McCarthy v. Wells Fargo Bank, N.A. (In re El-Atari)
| Decision Date | 18 November 2011 |
| Docket Number | 1:11cv1090 (LMB/IDD) |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | In re: OSAMA M. EL-ATARI, Debtor KEVIN R. MCCARTHY, Plaintiff, v. WELLS FARGO BANK, N.A., Defendant. |
Defendant Wells Fargo Bank, N.A ("Wells Fargo" or "defendant") has filed a Motion to Withdraw the Reference of Adversary Proceeding, in which it seeks to have a fraudulent conveyance proceeding withdrawn from the bankruptcy court to district court. For the reasons discussed below, defendant's motion will be denied.
In May 2008, Wells Fargo loaned $8 million to Osama El-Atari {"El-Atari or "debtor"). See Def. Wells Fargo Bank's Mot. to Withdraw {"Def.'s Mot.") at 2. A few months later, Wells Fargo became concerned about El-Atari after learning he was"making false statements to Wells Fargo," and, on that basis, it accelerated the payoff requirements and demanded immediate repayment. Def.'s Mot. at 2.1 In October 2008, El-Atari satisfied the Wells Fargo debt with an $8 million check. Id.
El-Atari has since been convicted of operating "a massive fraudulent scheme," in which he obtained bank loans totaling over $50 million by using fabricated life insurance policies as securities for the loans. Trustee's Opp'n to Mot. to Withdraw ("Pl.'s Opp'n") at 3-4.2 He has been brought into involuntary bankruptcy proceedings pursuant to chapter 7 of the Bankruptcy Code after three of his creditors named him in a chapter 7 petition. Id. Plaintiff Kevin R. McCarthy, who was appointed the interim trustee for the bankruptcy estate, has filed adversary proceedings in the bankruptcy court against Wells Fargo and over forty other entities to recover what he alleges to be fraudulent conveyances under 11 U.S.C. §§ 548(a)(1)(A) or (a)(1)(B). Id. at 4-5.
Defendant has moved this Court to exercise its discretionary powers under 28 U.S.C. § 157(d) to withdraw the trustee's fraudulent conveyance action on the grounds that, first, the bankruptcy court lacks constitutional authority under Stern v. Marshall, 131 S. Ct. 2594 (2011), to hear and decide the adversary proceeding; second, withdrawing the reference serves the interest of judicial economy because the same facts are at issue in Northern Trust Bank, FSB v. Wells Fargo Bank, N.A., No. 1: 11cv521 (CMH/JFA) (E.D. Va. May 13, 2011)3 ; and third, the bankruptcy court lacks the authority to conduct a jury trial should Wells Fargo choose to exercise its Seventh Amendment right. See Def.'s Mot. at 3. The trustee objects to each of defendant's stated grounds.
District courts "have 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." 28 U.S.C.§§ 1334(a),(b). The district courts have discretion to refer "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" to the bankruptcy judges for that district. 28 U.S.C. § 157(a). Reference by the district court may permit the bankruptcy judge both to hear and determine issues, ultimately "enter[ing] appropriate orders and judgments," or it may allow that judge only to propose findings of fact and conclusions of law, which the district court then reviews de novo. §§ 157(b)(1), (c)(1). The bankruptcy court's authority to enter a final order depends on whether the issue at hand is deemed a "core proceeding." § 157(b)(2).
Under § 157(b)(1), "bankruptcy courts may hear and enter final judgments in 'core proceedings' in a bankruptcy case" while § 157(c)(1) provides that in "non-core proceedings, the bankruptcy courts instead submit proposed findings of fact and conclusions of law to the district court, for that court's review and issuance of final judgment." Stern, 131 S. Ct. at 2601-02. Among the enumerated types of core proceedings are fraudulent conveyance actions. § 157(b)(2)(H).
Wells Fargo's primary argument is that the adversary proceeding should be withdrawn following the Supreme Court'sdecision in Stern v. Marshall. Stern addressed whether a counterclaim that § 157(b)(2)(C) defines as "core," but which was essentially a claim under state law, could be properly decided by a non-Article III judge. The Court held that because the state law claim raised in the counterclaim was "in no way derived from or dependent upon bankruptcy law" and "exists without regard to bankruptcy proceedings," the bankruptcy court, as a non-Article III court, did not have the constitutional authority to enter a final judgment on that claim. 131 S. Ct. at 2618. In light of § 157's unequivocal grant of authority to bankruptcy courts to decide such claims, the constitutional question could not be avoided to save the provision at issue, and the Court held that "Congress, in one isolated respect, exceeded [the] limitation [of Article III] in the Bankruptcy Act of 1984." Id. at 2620.
Although Stern addressed a different type of "core" adversary proceeding than the one at issue here, defendant argues that Stern "made clear that fraudulent conveyance claims like the one asserted in [this] Adversary Proceeding may not be heard and determined by a non-Article III bankruptcy court, even though 28 U.S.C. § 157(b)(2)(H) designates as core proceedings 'proceedings to determine, avoid, or recover fraudulent conveyances.'" Def.'s Mot. at 5. Defendant finds support for itsargument in Granfinanciera, S.A. v. Nordberg, 4 92 U.S. 33 (1989), which addressed the right to a jury trial on a fraudulent conveyance claim brought by the trustee against a third party who had filed no claim against the bankruptcy estate. Id. at 36. The Court explained that, although a core proceeding, a fraudulent conveyance action is akin to a common law contract suit rather than an intertwined component of federal regulation, and the right to a jury trial under the Seventh Amendment therefore attaches. Id. at 54-56, 64-65. The Stern Court confirmed the Granf inane iera view in its discussion of actions "at common law that simply attempt[] to augment the bankruptcy estate [which are] the very type of claim that we held in . . . Granfinanciera must be decided by an Article III court." Stern, 131 S. Ct. at 2616. Stern, together with Granfinanciera, clearly supports the conclusion that the authority to issue a final decision in a fraudulent conveyance action is reserved for Article III courts. See Paloian v. Am. Express Co.(In re Canopy Fin., Inc.), No. 11 C 5360, 2011 WL 3911082, at *2 (N.D. 111. Sept. 1, 2011)(«[B]y likening the claim in question to the fraudulent conveyance claims in Granfinanciera, the Stern Court made clear that the Bankruptcy Court lacks constitutional authority to enter final judgment on the [fraudulent conveyance] claims presented here.").
Finding that Stern precludes bankruptcy judges from issuing final orders in fraudulent conveyance proceedings4 does not, however, lead inexorably to the further conclusion that defendant's motion for withdrawal of the reference must be granted, because bankruptcy courts also have jurisdiction to "hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11." § 157(c)(1). Under this provision, after overseeing discovery and taking evidence, the bankruptcy judge submits proposed legal and factual findings to the district court, which then reviews the matter de novo and issues a final decision. Id. Regardless of whether the effect ofStern was to remove certain proceedings from the list of "core proceedings" under § 157(b)(2) or simply to strike the phrase "and determine" from § 157(b)(l),5 it does not follow that bankruptcy courts have lost all power to hear a fraudulent conveyance proceeding. Even if a fraudulent conveyance action, such as the one brought against Wells Fargo, has lost its vaunted status as a core proceeding, it is clearly "related to a case under title 11." See, e.g., Celotex v. Edwards, 514 U.S. 300, 308 n.5 (1995). As such, the bankruptcy court retains the authority to "submit proposed findings of fact and conclusions of law" that the district court then considers before entering a final judgment. § 157(c)(1).
Defendant objects to this approach, arguing that to permit bankruptcy judges to hear, but not finally decide, a fraudulent conveyance action would essentially rewrite the Bankruptcy Act. See Def. Wells Fargo Bank's Reply Br. Supp. Mot. ("Def.'s Reply") at 5 ().
Neither the statutory framework of the Bankruptcy Act nor the language of Stern itself supports defendant's argument. Far from rewriting the statute, permitting bankruptcy judges to hear and issue recommendations as to fraudulent conveyance actions comports with the statute's language and Congressional intent. See, e.g., Celotex, 514 U.S. at 308 .6 Although Congress gave bankruptcy courts the authority both to "hear and determine" fraudulent conveyance proceedings, the Supreme Court has essentially held that the second of those two responsibilities must be carried out by an Article III court. That decision in no respect diminishes the authority of the bankruptcy court to "hear" afraudulent conveyance action. Wells Fargo's overbroad interpretation of Stern is, therefore, rejected.
This conclusion that bankruptcy courts may still hear fraudulent conveyance actions is consistent with the Stern decision's repeated admonitions that...
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