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Bankruptcy Court Rejects Article III Challenge to its Authority to Adjudicate Based on Stern v. Marshall


On April 12, 2012, Judge Peter J. Walsh of the United States Bankruptcy Court for the District of Delaware (the “Court”), by narrowly interpreting Stern v. Marshall, 131 S.Ct. 2594 (2011), denied a motion to dismiss on the basis that the Court lacked Article III authority to adjudicate the proceeding. Litigation Trustee for the DBSI Estate Litigation Trust v. 1031 Exchange Group, et al., Adv. Pro. No. 10-54648.1

The defendants sought dismissal of causes of action that had been commenced by a litigation trustee seeking (i) avoidance and recovery of fraudulent and postpetition transfers pursuant to 11 U.S.C §§ 544, 547, 548, 549, 550 and 551; (ii) declaratory relief related to federal securities laws, unjust enrichment, rescission of agreements; and (iii) disallowance of claims pursuant to 11 U.S.C. § 502.

Judge Walsh’s opinion is predicated on a narrow interpretation of Stern consistent with that of his colleagues on the Delaware bankruptcy bench.2 In the Court’s view Stern only removes from final adjudicatory authority of the bankruptcy court, a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim. Because Defendants’ principal argument was that the Court, not being an Article III court, could not adjudicate the causes of action that sought to recover money based on claims of fraudulent transfers and preferences rather than state law counterclaims, so the Court found Sterninapplicable. The Court additionally held that it has authority to enter final judgments on core matters and issue proposed findings of fact and conclusions of law on non-core causes of action.

The Court also summarily rejected defendants’ argument that Stern changed the bankruptcy court’s subject matter jurisdiction and found defendants’ judicial economy concerns to misconstrue the meaning of de novo review and premature because no jury demand had yet been made. Lastly, the Court relied on the February 29, 2012 Amended Standing Order of Reference, which authorizes the District Court to treat any order of the Court as a recommendation if it later determines that Article III precludes the Court from entering a final judgment, to conclude that the issue of the Court’s authority to enter final judgments was academic.

A copy of the Court’s opinion is available here.

1 The motion to dismiss and the related opinion were filed in multiple adversary proceedings as identified in the Court’s opinion.
2 See Judge Gross opinion: Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 2012 WL 112502 (Bankr. D. Del. Jan. 12, 2012); see also Judge Sontchi opinion: Burtch v. Huston (In re USDigital, Inc.), 461 B.R. 276 (Bankr. D. Del. 2011).

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