Pre-trial on Fraudulent Transfer Claims Should Stay in Bankruptcy Court While Trial Should Move to District Court, According to Bankruptcy Judge
Pre-trial on Fraudulent Transfer Claims Should Stay in Bankruptcy Court While Trial Should Move to District Court, According to Bankruptcy Judge
A recent opinion out of the U.S. Bankruptcy Court for the S.D. of Florida provides an excellent overview of the contours of a bankruptcy court’s constitutional authority to adjudicate claims for which it has statutory jurisdiction, but which are based on state law.
Bankruptcy cases and adversary proceedings are usually referred to a bankruptcy court by a district court. However, a party may request that a district court withdraw such reference.
If the conditions for mandatory withdrawal are not present, withdrawal of reference is generally granted when the following three criteria are met: (1) the subject matter of the litigation is not within the “core” jurisdiction of the bankruptcy court, (2) procedural considerations support removal, such as if a party made a valid jury trial demand, and
- the bankruptcy court has already heard and decided all pretrial
matters. To determine if a claim is core or non-core, courts first look at the list of core proceedings in 28 U.S.C. §157(b)(2). Such list is non-exhaustive. Moreover, the broad language used in some examples (such as "matters concerning the administration of the estate") could result in almost all claims being designated as core.
On the other hand (and further complicating matters), the U.S. Supreme Court has held that a bankruptcy court could have statutory jurisdiction to hear a claim—if it falls within the list of “core proceedings” of 28 U.S.C. §157(b)(2)—and yet lack constitutional authority to adjudicate it. Examples of such claims include contract and tort claims arising under state law.
Courts have thus developed practical guidelines to determine whether a claim is core. In simple terms, a claim is core if it involves a right created by bankruptcy law or could only arise in bankruptcy. It is non-core if it doesn't invoke a substantive bankruptcy right and could exist outside bankruptcy.
Claims to avoid fraudulent transfers, and to recover the funds that were fraudulently transferred, are especially difficult in this context, since they can be creatures of state law but also arise under the bankruptcy code.
In Menotte v. Keough, Judge Mora recommended (the decision had to be made by the district court) that litigation of, both, the fraudulent transfer claims arising under the bankruptcy code, as well as the fraudulent conveyance claims based on state law, to proceed in bankruptcy court for pre-trial matters, including dispositive motions, but move to the district court for the requested jury trial.
Since other state law claims (breach of fiduciary duties) would require an assessment of the same facts and circumstances as the fraudulent transfer claims, the bankruptcy court also recommended that they be tried in the same consolidated proceeding to avoid inconsistent results. #bankruptcy #jurisdiction #fradulenttransfers