VICK v. IVEY

Filing 14

MEMORANDUM OPINION AND ORDER signed by JUDGE THOMAS D. SCHROEDER on 8/23/2013, that Defendants' Joint Motion to Withdraw Reference to the United States Bankruptcy Court (Doc. 10 (12-cv-00525, 12-cv-00528, 12-cv-00529); Doc. 7 (12-cv-00531)) is DENIED, and the Bankruptcy Court shall proceed to final judgment in the adversary proceedings. (Lloyd, Donna)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

JOSEPH E. MASON,
Defendant-Appellant,
v.
CHARLES M. IVEY, III, CHAPTER 7
TRUSTEE FOR THE ESTATE OF JAMES
EDWARDS WHITLEY,
Plaintiff-Appellee.
_______________________________
FAYE SWOFFORD,
Defendant-Appellant,
v.
CHARLES M. IVEY, III, CHAPTER 7
TRUSTEE FOR THE ESTATE OF JAMES
EDWARDS WHITLEY,
Plaintiff-Appellee.
_______________________________
ROBERT P. SWOFFORD,
Defendant-Appellant,
v.
CHARLES M. IVEY, III, CHAPTER 7
TRUSTEE FOR THE ESTATE OF JAMES
EDWARDS WHITLEY,
Plaintiff-Appellee.
_______________________________

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No. 1:12-cv-00525

No. 1:12-cv-00528

No. 1:12-cv-00529

LUCIAN VICK,

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Defendant-Appellant,
v.
CHARLES M. IVEY, III, CHAPTER 7
TRUSTEE FOR THE ESTATE OF JAMES
EDWARDS WHITLEY,
Plaintiff-Appellee.
_______________________________

No. 1:12-cv-00531

MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, District Judge.
This matter arises from adversary proceedings brought by
Chapter

7

Trustee

involuntary

Charles

bankruptcy

case

(“Whitley” or “Debtor”).
to

Withdraw

Reference

M.

Ivey,

of

III

Debtor

(“Trustee”)

James

Edwards

in

the

Whitley

Before the court is the Joint Motion

to

the

United

States

Bankruptcy

Court

filed by Defendants Joseph E. Mason, Faye Swofford, Robert P.
Swofford,

and

Lucian

Vick

(“Defendants”).

(Doc.

10

(12-cv-

00525, 12-cv-00528, 12-cv-00529); Doc. 7 (12-cv-00531).)

The

Trustee has responded (Doc. 14 (12-cv-00525, 12-cv-00528, 12-cv00529); Doc. 12 (12-cv-00531)) and Defendants have replied (Doc.
15

(12-cv-00525,

00531)).

12-cv-00528,

12-cv-00529);

The matter is ready for decision.

Doc.

13

(12-cv-

For the reasons set

forth below, the motion will be denied.
I.

BACKGROUND
On March 8, 2010, a group of unsecured creditors, which did

2

not include Defendants, filed an involuntary petition for relief
under Chapter 7 of the United States Bankruptcy Code against
Whitley.

As observed by the Bankruptcy Court, “James Edward[s]

Whitley (the ‘Debtor’) was the sole shareholder and principal
officer of South Wynd Financial, Inc., a corporation purportedly
in the business of invoice funding and receivables financing
(‘factoring’).

In reality, the Debtor’s factoring business was

non-existent, fictitious, and amounted to a Ponzi scheme.”

In

re

*1

Whitley,

Bankr.

No.

10-10426C-7G,

(Bankr. M.D.N.C. Apr. 13, 2012).

2012

WL

1268670,

at

Pursuant to 28 U.S.C. § 157

and the order of reference, the bankruptcy case was referred
from this court to the Bankruptcy Court, where it proceeds under
Chapter 7.
Defendants
timely

filed

Defendant

were

proofs

Mason,

a

investors

in

Whitley’s

of

claim

in

the

claim

for

scheme,

Bankruptcy

$1,330,000;

(2)

and

Court:

Defendant

they
(1)
Faye

Swofford, a claim for $528,538.00; Defendant Robert Swofford, a
claim

for

$865,000.00;

and

Defendant

Vick,

a

claim

for

$658,700.00.
In July 2011, the Trustee objected to the proofs of claim
and

brought

asserting

adversary

fraudulent

proceedings

transfer

claims

against
based

each
on

Defendants pursuant to the alleged Ponzi scheme.

Defendant,

transfers

to

In addition to

claims for constructive fraud, the Trustee’s complaint alleged

3

causes of action for (1) actual fraud pursuant to Bankruptcy
Code § 548(a)(1)(A) 1 (Count I) and (2) actual fraud under state
law, N.C. Gen. Stat. § 39-23.1 et seq., pursuant to Bankruptcy
Code § 544(b)(1) 2 (Count II).

Each Defendant filed an answer,

raised various defenses, 3 and demanded a jury trial.
here,

Defendants

jurisdiction
right

to

over

enter

also
the

a

challenged

adversary

final

the

Bankruptcy

proceedings,

judgment

on

the

Important
Court’s

specifically

fraudulent

the

transfer

claims in Counts I and II of the complaints, in light of the
Supreme Court’s decision in Stern v. Marshall, -- U.S. --, 131
S. Ct. 2594 (2011). 4
The Bankruptcy Court invited the parties to either consent
to its jurisdiction to enter a final judgment in the adversary
proceedings or brief why it lacked jurisdiction under Stern;
1

Section 548(a)(1)(A) allows a trustee to avoid any transfer of an
interest of a debtor in property or any obligation “that was made or
incurred on or within 2 years before the date of the filing of the
petition, if the debtor voluntarily or involuntarily – (A) made such
transfer or incurred such obligation with actual intent to hinder,
delay, or defraud any entity to which the debtor was or became . . .
indebted.”

2

Section 544(b)(1) allows a trustee to “avoid any transfer of an
interest of the debtor in property or any obligation incurred by the
debtor that is voidable under applicable law by a creditor holding an
unsecured claim that is allowable under section 502 of this title or
that is not allowable only under section 502(e) of this title.”

3

Defenses included good faith receipt of payments from Whitley and an
argument the Defendant was the “net loser” from the Ponzi scheme.
4

The Bankruptcy Court dismissed the Trustee’s claims for constructive
fraudulent transfer in the adversary proceedings against Faye
Swofford, Mason, and Vick because the pleadings demonstrated that they
had been paid less than their investment.

4

Defendants chose the latter.

On April 13, 2012, the Bankruptcy

Court issued a memorandum opinion in which it concluded that the
fraudulent transfer claims were core proceedings and that each
Defendant filed a proof of claim for monies loaned.

The court

concluded that, in light of the filed proofs of claim, it could
“enter final judgment on the Plaintiff’s claims because it is
necessary to decide the fraudulent transfer claims in order to
allow

or

disallow

the

Defendants’

proofs

of

claim.”

In

re

Whitley, 2012 WL 1268670, at *2.
Defendants filed for leave to appeal to this court.

This

court questioned whether a motion to withdraw the reference, as
opposed to an interlocutory appeal, was the appropriate vehicle
to present the issue to this court.

After a hearing, the court

denied without prejudice appellants’ joint motion for leave to
appeal, and the matter has proceeded on the instant motions to
withdraw the reference.

(Docs. 12 at 4 (12-cv-00525, 12-cv-

00528, 12-cv-00529), 9 (12-cv-00531).)

The court directed the

parties

of

to

address

whether

withdrawal

the

reference

was

either required or advisable, including the impact, if any, of
the Supreme Court’s decision in Stern on the Bankruptcy Court’s
authority to enter final judgments in the adversary proceedings.
Defendants now argue that the adversary proceedings must
or, alternatively, should be withdrawn because under Stern the
Bankruptcy Court lacks constitutional authority to enter final

5

judgment on the Trustee’s fraudulent transfer claims, which are
state law claims between private parties.

The Trustee contends

that the impact of Stern is narrow and that Defendants have
submitted

themselves

proofs of claim.
recover

to

entry

of

a

final

judgment

by

filing

The Trustee further argues that his power to

fraudulent

transfers

“unquestionably

invokes

the

Bankruptcy Code and, unlike the common law state claim at issue
in

Stern,

cannot

be

resolved

outside

the

claims

resolution

process.”
II.

ANALYSIS
A motion for withdrawal of the reference is governed by 28

U.S.C. § 157(d), which provides:
The district court may withdraw, in whole or in part,
any case or proceeding referred under this section, on
its own motion or on timely motion of any party, for
cause shown.
The district court shall, on timely
motion of a party, so withdraw a proceeding if the
court determines that resolution of the proceeding
requires consideration of both title 11 and other laws
of the United States regulating organizations or
activities affecting interstate commerce.
28

U.S.C.

§

157(d).

The

first

sentence

of

section

157(d)

provides for permissive withdrawal, while the second sentence
addresses mandatory withdrawal.
Defendants urge mandatory withdrawal on the grounds that
although the fraudulent transfer claims are core proceedings,
the Bankruptcy Court lacks constitutional authority to enter a
final judgment under Stern and the Bankruptcy Court therefore

6

lacks the statutory authority to enter proposed findings of fact
and conclusions of law under § 157(c)(1). 5

The Trustee contends

that Stern does not apply here, but if it does, the court should
rely on those cases that have held that the Bankruptcy Court
retains

authority

to

conclusions of law.

issue

proposed

findings

of

fact

and

See, e.g., Dang v. Bank of Am., N.A., No.

RDB-12-3343, 2013 WL 1683820, at *12 (D. Md. Apr. 17, 2013) (“A
majority of courts considering this issue in Stern’s wake have
concluded

that

a

bankruptcy

court

has

the

power

to

submit

proposed findings of fact and conclusions of law on claims for
which they cannot issue final judgments.”); ACC Retail Prop.
Dev.

&

8667572,

Acquisition
at

*3

Fund,

(E.D.N.C.

LLC,

No.

5:12-CV-361-BO,

Sept.

28,

2012)

(“[A]

2012

WL

majority

of

courts have found that Stern did not disturb the power of the
bankruptcy

court

to

issue

proposed

findings

of

fact

and

conclusions of law as to those claims over which it does not
have the power to enter final judgment.”); Joe Gibson’s Auto
World, Inc. v. Zurich Am. Ins. Co. (In re Joe Gibson’s Auto

5

Section 157(c)(1), Title 28, United States Code, provides:
A bankruptcy judge may hear a proceeding that is not a core
proceeding but that is otherwise related to a case under
title 11. In such proceeding, the bankruptcy judge shall
submit proposed findings of fact and conclusions of law to
the district court, and any final order or judgment shall
be entered by the district judge after considering the
bankruptcy judge's proposed findings and conclusions and
after reviewing de novo those matters to which any party
has timely and specifically objected.

7

World,

Inc.,

(D.S.C.

Apr.

Nextiraone

C/A

No.

2,

2012)

Fed.,

LLC,

7:11-2482-TMC,
(citing
No.

2012

cases);

1:12cv289,

WL

see

1107763,

2012

also

WL

at

*2

Schafer

v.

2281828,

at

*4

(M.D.N.C. June 18, 2012) (reviewing cases); Heller Ehrman LLP v.
Arnold & Porter LLP (In re Heller Ehrman LLP), 464 B.R. 348,
355-56 (N.D. Cal. 2011) (considering mandatory withdrawal but
concluding it did not apply because bankruptcy court could enter
proposed findings of fact and conclusions of law).
The

starting

jurisdiction

of

point

the

for

Defendants’

Bankruptcy

arguments

Court.

A

is

bankruptcy

the
court

derives its jurisdiction from the district court, which has,
with

exceptions

not

relevant

here,

“original

and

exclusive

jurisdiction of all cases under title 11,” and “original but not
exclusive jurisdiction of all civil proceedings arising under
title 11, or arising in or related to cases under title 11.”
U.S.C. § 1334(a), (b); id. § 157(a).

28

The manner in which a

bankruptcy judge may act on a referred matter depends on the
type of proceeding involved.

“Bankruptcy judges may hear and

determine . . . all core proceedings arising under title 11, or
arising in a case under title 11 . . . .”
(emphasis

added).

fraudulent

transfer

proceedings.

The
claims

parties
are

agree

defined

28 U.S.C. § 157(b)(2)
that
by

the

statute

Trustee’s
as

“core”

See 28 U.S.C. § 157(b)(2)(H) (“[P]roceedings to

determine, avoid, or recover fraudulent conveyances” are listed

8

as “core” proceedings.).
Bankruptcy

Court

has

Thus, while the parties agree that the
been

granted

statutory

authority

to

determine the Trustee’s fraudulent conveyance claims, Defendants
argue

that

Stern

determined

that

Congress’

grant

was

unconstitutional.
In Stern, the Supreme Court held that statutory authority
under

section

157(d)

must exist as well.

is

not

enough;

constitutional

authority

Stern arose out of a dispute over the

failure to include Vickie Marshall (a/k/a Anna Nicole Smith) in
the will of her deceased wealthy husband, J. Howard Marshall II.
Vickie sued Marshall’s son in state court, contending that the
son tortiously interfered with Marshall’s intent to provide for
her in his will.

She then filed for bankruptcy protection, and

the son filed a complaint and a proof of claim seeking damages
against Vickie’s bankruptcy estate for alleged defamation for
her

public

statements

inculpating

controlling Marshall’s assets.
interference counterclaim.

the

son

in

fraud

in

Vickie responded with a tortious

The bankruptcy court granted Vickie

summary judgment on the son’s defamation claim and awarded her
millions of dollars on her counterclaim.

Following appeals to

the district and appellate courts, the Supreme Court held that
while
final

the

bankruptcy

judgment

157(b)(2)(C)

as

on
a

court

had

Vickie’s

core

statutory

authority

counterclaim

proceeding,

9

it

lacked

under

to

enter

section

constitutional

authority to do so because determination of the state law claim
involved

the

“prototypical

exercise

defines an Article III court.

of

judicial

power”

that

131 S. Ct. at 2615.

Importantly here, in reaching its decision, the Court in
Stern considered its prior holding in Granfinanciera, S.A. v.
Nordberg,

492

33

“whether

considered

U.S.

a

(1989).
person

In
who

Granfinanciera,

has

not

the

submitted

a

Court
claim

against a bankruptcy estate has a right to a jury trial when
sued

by

the

trustee

in

bankruptcy

fraudulent monetary transfer.”

to

recover

an

492 U.S. at 36.

allegedly

The Supreme

Court held that although fraudulent transfer is listed as a core
proceeding, “the Seventh Amendment entitles such person to a
trial by jury.”

Id.

The only way for the bankruptcy court to

avoid a jury trial was to assert a “public right.”
concluded

that

fraudulent

conveyance

actions

were

The Court
matters

of

private, not public, right because they were “quintessentially
suits at common law that more nearly resemble state-law contract
claims.”

Id. at 56.

Drawing on this language, therefore, the

Court

Stern

that

in

held

the

trustee’s

state

law

tortious

interference counterclaim, like the fraudulent conveyance claim
in

Granfinanciera,

formulations
cases.”

of

the

“does

not

public

fall

rights

Stern, 131 S. Ct. at 2614.

10

within

any

exceptions

of
in

the
the

varied
Court’s

Drawing on this analysis, Defendants argue that after Stern
the Bankruptcy Court has been deprived of the constitutional
authority to decide the Trustee’s fraudulent transfer claims.
B.

Application of
Transfer Claims

Stern

to

the

Trustee’s

Fraudulent

The Fourth Circuit has not cited Stern to date.
been

said

to

have

“muddied

the

waters

of

Stern has

bankruptcy

court

jurisdiction by discussing a fraudulent conveyance action in a
case that did not contain such a claim.”

Miller v. Enviro Care,

Inc. (In re Rock Structures Excavating, Inc.), No. 2:12-CV-856
TS, 2013 WL 1284969, at *5 (D. Utah Mar. 27, 2013); see also
Waldman v. Stone, 698 F.3d 910, 918 (6th Cir. 2012) (“The law in
this area has a potluck quality.”); Tyler v. Bruce Banks (In re
Tyler), 493 B.R. 905, 914 (N.D. Ga. 2013) (“This confusion among
the courts has arisen primarily because of the sheer complexity
of

Stern’s

majority

opinion.”);

KHI

Liquidation

Trust

v.

Wisenbaker Builder Servs., Inc. (In re Kimball Hill, Inc.), 480
B.R. 894, 901 (Bankr. N.D. Ill. 2012) (“It is no surprise then
that courts of all levels post-Stern have attempted to reconcile
Stern’s

expressly

limited

holding

with

its

expressively

expansive dicta.”).
The

Trustee

bankruptcy
neither

and

intended

urges

district
to,

nor

the

court

to

follow

courts

that

have

did,

limit

the

11

a

found

number
that

bankruptcy

of

Stern

court’s

authority

beyond

constitutionality
§ 157(b)(2),

that

the
of

limited
a

is,

situation

specific

subsection

“counterclaims

by

persons filing claims against the estate.”
Deitz),

469

B.R.

applicability

11,

of

17

(9th

Cir.

BAP

nondischargeability

Bankruptcy Code § 523).

it

the

addressed:
of

28

estate

the

U.S.C.
against

Deitz v. Ford (In re
2012)

(considering

proceedings

under

As these courts note, the Supreme Court

itself emphasized that its holding was a narrow one:
We conclude today that Congress, in one isolated
respect, exceeded [Article III’s] limitation in the
Bankruptcy Act of 1984.
The Bankruptcy Court below
lacked the constitutional authority to enter a final
judgment on a state law counterclaim that is not
resolved in the process of ruling on a creditor’s
proof of claim.
Stern, 131 S. Ct. at 2620.

As the majority stated, its holding

would have few “practical consequences,” and the Court surmised
it did “not think that the removal of [such] counterclaims . . .
from

core

bankruptcy

jurisdiction

meaningfully

division of labor in the current statute . . . .”

changes

the

131 S. Ct. at

2619-20; but see First Nat’l Bank v. Crescent Elec. Supply Co.
(In re Renaissance Hosp. Grand Prairie Inc.), 713 F.3d 285, 294
n.12 (5th Cir. 2013) (cautioning that “Stern’s ‘in one isolated
respect’

language

encroachment

upon

may
the

understate
Judicial

the

Branch

totality
posed

by

of

Section

157(b)(2), which enumerates a list of ‘core proceedings’”).

12

the

Several reasons are offered for the conclusion that Stern
does not extend to fraudulent transfer proceedings, which are
statutorily

core

First,

has

it

proceedings
been

under

stated

28

that

U.S.C.

“[i]n

§

the

157(b)(2)(H).
years

between

Granfinanciera and Stern, the authority of bankruptcy courts to
enter

final

[remained]

judgments

in

unchallenged.”

fraudulent

In

re

Rock

conveyance

Structures

actions

Excavating,

2013 WL 1284969, at *3 (internal quotations omitted).
Second, courts should be cautious in invalidating federal
law on the ground that dicta in Stern might one day be extended
to other core proceedings.

As the Eighth Circuit Bankruptcy

Appellate Panel stated, “[u]nless and until the Supreme Court
visits

other

provisions

of

Section

157(b)(2),

we

take

the

Supreme Court at its word and hold that the balance of the
authority granted to bankruptcy judges by Congress in 28 U.S.C.
§ 157(b)(2) is constitutional.”

In re AFY, Inc., 461 B.R. 541,

547-48 (8th Cir. BAP 2012); accord Bakst v. United States (In re
Kane & Kane), Bankr. No. 09-15556-EPK, 2013 WL 1197609, at *15
n.7 (Bankr. S.D. Fla. Mar. 25, 2013) (declining “to extend Stern
beyond

its

holding”

in

light

of

Eleventh

Circuit

language

pointing out that it is not appropriate to extrapolate from a
Supreme

Court

decision,

extending

its

holding

in

a

manner

inconsistent with settled circuit law); Ward v. Jenkins (In re
Jenkins), Bankr. No. 12-50413, 2012 WL 6186347, at *2 (Bankr.

13

W.D.N.C. Dec. 12, 2012) (agreeing, in the context of section
157(b)(2)(H), that while the Supreme Court may hold that section
157(b)(2)(F)

dealing

with

fraudulent

conveyances

unconstitutional . . . Bankruptcy courts should not invalidate a
Congressional statute . . . or otherwise limit [their] authority
to

finally

resolve

other

core

proceedings

[]

simply

because

dicta in Stern suggests the Supreme Court may do the same down
the road.” (quoting In re Safety Harbor Resort and Spa, 456 B.R.
703, 718 (Bankr. M.D. Fla. 2011), and finding reasoning equally
applicable

to

fraudulent

transfer

proceedings

before

the

district court)).
Third, the holding in Granfinanciera was limited to the
issue of a right to a jury trial under the Seventh Amendment
and,

in

fact,

suggested

that

bankruptcy

courts

may

in

fact

adjudicate fraudulent transfer actions and conduct jury trials.
In re Tyler, 493 B.R. at 917-19 (citing cases); see also Burtch
v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 466
B.R. 626 (Bankr. D. Del. 2012); Walker, Truesdell, Roth & Assoc.
v. Blackstone Grp., L.P., (In re Extended Stay, Inc.), 466 B.R.
188,

202

n.70

(S.D.N.Y.

2011)

(“Stern

does

not

affect

the

ability of the bankruptcy court to rule on state law fraudulent
conveyance claims” when determining a proof of claim).
In
argue

response
that

Stern

to

these

arguments,

applies.

But

14

Defendants

even

nevertheless

Defendants

have

to

acknowledge that Granfinanciera, upon which they rely heavily,
involved a defendant sued for fraudulent conveyance who had not
filed

a

proof

unpersuasive.

of

claim.

Thus,

Defendants’

argument

is

But even assuming, without deciding, that Stern

applies to challenges to fraudulent conveyance actions, it is
apparent

that

Defendants

cannot

demonstrate

that

they

can

overcome its two-prong test to determine whether a matter is
constitutionally core.
Under

Stern,

a

bankruptcy

court

may

constitutionally

determine a matter as a core proceeding if (1) the action stems
from the bankruptcy itself or (2) the issue in question would
“necessarily be resolved in” the claims allowance process.
S. Ct. at 2618.

131

The court need not dwell on the first of these

bases, because it is clear that the second is met: the Trustee’s
fraudulent transfer claims would necessarily be resolved in the
claims allowance process because Defendants have each filed a
proof of claim.
In Stern, the court’s finding of unconstitutionality relied
on the fact that the debtor-in-possession’s claim was “a state
law action . . . not necessarily resolvable by a ruling on the
creditor’s proof of claim in bankruptcy.”

131 S. Ct. at 2611;

see Sundale, Ltd. v. Fla. Associates Capital Enter., LLC, (In re
Sundale, Ltd.), 499 F. App’x 887, 892-93 (11th Cir. 2012) (“[I]t
must follow that a bankruptcy court would have jurisdiction to

15

enter

final

judgment

on

state

law

counterclaims

that

are

necessarily resolved in the process of ruling on a creditor’s
proof

of

proofs

claim.”).

of

In

claim.

the

This

present

is

cases,

fundamentally

Defendants

filed

different

from

Granfinanciera, “where the bankruptcy estate reached out to file
a fraudulent transfer claim against a party who had filed no
claim

against

the

estate.”

Onkyo

Am.

Inc.

v.

Global

Technovations Inc. (In re Global Technovations Inc.), 694 F.3d
705, 722 (6th Cir. 2012).

A proof of claim triggers the claims

allowance process subject to resolution by the bankruptcy court.
It has long been recognized that a creditor filing a proof of
claim consents to entry of a final order as to that claim.
Bryan

v.

Bernheimer,

181

U.S.

188,

197

(1901)

(consent

to

summary jurisdiction by filing proof of claim).
Defendants argue that the determination of their proofs of
claim

cannot

claims.

fully

resolve

the

Trustee’s

fraudulent

transfer

Asserting that their proofs of claim are for fraud

against the Debtor and arose pre-petition, Defendants contend
that the claims allowance process will determine how much the
Debtor is indebted to them but will not include the Defendants’
liability, if any, for payment of damages to the Trustee.
Defendants take too narrow a view.
interference

claim

in

Stern,

which

16

Unlike the tortious

neither

arose

from

nor

depended in any way on bankruptcy law, 6 avoidance actions under
sections 544(b) and 548 are necessary to the claims-allowance
process.
shall

Bankruptcy

disallow

any

Code
claim

§

502(d)

of

any

provides
entity

.

that

“the

court

.

that

is

.

a

transferee of a transfer avoidable under section . . . 544, . .
. [or] 548 . . . of this title, unless such entity or transferee
has paid the amount, or turned over any such property, for which
such

entity

or

transferee

. . . of this title.”

is

liable

under

section

. . .

550

See, e.g., Dietz v. Spangenberg, No. 11-

2600 ADM/JJG, 2013 WL 883464, at *5 (D. Minn. March 8, 2013)
(“Moreover, [a defendant] has filed a proof of claim in [the]
bankruptcy case, and so the Trustee’s claim for preferential
[section
[this

547]

and

defendant]

fraudulent
will

allowance process.”).
fraudulent

conveyance

transfers

necessarily

be

[section

resolved

548]

in

against

the

claims

Here, absent resolution of the Trustee’s
claims,

Defendants’

claims

will

be

disallowed. 7

6

In this regard, Defendants’ reliance on In re Ortiz, 665 F.3d 906
(7th Cir. 2011), is misplaced. In Ortiz, the claimant filed a proof
of claim related to medical care services rendered to the debtors
while
the
debtors’
counterclaim
asserted
that
the
creditor’s
disclosure of medical information in filing claims violated state law.
The Seventh Circuit concluded that “[t]he debtors’ claimed right to
relief does not flow from a federal statutory scheme.”
665 F.3d at
914 (citing Stern, 131 S. Ct. at 2614). In doing so, the court never
referenced section 502(d).
7

In Stern, the Court’s only reference to section 502(d) was in its
discussion of Katchen v. Landy, 382 U.S. 323 (1966), where the
preferred creditor’s claim in bankruptcy could be disallowed as a

17

Although
become

Defendants

operative

until

argue
the

that

section

trustee

has

a

502(d)

does

judgment

not

allowing

avoidance of a transfer, the plain language of the statute makes
clear that Defendants’ proofs of claim cannot be allowed until a
determination of the fraudulent transfer claims has been made.
See Kriegman v. Cooper (In re LLS America, LLC), Bankr. No. 0906194-PCW11, 2012 WL 2564722, at *6 (Bankr. E.D. Wash. July 2,
2012)

(“As

part

of

the

claims

determination

bankruptcy court applies § 502(d).

process,

the

That section precludes the

allowance of a claim by any entity which received a transfer
which is voidable under 11 U.S.C. § 547 or 11 U.S.C. § 548 or
other provisions of the Code. . . . It is axiomatic that in
order to determine the validity, amount and treatment of a proof
of

claim,

improper

the

bankruptcy

transfer

has

therefore,

that

when

bankruptcy

case

to

a

court

must

occurred.”).
proof

which,

of

as

The

claim

here,

determine

has

the

court
been

trustee

whether

an

concludes,
filed

in

a

objects,

a

result of the preference. 131 S. Ct. at 2616. The Court noted that
in the case before it there was “never reason to believe that the
process of ruling on Pierce’s proof of claim would necessarily result
in the resolution of Vickie’s counterclaim.”
Id. at 2617.
While
preference claims play a somewhat different role than fraudulent
transfer claims, section 502(d) applies to section 544 and 548 claims
as well as section 547 claims.
To be sure, in Stern the Court
distinguished cases that involved preferences because they “in effect
increase that creditor’s proportionate share of the estate” and
require a ruling before adjudicating the creditor’s proof of claim.
131 S. Ct. at 2617.
This language does not preclude fraudulent
transfers from being part of the claims allowance process, however.

18

trustee’s

fraudulent

transfer

claims

necessarily

must

be

resolved in the claims allowance process.

See 1-3 Collier on

Bankruptcy

(“With

¶

3.02[3][b]

(16th

ed.

2013)

respect

to

avoiding power counterclaims to a proof of claim, the majority
in

Stern

appears

to

have

been

satisfied

with

the

result

in

Katchen v. Landy, which held that because a claim cannot be
allowed

until

the

claimant

has

satisfied

any

avoiding

power

judgment, determining the cause of action is part and parcel of
the allowance process.” (footnote omitted) (also suggesting that
the treatment of an avoiding power cause of action where the
defendant has not filed a proof of claim may fundamentally be
treated as a jury-trial right issue rather than one governed by
Stern,

“although

it

is

not

surprising

that

some

post-Stern

courts have treated the matter as one of authority”)).
Defendants also urge withdrawal on the grounds they are
entitled to a jury trial.

The filing of a proof of claim has

historically transformed a matter ordinarily legal in nature (to
which the Seventh Amendment may provide a right to a jury trial)
to

one

equitable

in

disallowance of a claim.
(1992).

nature,

that

is,

the

allowance

or

See Langenkamp v. Culp, 498 U.S. 42

Defendants have not identified anything in Stern that

requires a contrary result in light of the court’s resolution
above.

Compare Granfinanciera, 492 U.S. at 58-59) (“Because

petitioners . . . have not filed claims against the estate,

19

respondent’s

fraudulent

conveyance

action

does

not

arise

‘as

part of the process of allowance and disallowance of claims’”
and they retain “their Seventh Amendment right to a trial by
jury”)

with

Langenkamp,

498

U.S.

at

45

(“Respondents

filed

claims against the bankruptcy estate” and “[c]onsequently, they
were not entitled to a jury trial”).

Thus, Defendants’ claim of

a right to jury trial is unpersuasive.
Defendants finally argue that even if the Bankruptcy Court
is

constitutionally

able

to

enter

a

final

judgment

on

the

Trustee’s claims, permissive withdrawal of the reference under
section 157(d) is warranted based on other factors traditionally
considered

by

courts

in

determining

a

motion

for

permissive

withdrawal.
A district court has broad discretion to determine whether
to withdraw the reference upon a finding of “cause.”
Studios, Inc.

v.

Man

Roland,

Inc.

(In

re

Millennium

Millennium

Studios

Inc.), 286 B.R. 300, 303 (D. Md. 2002); ACC Retail, 2012 WL
8667572,

at

*1.

“Cause”

is

not

statutorily

defined.

Many

courts considering motions to withdraw the reference in light of
Stern do so by considering the factors generally applicable to
permissive

withdrawal.

These

include:

(1)

whether

the

proceeding is core or non-core; (2) the uniform administration
of bankruptcy proceedings; (3) expediting the bankruptcy process
and promoting judicial economy; (4) the efficient use of the

20

resources

of

debtors

and

creditors;

(5)

reduction

in

forum

shopping; and (6) the preservation of a right to a trial by jury
(or likelihood of a jury trial).

In re U.S. Airways Group,

Inc., 296 B.R. 673, 681-82 (E.D. Va. 2003) (citing circuit court
opinions); see Millennium Studios, 286 B.R. at 303 (same).

The

determination is made on a case-by-case basis, after weighing
all the factors.

U.S. Airways, 296 B.R. at 682.

The first consideration is whether the matter is core or
non-core.

A

finding

that

the

claims

are

core

militates against withdrawal of the reference.”

“strongly

Dwyer v. First

Nat’l Bank, (In re O’Brien), 414 B.R. 92, 98 (S.D.W. Va. 2009).
The

claims

at

issue

here

are

core.

Because

the

court

has

determined that the Bankruptcy Court has the power after Stern
to adjudicate the proceeding, this factor weighs heavily against
withdrawal.

See ACC Retail, 2012 WL 8667572, at *2 (considering

whether bankruptcy court had final power to adjudicate matter
rather than whether matter was classified as core or noncore).
The

remaining

neutral.

factors

also

disfavor

withdrawal

or

are

Uniformity of administration will be fostered by an

initial determination by the Bankruptcy Court because, although
state

law

determined

claims
are

are

common

involved,
with

the

the

facts

and

bankruptcy

issues

proof

of

to

be

claim

proceedings and, further, the Bankruptcy Court is familiar with
fraudulent

transfer

proceedings

21

generally.

Judicial

economy

will be enhanced by allowing the Bankruptcy Court to resolve the
Trustee’s objections to Defendants’ proofs of claim in addition
to resolving the fraudulent transfer claims.

The Bankruptcy

Court is in the best position to consider these issues together
in the first instance.

The forum selection factor is neutral

here, and, as noted above, a right to a jury trial does not
exist, so this factor weighs against withdrawing the reference. 8
In short, none of Defendants’ arguments for withdrawal is
persuasive.

Because Defendants have filed proofs of claim, the

Trustee’s fraudulent conveyance claims are constitutionally core
and the Bankruptcy Court may resolve them.

Defendants have not

identified any other basis that warrants withdrawal.
therefore,

will

deny

Defendants’

motions

to

The court,

withdraw

the

reference.
III. CONCLUSION
For the reasons set forth above, therefore,
IT IS ORDERED that Defendants’ Joint Motion to Withdraw
Reference to the United States Bankruptcy Court (Doc. 10 (12-cv00525,

12-cv-00528,

12-cv-00529);

8

Doc.

7

(12-cv-00531))

is

Even a right to a jury trial does not require immediate withdrawal.
See In re Stansbury Poplar Place, Inc., 13 F.3d 122, 128 (4th Cir.
1993) (“Our holding that bankruptcy judges are not authorized to
conduct jury trials does not mean that the bankruptcy court
immediately loses jurisdiction of the entire matter or that the
district
court
cannot
delegate
to
the
bankruptcy
court
the
responsibility
for
supervising
discovery,
conducting
pre-trial
conferences, and other matters short of jury selection and trial.”).

22

DENIED, and the Bankruptcy Court shall proceed to final judgment
in the adversary proceedings.

/s/
Thomas D. Schroeder
United States District Judge
August 23, 2013

23