Carr v. Loeser (In re Int'l Auction & Appraisal Services LLC)

• Decision Date: 04 June 2013
• Docket Number: Adversary No. 1–13–ap–00018–MDF.,Bankruptcy No. 1–11–bk–00813–MDF.
• Citation: 493 B.R. 460
• Parties: In re INTERNATIONAL AUCTION AND APPRAISAL SERVICES LLC, Debtor. Steven M. Carr, Trustee, Plaintiff v. Alan D. Loeser and Patricia M. Britton, Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

493 B.R. 460

In re INTERNATIONAL AUCTION AND APPRAISAL SERVICES LLC, Debtor.Steven M. Carr, Trustee, Plaintiff

v.Alan D. Loeser and Patricia M. Britton, Defendants.

Bankruptcy No. 1–11–bk–00813–MDF.

Adversary No. 1–13–ap–00018–MDF.

United States Bankruptcy Court, M.D. Pennsylvania.

June 4, 2013.

Held Unconstitutional

28 U.S.C.A. § 157(b)(2)(H)

Torren C. Ecker, Scott J. Strausbaugh, Becker & Strausbaugh, P.C., Hanover, PA, for Plaintiff.

Jeffrey S. Cianciulli, Weir and Partners, LLP, Philadelphia, PA, for Defendant Alan D. Loeser.

Patricia M. Britton, New Freedom, PA, pro se.

OPINION

MARY D. FRANCE, Chief Judge.

Before the Court is the motion of Alan D. Loeser (“Loeser”) and Patricia M. Britton (“Britton”) (collectively, “Defendants”) to dismiss the Amended Complaint filed by Steven Carr (the “Trustee”), Chapter 7 trustee for the estate of International Auction and Appraisal Services LLC (“Debtor”). The Trustee is seeking to avoid certain transfers made to Defendants before Debtor filed its bankruptcy petition. For the reasons that follow, Defendants' Motion will be denied.

I. Background

Before filing for bankruptcy, Debtor was a limited liability company that provided industrial appraisal and auction services. Defendant Loeser was Debtor's managing director and sole member. He is married to Defendant Britton. Neither Defendant has filed a proof of claim in Debtor's bankruptcy case.

The Trustee commenced an adversary proceeding against Defendants on January 13, 2013. On February 5, 2013, he filed the Amended Complaint seeking to recover $96,524.04 that he alleges Defendants withdrew from Debtor's general business account between January 2010 and January 2011 as “owner draws.” The Amended Complaint asserts that Loeser took eight “owner draws” payable to himself from Debtor's general business account in an aggregate amount of $57,024.04, including $33,274.04 withdrawn in September 2010. The funds withdrawn in September 2010 allegedly were used by Defendants as a down payment on a beach house. The Trustee asserts that this draw rendered Debtor insolvent. The Trustee also alleges that between January 2010 and December 2010, Debtor issued ten separate checks in an aggregate amount of $39,500 payable to Britton and drawn on Debtor's general business account. According to the Amended Complaint, Debtor made other disbursements directly to Defendants' creditors for items such as mortgage payments, vehicle payments, and country club memberships. The Amended Complaint alleges that these transfers were not made in good faith or in the normal course of Debtor's business affairs.

In Count I of the Amended Complaint, the Trustee avers that Loeser and Britton are “insiders” as defined by the Bankruptcy Code. He further asserts that the transfers drained Debtor's bankruptcy estate and were made with actual intent to hinder, delay, or defraud creditors. The Trustee concludes, therefore, that the transfers may be avoided under 11 U.S.C. § 548(a)(1)(A). Based on the same factual allegations, the Trustee asserts in Count III that the transfers are avoidable under the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa.C.S. § 5104, which the Trustee may enforce through 11 U.S.C. § 544(b).

In Count II of the Amended Complaint, the Trustee avers that Debtor received less than reasonably equivalent value from Loeser and Britton in exchange for the transfers, that Debtor was insolvent on the date of the transfers or became insolvent as a result of the transfers, and that the transfers were made pursuant to an employment contract. Therefore, these transfers may be avoided under 11 U.S.C. § 548(a)(1)(B). Based on the same allegations, the Trustee avers in Count IV of the Amended Complaint that the transfers are avoidable under PUFTA, 12 Pa.C.S. § 5105, which also may be enforced through 11 U.S.C. § 544(b).

On March 6, 2013, Defendants filed a Motion to Dismiss the Amended Complaint under Fed.R.Civ.P. 12(b)(1) and (6). Rule 12(b)(1) provides that a defendant may raise by motion the defense that a court lacks subject-matter jurisdiction. In support of the Motion under Rule 12(b)(1), Defendants argue that under the Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2616, 180 L.Ed.2d 475 (2011), this Court lacks the constitutional authority to enter final judgment in a fraudulent transfer action without their consent.¹ Defendants also allege that the Trustee has failed to state a claim upon which relief can be granted because some of the transfers described in the Amended Complaint were made before Debtor allegedly became insolvent.

On March 20, 2013, the Trustee filed an Answer in opposition to the Motion to Dismiss. In his Answer, the Trustee argues that Defendants' interpretation of Stern is too broad and that this Court clearly has jurisdiction over core bankruptcy matters such as fraudulent transfer actionsunder PUFTA through 11 U.S.C. § 544 and under 11 U.S.C. § 548. The Trustee also asserts that under the relevant sections of the Bankruptcy Code and PUFTA, he either is not required to prove Debtor was insolvent or that the preliminary nature of the proceeding makes a ruling based on disputed factual allegations inappropriate.

The parties have filed briefs on the Motion and Answer, and the matter is ready for decision.

II. Discussion

A. Authority of bankruptcy court to enter final judgment in fraudulent transfer action

Sections 544 and 548 of the Bankruptcy Code provide a Chapter 7 trustee with “general authority to avoid certain [pre-petition] transfers for the benefit of the estate.” In re MS55, Inc., 477 F.3d 1131, 1134 (10th Cir.2007). Section 544 enables a trustee to use state law to avoid any transfer that an unsecured creditor could have avoided outside of bankruptcy. Section 548 includes a separate power authorizing a trustee to avoid fraudulent conveyances that occurred before the petition was filed. Under 28 U.S.C. § 157(b)(2)(H), fraudulent conveyance actions are specifically denoted as “core” proceedings arising under the Bankruptcy Code and subject to final determination by the bankruptcy court.

Notwithstanding this clear statutory authority, many courts have considered whether a bankruptcy court has the constitutional authority to enter a final judgment on a fraudulent transfer claim when a trustee is asserting the claim against a party that has not filed a proof of claim and has not consented to the bankruptcy judge entering final judgment in the matter. In Stern v. Marshall, the Supreme Court held that not all matters designated as “core” could be finally determined by an Article I court. Specifically, the Court held that a bankruptcy judge lacked constitutional authority to enter final judgment on a state law counterclaim brought by the bankruptcy estate against a creditor. Stern, 131 S.Ct. at 2608. The Supreme Court observed that although these types of claims are designated as “core,” and the bankruptcy court is authorized by statute to decide core matters, this power exceeds the constitutional limits placed on an Article I judge. Id. at 2614.Stern instructs that unless a defendant consents to entry of a final order by a bankruptcy court, the court may not adjudicate a counterclaim claim against a creditor or other party unless resolution of the claim against the defendant is part of the claim allowance process or the claim against the defendant falls within the public rights exception. Resource Funding, Inc. v. Pac. Continental Bank (In re Washington Coast 1, LLC), 485 B.R. 393, 403 (9th Cir. BAP 2012) (citing Stern, 131 S.Ct. at 2612–18).²

Defendants do not dispute that this adversary involves a core matter. They do not, however, consent to entry of final judgment by an Article I court. Further, the Trustee's claim against Defendants will not be resolved as part of the claims allowance process because neither Defendant has filed a claim. Thus, the Trustee's claim may be adjudicated by this Court only if it is a claim that falls within the public rights exception. Recent cases, however, provide no support for the proposition that the Supreme Court would categorize fraudulent transfer claims as public rights.

The Supreme Court's decision in Stern relies heavily on its prior decision in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). In Granfinanciera, the Court considered whether a non-creditor defendant to a fraudulent conveyance action under § 548 had a Seventh Amendment right to a jury trial. Id. at 36, 109 S.Ct. 2782. To resolve this question, the Supreme Court reexamined the public rights exception considering that “Congress may only deny trials by jury in actions at law ... in cases where ‘public rights' are litigated.” Id. at 51, 109 S.Ct. 2782. The Court noted that fraudulent conveyance actions are “quintessentially suits at common law that more nearly resemble state-law contract claims brought by a [debtor] to augment the bankruptcy estate than they do creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res.” Id. at 56, 109 S.Ct. 2782 (citation omitted). Therefore, a defendant in a fraudulent transfer action brought in bankruptcy court cannot be divested of the right to a jury trial “merely because Congress [has] designated fraudulent conveyance actions ‘core proceedings' under the Bankruptcy Code.” Smith v. Dowden, 47 F.3d 940, 942 (8th Cir.1995) (citing Granfinanciera, 492 U.S. at 58–59, 109 S.Ct. 2782).

In Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 561 (9th Cir.2012), the Court of Appeals for the Ninth Circuit recently became the first circuit court to hold that the Supreme Court's reliance on the logic of Granfinanciera in Stern leads to the conclusion that fraudulent transfer actions may not be decided by an Article I court. Examining the line of Supreme Court decisions commencing with Northern Pipeline Construction Co. v. Marathon Pipe Line...