Analyzing The Post-'Stern' Landscape In New York

It has been more than two years since the U.S. Supreme Court's decision in Stern v. Marshall,¹ and the New York courts and litigants are still struggling with the extent of Stern's application to the bankruptcy court's jurisdiction and constitutional authority to render final orders in adversary proceedings. In fact, "Stern v. Marshall has become the mantra of every litigant who, for strategic or tactical reasons, would rather litigate somewhere other than the bankruptcy court." In re Ambac Financial Group, 457 B.R. 299, 308 (Bankr. S.D.N.Y. 2011) (J. Chapman); see also In re Extended Stay, 466 B.R. 188, 202 (S.D.N.Y. 2011) (J. Scheindlin); In re Pali Holdings, 488 B.R. 841, 848 (Bkrtcy. S.D.N.Y. 2013) (J. Gerber).

In response to litigants' attempts to remove almost every litigation from the bankruptcy court, the U.S. District Court for the Southern District of New York issued a standing order that has made it clear that Stern is not jurisdictional, but, instead, determines the bankruptcy court's constitutional authority to issue a final judgment. See Jan. 31, 2012 Amended Standing Order of Reference (discouraging litigants from moving to withdraw the reference in core proceedings and suggesting that in cases where the bankruptcy court lacks constitutional authority to issue the final decision, it shall, nevertheless, hear the proceeding and submit proposed findings of fact and conclusions of law to the district court). Other district courts have issued similar orders.

However, New York courts' views on the issue of bankruptcy court's constitutional authority are not uniform and generally fall into one of two categories. Those judges who follow the "expansive" interpretation of Stern rarely hold that the bankruptcy court has constitutional power to enter a final order in an adversary proceeding, while judges who follow the "narrow" interpretation generally hold the opposite. Not surprisingly, perhaps, a review of recent decisions in New York shows that bankruptcy courts tend to follow the "narrow" approach, while many district court judges appear to support the "expansive" approach.

This article discusses recent New York courts' interpretations of Stern in connection with adversary proceedings. Specifically, we focus on two categories of actions that arise in bankruptcy cases: actions to recover estate property directly (often called "turnover proceedings") and actions to avoid fraudulent transfers.

Turnover Proceedings

There have not been many decisions in New York concerning the bankruptcy court's authority to issue a final order in a turnover proceeding. However, Judge Robert E. Gerber's recent decision in Geron v. Peebler (In re Pali Holdings), — B.R.—, 2013 WL 1197670 (Bkrtcy. S.D.N.Y. March 25, 2013), offers a thoughtful insight on this issue. In Peebler, the court granted the trustee's motion for summary judgment seeking turnover of the proceeds of a promissory note that the defendant, David Peebler, a former employee of the Debtor, Pali Holdings (Pali), had executed in favor of Pali. The court found that Peebler's defenses to payment on the note were frivolous.

Significantly, Gerber held that he has the constitutional power to issue a final judgment against Peebler because the trustee sued for turnover of the proceeds of the note, which constituted the property of the estate, and the defendant did not raise any real or substantial defenses to the trustee's claim.

Peebler argued that a bankruptcy judge lacks the constitutional power to issue a...