For decades, bankruptcy courts have been hearing and entering final judgments in fraudulent conveyance and preference actions with little question as to their authority to do so. However, in June of last year, the Supreme Court's decision in Stern v. Marshall, 131 S. Ct. 2594, 2616 (2011), has led courts and practitioners to question the bankruptcy court's power in areas that previously were considered "core" or traditional bankruptcy claims. Stern held unconstitutional the bankruptcy court's power to adjudicate "counterclaims to proofs of claim" that, though statutorily defined as "core" under 28 U.S.C. § 157(b)(2), were premised on state law independent of the bankruptcy case. Despite the fact that the Stern Court characterized its holding as a "narrow" one and not intended to change the bankruptcy landscape, it has caused lower courts to reexamine whether bankruptcy courts have the constitutional authority to hear and decide other statutorily codified "core" actions under § 157(b)(2). For the most part, the few cases since Stern with respect to preference actions generally support the bankruptcy courts' authority to hear and decide such actions. However, courts have diverged with respect to fraudulent transfer actions.

Though the Supreme Court majority emphasized that Stern was to be interpreted narrowly, the lower court case law that has followed evidences that there are many unanswered questions as to the bankruptcy court's power over other defined "core" proceedings in § 157(b)(2), especially with respect to fraudulent conveyance actions.

Since Stern, the cases generally have been decided in one of three ways:

  1. First, the bankruptcy court continues to hear and decide the fraudulent transfer proceeding and provide a final ruling on the controversy before it. As added protection, such rulings may also include a caveat that should the district court find that the bankruptcy court lacked authority to enter a final ruling, the opinion should be deemed the bankruptcy court's proposed findings of fact and conclusions of law.
  2. Second, in accordance with § 157(c)(1), the bankruptcy court hears the fraudulent transfer proceeding but does not enter a final judgment. Instead, the bankruptcy court only provides recommendations to the district court for its final judgment. In essence, the bankruptcy court treats the statutory "core" matters as "non-core."
  3. Third, under the strictest interpretation of the Stern decision, the bankruptcy court finds that its authority is completely void as to the fraudulent transfer proceeding and the proceeding must immediately be withdrawn to district court. Some courts have even held that there exists a statutory gap as a result of Stern that leaves the bankruptcy court without authority to even hear the matter.

To read more about the Stern decision, its aftermath and the uncertainty that has ensued and how courts are handling such uncertainty, please click here.

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