Ordinarily, a defendant will move heaven and earth to kick a fraudulent transfer suit out of bankruptcy court. When the shoe was on the other foot and the defendant was nailed in state court for receipt of a fraudulent transfer, the defendant argued that the bankruptcy court had exclusive jurisdiction, depriving the state court of jurisdiction over the suit.
The Nevada Supreme Court waded through the maze of confusing federal statutes to arrive at the correct conclusion: State and federal courts share jurisdiction over fraudulent transfer suits, assuming there is no violation of the automatic stay or no prosecution of a suit belonging to the bankrupt estate.
The plaintiffs won a $150 million judgment in state court against an individual and his company. The defendants agreed to settle for $85 million, but the individual defendant transferred his assets to several transferees during the litigation.
The defendants defaulted on the settlement agreement, so the plaintiffs filed an involuntary chapter 7 petition against the individual defendant. The bankruptcy court entered an order for relief.
The plaintiffs had filed a fraudulent transfer suit in Nevada state court against the individual debtor and several of his transferees. After bankruptcy, the plaintiffs stipulated to substituting the trustee as a plaintiff in state court and dropping the debtor as a defendant.
After trial, the state court avoided all of the transfers against one of the fraudulent transfer defendants and entered judgment in favor of the trustee. The judgment debtor appealed, contending that the state trial court lacked subject matter jurisdiction, based on the idea that the bankruptcy court had exclusive jurisdiction over the fraudulent transfer suit.
The Nevada Supreme Court affirmed in a September 16 opinion by Chief Judge James W. Hardesty.
The judgment debtor based its argument largely on a statement by the Ninth Circuit in Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir. 1999), where the appeals court said that the bankruptcy court has “plenary power over core proceedings.” Asserting that the fraudulent transfer suit was a core proceeding, the defendant drew the conclusion that the bankruptcy court had exclusive jurisdiction, thus depriving state courts of subject matter jurisdiction over the fraudulent transfer suit.
Judge Hardesty was not persuaded by fast talk about the complexities of bankruptcy jurisdiction. Under 28 U.S.C. § 1334(a), he said that federal courts have exclusive jurisdiction only over a case under title 11.
Otherwise, Judge Hardesty said that federal courts under Section 1334(b) have “original but not exclusive jurisdiction” over proceedings arising under title 11 or arising in or related to a case under title 11. Furthermore, the exercise of jurisdiction is not mandatory because 28 U.S.C. § 157(b)(1) says that bankruptcy courts “may hear and determine” core proceedings.
Poignantly, Judge Hardesty said that denominating a proceeding as “‘core’ does not mean that it lies within the exclusive jurisdiction of the bankruptcy court.” Rather, he said, classification as core or noncore “determines the relationship between Article I bankruptcy courts and Article III federal district courts, not state court.” In other words, calling something “core” only allows a bankruptcy court to enter a final order and does not prescribe “whether a state court has jurisdiction over the matter.”
Putting the pieces together, Judge Hardesty said that Section 157(b)(2) “‘does not equate to exclusive federal jurisdiction. Rather, there is concurrent federal and state jurisdiction over fraudulent transfer actions and many other core proceedings,’” quoting McCarthy v. Prince (In re McCarthy), 230 B.R. 414, 418 (B.A.P. 9th Cir. 1999).
Judge Hardesty affirmed the judgment, holding that “the state court and the bankruptcy court shared concurrent jurisdiction over this fraudulent conveyance action.”
Ordinarily, a defendant will move heaven and earth to kick a fraudulent transfer suit out of bankruptcy court. When the shoe was on the other foot and the defendant was nailed in state court for receipt of a fraudulent transfer, the defendant argued that the bankruptcy court had exclusive jurisdiction, depriving the state court of jurisdiction over the suit.
The Nevada Supreme Court waded through the maze of confusing federal statutes to arrive at the correct conclusion: State and federal courts share jurisdiction over fraudulent transfer suits, assuming there is no violation of the automatic stay or no prosecution of a suit belonging to the bankrupt estate.