Category Archives: Fraudulent Transfer – Constructive Fraud (11 U.S.C. § 548(a)(1)(B))

Judge Sontchi (Bankr. D. Del.) Holds That Bankruptcy Courts May Enter Final Judgment on Core Fraudulent Transfer Claims Against Party With No Filed Claim

Written by Daniel N. Brogan

A recent decision by Judge Sontchi for the Bankruptcy Court for the District of Delaware in Paragon Litigation Trust v. Noble Corp. plc (In re Paragon Offshore, plc, et al.), Adv. Proc. No. 17-51882 (CSS) [D.I. 168] (Bankr. D. Del. Mar. 11, 2019) (“Paragon”) holds that significant Supreme Court precedent does not preclude bankruptcy courts from entering final orders on fraudulent transfer claims brought against a defendant that has not asserted a claim against the debtor’s estate. The opinion is contrary to prior decisions in the Ninth Circuit and the Southern District of New York, creating the likelihood that the issue will be addressed on appeal. The decision also addresses a party’s potential implied consent to final determination by a bankruptcy court.

In Paragon, a post-confirmation litigation trust (the “Trust”) sued Noble Corporation plc (“Noble”) asserted several causes of action, including five fraudulent transfer claims, against Noble. The debtors commenced their bankruptcy cases in February 2016. Shortly after the petition date, the debtors proposed a plan (the “Failed Plan”) incorporating a settlement between Noble and the Debtors (the “Settlement Agreement”) that provided for broad releases of the estates’ claims against Noble. The effectiveness of the releases was conditioned on bankruptcy court approval of the Settlement Agreement and effectiveness of the Failed Plan. In November 2016, the bankruptcy court denied confirmation of the Failed Plan. The debtors then proposed a new plan (the “Confirmed Plan”) that did not incorporate the Settlement Agreement, which was confirmed in June 2017. Noble provided input into the drafting of the Confirmed Plan, and it did not object to inclusion of a provision granting the bankruptcy court exclusive jurisdiction to adjudicate claims vested in the litigation trust (the “Trust”) created under the Confirmed Plan.

Subsequently, the Trust filed an adversary proceeding against Noble and other defendants (collectively, the “Defendants”). In response, the Defendants filed a motion to determine the bankruptcy court’s jurisdiction, arguing that the bankruptcy court lacked constitutional authority to finally adjudicate the claims, including the fraudulent transfer claims. Relevantly, the Defendants argued that, under the Supreme Court’s decisions in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (“Granfinanciera”) and Stern v. Marshall, 564 U.S. 462 (2011) (“Stern”) the bankruptcy court lacked constitutional authority to issue final orders when a debtor (or its successor-in-interest) files a fraudulent transfer claim against a defendant that has not filed a claim in the underlying bankruptcy case.

As a threshold matter, Judge Sontchi held that Noble did not implicitly consent to entry of final orders by the bankruptcy court on the fraudulent transfer claims by either entering into the failed Settlement Agreement or not objecting to the Confirmed Plan’s jurisdictional retention provisions.

Judge Sontchi then focused on whether Granfinanciera and Stern controlled. In Granfinanciera, the Supreme Court held that a party with no claim against a bankruptcy estate has a right to a jury trial when sued by a trustee to recover an allegedly fraudulent transfer. Judge Sontchi distinguished Granfinanciera reasoning that the issue there was not Article III authority, but rather the right to a jury trial under the 7th Amendment. Next, he addressed Stern and concluded that it was not controlling because the issue there—a bankruptcy court’s constitutional authority to finally resolve a state law counterclaim that is not necessarily resolved in the proof of claim process—was not before the Court in Paragon. Having concluded that neither Granfinanciera nor Stern controlled, Judge Sontchi rejected the Defendants’ arguments that would have him extend—rather than apply—the holdings of those cases.

Judge Sontchi did acknowledge that other courts, including the Ninth Circuit and three judges in the Southern District of New York, have reached the opposite conclusion and held that Stern extended Granfinanciera to the Article III context. In disagreeing, Judge Sontchi noted that in Executive Benefits Insurance Agency v. Arkison, 573 U.S. 25 (2014), the Supreme Court indicated ambiguity on the issue by expressly assuming, without deciding, that fraudulent transfer claims were Stern claims.

The Paragon opinion provides litigants with important takeaways on how Stern issues may be addressed by bankruptcy courts in Delaware. First, parties entering into a settlement agreement and submitting it for approval do not necessarily implicitly consent to the bankruptcy court’s final adjudication of claims addressed by the settlement agreement. Likewise, the failure to object to an exclusive jurisdiction provision in a plan does not constitute implicit consent to the bankruptcy court’s constitutional authority—even where a party is an active participant in formulating the plan. Finally, the Paragon decision opens the door, for the time being, for fraudulent transfer claims to be finally adjudicated by bankruptcy courts in Delaware, even where the defendant has not filed a proof of claim. Given that the decision creates a split in authority, the ruling may see further clarification or possible reversal on appeal; a motion for leave to appeal is presently pending in the United States District Court for the District of Delaware as Case No. 19-00078 (LPS).

A copy of the opinion can be found here.

Judge Walrath (Bankr. D. Del.) Denies Motion to Transfer Venue of Preference Action Notwithstanding Defendant’s Forum Selection Clause

In Judge Walrath’s RCS Creditor Trust v. Schulte Roth & Zabel LLP (In re RCS Capital Corp.) opinion, the Court found that the presence of a forum selection clause (“FSC”) was not enough to trump the bankruptcy court’s ability to maintain venue for an avoidance action.  In so finding, the judge agreed with the Trustee-Plaintiff’s argument that the Debtors’ creditors were the ultimate parties-in-interest in the action, and thus were not bound by any FSC between the Debtors and Defendant (the Debtors and Defendant hereafter the “Parties”).  On that and other bases, the Court denied Defendant’s motion to transfer venue (the “Motion”) to the Southern District of New York (“SDNY,” the venue required by the FSC) under 28 U.S.C. § 1412 and Fed. R. Bankr. P. 7087.

Background and the Twelve Factor Jumara Test

Plaintiff sought to recover approximately $580,000 pursuant to 11 U.S.C. §§ 547 and 548(a)(1)(B).  Defendant, a law firm, responded by filing the Motion.

Courts in the Third Circuit consider a variety of factors in deciding whether to grant a motion to transfer venue, including:

(1) plaintiff’s choice of forum,

(2) defendant’s forum preference;

(3) whether the claim arose elsewhere,

(4) location of books and records,

(5) convenience of the parties based upon their relative physical and financial condition,

(6) convenience of the witnesses

(7) enforceability of the judgment,

(8) practical considerations that would make the trial easy, expeditious, or inexpensive,

(9) congestion of the courts’ dockets,

(10) public policies of the fora,

(11) familiarity of the judge with the applicable state law, and

(12) local interest in deciding local controversies at home.

 

See Jumara v. State Farm Ins. Co., 55 F.3d 873 (3d Cir. 1995) (the “Jumara Factors”).  The Court found only three Jumara Factors (2, 3, and 6) weighed in Defendant’s favor here, as briefly summarized in the chart below.

 

Factor Arguments Ruling
1

(P)

D: deference to a plaintiff’s choice of forum is lessened when suing in a representative capacity. The rationale for less deference to a representative plaintiff is inapplicable to a bankruptcy trustee.
2

(D)

D: prefers SDNY. True, but D’s preference given less weight than P’s.
3

(D/P)

D: all facts occurred in the SDNY.  Also, the Parties’ engagement letter (the “Agreement”) included the FSC, requiring resolution in the SDNY.

 

P: avoidance actions arise by statute and are separate from an underlying contract. Also, the Debtors’ creditors are the parties-in-interest in an avoidance action, and thus are not bound by the Parties’ FSC.

Performance of the legal services is not at issue, although payments made in SDNY militates towards transfer.

 

Regarding the FSC, the Court agreed with Plaintiff’s argument (derived from AstroPower Liquidating Trust v. Xantrex Tech. Inc. (In re AstroPower Liquidating Trust), 335 B.R. 309 (Bankr. D. Del. 2005) and Charys Liquidating Trust v. McMahan Sec. Co., L.P., (Charys Holding Co., Inc.), 443 B.R. 628 (Bankr. D. Del. 2010)).

4

(N)

D: Books and records are all in SDNY. Discovery in this case will be largely electronic.
5

(P)

D: D is based in NYC, plus P’s counsel has a NYC office as well.

 

P: D often travels to Delaware for other cases.

While transfer would be more convenient for D, pursuing actions in multiple fora creates temporal and financial burdens on P.  Also, Delaware is nearby, D often appears in Delaware, and Delaware counsel has already been retained by P.
6

(P)

D: all witnesses are in the SDNY, beyond the Court’s subpoena power.

 

P: avoidance actions rarely go to trial, are typically short.

No indication that any witness won’t voluntarily appear.
7

(N)

Judgments in either court are entitled to full faith and credit.
8

(P)

P: keeping the avoidance action in the same venue as the main case is more economical due to the Court’s familiarity with the case and the other, similar actions taking place. Agreed with P.
9

(P)

This case does not overburden the Court.
10

(P)

P: transferring this case creates a slippery slope. Agreed with P, as P is pursuing multiple avoidance actions, and transfer of one could result in transferring hundreds of others.
11

(N)

No state law issues.
12

(P)

Purely federal bankruptcy issues predominate here, offsetting any potential interest the SDNY may have.

 

In sum, the Court found Defendant had not carried its burden to show that transfer was appropriate by a preponderance of the evidence.

Conclusion

The presence of the FSC in this case provides an interesting wrinkle, especially since the Jumara case itself instructs a court to “place considerable weight on the parties’ original choice of forum, as expressed in a contractual forum selection clause.” Jumara, 55 F.3d at 882.  The Jumara case, however, was a non-bankruptcy case brought under state law by insureds against an insurer.  Given that the instant case was (i) rooted in federal bankruptcy law, not the performance of the Agreement, and (ii) brought for the benefit of parties-in-interest who were not parties to the Agreement, the Court distinguished the FSC’s relevance here.  The extent to which this rationale could be used in the context of other types of clauses or agreements remains to be seen.  In addition, one wonders if the Court would find the “slippery slope” concerns of Factor 10 to be mitigated were the instant case the only one filed, and not one of “multiple actions” filed instead.

A copy of the Opinion can be found here.

Are Customer Funds Held by Debtor Logistics Company Property of the Debtor’s Estate? Chief Judge Ferguson (D.N.J.) Addresses Multiple Avoidance Issues in TransVantage Solutions

By Evan T. Miller, Esq.

Bankruptcies involving logistics management companies inherently involve unique issues with respect to avoidance actions, be it the tripartite nature of the transactions (customer/debtor/carrier), the contentious dispute over what constitutes property of the estate, and so on. Continue reading

Judge Houle (Bankr. C.D. Cal.) Addresses the Impact of Substantive Consolidation On Fraudulent Transfer Defenses in In re Empire Land, LLC

By Evan T. Miller, Esq.

*Update as of 7/19/2016: Since the post below on 4/18/2016, this decision has been appealed to the United States District Court for the Central District of California, and remains pending.*

Judge Houle (Bankr. C.D. Cal.) recently applied the “dominion test” to a series of transfers in the In re Empire Land, LLC bankruptcy cases, finding a material issue of fact existed as to whether the fraudulent transfer defendant could use the funds as it saw fit – hence, whether it could be a transferee of the funds. Continue reading

Badges of Fraud and the Imputation of Actual Fraudulent Intent – Chief Judge Shannon (Bankr. D. Del.) Issues Latest Order in Long-Running Syntax-Brillian Fraudulent Transfer Action

By Evan T. Miller, Esq.

In the latest memorandum order from SB Liquidation Trust v. Preferred Bank (In re Syntax-Brillian Corp.), Case No. 08-11407 (BLS), Adv. No. 10-51389 (BLS) (Bankr. D. Del.), an adversary proceeding that has already spawned three opinions (including one from the Third Circuit), Chief Judge Shannon denied the defendant-bank’s (“Defendant”) motion to dismiss the complaint (as amended, the “Complaint”). Continue reading

How Much Control Must a Bank Exert to be Considered an Initial Transferee Under 11 U.S.C. § 550? Can Substantive Consolidation be Applied Nunc Pro Tunc to Help ‘Create’ an Avoidance Action? Chief Judge Frank (Bankr. E.D. Pa.) Provides an Answer in In re Universal Marketing, Inc.

By Evan T. Miller, Esq.

Chief Judge Frank of the Bankruptcy Court for the Eastern District of Pennsylvania recently issued an opinion in Goldstein v. Wilmington Savings Fund Society (In re Universal Marketing, Inc.) that deals with certain issues not often seen in avoidance actions.  Specifically, the opinion touches upon the level of control or dominion that a bank must exercise over a disputed conveyance for purposes of determining whether it was an “initial transferee” under 11 U.S.C. § 550. Continue reading