Issuing Final Judgment In Fraudulent Transfer Actions

In 2011, the U.S. Supreme Court issued Stern v. Marshall, 564 U.S. ___ (2011), which declared unconstitutional the statutory authorization permitting bankruptcy courts to finally adjudicate state law counterclaims not otherwise resolved in the claims allowance process. Although Stern is relatively old news, a recent decision clarifying and arguably broadening its holdings is not. In Carr v. Loeser (In re International Auction and Appraisal Services LLC), Ch. 7 No. 1-11-bk-00813, Adv. No. 1-13-ap-00018, 2013 Bank. LEXIS 2306, at *7 (Bankr. M.D. Pa. June 4, 2013), the U.S. Bankruptcy Court for the Middle District of Pennsylvania held that it lacked jurisdiction to issue a final judgment in any fraudulent transfer action where the defendant has not consented to jurisdiction, unless resolution of the claim is otherwise part of the claims allowance process.

In Loeser, the Chapter 7 trustee filed an adversary proceeding seeking to recover, among other claims, certain alleged fraudulent transfers pursuant to Section 548 of the Bankruptcy Code and Pennsylvania's Uniform Fraudulent Transfer Act, 12 Pa. Cons. Stat. § 5104 (applicable by way of 11 U.S.C. § 544(b)). The defendants filed a motion to dismiss, arguing that pursuant to Stern, the bankruptcy court lacked the "constitutional authority to enter a final judgment in a fraudulent transfer action without their consent." The trustee argued in response that the bankruptcy court "clearly" has jurisdiction over "core bankruptcy matters such as fraudulent transfer actions" and that the defendants' "interpretation of Stern [was] too broad."

U.S. Bankruptcy Chief Judge Mary France of the Middle District of Pennsylvania began her analysis by acknowledging the court's "clear statutory authority" to enter a final judgment under the circumstances. As set forth in 28 U.S.C. § 157(b)(2)(H), "fraudulent conveyance actions are specifically denoted as 'core' proceedings arising under the Bankruptcy Code and subject to final determination by the bankruptcy court." (See § 157(b)(1) and (2) ("Bankruptcy judges may hear and determine all cases under Title 11 ... and may enter appropriate orders and judgments. ... (2) Core proceedings include ... (H) proceedings to determine, avoid, or recover fraudulent conveyances.").)

Nevertheless, the court, in accord with Stern, found that "although these types of claims are designated as 'core,' and the bankruptcy court is authorized by statute to decide core matters, this...