9th Circuit Says: Federal Bankruptcy Courts May Not Make Final Judgments on Fraudulent Conveyance Claims

Recently, the 9th Circuit Appeals Court issued a decision finding that Federal Bankruptcy Courts do not have the authority to enter final judgments on federal fraudulent conveyance claims unless the right to a hearing in an Article III Court (such as a Federal District Court) is waived. Fraudulent conveyance claims are typically brought by Chapter 7 trustees and Chapter 11 liquidating trustees in the effort to recover assets for the benefit of creditors. The 9th Circuit further held that Bankruptcy Court’s do have the statutory authority to issue proposed findings of fact and conclusions of law for consideration by the federal district court on these types of claims. A bankruptcy judge’s ability to enter a final judgment depends on whether the matter is a “core” proceeding under 28 U.S.C. § 157.

Proceedings to determine, avoid, or recover fraudulent transfers are considered “core” proceedings because they involve public rights. 28 U.S.C. § 157(b)(2)(H). Under the statute, a bankruptcy judge can hear and determine all “core” proceedings, subject only to appellate review. However, in non-core proceedings, a bankruptcy judge may only “submit proposed findings of fact and conclusions of law to the district court.” Id. § 157(c)(1).The 9th Circuit’s decision relies on the United States Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), that ruled bankruptcy courts have statutory power over “core” proceedings except those that fall under the power of Article III Courts, like fraudulent conveyances. For such issues, they may only make recommendations to the federal district court unless parties waive federal court review by not objecting to the bankruptcy judge deciding on the matter.