Since the U.S. Supreme Court’s opinion in Stern v. Marshall (all cites omitted) federal courts have issued differing opinions regarding the range of a bankruptcy court’s jurisdiction to enter final judgments in adversary proceedings. In Executive Benefits Insurance Agency v. Arkison, looking at Stern, the Ninth Circuit Court of Appeals held that a bankruptcy court may not enter a final judgment on a claim to avoid a fraudulent conveyance against a noncreditor to a bankruptcy estate.

The situation in the Executive Benefits decision are common of a fraudulent conveyance claim: An insolvent debtor transfers assets (insurance commissions) to a recently formed company and later files for bankruptcy. In the bankruptcy case, the chapter 7 trustee sued the transferee entity (a noncreditor) for, among other things, federal and state law preference and fraudulent transfer claims in order to recover the insurance commissions. In granting the trustee’s motion for summary judgment, the bankruptcy court found the transfers to be fraudulent and entered a final judgment for $373,000. After the district court, on appeal, affirmed the bankruptcy court’s decision, the appellant-transferee appealed to the Ninth Circuit, contesting for the first time the bankruptcy court’s authority to enter a final judgment under Stern.

On appeal, after ruling fraudulent conveyance claims do not fall within the public right exception of in Stern and in Granfinciera S.A. v. Nordberg the Ninth Circuit addressed the argument raised by several amici that bankruptcy courts can render final judgments on fraudulent transfer claims arising under the Bankruptcy Code, as distinguished from fraudulent transfers arising under state law. The Ninth Circuit slammed this position, relying upon Sternand Granfinciera, holding that the Stern court’s characterization of the holding in Granfinanciera would render Stern internally contradictory if a blanket “public right” classification applied for any claim based on federal law.

The Ninth Circuit further said that its decision created a gap in the statutory framework governing the jurisdiction of the bankruptcy courts. Specifically, although federal law authorizes bankruptcy judges to “hear and determine all cases under title 11 and all core proceedings arising under title 11,” the Constitution prohibits bankruptcy judges from entering a final judgment in core proceedings when the primary cause of action is not against a creditor to the estate.

The Ninth Circuit, having found an absence of authority for a bankruptcy court to enter a final judgment against a noncreditor on a fraudulent transfer claim, also held that § 157 permits bankruptcy courts to submit reports and recommendations to the district courts in core proceedings. The court acknowledged that this finding created a split with the Sixth Circuit, which previously held, in dicta, that bankruptcy courts cannot propose findings of facts and conclusions of law in core proceedings.

Although the Ninth Circuit found that a bankruptcy court lacked the authority to enter a final judgment in such a case, it nevertheless affirmed the district court’s opinion, holding that the defendant waived its right to an Article III hearing by litigating in the bankruptcy court without having raised any objection to that court’s jurisdiction to hear the fraudulent transfer claim. Interestingly, this holding also contradicts the Sixth Court’s Waldman opinion, in which the Court of Appeals found that a party could not waive its Article III rights.

At the law firm of William A. Miller, we take these fraudulent conveyance claims serious. We helped draft the UFTA legislation in Arizona years ago. If you need more direction in this or any other business dispute, call us at 602.319.6899 or stop by for a visit at 8170 North 86th place, suite 208 Scottsdale, Arizona 85258

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