On December 4, 2012, the United States Court of Appeals for the Ninth Circuit added to the growing body of case law delineating the extent of bankruptcy courts’ jurisdiction in the wake the Supreme Court’s decision in Stern v. Marshall.
Lest you thought you had heard the end of the Stern v. Marshall debate, two recent circuit court decisions remind us that Stern is alive and influential. In October, the Sixth Circuit weighed in on a bankruptcy court’s constitutional authority where it discharged certain fraudulent debts and awarded damages. In early December, the Ninth Circuit performed a similar constitutional analysis where the bankruptcy court decided a fraudulent transfer action against a noncreditor of the bankruptcy estate.
Becoming the first Court of Appeals to address an issue that has divided the bankruptcy and district courts, the Ninth Circuit adopted a forceful view of Stern v. Marshall,1 to hold in In re Bellingham Insurance Agency, Inc.2 that absent the parties’ consent, the limitations imposed by Article III of the Constitution deprive a bankruptcy judge of the constitutional authority to enter judgment on fraudulent transfer claims brought against parties who have not filed proofs of claim.
The Ninth Circuit recently held that: (1) bankruptcy courts lack the constitutional authority to enter a final judgment on all fraudulent transfer claims against non-claimants, whether brought under state or federal law, and (2) a defendant can waive such an argument by not asserting the applicability of Stern v. Marshall1 at the trial level.2 Further, in dicta, the court noted that bankruptcy courts may issue proposed findings of fact and conclusions of law in matters in which the bankruptcy court cannot issue final orders.
On Dec. 4, 2012, the U.S. Court of Appeals for the 9th Circuit delivered its long-awaited decision in Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.). The Bellingham decision effectively clears away much of the analytical underbrush that had surrounded—at least in the 9th Circuit —several important post-Stern v. Marshall questions.
The Bottom Line:
Affirming the bankruptcy and district courts below, the Third Circuit Court of Appeals, in In re Federal-Mogul Global Inc., 684 F.3d 355 (3d Cir. 2012), held that a debtor could assign insurance policies to an asbestos trust established under section 524(g) of the Bankruptcy Code, notwithstanding anti-assignment provisions in the policies and applicable state law.
Asbestos Trusts in Bankruptcy
It is not uncommon for a supplier of goods or services to receive a demand letter or adversary complaint alleging that it received avoidable transfers—commonly known as "preferential payments" or "preferences"—during the 90 days preceding a customer's bankruptcy filing. Such claims arise under section 547 of the Bankruptcy Code, and can result in a supplier having to return certain payments made during the 90-day preference period.
In Schwartz-Tallard v. America's Servincing Co.
In Loop 76, LLC, the Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) recently held that a bankruptcy court may consider whether a creditor received a third party source of payment (e.g., a guaranty) when determining whether that creditor’s claim is “substantially similar” to other claims for purposes of plan classification under 11 U.S.C. § 1122(a). In re Loop 76, LLC, 465 B.R. 525 (B.A.P. 9th Cir. 2012).