By: Joseph P. Donnelly IV
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Adopting a narrow interpretation of the holding of Stern v. Marshall,[1] the Bankruptcy Court for the District of Delaware, in In re DBSI,[2] held that Stern does not preclude a bankruptcy court from adjudicating avoidance claims.[3] In November 2008, DBSI Inc. and several of its affiliates (the “Debtors”) filed for Chapter 11 bankruptcy protection.[4] Following confirmation of the Debtors’ liquidating plan, a litigation trustee commenced several adversary proceedings relating to, inter alia, preferential or fraudulent transfer claims.[5] Certain defendants (the “Movants”) sought to have these adversary proceedings dismissed, arguing that the bankruptcy court lacked jurisdiction under 28 U.S.C. § 157 and the United States Supreme Court’s decisions in Stern v. Marshall and Granfinanciera, S.A. v. Nordberg,[6]to adjudicate causes of action sounding in preference or fraudulent conveyance.[7]
In Stern, the Supreme Court held that although section 157 grants statutory authority for a bankruptcy court to finally adjudicate a state law tort counterclaim, Article III of the United States Constitution prohibits such a result.[8] As the DBSI court acknowledged, bankruptcy courts across the country have split between a broad and a narrow interpretation of the holding.[9] Some bankruptcy courts have adopted a broad reading of Stern and held that they do not have authority to finallly adjudicate certain avoidance actions.[10] These courts interpret Stern to hold that such actions are “quintessentially suits at common law” and consequently require adjudication by an Article III court.[11] The DBSI court disagreed with this approach and was instead persuaded by several recent Delaware bankruptcy court decisions, including In re Direct Response Media[12]and In re USDigital, Inc.,[13] that adopted a narrow reading of Stern.[14] The narrow interpretation focuses on the language in Stern that its holding was a narrow one, intended only to limit bankruptcy courts’ ability to finally adjudicate state law counterclaims.[15] DBSI agreed with the conclusion that “Stern’s repeated reference to its ‘narrow’ holding that would not ‘meaningfully change[] the division of labor’ between bankruptcy and district courts meant that the narrow view is the correct view.”[16] Thus, DBSI held that Stern did not apply to the present action, because it did not involve a state law counterclaim by the estate.[17] The court concluded that Stern does not remove the authority of bankruptcy courts to enter final judgments on other “core” matters, including preference and fraudulent conveyance actions.[18]
The ruling in DBSI reveals a developing consensus among Delaware bankruptcy courts that Stern v. Marshall should be narrowly construed.[19] Courts in other jurisdictions remain split on this issue. In In re Miles,[20] the Bankruptcy Court for the Northern District of Georgia concluded that Stern “does not abrogate the power of the bankruptcy court to finally decide fraudulent conveyance actions.”[21] The Miles court reiterated arguments made by the court in DBSI,[22] distinguishing fraudulent conveyance actions from the state law counterclaim that was at issue in Stern.[23] However, some courts in other jurisdictions, notably the Southern District of New York, have taken the opposite view.[24] While the question of whether the bankruptcy courts have authority to finally adjudicate fraudulent transfer claims will likely hinge on a future appellate ruling, most courts are in agreement with DBSI[25] that bankruptcy courts have authority to issue proposed findings of fact and conclusions of law to the district court on such claims.[26]
[1] — U.S. —, 131 S.Ct. 2594 (2011).
[2] 467 B.R. 767 (Bankr. D. Del. 2012).
[3] See In re DBSI, 467 B.R. at 773.
[4] Id. at 769.
[5] See id. at 769–70.
[6] 492 U.S. 33 (1989).
[7] See In re DBSI, 467 B.R. at 768–69.
[8] See Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 2620 (2011). Prior to the Court’s decision in Stern, the constitutionality of the statutory authority granted to bankruptcy courts in section 157(b)(2) to hear the enumerated core proceedings “was unchallenged.” See In re Direct Response Media, 466 B.R. 626, 640 (Bankr. D. Del. 2012).
[9] See In re DBSI, 467 B.R. at 772 (“There has been much debate about the scope of the Stern decision and its effect on the division of labor between the bankruptcy courts and the district courts.”). The court noted that as of the writing of the opinion, Stern had been cited in more than 325 decisions. Id.
[10] See id.
[11] See In re Direct Response, 466 B.R. at 640 (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 (1989)). The Court in Granfinanciera held that fraudulent conveyance actions by bankruptcy trustees “more nearly resemble state-law contract claims brought by a bankrupt corporation to augment the bankruptcy estate . . . [and] therefore appear matters of private right rather than public right.” 492 U.S. at 56.
[12] 466 B.R. 626 (Bankr. D. Del. 2012).
[13] 461 B.R. 276 (Bankr. D. Del. 2011).
[14] See In re DBSI, 467 B.R. at 772.
[15] See In re Direct Response, 466 B.R. at 642 (citing Stern, 131 S.Ct. at 2620).
[16] In re DBSI, 467 B.R. at 772 (citing In re USDigital, 461 B.R. at 290).
[17] See id. at 773.
[18] See id.; In re Direct Response, 466 B.R. at 644.
[19] See In re DBSI, 467 B.R. at 772 (agreeing with colleagues that Stern’s holding should be read narrowly).
[20] No. 09-92601-MHM, 2012 WL 3643070 (Bankr. N.D. Ga. Aug. 17, 2012).
[21] Id. at 3.
[22] See In re DBSI, 467 B.R. at 773 n. 9. The DBSI court explained that Stern distinguished statelaw counterclaims like the one at issue there, with those actions that “flow from a statutory federal scheme” and are “completely dependent upon adjudication of a claim created by federal law” and thus could be adjudicated by non-Article III courts. Id. (citing In re Refco, 461 B.R. 181, 187 (Bankr. S.D.N.Y. 2011). Stern states that the “question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Id. (alteration in original) (quoting Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 2618 (2011)). The DBSI court opined that a “fraudulent transfer action under § 548, which is expressly created by the Bankruptcy Code . . . does in fact ‘stem from the bankruptcy itself’ in the same way as a preference action.” Id.
[23] See In re Miles, No. 09-92601-MHM, 2012 WL 3643070, at *3 (“Trustee’s power under § 548 to bring fraudulent conveyance actions is explicitly found in the Bankruptcy Code; absent Title 11, no court would have any basis to hear a Chapter 7 trustee’s claim for relief to avoid and recover a fraudulent transfer.” (alteration in original) (citing In re Appalachian Fuels, LLC, 472 B.R. 731, 741 (Bankr. E.D. Ky. 2012)).
[24] See, e.g.,Adelphia Recovery Trust v. FLP Group, Inc., No. 11 Civ. 6847(PAC), 2012 WL 264180, (S.D.N.Y. Jan. 30, 2012); Dev. Specialists, Inc. v. Orrick, Herrington & Sutcliffe, LLP, No. 11 Civ. 6337(CM), 2011 WL 6780600 (S.D.N.Y Dec. 23, 2011); In re Lyondell Chemical Co., 467 B.R. 712 (Bankr. S.D.N.Y. 2012) (all holding bankruptcy courts lack authority to finally adjudicate fraudulent transfer claims). Compare with In re Madoff, 848 F.Supp.2d 469 (S.D.N.Y. 2012); In re Perry H. Koplik & Sons, Inc., No. 02-B-40648 (REG), No. 04-02490 (REG), 2012 WL 2870149 (Bankr. S.D.N.Y. Jul. 11, 2012); In re Refco, 461 B.R. 181 (Bankr. S.D.N.Y. 2011) (all holding bankruptcy court could adjudicate fraudulent transfer claims).
[25] See In re DBSI, 467 B.R. at 774 (“I agree that ‘it would be absurd to conclude that the bankruptcy courts are deprived of jurisdiction over matters designated by Congress as core, when for Article III reasons, Congress gave jurisdiction to bankruptcy courts to issue proposed findings of fact and conclusions of law in non-core matters.’” (quoting United States v. Booker, 543 U.S. 220, 246 (2005)).
[26] See Kirschner v. Agoglia, No. 11 Civ. 8250 (JSR), 2012 WL 1622496, at *5 (S.D.N.Y May 9, 2012).
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