Final Orders Allowed in Preference Suits Against Defendants Who Didn’t File Claims

Constrained by the logic of In re Bellingham Ins. Agency Inc., 702 F.3d 553, 565 (9th Cir. 2012), although not by its holding, Bankruptcy Judge Daniel P. Collins of Phoenix went as far as he could toward holding that bankruptcy courts have constitutional authority to issue final orders in preference and fraudulent transfer suits.

The March 15 opinion by Judge Collins is strikingly similar to a decision four days earlier by Chief Bankruptcy Judge Christopher S. Sontchi of Delaware in Paragon Litigation Trust v. Noble Corp. PLC (In re Paragon Offshore PLC), 17-51882, 2019 BL 81418, 2019 WL 1112298 (Bankr. D. Del. March 11, 2019).

Judge Sontchi held in Paragon that a bankruptcy court has constitutional authority to enter a final judgment in a fraudulent transfer suit against a defendant who neither filed a claim nor consented to final adjudication in the bankruptcy court. To read ABI’s discussion of Paragon, click here.

The Fiduciary Duty Claims

The case before Judge Collins involved an adversary proceeding against multiple defendants asserting claims for breach of fiduciary duty, preference, and intentionally fraudulent transfer. Some of the defendants had filed proofs of claim, but others had not.

In what it described as a “narrow” holding, the Supreme Court ruled in Stern v. Marshall, 564 U.S. 462 (2011), that the bankruptcy court lacks constitutional authority to issue a final judgment on a state law counterclaim for tortious interference that would not be resolved in ruling on the creditor’s proof of claim. In view of Stern, the plaintiff in the case before Judge Collins conceded that the bankruptcy court could not enter a final judgment on the fiduciary duty claims.

The Preference Claims

The defendants argued that the bankruptcy court could not enter final orders on preference claims against those who had not filed proofs of claim.

Judge Collins disagreed. He said that preference claims only exist as a matter of bankruptcy law and are “not independent of federal bankruptcy law.” He cited Paragon approvingly for the proposition that fraudulent transfer defendants are subject to the bankruptcy court’s final adjudicatory power, even if the defendant has not filed a proof of claim.

The “narrow scope of Stern,” together with the nature of preference claims as a “creature of the Bankruptcy Code,” led Judge Collins “to determine that preferential transfer avoidance claims are the type of ‘core proceedings’ over which this Court has the authority to enter final orders, regardless of whether a given Defendant has filed a proof of claim in this case.”

Fraudulent Transfer Claims

On his final authority regarding fraudulent transfer claims, Judge Collins was constrained by Bellingham, whereas Judge Sontchi was not. Bellingham is generally understood to mean that the bankruptcy court has no final adjudicatory power over a fraudulent transfer defendant who did not file a claim or otherwise submit to the bankruptcy court’s power.

However, Judge Collins parsed Bellingham further. He said the case was “entirely resolved” by the determination that the defendant has “implicitly consented to the bankruptcy court’s authority by failing to challenge the court’s authority until the bankruptcy court’s decision was appealed.” Bellingham was dicta, he said, for the idea that defendants who had not filed proofs of claim are not subject to the bankruptcy court’s final adjudicatory power.

Finding Bellingham’s logic nonetheless “compelling,” Judge Collins held that a bankruptcy court cannot enter a final order against a fraudulent transfer defendant absent consent or the filing of a claim.

Judge Collins devoted the remainder of his opinion to describing what is or is not consent.

Consent

One defendant had made a setoff argument to counter a fraudulent transfer claim. By raising setoff, Judge Collins said that the defendant had waived objections to the court’s power by invoking the claims-allowance process, even though he had found there was no valid setoff.

None of the defendants had demanded a jury trial. Consent did not result, Judge Collins said, because “failing to request a jury trial . . . is not indicative of Defendants’ consent to entry of final orders by a non-Article III Court.”

The plaintiff argued that some of the defendants consented to the bankruptcy court’s power by having participated in administrative aspects of the bankruptcy case before they were sued. Judge Collins found no waiver.

While not having filed a claim, participating in “the administrative portion” of the case “does not waive the participant’s right to adjudication by an Article III court in a subsequent adversary proceeding brought against them.”