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Bankruptcy Court Gives And Then Takes Away In Latest Stern-Related Ruling

What are the limits of a bankruptcy court’s authority to issue final orders and judgments?  Does a bankruptcy court have authority under Article III of the U.S. Constitution to enter final orders in quintessential bankruptcy matters such as fraudulent transfer claims, or are the court’s powers more constrained?  While the Supreme Court’s rulings in Stern v. Marshall, 546 U.S. 462 (2011), Executive Benefits Ins. Agency v. Arkison, 573 U.S. 25 (2014) and Wellness International Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) laid a framework for answering these questions, confusion still exists.

In Stern, the Supreme Court created a class of claims, commonly referred to as “Stern” claims, that may not be adjudicated to final order or judgment by the bankruptcy court even though the Bankruptcy Code directs otherwise.  A bankruptcy court that is faced with a Stern claim can only submit proposed findings of fact and conclusions of law to the district court which are reviewed de novo.  Only the district court can enter final judgment on these claims.  Thus, even though fraudulent transfer claims are statutorily core claims under 28 U.S.C. § 157(b)(2)(H) and the bankruptcy court is directed to enter final judgments on those claims under 28 U.S.C. § 157(b)(1), the question remains whether the bankruptcy court has the constitutional authority to do so.

On March 11, 2019, the U.S. Bankruptcy Court for the District Of Delaware held that the bankruptcy court has authority to enter final judgments adjudicating fraudulent transfer claims, even those brought by a successor to the debtor and against parties that did not file claims in the bankruptcy.  This opinion stands in contrast with opinions issued by the Ninth Circuit Court of Appeals and district courts in the Southern District of New York, and is sure to lead to further litigation over the authority of a bankruptcy court to adjudicate such claims.

In Paragon Litigation Trust v. Noble Corporation, plc, the plaintiff, Paragon Litigation Trust (the “Trust”), was a litigation trust created under the terms of a confirmed plan.  Prior to confirmation, the defendant, Noble Corporation plc (“Noble”) had negotiated a settlement agreement with the debtor, which included broad releases in favor of Noble and affiliated parties.  The settlement agreement was included in the terms of a prior plan, but the court denied confirmation of that plan.  The plan that was ultimately confirmed did not include either the settlement agreement or the releases.  The plan did, however, provide that the bankruptcy court retained jurisdiction to “adjudicate” claims by Paragon (and by extension the Trust) “to the fullest extent permitted by law.”

Post-confirmation, the Trust filed a multi-count complaint against Noble and other parties. Noble moved for an order determining that the bankruptcy court could only enter proposed findings of fact and conclusions of law with respect to all of the counts in the complaint, including the fraudulent transfer claims.  Noble argued that although the fraudulent transfer claims were statutorily core matters (28 U.S.C. § 157(b)(2)(H)) they were Stern claims, meaning that the bankruptcy court did not have constitutional authority to enter a final judgment.

In response, the Trust argued that Noble had implicitly consented to the bankruptcy court’s entry of a final judgment on the fraudulent transfer claims.  Implicit consent is found where the litigant or counsel was made aware of the need for consent and the right to refuse it, but still voluntarily appeared to try the case before the bankruptcy judge.  The bankruptcy court rejected the Trust’s implicit consent argument.  First, Noble’s entry into the settlement agreement with the debtor was an insufficient basis upon which to find implicit consent even though the settlement agreement would, by its terms, only become effective (a) upon entry of an order by the bankruptcy court approving the settlement agreement, and (b) upon the plan becoming effective.  The court held that Noble’s requirement that the bankruptcy court approve the settlement did not constitute consent to the court’s later adjudication of issues that were included in, but were not necessarily the sole subject of, the settlement agreement.  Second, Noble’s failure to object to the jurisdictional provisions in the plan which provided for the bankruptcy court’s “exclusive jurisdiction” over the claims against Noble “to the fullest extent permitted by law” did not constitute implicit consent since a party’s “failure to object to a plan provision providing for this Court’s continued jurisdiction does not constitute a waiver of a party’s right to have claims heard by an Article III tribunal.”

Since there was no consent, the bankruptcy court turned to the merits of the argument, i.e., whether a bankruptcy court may enter final judgment on core fraudulent transfer claims brought against non-claimant defendants by a successor-in-interest to the debtor.  Here is where the opinion diverges, and some might argue breaks new ground, in the discourse about the reach of Stern.  The bankruptcy court noted that Noble was, in essence, asking the court to declare certain aspects of federal statutes enacted by Congress (28 U.S.C. §§ 157 & 158), which explicitly direct bankruptcy courts to enter final orders in core proceedings subject to appellate review by the district court or a bankruptcy appellate panel, unconstitutional.  The bankruptcy court discussed the Supreme Court’s rulings in Stern and Granfinanciera, S.A. v. Nordberg , 492 U.S. 33 (1989) at length, and ultimately concluded that, while the language in those cases was perhaps sweeping, the holdings were in fact very narrow, and the Supreme Court never held sections 157 or 158 to be unconstitutional.  Having wiggled out from the effects of those Supreme Court cases, the bankruptcy court relied on the presumption that federal statutes are constitutional unless and until they are held to be otherwise.  Given the lack of controlling precedent from the Supreme Court or appellate courts ruling unequivocally that these statutory provisions are unconstitutional, the bankruptcy court held that it was bound to follow the express requirements of those statutes, and that it was indeed able to enter a final judgment on the Trust’s core fraudulent transfer claims brought against Noble.

What are the implications of Paragon?  First, the court’s decision in Paragon limits the circumstances under which a party can be said to have implicitly consented to a bankruptcy court entering final orders on Stern claims.  Entering into a settlement agreement that requires bankruptcy court approval, or participating in the plan negotiating process and not objecting to plan provisions providing for the court’s retention of jurisdiction, are not sufficient bases to establish implied consent.  But, while the opinion “gives” in terms of restricting implied consent, it “takes away” in terms of holding that a bankruptcy court may enter final judgments in core fraudulent transfer claims, including those brought by successors to the debtor and those brought against defendants who did not file a proof of claim.  This holding is a departure from how other cases have interpreted Stern and its progeny.  Thus, at least in the Third Circuit, defendants in fraudulent transfer claim cases may find themselves subject to a final judgment being entered by the bankruptcy court.

© Copyright 2023 Squire Patton Boggs (US) LLPNational Law Review, Volume IX, Number 95

About this Author

Mark Salzberg, Restructuring, Insolvency, Bankruptcy, Attorney, Squire Patton Bo

Mark Salzberg is a partner in Squire Patton Boggs’ Washington, DC office and a member of the firm’s Restructuring & Insolvency practice group. He focuses his practice on bankruptcy litigation, creditors’ rights, debtor reorganizations and complex commercial litigation.

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Nava Hazan Bankruptcy Restructuring Attorney Squire Patton Boggs New York, NY

Nava Hazan is a partner in the Restructuring & Insolvency Practice Group located in the New York office and is the co-chair of the firm’s Cross-Border Restructuring Practice.

Nava's practice involves the representation of debtors, foreign liquidators and administrators in Chapter 15 cases and other cross-border proceedings. She also represents debtors, creditors’ committees, and secured and unsecured creditors in Chapter 11 cases in various industries.

Susan Kelly Restructuring & Insolvency Attorney Squire Patton Boggs Manchester, UK

Susan Kelly is a partner in our Restructuring & Insolvency Practice Group.

Susan has an extensive national and cross-border and restructuring practice in which she represents international banks, asset-based lenders and other financiers, restructuring and turnaround professionals, directors and management teams, as well as creditors, and advises on all issues arising in financially stressed and distressed scenarios.

Susan’s expertise covers a broad range of domestic and international insolvency (both contentious and non-contentious), lender security reviews and...

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Stephen Lerner Restructuring & Insolvency Attorney Squire Patton Boggs Cincinnati, OH & New York, NY

Stephen Lerner is global chair of the Squire Patton Boggs Restructuring & Insolvency Practice Group. He has an extensive national and cross-border restructuring practice in which he represents debtors, distressed businesses, committees of unsecured creditors, secured and unsecured creditors, equity interest holders, boards of directors and acquirers of troubled businesses in Chapter 11 reorganization cases, Chapter 15 cross-border cases, Chapter 9 municipal restructurings and out-of-court restructurings throughout the United States, Europe and, most recently, in the United Arab...