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Clawback actions in Ponzi scheme cases may be a dime a
dozen these days, but the issues now raised by the Supreme Court decision in Stern v. Marshall, __ U.S. __, 131 S. Ct.
2594 (2011), can become quite costly for those involved. In Stern
v. Marshall, the Supreme Court held that bankruptcy judges do not have 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,"
even though Congress designated it as a core claim in 28 U.S.C. § 157(b)(2)(C).
Id. at 2620.
Whether you are representing the trustee plaintiff or a
clawback defendant, the issue commands immediate attention and can impact the
tenor of the entire case. Following Stern
v. Marshall, two circuit courts have stated that Stern v. Marshall prohibits bankruptcy judges from entering final
judgments in fraudulent transfer actions, at least when the defendant has not
filed a proof of claim that is related to the trustee's fraudulent transfer
claim. Executive Benefits Insurance
Agency v. Arkison (In re Bellingham
Ins. Agency, Inc.), 2012 U.S. App. LEXIS 24873 (9th Cir. Dec. 4, 2012); Waldman v. Stone, 698 F.3d 910 (6th Cir.
On the other hand, in Onkyo
Europe Electronics GMBH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d 705, 722-23 (6th Cir. 2012),
the Sixth Circuit held that a bankruptcy court can enter a final judgment on a
fraudulent transfer action that is related to the defendant's proof of claim.
In light of Stern
v. Marshall and its progeny, a Ponzi scheme clawback defendant therefore
must move quickly and carefully in evaluating whether to seek to transfer the
case to the district court, and the trustee must thoughtfully respond. What are
the available options and what strategic considerations parties should think
about in evaluating those options? And, if the best choice for your client is
to seek to transfer the case to the district court, what are the steps to get
the Court to Hear Fraudulent Transfer Claims
The choice of courts comes down to two - the bankruptcy
court or the district court. Determination of which court is the right court or
better court is a multi-step process, with several variables to consider.
One: Who Filed a Proof of Claim?
The first question is whether the defendant has filed a
proof of claim in the bankruptcy case. Or, if you are representing the
defendant, whether the defendant should file a proof of claim (probably for
purposes of participating in any distributions from the assets that the trustee
collects, including the clawback actions). As noted, at least the Sixth Circuit
has held the filing of a proof of claim gives the bankruptcy court jurisdiction
over a fraudulent transfer claim when it is related to the defendant's proof of
claim. Onkyo Europe Electronics GMBH v.
Global Technovations Inc. (In re
Global Technovations Inc.), 694 F.3d at 722 -23. In the clawback situation,
this relationship likely cannot be contested because both the proof of claim
and the trustee's clawback claim most probably arose out of the same series of
If there is a group of clawback defendants, how many of
them filed proofs of claims? If none of the clawback defendants have filed
proofs of claim, then an analysis must be undertaken to determine which court
is the better court (see Step Two below). If all or nearly all of the
defendants have filed claims, then the chances are that the cases will remain in
the bankruptcy court for final resolution. But what if some of the defendants did
file proofs of claim and others did not, for whatever reason? Then the district
court may still be an option, and the party seeking to move the case to
district court might argue that there are common issues in the actions - insolvency,
the Ponzi presumption, and possibly good faith. The argument, therefore, would
be that all of the cases involving all defendants, whether or not the
defendants have filed claims, should be tried in the district court that has
jurisdiction over all of the actions. The resulting efficiencies would be the
"cause" for withdrawal of the reference under 28 U.S.C. § 157(d).
Another possible path to getting all of the cases to the district
court would be, of course, to withdraw the proofs of claim, if such an action
is otherwise advisable. This would remove the basis for keeping the clawback
actions in the bankruptcy court. However, defendants must fully understand the
consequences of withdrawing their claims before they do so. A trustee, on the
other hand, should pay close attention to the withdrawal of a defendant's proof
of claim. If a defendant withdraws a proof of claim in order to pursue a Stern v. Marshall issue in the district
court, the trustee should make sure the withdrawal papers explicitly bar re-filing
the claim and bar any distribution from the estate. The trustee could
consider seeking that such a bar apply even to any claim that might otherwise
arise from any recovery that the trustee might obtain against the
defendant on the clawback claim. The trustee would also be prudent to insist on
the defendant's signature on the withdrawal, not just the lawyer's.
Two: The Strategic Considerations
If representing the clawback defendant, there are many
factors to consider when deciding whether to push for removal to the district
court or to stay in the bankruptcy court.
First is the "know your judge" factor. It is fair to say
that very few clawback actions ever go to trial. Most are either dismissed by
the court or settled. Whether you are likely to do better for your clients on
your dismissal motion or in your settlement with the trustee in the district
court or the bankruptcy court depends at least in part on the judges involved.
So if you are unfamiliar with them, you would serve your clients well to
inquire about them in an effort to get some local knowledge. The unknown
variable here, however, is that, although you know which bankruptcy judge is
assigned, you will not know which district judge is assigned until you actually
file a motion to withdraw the reference, unless your district has only one
Second, from a litigation tactic standpoint, give some
consideration to which court your opponent would likely prefer and then
consider pushing for the opposite if it otherwise makes sense. The trustee and
the trustee's attorney are likely more comfortable in the bankruptcy court if
only because that is where they more regularly practice. Withdrawal of the
reference or even the threat of going to the district court could potentially
impact the posture of the case and settlement value.
Third, the speed at which the different courts can get a
case to trial may also be a consideration that can sway the decision. In many
districts, experience suggests that the district court takes longer to set a
matter for trial than in the bankruptcy court. Either the trustee or the defendant
may feel more or less pressure to resolve the case expeditiously and such
variables should be considered.
Fourth, if the case proceeds in bankruptcy court and the defendant
either has not filed a claim or has withdrawn it, and that court eventually
enters a money judgment against the defendant, the defendant might then be able
to argue that the judgment is void under Stern
v. Marshall. This is questionable because the cases are split on whether
the Stern v. Marshall issue can be
waived. In In re Bellingham Ins. Agency,
the Ninth Circuit held that the issue could be waived, and even implicitly so
by conduct. But in Waldman v. Stone,
the Sixth Circuit held that, because of the institutional concerns on which Stern v. Marshall relied, the issue
cannot be waived.
Finally, one more factor could influence which court will
hear the clawback. A defendant could file a jury demand and then refuse to
consent to a trial in the bankruptcy court under 28 U.S.C. § 157(e). In Granfinanciera S.A. v. Nordberg, 492
U.S. 33, 109 S. Ct. 2782 (1989), the Supreme Court held that there is a right
to a jury trial in a fraudulent transfer action, at least when the defendant
has not filed a proof of claim. This would also take the case into district
court, at least for trial.
If you decide that it is in your client's better
interests for the clawback case to go to the district court, the process is relatively
straightforward. You file a motion to withdraw the reference for cause under 28
U.S.C. § 157(d). Under Rule 5005(a), Fed.R.Bankr.P., the motion is filed with
the bankruptcy clerk, but under Rule 5011(a), it is heard by a district judge.
That judge is selected when the bankruptcy clerk transmits the motion to the
district court. Under Rule 5011(c), the motion does not stay the proceedings in
the bankruptcy court unless the bankruptcy court so orders.
The district judge may then grant the motion, deny the
motion, or defer it until the matter is ready for a dispositive motion or
A trustee may resist a motion to withdraw the
reference on the grounds that there is not cause for the withdrawal until the
case is ready for trial and there is no reason why the bankruptcy judge can't
supervise all of the pretrial proceedings. The trustee may hold out hope
that, by the time the matter is ready for trial (if it hasn't
settled), the defendant might be prepared to consent to the bankruptcy
Although potentially costly, both Stern v. Marshall and Granfinanciera
provide your clawback defendants with potentially valuable strategic options. If
considered carefully, they could offer advantages that could
change the tenor and momentum of a case.
subscribers can access enhanced versions of the opinions and annotated versions
of the statutes cited in this article:
v. Marshall, __ U.S. __, 131 S. Ct. 2594 (2011)
U.S.C. § 157
Benefits Insurance Agency v. Arkison (In
re Bellingham Ins. Agency, Inc.), 2012
U.S. App. LEXIS 24873 (9th Cir. Dec. 4, 2012)
v. Stone, 698 F.3d 910 (6th Cir. 2012)
Europe Electronics GMBH v. Global Technovations Inc. (In re Global Technovations Inc.),
694 F.3d 705 (6th Cir. 2012)
S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782 (1989)
R. Bankr. P. 5005
R. Bankr. P. 5011
Read additional articles at The Ponzi Scheme
Kathy Bazoian Phelps is the co-author of The Ponzi Book: A Legal
Resource for Unraveling Ponzi Schemes (LexisNexis 2012), along with
Hon. Steven Rhodes. The Ponzi Book, recently reviewed by Commercial Crime International, is
available for purchase at www.lexisnexis.com/ponzibook, and more information about
the book can be found at www.theponzibook.com.
more information about LexisNexis products and solutions connect with us
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