In re Paragon Offshore PLC, 598 B.R. 761 (D. Del. 2019)
The Bankruptcy Court for the District of Delaware denied a motion to determine that the Court did not have power under Article III of the U.S. Constitution to issue a final order on a core fraudulent transfer claim brought against a non-claimant defendant. The Court concluded that bankruptcy courts have authority to enter final judgments in all core fraudulent transfer claims.
Paragon Offshore plc and certain of its affiliates filed voluntary petitions under chapter 11 in 2016. A series of plans were proposed to the Bankruptcy Court which were not confirmed for various reasons. One of the failed plans included a settlement agreement which provided broad releases in favor of Noble Corporation plc (“Noble”) and affiliated parties of a variety of potential claims, including fraudulent transfer claims. The plan which the Court ultimately confirmed did not include the settlement agreement. Under the confirmed plan, the debtors’ rights to pursue certain claims – including fraudulent transfer claims – were transferred to Paragon Litigation Trust. Paragon Litigation Trust then filed a complaint which included fraudulent transfer claims against Noble and certain other defendants. Noble and the other defendants filed a motion seeking an order determining, among other things, that the Court did not have authority under the U.S. Constitution to enter a final order with respect to the fraudulent transfer claims.
In its decision, the Court explained that Article III of the U.S. Constitution provides that the judicial power of the United States shall be vested in the U.S. Supreme Court and in lower courts established by Congress in which judges shall hold their offices during good behavior (i.e., without term limits). Since bankruptcy judges are subject to term limits, they do not wield the judicial power of the United States. Congress’ ability to grant adjudicative authority to bankruptcy judges under Article III is therefore limited.
Over time, certain cases – including most notably Northern Pipeline Construction Co. v. Marathon Pipe Line Co. in 1978 – developed a general principle that Article III bars Congress from establishing legislative courts to exercise jurisdiction over all matters related to those arising under the bankruptcy laws. In response to such cases, in 1984, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the “1984 Amendments”), which amended the U.S. bankruptcy code and created a distinction between “core” matters (over which bankruptcy courts may enter final orders) and “non-core” matters (as to which bankruptcy courts may only submit findings of fact and conclusions of law).
Two Supreme Court opinions, one issued in Granfinanciera, S.A. v. Nordberg in 1989 and the other issued in Stern v. Marshall in 2011, addressed the Article III issues raised by the 1984 Amendments. In Stern, the Supreme Court concluded that, by enacting the 1984 Amendments, Congress exceeded its authority in “one isolated respect”, which was by permitting bankruptcy courts to enter final judgments on state law counterclaims that are not resolved in the process of ruling on a creditor’s proof of claim. Claims over which a bankruptcy court lacks authority to issue a final judgment are referred to as Stern claims. When a bankruptcy court is faced with a Stern claim, it must hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.
In this case, Noble and the other defendants argued that, while the fraudulent transfer claims filed against them were statutory “core” matters, under Granfinanciera and Stern, bankruptcy courts lack authority to issue a final order when a debtor files a fraudulent transfer claim against a party that has not filed a claim in the underlying bankruptcy case (in other words, the defendants asserted that the claims constituted Stern claims).
The Court concluded that bankruptcy courts have the power to enter final judgments in all core fraudulent transfer claims, including the ones at issue in this case. It noted that the 1984 Amendments direct bankruptcy courts to enter final orders in core proceedings, and provide that core proceedings include proceedings to determine, avoid or recover fraudulent conveyances. The Court found that neither Granfinanciera nor Stern decided the constitutionality of the 1984 Amendments as they apply to fraudulent transfer actions against non-claimant parties. Granfinanciera specifically avoided determining whether the statutory division of labor between bankruptcy courts and District Courts is unconstitutional. Stern’s holding also did not decide the issue raised in this case, and the Stern opinion stated clearly that Congress exceeded its Article III power in passing the 1984 Amendments in one isolated respect only, and that isolated issue was not the issue presented in this case.
Article courtesy of Margaret G. Parker-Yavuz of Akin Gump Strauss Hauer & Feld LLP.