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
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:
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.
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."
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
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On July 26, 2016, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit ruled that the Bankruptcy Code section 546(e) "safe harbor" applicable to constructive fraudulent transfers . . .
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