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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.

D.C. Bankruptcy Court Finds Pillowtex Analysis Not Required for Retaining Section 327(e) Professional

By Evan T. Miller, Esq.

In a helpful reminder for professionals regarding the nuances of 11 U.S.C. § 327 and its intersection with preference law, the Bankruptcy Court for the District of Columbia recently overruled a creditor’s objection to a debtor’s application (the “Application”) to retain special counsel under section 327(e).  The objection, filed in In re Core Communications, Inc., Case No. 17-00258, was based in part upon the fact that the debtor and proposed counsel (the “Professional”) had not provided a “Pillowtex Analysis” in support of the Application – i.e., an analysis disclosing any debtor payments made to the Professional in the 90 days prior to the Petition Date (the “Preference Period”).  The creditor maintained this assertion, notwithstanding the fact that the Professional had waived any claims it had against the estate.

The Court rejected the creditor’s argument.  Judge S. Martin Teel began with a recitation of professional retention guidelines and jurisprudence, noting that “[a] court authorizing the retention of professionals under 11 U.S.C. § 327(a) must determine whether the professional is disinterested, including whether the professional is the recipient of a preferential transfer.” In re Core Commc’ns, Inc., 2017 WL 5151674, at *3 (Bankr. D.D.C. Nov. 5, 2017) (citing In re Pillowtex, Inc., 304 F.3d 246 (3d Cir. 2002)).  While the Application did not disclose whether the debtor made any payments to the Professional during the Preference Period, the Court found the Application was made pursuant to 11 U.S.C. § 327(e), and as such, “adverse interests that would disqualify an attorney from being retained under § 327(a) are distinguishable from adverse interests that would disqualify an attorney from being retained under § 327(e).” Id. (quoting Giuliano v. Young (In re RIH Acquisitions NJ, LLC), 551 B.R. 563, 569 (Bankr. D. N.J. 2016).  Under section 327(e), “the attorney being retained only needs to be disinterested with respect to the matter on which such attorney is to be employed.” Id. (internal quotations omitted).  As a result, there was no need to “disclose the existence of any preferences incident to the Application.Id.

A copy of the Opinion can be found here.