Bodenstein v. Univ. of N. Iowa (In re Peregrine Fin. Grp., Inc.)

• Citation: 589 B.R. 360
• Decision Date: 11 July 2018
• Docket Number: Adv. No. 14 A 00441,Case No. 12 B 27488
• Parties: IN RE: PEREGRINE FINANCIAL GROUP, INC. d/b/a PFG Best, Debtor. Ira Bodenstein, not personally, but as chapter 7 trustee for the estate of Peregrine Financial Group, Inc. d/b/a PFG Best, Plaintiff, v. University of Northern Iowa, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

589 B.R. 360

IN RE: PEREGRINE FINANCIAL GROUP, INC. d/b/a PFG Best, Debtor.

Ira Bodenstein, not personally, but as chapter 7 trustee for the estate of Peregrine Financial Group, Inc. d/b/a PFG Best, Plaintiff,

v.University of Northern Iowa, Defendant.

Case No. 12 B 27488

Adv. No. 14 A 00441

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

Dated: July 11, 2018

Terence G. Banich, David R. Doyle, Fox Rothschild LLP, Marc S Reiser, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, for Plaintiff

Paula K. Jacobi, Esq., Barnes & Thornburg LLP, Chicago, IL, Michael P. Mallaney, Hudson, Mallaney, Shindler & Anderson, P., West Des Moines, IA, Jonathan D. Sundheimer, Barnes, Thornburg LLP, Indianapolis, IN, for Defendant

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Carol A. Doyle, United States Bankruptcy JudgeIra Bodenstein, the chapter 7 trustee of Peregrine Financial Group, Inc., filed this adversary proceeding against the University of Northern Iowa ("University"). He seeks to recover an alleged fraudulent transfer of $500,000 made to the University from funds in a Peregrine bank account containing customers' segregated funds. A trial was held on June 18 and 19, 2018. The following are the court's findings of fact and conclusions of law. Judgment will be entered in favor of the University on both of the trustee's claims.

I. Jurisdiction and Authority to Enter Final Judgment

Based on the trial briefs submitted before trial, the parties seem to agree that the bankruptcy court should not enter a final judgment on a fraudulent transfer action unless all parties consent. The trustee consented but the University refused to consent. At the beginning of trial, the court assumed that the parties were correct and stated its intention of sending proposed findings of fact and conclusion of law to the district court. Upon further consideration of the issue, however, the court has concluded that the claims in this case are within its core jurisdiction and that the court has the constitutional authority to enter a final judgment.

Congress explicitly authorized bankruptcy courts to enter final judgments resolving disputes over fraudulent conveyances. 28 U.S.C. § 157(b)(2)(H) ("Bankruptcy judges may hear and determine all ... core proceedings arising under title 11 ... and may enter appropriate orders and judgments ...[in] ... proceedings to determine, avoid, or recover fraudulent conveyances ..."). In 2011, the Supreme Court held that a non-Article III bankruptcy court does not have the constitutional authority to enter a final judgment on a state law counterclaim that is not a part of the bankruptcy claims process despite the bankruptcy court's statutory authority under 28 U.S.C. § 157(b)(2)(C). Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

Since Stern , courts have grappled with whether bankruptcy courts may enter final judgments in other core proceedings explicitly enumerated in § 157(b)(2), including fraudulent transfer cases. This court agrees with the many courts that read Stern narrowly and conclude that bankruptcy courts have the constitutional authority to enter final judgments in fraudulent transfer proceedings. See, e.g., Reid v. Wolf (In re Wolf ), No. 16 A 00066, 2018 WL 2386813 (Bankr. N.D. Ill. May 24, 2018) ; Clay v. City of Milwaukee (In re Clay ), No. 14 A 2315, 2015 WL 3878454 (Bankr. E.D. Wis. June 19, 2015) ; Mason v. Ivey , 498 B.R. 540, 546 (M.D.N.C. 2013) ; KHI Liquidation Trust v. Wisenbaker Builder Services, Inc. (In re Kimball Hill, Inc. ), 480 B.R. 894 (Bankr. N.D. Ill. 2012) ; Andrews v. RBL, LLC (In re Vista Bella, Inc. ), No. 12 A 00060, 2012 WL 3778956, at *2 (Bankr. S.D. Ala. Aug. 30, 2012) ; Gugino v. Canyon Co. (In re Bujak ), No. 11 A 6038, 2011 WL 5326038, at *4 (Bankr. D. Idaho Nov. 3, 2011) ; Liberty Mutual Insur. Co. v. Citron (In re Citron ), No. 09 A 8125, 2011 WL 4711942, at *1 (Bankr. E.D.N.Y. Oct. 6, 2011). As the Kimball Hill and Clay courts noted, an action under § 548 and § 550 is a claim created by a federal statute—not a counterclaim based on state law—that reflects claims that have been part of insolvency proceedings since 1570. Kimball Hill , 480 B.R. at 906 ; Clay , 2015 WL 3878454, fn. 1. The Supreme Court itself stated in Stern that "the question presented here is a ‘narrow’ one ... [and that] Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984." Stern , 564 U.S. at 502, 131 S.Ct. at 2620.

Some courts in this circuit have concluded that bankruptcy courts do not have the authority to enter final judgments in fraudulent transfer proceedings. See FTI Consulting, Inc. v. Merit Management Group, LP , 476 B.R. 535 (N.D. Ill. 2012) ; Paloian v. American Express Co. (In re Canopy Financial, Inc. ), 464 B.R. 770 (N.D. Ill. 2011). They adopted a broad reading of Stern as well as Granfinanciera, S.A. v. Nordberg , 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) that is not mandated by either decision.

In Granfinanciera, the Court found that a defendant in a fraudulent transfer adversary proceeding who had not filed a proof of claim in the debtor's bankruptcy case was entitled to a jury trial under the Seventh Amendment to the United States Constitution. The Court expressly identified all the issues it was not deciding, including: (1) whether bankruptcy courts may conduct jury trials in fraudulent conveyance suits brought by a trustee against a person who has not filed a claim against the estate; (2) if Congress has authorized bankruptcy courts to hold jury trials in fraudulent conveyance actions, whether that authority would comport with Article III; and (3) whether a jury trial conducted by a bankruptcy court would satisfy the Seventh Amendment. 492 U.S. at 50, 109 S.Ct. at 2794-95. "The sole issue before us is whether the Seventh Amendment confers on petitioners a right to jury trial in the face of Congress' decision to allow a non-Article III tribunal to adjudicate the claims against them. " Id. (Emphasis added.) Thus, the Court did not address the constitutional authority of a bankruptcy court to enter a final judgment on a fraudulent transfer claim after holding a bench trial. The district courts in FTI Consulting and Canopy Financial applied Granfinanciera and Stern expansively. This court adopts a more narrow interpretation consistent with the Stern observation that its holding is limited to one isolated issue and will not have a significant impact on bankruptcy proceedings.

The Supreme Court's more recent decision in Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.) , 573 U.S. 25, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014), does not require a different result. The Court held that when a bankruptcy court hears a Stern claim—one that bankruptcy courts are statutorily but not constitutionally authorized to adjudicate—it is treated like a non-core, related claim. The bankruptcy court should therefore issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court. 134 S.Ct. at 2168. The Arkison Court expressly stated that it assumed without deciding that the fraudulent transfer claims in the case were Stern claims, presumably because resolving the issue would not affect the result. Either way, the bankruptcy court could hear the claims and enter findings, as it had done in that case. 134 S.Ct. at 2174.¹ Arkison does not preclude this court from entering a final judgment in this case.

Under Rule 52 of the Federal Rules of Civil Procedure (applicable here under Rule 7052 of the Federal Rules of Bankruptcy Procedure ), the court must make findings of fact and conclusions of law in an action "tried on the facts without a jury." Fed. R. Bankr. P. 7052. The court will therefore enter these findings of fact and conclusions of law.² Under 28 U.S.C. § 157(b)(2)(H), the court will also enter a separate final judgment in this adversary proceeding. If any reviewing court concludes that the bankruptcy court does not have the constitutional authority to enter a final judgment without the consent of all parties, the findings below may be considered as proposed findings of fact and conclusions of law.

II. Findings of Fact

The court makes the following findings of fact based on the stipulations of the parties and the evidence presented at trial:

1. Peregrine Financial Group Inc. was a futures commission merchant ("FCM") registered with the U.S. Commodity Futures Trading Commission ("CFTC"). Stipulation No. 7. It was regulated under the Commodity Exchange Act ("CEA") and regulations of the CFTC. Its customers traded futures contracts and other financial products.

2. As an FCM, Peregrine was required by the CEA and CFTC regulations to maintain at least one bank account for funds deposited by its commodity futures customers for commodity futures trading and to keep those funds segregated from its operating funds. Stipulation No. 10. The parties refer to these funds as "segregated funds." Though the segregated funds were held in a bank account owned by Peregrine, it did not own these funds; they were held solely for the benefit of its customers.

3. Russell Wasendorf Sr. was the Chief Executive Officer and Chairman of the Board of Peregrine. Stipulation No. 8. He committed massive fraud on Peregrine, its customers, the CFTC, and the National Futures Association ("NFA"), a self-regulatory association for the commodities industry. He stole over $200 million in customer segregated funds over a period of approximately 20 years. PX 12, Wasendorf Plea Agreement, p. 4-5.

4. Wasendorf's fraud was discovered in July 2012, after which Peregrine filed a chapter 7 bankruptcy case. Ira Bodenstein was appointed the chapter 7 trustee in the case.

5. Wasendorf stole funds primarily from one Peregrine account with US Bank holding customer segregated funds: account number 621011845 ("the 1845 account").

6. Wasendorf accomplished this fraud by personally receiving the bank statements in paper from US Bank...