Bank of Am., N.A. v. Arun Veluchamy, Anu Veluchamy, Sonia Veluchamy, Oakbrook Fin., Inc. (In re Veluchamy), Bankruptcy No. 11 B 33413.

• Decision Date: 18 December 2014
• Docket Number: Adversary No. 12 A 01715.,Bankruptcy No. 11 B 33413.
• Citation: 524 B.R. 277
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: In re Pethinaidu VELUCHAMY and Parameswari Veluchamy, Debtors. Bank of America, N.A., Derivatively on Behalf of the Estate of Pethinaidu and Parameswari Veluchamy, Plaintiff, v. Arun Veluchamy, Anu Veluchamy, Sonia Veluchamy, Oakbrook Financial, Inc., Veluchamy 2009 Dynasty Trust, Vasudevaki Naidu, Jaganath Naidu, Rajiv Parthasarathy, Arjun Parthasarathy, Pethinaidu Veluchamy, and Parameswari Veluchamy, Defendants.

524 B.R. 277

In re Pethinaidu VELUCHAMY and Parameswari Veluchamy, Debtors.
Bank of America, N.A., Derivatively on Behalf of the Estate of Pethinaidu and Parameswari Veluchamy, Plaintiff,
v.
Arun Veluchamy, Anu Veluchamy, Sonia Veluchamy, Oakbrook Financial, Inc., Veluchamy 2009 Dynasty Trust, Vasudevaki Naidu, Jaganath Naidu, Rajiv Parthasarathy, Arjun Parthasarathy, Pethinaidu Veluchamy, and Parameswari Veluchamy, Defendants.

Bankruptcy No. 11 B 33413.
Adversary No. 12 A 01715.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed Dec. 18, 2014

Ordered accordingly.

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Vincent J. Connelly, Thomas S. Kiriakos, Howard J. Roin, Beverley J. Klein, Joshua M. Grenard, Mayer Brown LLP, Chicago, IL, for Plaintiff.

Ariel Weissberg, John B. Wolf, Weissberg & Associates, Chicago, IL; Abraham Brustein, Derek D. Samz, Julia Jensen Smolka, DiMonte & Lizak, LLC, Park Ridge, IL; Debra R. Bernard, Daniel A. Zazove, Perkins Coie LLP, Chicago, IL; Precious S. Jacobs, Vincent E. Lazar, Sally K. Sears Coder, Charles B. Sklarsky, Jenner & Block LLP, Chicago, IL; William J. Factor, David Paul Holtkamp, Sara E. Lorber, Jeffrey K. Paulsen, Law Office of William J. Factor, Ltd, Chicago, IL; Thomas McQueen, Law Office of Thomas K. McQueen, Chicago, IL, for Defendants.

Corrected Amended Memorandum of Decision on the Entry of Final Judgment and Proposed Findings of Fact and Conclusions of Law
EUGENE R. WEDOFF, Bankruptcy Judge.

This adversary proceeding, filed in a voluntary Chapter 7 bankruptcy case, is before the court for decision after trial. The debtors in the bankruptcy case are a married couple who owned and operated several successful businesses. One of their businesses, a bank in Chicago, failed after the debtors had incurred or guaranteed large amounts of debt to support it. When the debtors did not pay these debts, their lender sued them, and after judgment was entered against them, they filed this bankruptcy case.

The adversary proceeding was brought on behalf of their Chapter 7 estate. The complaint alleges that the debtors engaged in a wide-ranging scheme to hinder, delay, or defraud their creditors, principally by transferring cash and other assets to their son and daughter. As discussed below, the evidence at trial established all of the major allegations of the complaint, but the estate is not entitled to each of the remedies it requests, and a bankruptcy judge's authority to enter judgment does not extend to every count. As a result, judgment

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will be entered now as to certain counts of the complaint, and for the other counts, findings of fact and conclusions of law will be proposed for entry of judgment by the district court.

I. Jurisdiction

Under 28 U.S.C. § 1334(a), the federal district courts have “original and exclusive jurisdiction” of all cases under the Bankruptcy Code (Title 11, U.S.C.). The district courts may refer these cases to the bankruptcy judges for their districts under 28 U.S.C. § 157(a), and the District Court for the Northern District of Illinois has made such a reference through Internal Operating Procedure 15(a).

After a case is referred to a bankruptcy judge, 28 U.S.C. § 157(b)(1) authorizes the judge to issue final judgments in “core proceedings” arising under the Bankruptcy Code, and § 157(b)(2) gives several examples of core proceedings. However, under Article III of the Constitution, a bankruptcy judge, lacking the life-tenure and protected compensation that Article III requires for federal judges, may only enter final judgment on matters of “public right,” even though the statute includes matters of “non-public right” within its examples of core proceedings. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2611–12, 180 L.Ed.2d 475 (2011). At least without the consent of the parties, disputes over non-public rights can only be treated by a bankruptcy judge through the issuance of proposed findings of fact and conclusions of law under 28 U.S.C. § 157(c)(1), with judgment entered by the district court after de novo review of the proposed findings and conclusions. Exec. Benefits Ins. Agency v. Arkison, ––– U.S. ––––, 134 S.Ct. 2165, 2173–74, 189 L.Ed.2d 83 (2014).¹

This adversary proceeding deals primarily with efforts by the debtors' estate to avoid fraudulent transfers. Fraudulent transfer actions are among the matters that the statute lists as core proceedings. 28 U.S.C. § 157(b)(2)(H). In Arkison, the Supreme Court considered a bankruptcy judge's constitutional authority to enter final judgment on fraudulent transfer actions but did not decide the question. Rather, the Court noted that the district court had given de novo review to the bankruptcy judge's entry of judgment, as it would have given to proposed findings and conclusions, and the Court held that this review cured any error in the entry of judgment by the bankruptcy judge. Id. at 2175. The Supreme Court has not yet decided whether, consistent with its reasoning in Stern v. Marshall, fraudulent transfer actions are generally outside a bankruptcy judge's authority to enter judgment.

Without a decision from the Supreme Court defining the breadth of Stern, the lower courts have disagreed about the extent to which Article III prohibits bankruptcy judges from entering final judgments on various matters listed as core proceedings in § 157(b)(2). See Albert v. Site Management, Inc., 506 B.R. 453, 458 (D.Md.2014) (discussing conflicting decisions). However, the Ninth Circuit's decision in Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency), 702 F.3d 553 (9th Cir.2012), aff'd on other grounds, Arkison, 134 S.Ct. at 2175, convincingly holds that bankruptcy judges generally may not enter final judgment in

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fraudulent transfer actions. The basis for this conclusion is that (1) in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), the Supreme Court held that fraudulent transfer actions were non-public actions giving rise to a right to jury trial, and (2) in Stern, 131 S.Ct. at 2614, the Court equated the right to Article III adjudication with the jury trial right, specifically citing Granfinanciera.

The leading contrary decision, In re Refco, Inc., 461 B.R. 181, 186–87 (Bankr.S.D.N.Y.2011), suggests that the public right analysis of Stern is only an alternative holding by a plurality of the Court and that the concurring opinion of Justice Scalia suggests a different analysis for fraudulent transfers—first, that a bankruptcy judge may be constitutionally authorized to issue a final judgment on matters for which such judgment entry is “a firmly established historical practice,” Stern, 131 S.Ct. at 2621 (Scalia, J., concurring), and second, that historically, fraudulent transfer actions have been subject to final judgment by bankruptcy judges. There are difficulties with each step in this analysis. First, in Arkison, a unanimous court failed to adopt a historical analysis of bankruptcy court adjudicative authority, but rather read Stern this way: “Because ‘[n]o “public right” exception excuse[d] the failure to comply with Article III,’ we concluded that Congress could not confer on the Bankruptcy Court the authority to finally decide the claim.” 134 S.Ct. at 2172 (quoting Stern, 131 S.Ct. at 2611). To determine whether a bankruptcy judge may finally adjudicate a matter, then, the test of Arkison is not historical practice but the status of the matter as a public right. Second, even if Stern had adopted historical practice as the test of decisional authority, there is no firmly established historical practice of final judgments being entered by bankruptcy judges or referees in fraudulent transfer actions. To the contrary, the Refco decision itself notes that before the Bankruptcy Code was enacted in 1978, such actions were “plenary,” requiring that they be adjudicated by the district court. Refco, 461 B.R. at 188 n. 5. Standing on their own, then, fraudulent transfer actions are not constitutionally subject to final judgment by a bankruptcy judge.

In one context, however—where the defendant in a fraudulent transfer action has filed a claim against the bankruptcy estate—a bankruptcy judge may enter final judgment in the action. Two steps lead to this result. First, disputes over creditors' claims are “ ‘integral to the restructuring of the debtor-creditor relationship’ ” and so are “subject to resolution by the bankruptcy court.” Stern, 131 S.Ct. at 2617 (2011) (quoting Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990)); see 28 U.S.C. § 157(b)(2)(B) (listing “allowance or disallowance of claims against the estate” as a core proceeding). Second, § 502(d) of the Code makes adjudication of fraudulent transfer claims a necessary part of claims adjudication by requiring disallowance of the claim of a creditor who is a defendant in a fraudulent transfer action unless the defendant has paid the amount of any monetary judgment and turned over any property ordered to be returned. A pending fraudulent transfer action against a creditor is therefore a defense to the creditor's claim against the estate. See Stern, 131 S.Ct. at 2616–17; see also Langenkamp, 498 U.S. at 44–45, 111 S.Ct. 330 (1990); Katchen v. Landy, 382 U.S. 323, 336, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) (using the same reasoning to find no right to jury trial in preference actions against defendants who had filed claims against the estate).

In the bankruptcy case now before the court, two of the three parties against whom fraudulent transfer actions are being

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pursued—the debtors' children—have filed claims against the estate. Judgment may be entered on the fraudulent transfer actions brought against those defendants. For the defendant who has not filed a claim, proposed findings of fact and conclusions of law are required.

In addition to seeking recovery on fraudulent transfer claims, the adversary proceeding seeks a turnover of...