudulent transfer and preference claims
against a creditor who has filed a proof of claim without crossing any
constitutional separation of powers boundaries.
The Supreme Court's discussion in Stern of its earlier Katchen and
Langenkamp decisions cements this conclusion. In Katchen v. Landy, the
Supreme Court "permitted a bankruptcy referee acting under the Bankruptcy
Acts of 1898 and 1938 (akin to a bankruptcy court today) to exercise what
was known as ‘summary jurisdiction' over a voidable preference claim
brought by the bankruptcy trustee against a creditor who had filed a
proof of claim in the bankruptcy proceeding."20 The creditor in
Katchen argued
that the "preferen[tial transfer at issue in that case] should be resolved
through a ‘plenary suit' in an Article III court," but the Supreme Court "concluded that summary adjudication in bankruptcy was appropriate,
because it was not possible for the referee to rule on the creditor's
proof of claim without first resolving the voidable preference issue."21
"There was no question that the bankruptcy referee could decide whether
there had been a voidable preference in determining whether and to what
extent to allow the creditor's claim" under the version of Section 502(d)
then in effect.22 Thus,
"[t]he plenary proceeding the creditor sought could be brought into
the bankruptcy court because the same issue arose as part of the
process of allowance and disallowance of claims."23 In other
words, one of the consequences of filing the proof of claim "was
resolution of the preference issue as part of the process of allowing or
disallowing claims, and accordingly there was no basis for the creditor to
insist that the issue be resolved in an Article III court." For purposes
of this analysis, "of course it makes no difference…whether the bankruptcy
trustee urges only a [claim] objection or also seeks affirmative
relief."24
Langenkamp v. Culp similarly supports the conclusion that filing a proof
of claim necessarily brings resolution of fraudulent transfer and
preference actions within the claims allowance process and, by extension,
within the constitutionally permissible realm of bankruptcy court
authority. In Stern, the Supreme Court quoted Langenkamp's explanation
"that a preferential transfer claim can be heard in bankruptcy when
the allegedly favored creditor has filed a claim, because then ‘the
ensuing preference action by the trustee becomes integral to the
restructuring of the debtor creditor relationship."25 "If, in contrast, the creditor has
not filed a proof of claim, the trustee's preference action does not
‘become part of the claims-allowance process' subject to resolution by the
bankruptcy court." In essence, Langenkamp confirms the proposition "that
by filing a claim against a bankruptcy estate[,] the creditor triggers the
process of ‘allowance and disallowance of claims,' thereby subjecting
himself to the bankruptcy court's equitable power."26
Moreover, Langenkamp clarified the scope of the Court's then recent, prior
Granfinanciera S.A. v. Nordbeg opinion, making clear that the
constitutional limits in Granfinanciera do not apply where a creditor has
filed a proof of claim: "In Granfinanciera we recognized that by filing a
claim against a bankruptcy estate the creditor triggers the process of
allowance and disallowance of claims, thereby subjecting himself to the
bankruptcy court's equitable power. If the creditor is met, in turn, with
a preference action from the trustee, that action becomes part of the
claims-allowance process which is triable only in equity. In other words,
the creditor's claim and the ensuing preference action by the trustee
become integral to the restructuring of the debtor-creditor relationship
through the bankruptcy court's equity jurisdiction."27
When read together with Stern, the Katchen and Langenkamp decisions bring
the "necessarily be resolved in the claims allowance process" standard in
Stern into focus. Given the reaffirmation of these cases in Stern and the
unambiguous text of Section 502(d), it should be evident that where a
creditor has filed a proof of claim, fraudulent transfer and preference
claims asserted against that creditor under 11 U.S.C. §§ 544, 547, 548,
and 550 "necessarily" become part of the claims allowance process within
the meaning of Stern. As such, the "narrow" and "isolated" constitutional
separation of powers concern identified in Stern simply does not apply to
such claims.
Two circuits essentially have adopted this reading of Stern as it applies
to fraudulent transfer claims against creditors who have filed claims. In
a 2013 post-Stern decision, Peterson v. Somers Dublin Ltd.,28 the Seventh
Circuit came to the same conclusion outlined above for basically the same
reasons. The Seventh Circuit held that, "The current dispute comes within
a bankruptcy judge's authority, notwithstanding Stern, because all of the
defendants submitted proof of claims as . . . creditors and thus
subjected themselves to preference recovery and fraudulent conveyance
claims by the Trustee."29 The Seventh Circuit's conclusion was based on a citation to
Section 502(d) and its observations that the "Supreme Court [so] held in
Katchen [] and Langenkamp," and that "Stern stated that its outcome is
consistent with those decisions."30
Similarly, in Onkyo America Inc. v. Global Technovations, Inc. (In re
Global Technovations, Inc.),31 the Sixth Circuit held that, "It is crystal
clear that the bankruptcy court had constitutional jurisdiction to
adjudicate [a fraudulent transfer claim] because ‘it was not possible . .
. to rule on [the creditor's] proof of claim without first resolving the
fraudulent transfer issue. Stern, 131 S.Ct. at 2616 [citations omitted]."
The Sixth Circuit noted that the debtor's defense against the proof of
claim was the fraudulent transfer claim against the creditor.32 This
defense, of course, arises out of Section 502(d) and applies in all cases
where the debtor pursues a fraudulent transfer claim against a creditor
who filed a proof of claim.
The Sixth Circuit went on to observe that "[w]hat is not crystal clear is
whether the bankruptcy court had jurisdiction under Stern" to make
findings that may not have been necessary to determine the creditor's
proof of claim.33 The Court of Appeal then further held that, "We do not
believe that Stern requires a court to determine, in advance, which facts
will ultimately prove strictly necessary to resolve a creditor's proof of
claim."34 Findings that the bankruptcy court reaches as part of its
resolution of the fraudulent transfer defense are within the authority of
the bankruptcy court to make. Under the sound logic of the In re Global
Technovations, Inc. decision, because it is necessary to resolve a
fraudulent transfer defense to resolve a creditor's proof of claim, the
bankruptcy court is within its constitutional authority, as refined by
Stern, to enter a final judgment on the affirmative claim for relief that
is part and parcel of the fraudulent transfer issues raised by the Section
502(d) defense.
- A Creditor Who Filed a Claim Loses the Right to a Jury Trial With
Respect to a Debtor's Fraudulent Transfer Action
For the same reasons outlined above, a creditor who has filed a proof of
claim loses his or her right to a jury trial with respect to a debtor's
fraudulent transfer claim. As described by the Ninth Circuit in Executive
Benefits, "Stern fully equated bankruptcy litigants' Seventh Amendment
right to a jury trial in federal bankruptcy proceedings with their
right to proceed before an Article III judge."35 A creditor who has filed a
proof of claim subjects himself or herself to the claims allowance
process. Under Katchen and Langenkamp, the claims allowance process is
within the authority of the bankruptcy court to decide and does not give
rise to a right to a jury trial. Stern described in detail how its
decision was consistent with the Katchen/Granfinanciera/ Lagenkamp
precedents.36 In sum, the long familiar rule that there is no right to a
jury trial on a debtor's fraudulent transfer action if the creditor has
filed a proof of claim still stands on solid ground.
- A Bankruptcy Court's Final Judgment Against a Creditor Who Has Filed a
Proof of Claim is Subject to the Standard Appellate Process
As a practical matter, one of the most significant results of the
bankruptcy court entering a final judgment is that such a final judgment
is subject to the normal process for appellate review of bankruptcy court
appeals from "final judgments, orders and decrees" under 28 U.S.C. §
158(a). The appeal is then governed by Federal Rules of Bankruptcy
Procedure ("FRBP") Rules 8001 – 8020. Factual findings are reviewed under
the "clearly erroneous" standard of review as set forth in FRBP Rule 8013
and "due regard shall be given to the opportunity of the bankruptcy court
to judge the credibility of the witnesses." Conclusions of law are
reviewed de novo. The briefing process for bankruptcy appeals generally
mirrors the traditional appellate process.
In contrast, of course, when the bankruptcy court lacks authority to enter
a final judgment, it may only issue proposed findings of fact and
conclusions of law. These are presented to the district judge for entry of
a final judgment "after considering the bankruptcy judge's proposed
findings and conclusions and after reviewing de novo those matters as to
which any party has timely and specifically objected" pursuant to 28
U.S.C. § 157(c)(1). The review of proposed findings of fact and
conclusions of law is governed by FRBP Rule 9033. As discussed below,
review of findings of fact is de novo "upon the record, or after
additional evidence, of any portion" of the proposed findings as to which
there is a specific objection made.37 The briefing is limited by rule to
the written objections and a response, with shorter time periods than in
the usual appellate review process.
- Fraudulent Transfer Claims Brought Against Parties that Are Not
Creditors
- Determining the Proper Forum
The Supreme Court's 2015 decision in Wellness, coupled with its 2014
decision in Executive Benefits, reaffirms the essential underpinnings of
the "division of labor in the current statute." Indeed, in Wellness, the
Supreme Court expressly noted the importance of bankruptcy judges (and
magistrate judges) to the work of the federal courts: "[I]t is no
exaggeration to say that without the distinguished service of these
judicial colleagues, the work of the federal court system would grind
to a halt."38 The Court emphasized the importance of practical attention to
substance rather than form in considering the proper forum to hear claims
related to bankruptcy proceedings. The Court also noted that the close
relationship of Article III courts to bankruptcy judges diminishes
concerns that leaving Stern claims for decision in the bankruptcy courts
usurps the role of Article III courts.39
The Court recognized the basic value of the effort by Congress to
"supplement[] the capacity of the district courts through the able
assistance of bankruptcy judges. So long as those judges are subject
to control by the Article III courts, their work poses no threat to
the separation of powers."40 The Wellness decision thus builds on the
recognition in Executive Benefits that the process for handling non-core
claims by submitting proposed findings of fact and conclusions of law "may
be applied naturally to Stern claims."41 With respect to fraudulent
transfer claims in particular, the Court in Executive Benefits noted the
inherent relationship between the bankruptcy case as a whole and
fraudulent transfer claims, which "[a]t bottom . . . assert that property
that should have been part of the bankruptcy estate and therefore
available to creditors pursuant to Title 11 was improperly removed."42
The two recent decisions should go far in reassuring district courts and
litigants, as well as bankruptcy courts, that, absent unusual
circumstances, fraudulent transfer claims remain a prime example of the
type of labor that is appropriate to rest on the shoulders of the
bankruptcy courts, rather than Article III judges, in the first
instance.43 Thus, even when there is a fraudulent transfer claim against a
noncreditor, the cases presumptively should be adjudicated in the
bankruptcy court before being sent to the district court for entry of a
final judgment.
In cases in which there is no jury demand, Executive Benefits teaches that
"these Stern claims fit comfortably within the category of claims
governed by section 157(c)(1) [thus permitting] the Bankruptcy Court .
. . to follow the procedures required by that provision, i.e., submit
proposed findings of fact and conclusions of law to the District Court
to be reviewed de novo."44 When such claims are filed in the bankruptcy courts,
they will remain there unless there is a motion to withdraw the reference
in accordance with 28 U.S.C. § 157(d). Withdrawal can be sought on
mandatory or permissive grounds. It is now established that mandatory
withdrawal of the reference is not required as a result of some statutory
"gap," as had been argued often in the wake of Stern.45
That leaves permissive withdrawal of the reference as the option for
removing fraudulent transfer claims filed in the bankruptcy court.
Permissive withdrawal of the reference requires that it be for "cause
shown." Although Section 157(d) does not define "cause," the following
factors help guide whether sufficient cause exists for permissive
withdrawal of the reference: (1) the efficient use of judicial resources;
(2) the delay and costs to the parties; (3) the uniformity of bankruptcy
administration; (4) the prevention of forum shopping; and (5) other
related factors.46 "Permissive withdrawal is permitted only in
a limited number of circumstances."47
As such, courts "strictly construe the section
157(d) factors so that it does not provide an ‘escape hatch' out of
bankruptcy court."48
It should be the rare case in which sufficient cause will exist to remove
fraudulent transfer claims from bankruptcy courts under ordinary
circumstances. Many courts throughout the country have recognized that all
of the factors generally will weigh in favor of keeping the case with the
bankruptcy courts and thus taking advantage of the bankruptcy courts
knowledge of the underlying case, promoting uniformity with respect to
multiple claims, the specialized expertise of the judges in bankruptcy
law, and the judicial efficiency to be gained by keeping these cases on
the bankruptcy court's docket.49 While there was initial uncertainty in
the immediate aftermath of Stern about the wisdom of keeping the cases in
the bankruptcy forum,50 the established recent trend is to maintain
fraudulent transfer cases in the bankruptcy courts.51
Even in cases where a jury demand has been made and thus the case may
ultimately be removed to the district court for the jury trial, permissive
withdrawal of the reference generally should be delayed until discovery is
complete, all dispositive motions have been ruled upon, and the case is
ready for trial. As held by the Ninth Circuit in In re Healthcentral.com,
"[a] Seventh Amendment jury trial in the district court does not mean
the bankruptcy court must instantly give up jurisdiction and that the
action must be transferred to the district court."52 To the contrary, as the
Chief District Judge in the Eastern District of California also recently
held, "[a]llowing the bankruptcy court to handle the discovery issues,
settlement conferences, and motion practice is the most efficient outcome"
and best ensures that the efficient division of labor between district
courts and bankruptcy courts is maintained.53 Indeed, withdrawing the
reference simply because there is a jury demand creates a serious risk of
inconsistent results, since many bankruptcy cases involve multiple
fraudulent actions and most are likely to be filed against creditors, in
which no jury trial right attached, so most actions would likely be heard
in the bankruptcy courts.
Many of the concerns with keeping fraudulent transfer cases raised in the
aftermath of Stern arose out of the prospect that de novo review by an
Article III would require the functional equivalent of a complete "do
over."54 As discussed next, however, the nature of the
de novo review of
proposed findings of fact and conclusions of law in fraudulent transfer
actions against noncreditors where there has been no jury demand does not
create any need for a complete rehash of the underlying proceedings, but
is a targeted, focused, and flexible review process. Similarly, where
there is a valid jury demand against a noncreditor the review process for
any case dispositive rulings by the bankruptcy court would be the
substantially the same as the review for other proposed findings of fact
and conclusions of law by bankruptcy courts. With respect to any
non-dispositive case rulings in jury trial cases, the district court
should retain great flexibility to decide which, if any, non-dispositive
case rulings by the bankruptcy court to review before submitting any
remaining claims to a jury.
- The Review of Bankruptcy Court Decisions on Claims Brought Against
Parties that Are Not Creditors.
The de novo review of proposed findings of facts and conclusions of law
outlined in 28 U.S.C. §157(c)(1) is statutorily contained to a review of
"those matters to which any party has timely and specifically objected."
It thus does not require that a district court conduct a rehearing or
broadly reconsider all matters that were before the bankruptcy court from
scratch. Rather, the review proceeds in accordance with FRBP Rule 9033(a)
with a targeted focus on a party's "written objections [that] identify the
specific grounds for such proposed findings or conclusions objected to and
state the grounds for such objection." The Rule is modelled after Federal
Rule of Civil Procedure ("FRCP") Rule 72, which governs the review of
proposed findings of fact and conclusions of law submitted to district
courts by magistrate judges.55
In the 1980 decision of United States v. Radditz, the Supreme Court
considered whether the procedure in FRCP Rule 72 comported with due
process.56 The Court began by stating that, "It should be clear that on
these dispositive motions [the procedures] call[] for a de novo
determination, not a de novo hearing." The Court noted that the statute
governing proposed findings of fact and conclusions of law submitted by
magistrate judges to the district court, the language of which is tracked
in Section 157(c)(1), "grants the district judge the broad discretion to
accept, reject or modify the magistrate's proposed findings."57 The Court
recognized the value to the district courts in making use of the
proceedings already had and the assembling and analysis of facts presented
for review. The Supreme Court held that the district judges act well
within their broad discretion "to give such weight as [their] merit
commends and the sound discretion of the judge warrants[.] [T]hat
delegation does not violate Article III so long as the ultimate
decision is made by the district court."58
The Radditz decision established that there is no general duty on the part
of district courts either to conduct new de novo hearings or to comb
exhaustively through the underlying record to conduct a de novo review of
the bankruptcy court's recommendations. Rather, much as is the case with
traditional appellate review, the reviewing court's focus will be driven
by the parties' contentions of error and the support presented by the
parties from the record to support or rebut the contentions While the
district court reviewing proposed findings of fact and conclusions of law
may request "additional evidence" or "recommit the matter to the
bankruptcy judge with instructions," the district judge retains great
flexibility in using his or her judgment to evaluate the need for more
evidence and choosing the proper course. The Courts of Appeal will review
the district judge's decisions in accepting, rejecting, or modifying the
proposed findings on the merits and presume that the district court
conducted an appropriate analysis of the record before ruling on the
recommendations of the bankruptcy court.59
In his concurring opinion in Radditz, Justice Blackmun emphasized the
benefits from the two step review of proposed findings of fact and
conclusions of law to accurate decision-making. As the Justice astutely
observed, eliminating the first level of decision-making would undermine,
not enhance, the procedural protections and efforts to get to the right
results.60 For decades, the process by bankruptcy courts of submitting
proposed findings of fact and conclusions of law to district courts has
improved the efficient use of judicial resources, relieved overburdened
district courts of their work, and resulted in a system that works well.
As the dust has settled after Stern, it should be considerably more
apparent that the specter of having to conduct proceedings twice in order
to conduct de novo review of proposed findings of fact and conclusions of
law was overblown. The system established by Section 157(c)(1) and FRBP
Rule 9033, and related rules, does not result in inefficiencies, extra
work, or unnecessary duplication.
In fraudulent transfers cases against a noncreditor in which there is a
jury demand and the case is left in the bankruptcy court until it is ready
for trial, questions may arise with respect to both rulings on
case-dispositive motions (i.e., motions for summary judgment or dismissal
as a matter of law) and with regard to non-case dispositive motions ruled
upon by the bankruptcy court in the course of getting the matter ready for
trial. The question should be easily answered with respect to dispositive
motions – those rulings should be submitted as proposed findings of fact
and conclusions of law following the procedures in Section 157(c)(1) and
FRBP Rule 9033 in accordance with the holding in Executive Benefits.
The decision on how a district court should handle non-dispositive rulings
when the case is withdrawn as ready for trial, especially rulings on
summary adjudication motions that resolve some, but not all claims, is
more difficult. One option would be to proceed to a jury trial on all of
the remaining claims and consider the non-dispositive rulings once there
is a final judgment. Indeed, in a recent district court case, the
defendants argued that the district court had no authority to rule on
partial summary judgment orders of the bankruptcy court – that such orders
could only be reviewed on direct appeal to the Court of Appeal after there
was a final judgment entered.61 The district court rejected the argument,
finding that the bankruptcy court's rulings granting summary adjudication
of entire claims should be considered as final dispositions of those
claims and treated as proposed findings of fact and conclusions of law.62
Those rulings would be considered de novo before the jury trial on the
remaining claims. On the other hand, the district court declined to review
de novo pre-trial rulings that were not dispositive of entire claims.63
The district court's approach is consistent with the general rule for
non-dispositive motions set forth in Federal Rule of Civil Procedure, Rule
54(b). Rule 54(b) provides that "any order or decision . . . that
adjudicates fewer than all of the claims . . . may be revised at any time
before entry of a [final] judgment." When the bankruptcy court has
certified the case as ready for trial and the case is withdrawn to the
district court, the district court will be in the best position to judge
how the trial should proceed before the jury and what issues and prior
rulings are significant enough to merit de novo review before the trial is
conducted. The parties should be provided an opportunity to specify which,
if any, pre-trial rulings should be reviewed and the reasons for their
position. The other party should be afforded an opportunity to oppose the
request to re-consider pre-trial rulings. With respect to non-dispositive
rulings that dispose of entire causes of action or resolve the claims as
to some, but not all parties, a proper default rule may be to consider all
such rulings as proposed findings of fact and conclusions of law subject
to de novo review.64 With respect to those rulings that are reviewed, the
review should be conducted in accordance with FRBP 9033.
Conclusion
The Stern decision caused a lot of chaos, confusion, and procedural
maneuvering by litigants. Recent case law, however, provides substantial
guidance. The procedures for litigating fraudulent transfer claims to
final judgment both in and out of bankruptcy courts should develop further
and with more predictability going forward.
1 Unless noted otherwise, statutory citations will be to the United States
Bankruptcy Code, 11 U.S.C. §§ 101 et seq.
2
131 S. Ct. 2594 (2011).
3
135 S. Ct. 1932 (2015).
4 134 S. Ct. 2165 (2014).
5 In particular, the term "Stern claims" refers to those claims that
Congress designated as "core" proceedings under 28 U.S.C. § 157(b)(2), but
as to which bankruptcy courts lack constitutional authority to enter a
final judgment under the holding of Stern. Executive Benefits held that
bankruptcy courts can hear such "unconstitutional core claims" and issue
proposed findings of fact and conclusions of law in the same manner that
statutory "non-core" proceedings are treated under 28 U.S.C. § 157(c)(1).
6 134 S. Ct. 2169 (quoting In re Bellingham Insurance Agency, Inc., 702
F.3d 553, 565 (9th Cir. 2012). Interestingly, the Supreme Court did not
actually reach the issue, but instead "assume[d] without deciding that the
fraudulent claims in this case are Stern claims [(claims that are
designated by statute as core, but that as to which the bankruptcy court
cannot constitutionally enter a final judgment)]." 134 S. Ct. at 2174.
7 See 702 F.3d at 561.
8 492 U.S. 33, 56 (1989).
9 28 U.S.C. § 157(e).
10
See, e.g., In re Heller Ehrman LLP, 464 B.R. 348, 358 (N.D. Cal. 2011);
Kelly v. J.P. Morgan Chase & Co., 464 B.R. 854, 858 (D. Minn. 2011).
11 11 U.S.C. § 502(d). "Entity" includes any person. 11 U.S.C. § 101(15).
12 131 S. Ct. at 2619-20.
13 Id. at 2618.
14 Id. at 2617-18.
15 86 S. Ct. 467 (1966).
16 498 U.S. 42, 111 S. Ct. 330 (1990).
17 131 S. Ct. at 2616-17 (internal quotations and citations omitted).
18 702 F.3d at 564.
19 Doctors Hosp. of Hyde Park,
—-BR—-, 2013, WL 5524696, at *20-21
(emphasis added).
20 Stern, 131 S. Ct. at 2616 (citing
Katchen v. Landy, 86 S. Ct. 46
(1966)).
21 Stern, 131 S. Ct. at 2616.
22 Stern, 131 S. Ct. at 2616; see
Katchen, 86 S. Ct. at 473.
23 Stern, 131 S. Ct. at 2616.
24 Katchen, 86 S. Ct. at 477.
25 Stern, 131 S. at 2617 (quoting
Langenkamp, 498 U.S. at 44).
26 Langenkamp, 498 U.S. at 44.
27 Id. at 42, 44-45 (internal quotations and citations omitted).
28 729 F.3d 741, 747 (7th Cir. 2013).
29 Id.
30 Id. 747 (citations omitted).
31 694 F.3d 705, 722 (6th Cir. 2012).
32 Id.
33 Id.
34 Id.
35 702 F.3d at 563.
36 Stern, 131 S. Ct. at 2616-18; see also Peterson, 729 F.3d at 747.
37 FRBP 9033(d).
38 135 S. Ct. at 1938-39.
39 Id. at 1944-45.
40 Id. at 1946.
41 134 S. Ct. at 2173.
42 Id. at 2174.
43 See Wellness, 135 S. Ct. at 1946.
44 134 S. Ct. at 2174.
45 See, e.g., In re Heller Ehrman LLP, 464 B.R. 348, 358 (N.D. Cal. 2011);
In re Blixeth, 2011 Bankr. LEXIS 29533, 2011 WL 3274042 (Bankr. D. Mont.
2011).
46 See, e.g., In re Canter, 299 F.3d 1150, 1154 (9th Cir. 2002) (quoting
Sec. Farms v. Int'l Bhd. of Teamsters, Chauffeurs, Warehousemen, &
Helpers, 124 F.3d 999, 1008 (9th Cir. 1997)).
47 E.g., In re The Mortgage Store, Inc., 464 B.R. 421, 428 (D. Haw. 2011)
(quoting Hawaiian Airlines, 355 B.R. at 223).
48 In re Don's Making Money, LLP, No. CV-07-319-PHX-MHM, 2007 WL 1302748,
at *7 (D. Ariz. May 1, 2007) (internal quotations and citations omitted).
The movant, moreover, bears the burden of showing that these factors
constitute sufficient cause to withdraw the reference. See, e.g., In re
First Alliance Mortgage Co., 282 B.R. 894, 902 (C.D. Cal. 2001).
49 E.g., In re Healthcentral.com, 504 F.3d 775, 788 (9th Cir. 2007).
50 See, e.g., In re Bearingpoint, Inc., 453 B.R. 486, 488 (Bankr. S.D.N.Y.
2011) (bankruptcy court declined to hear state law claims as required in
confirmation plan due to concerns raised by Stern).
51 See, e.g., In re Rhodes Companies, LLC, No. 2:12-CV-01272-MMD, 2012 WL
5456084, at *6 (D. Nev. Nov. 7, 2012) ("Judicial economy militates in
favor of allowing the bankruptcy court to proceed with pre-trial matters
in cases involving fraudulent conveyance claims."); In re Heller Ehrman
LLP, 464 B.R. 348, 358 (N.D. Cal. 2011) (denying motion to withdraw the
reference and noting that "several other district courts have come to the
same conclusion, focusing on the efficiency of the bankruptcy system as a
whole and the specific knowledge of bankruptcy judges as to
federally-created fraudulent conveyance actions").
52 504 F.3d at 788.
53 Bell v. Lehr,
2014 WL 526406, at *2 (E.D. Cal. Feb. 7, 2014).
54 See Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld, LLP (In
re Coudert Brothers LLP), 462 B.R. 457, 472 (S.D.N.Y. 2012). [check cite]
55 FRBP 9033, Notes of Advisory Committee on Rules—1987.
56 447 U.S. 667, 669 (1980).
57 Id. at 680-81.
58 Id.
59 See Home Federal Savings & Loan Ass'n v. Dillon Construction Company,
Inc. (In re Dillon Construction Company, Inc.), 922 F.2d 495, 497 (8th Cir
1982); Vekamaf Holland B.V. v. Pipe Benders, Inc., 671 F.2d 1185, 1886
(9th Cir. 1982).
60 447 U.S. at 438-39 (Blackmun, J., concurring).
61 Schoenmann v. Torchia (In re Synergy Acceptance Corp.), 2015 WL 3958155
*3 & n.6 (N.D. Cal. June 29, 2015).
62 Id. at *4.
63 Id.
64 See, e.g., id.; In re Rady, 138 B.R. 608, 610 (D. Nev. 1992).
*Christopher D. Sullivan is managing
partner of the San Francisco office of Diamond McCarthy LLP. He currently
represents Ms. Beverly McFarland as litigation counsel for her as Chapter
11 Trustee in the IMG/Wannakuwatte Ponzi scheme case in the Eastern
District of California, where he is prosecuting a number of fraudulent
transfer actions.
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