Are Stern & Granfinanciera Going The Way Of Dewsnup: Being Limited To Their Narrow Holdings?

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Limiting the flow (photo by Marilyn Swanson)

By: Donald L. Swanson

“Movants are asking this Court to extend the holdings of [Stern v. Marshall and Granfinanciera] in order to find that 28 U.S.C. § 157(a) is unconstitutional . . . The Court declines to make that leap.”

Chief Judge Christopher S. Sontchi, Delaware Bankruptcy Court, in Paragon v. Noble Corporation, A.P. No. 17-51882, Doc. 168 (March 11, 2019).

Bankruptcy is a specialized area of law. U.S. Supreme Court justices are generalists, but they still get final say on bankruptcy laws. Sometimes they get it wrong: their Dewsnup v. Timm ruling is an example. Accordingly, bankruptcy courts and their appellate overseers manage around Dewsnup by limiting its holding to its narrow facts.

That’s what appears to be happening to the U.S. Supreme Court’s Stern v. Marshall and Granfinanciera v. Nordberg opinions, as shown by the recent Delaware bankruptcy opinion quoted above.

What follows is an attempt at summarizing the Delaware Bankruptcy Court’s Paragon v. Noble opinion.

Facts of Paragon v. Noble

The Chapter 11 bankruptcy estate sues Noble Corporation in Delaware Bankruptcy Court on fraudulent transfer claims. Noble Corporation had not filed a claim in the bankruptcy, and so it contends that the Bankruptcy Court cannot issue a final ruling on the fraudulent transfer claim.

Constitution and Statute Context

The Bankruptcy Code has its origins in Article I of the U.S. Constitution, which authorizes Congress to pass “uniform laws on the subject of bankruptcies.”

The U.S. Constitution also provides, in Article III: (i) “The judicial power of the United States shall be vested in one supreme court and in [other] inferior courts,” and (ii) “judges shall hold their offices during good behavior.” Such provisions apply in bankruptcy because of this additional Article III directive: “The judicial power shall extend to all cases, in law and equity, arising under…the laws of the United States.”

So, here’s the problem under the Bankruptcy Code: bankruptcy judges only hold office for fourteen years, no matter how good their behavior may be, so they may not wield the judicial power of the United States.

Congress attempted to address this problem by creating a division of labor between bankruptcy courts and district courts in 28 U.S.C. § 157. The division authorizes bankruptcy courts to issue final rulings in “core” proceedings (i.e., those at the heart of the bankruptcy process) and to issue proposed findings of fact and conclusions of law for final determination by district courts in other proceedings related to the bankruptcy process.

So, the question becomes this: did Congress exceed its constitutional authority by including fraudulent transfer claims as “core” proceedings in 28 U.S.C. § 157, when applied against a party who has not filed a claim in the bankruptcy?

Stern v. Marshall and Granfinanciera

Delaware Bankruptcy Court’s Paragon v. Noble opinion focuses on two U.S. Supreme Court cases:

  1. In Granfinanciera, the Supreme Court addressed the judicial power question in ruling on a 7th Amendment jury trial issue; and
  2. In Stern v. Marshall, the Supreme Court discussed Granfinanciera and gave us “Stern claims” by declaring that Congress exceeded its authority, in 28 U.S.C. § 157, in “one isolated respect”: a Bankruptcy Court cannot enter final judgment on a state law counterclaim outside the process of ruling on a creditor’s proof of claim.

Granfinanciera and Stern are, of course, binding on bankruptcy courts—but only when properly applicable to the facts of a case. Determining if and when such rulings apply, however, “is not easy work,” according to Judge Sontchi. For example:

  • Justice Rehnquist observed in Northern Pipeline that cases dealing with the authority of Congress to create non-Article III courts “do not admit of easy synthesis”; and
  • A treatise suggests that “the Supreme Court’s shifting decisions in this area” fail to provide “a coherent approach” to the general question

The Constitutionality Issue

The Article III issue, in Paragon v. Noble, is this:

–whether the Bankruptcy Court may enter final judgment on core fraudulent transfer claims when those claims are brought against non-claimant defendants.

What the movants are asking the Bankruptcy Court to do is this: determine that a federal statute is, in part, unconstitutional. Since Congress authorized bankruptcy courts, in 28 U.S.C. § 157(b)(2)(H), to issue final rulings on fraudulent transfer claims, asking a court to reject Congress’s action is, in reality, asking for a declaration that 28 U.S.C. § 157(b)(2)(H) is unconstitutional as written.

On this constitutionality issue, Judge Sontchi makes two observations:

  1. “The general principle of judicial restraint weighs heavily against such a declaration” because federal statutes “are presumed constitutional . . . until the contrary is clearly established”; but
  2. If the Supreme Court has already ruled 28 U.S.C. § 157(b)(2)(H) to be unconstitutional, as applied to fraudulent transfer actions against parties who haven’t filed a claim, this Bankruptcy Court “would, of course, be bound by such a ruling.”

The “Pivotal Question”

Accordingly, the Delaware Bankruptcy Court’s opinion turns to the “pivotal question” of “what, exactly, is compelled by Granfinanciera and its close cousin, Stern v. Marshall, the two Supreme Court cases touching on this issue?”

–First conclusion: Granfinanciera is “closely related but not binding.”

Granfinanciera’s facts are closely analogous to Paragon v. Noble facts: “a party with no claim against a bankruptcy estate was haled into bankruptcy court to defend against a fraudulent transfer claim.” And Granfinanciera’s holding is this: “a person who has not submitted a claim against a bankruptcy estate has a right to a jury trial” when sued by the bankruptcy trustee “to recover an allegedly fraudulent monetary transfer.”

Granfinanciera’s rationale has been described as “particularly confusing” for Article III issues. That’s because Granfinanciera dealt with 7th Amendment jury trial rights (not Article III issues) and whether such rights could be limited by the so-called “public rights exception” (which exception “has a long and complex history in the Supreme Court”).

Granfinanciera applied the “public rights exception” and considered both 7th Amendment and Article III precedents. Accordingly, Paragon v. Noble’s movants argue to the Delaware Bankruptcy Court that the “public rights exception” must be applied identically in both 7th Amendment and Article III contexts. In rejecting this argument, the Delaware Bankruptcy court acknowledges the question to be “a difficult” one. Here is its rationale:

  • Granfinanciera mentions the 28 U.S.C. § 157 division of labor between bankruptcy and district courts “and specifically avoids determining” it to be unconstitutional;
  • Granfinanciera declares as the “sole issue,” whether “the Seventh Amendment confers on petitioners a right to a jury trial in the face of Congress’ decision to allow a non-Article III tribunal to adjudicate the claims against them”; and
  • Granfinanciera takes pains to avoid expressing “any view” on whether “Article III allows jury trials” in fraudulent conveyance actions before bankruptcy judges—leaving that issue “for future decisions.”

Accordingly, the Supreme Court explicitly refused, in Granfinanciera, to weigh in on the Article III issue that’s presently before the Delaware Bankruptcy Court.

–Second conclusion: Stern v. Marshall described, without deciding, the Article III issue.

Stern, like Granfinanciera, does not bind lower courts on issues that were not directly before it.

The Delaware Bankruptcy Court explains, in Paragon v. Noble, that “Stern, by its own lights, should be read narrowly,” because (i) the Stern opinion contains “a crystal-clear statement” that “Congress, in one isolated respect, exceeded” its Article III power, and (ii) such issue “is not the issue before this Court today.”

Moreover, the Ninth Circuit has already held that Granfinanciera and Stern do not settle the Article III question on fraudulent conveyance claims against noncreditors to the bankruptcy estate.

–Ultimate conclusion: Neither Stern nor Granfinanciera control

The Delaware Bankruptcy Court concludes with these two items:

  • Since “neither Stern nor Granfinanciera control on this issue, . . . Movants are asking this Court to extend the holdings of those cases, in order to find that 28 U.S.C. § 157(a) is unconstitutional” as applied in Paragon v. Noble; and
  • “The Court declines to make that leap.”

Conclusion

It appears that Stern v. Marshall and Granfinanciera are going the way of Dewsnup: i.e., their holdings are viewed as erroneous, and lower courts are managing around them by limiting their holdings to the specific facts of those cases.

Paragon v. Noble is a prime example of such a trend.

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