Tabor v. Kelly (In re Davis)
| Decision Date | 05 October 2011 |
| Docket Number | Adv. Proc. No. 07-05181-L,Case No. 05-15794- GWE |
| Parties | In re CECIL RAY DAVIS, Debtor. MICHAEL TABOR, Chapter 7 Trustee, Plaintiff, v. CHARLES KELLY, SR., Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Tennessee |
The following is ORDERED:
BEFORE THE BANKRUPTCY COURT are cross motions for summary judgment filed by the Plaintiff and the Defendant in this adversary proceeding, which was commenced by the Trustee on July 7, 2007, seeking the avoidance and recovery of allegedly fraudulent and/or preferential transfers arising from a Ponzi scheme perpetrated by the Debtor, Cecil Ray Davis. Before considering the substance of the parties' arguments, however, the court must first determine whether a bankruptcy judge has authority to hear and finally determine the claims asserted in this adversary proceeding. Because I conclude that bankruptcy courts do not have that authority, but may make a report and recommendation to the district court, I make the following report and recommendation to the district court.
The bankruptcy case of Cecil Ray Davis was commenced by the filing of an involuntary petition pursuant to section 303 of the Bankruptcy Code on December 22, 2005. The Defendant Charles Kelly, Sr. was one of the petitioning creditors, but he has not filed a proof of claim. See Dkt. No. 1 and Claims Register. Davis filed an answer to the petition and a hearing was conducted which resulted in the entry of an order for relief on February 2, 2006. The Plaintiff, Michael T. Tabor, was appointed trustee on February 6, 2006. The Trustee filed some 110 adversary proceedings to recover for the benefit of the estate funds paid out by the Debtor to various persons in the years preceding his bankruptcy filing. The complaint against Kelly is one of those adversary proceedings.
The complaint alleges that the Debtor operated a number of businesses in the years prior to the filing of the involuntary petition in furtherance of a Ponzi scheme. It alleges that the Debtor was insolvent from at least 1999 through the date of the order for relief [February 2, 2006]. It alleges that the Debtor entered a plea agreement in the United States District Court for the Western District of Tennessee, in which he admitted a scheme and artifice to defraud by way of a Ponzi scheme. It alleges that the Defendant, Charles Kelly, Sr., received $52,150 from the period December 22, 2001,through the date of the filing of the bankruptcy petition [December 22, 2005]. It alleges that these payments were fraudulent and/or preferential and may be recovered by the Trustee.
The Defendant filed an answer to the complaint on September 14, 2007, in which he asserts that any transfers received by him were outside the applicable limitations period, and denies that the Trustee is entitled to relief. He demands a jury trial to try his case. Dkt. No. 7. After the answer was filed, there followed prolonged attempts at settlement. The Trustee eventually filed his motion for summary judgment on April 15, 2009. Dkt. No. 10. The Defendant filed his response on July 30, 2009, and a second response and motion to dismiss or in the alternative, for summary judgment on March 3, 2011. Dkt. Nos. 11, 13, 15. The undersigned bankruptcy judge was assigned to this proceeding on April 1, 2011. Dkt. No. 17. The Trustee filed a response to the Defendant's motion to dismiss and for summary judgment on April 4, 2011, and requested that the court set a hearing on his motion for summary judgment on May 11, 2011. Dkt. Nos. 19, 20, 21. I heard oral argument on June 23, 2011, following which I asked the parties to prepare post-hearing briefs on three issues:
As I was drafting the Post-Hearing Briefing Order, I received notice that the Supreme Court had issued its opinion in Stern v. Marshall, ___ U.S. ___, 131 S. Ct. 2594 (June 23, 2011). As a result, I added a fourth issue to those that should be briefed by the parties:
4. Whether and how the Supreme Court's decision in Stern v. Marshall impacts the authority of the bankruptcy court to enter a final order in this case.
The parties completed the filing of their post-hearing briefs, responses, and replies on August 12, 2011.
The Defendant takes the position that, as the result of Stern v. Marshall, "a bankruptcy court has no authority to decide a matter that could have been brought if the bankruptcy case had never been filed." Post-Hearing Memorandum of Law of Defendant Charles Kelly, Sr. on Cross Motions for Summary Judgment. Dkt. No. 45, p. 24. The Defendant concludes from this that the bankruptcy court is without authority to entertain claims brought pursuant to section 544 of the Bankruptcy Code, which permits the trustee to "avoid any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of . . . title [11] or that is not allowable only under section 502(e) of . . . title [11]. 11 U.S.C. § 544(b)(1). The effect of this statute is to permit the trustee in bankruptcy to avoid for the benefit of the estate (rather than for the benefit of a single creditor) transfers made within the applicable reach-back period under state law, but beyond the reach-back period for a similar cause of action provided by federal bankruptcy law at section 548(1).1
The Defendant argues that the bankruptcy court is without authority to hear any cause of action brought pursuant to section 544(b)(1). Further, the Defendant asserts that while the bankruptcy court may have authority to hear and determine the section 548 claims, the interests ofjudicial economy and convenience, and the risk of inconsistent, overlapping decisions dictates that the bankruptcy court abstain from hearing those matters to permit the Defendant to seek withdrawal of the reference by the district court. Finally, the Defendant asserts that the Trustee has failed to demonstrate that the transfers to the Defendant were fraudulent as a matter of law, and thus, that he is entitled to summary judgment. Dkt. No. 45, p. 24.
The Trustee responds that the facts and circumstances of this case are distinguishable from those in Stern v. Marshall, and thus, the bankruptcy court does have authority to entertain state fraudulent transfer claims as well as federal fraudulent transfer claims. The Trustee asserts that this is so because the claims that he is pursuing "arise under" the Bankruptcy Code by virtue of sections 548 and 544(b), even though section 544(b)(2) incorporates state law. The Trustee asserts that his complaint initiated a core proceeding and that the Defendant has admitted that it is a core proceeding; thus, the Trustee concludes, the bankruptcy court has authority to hear and determine these claims. Dkt. No. 48, p.4.
The Trustee filed a consent to have the jury trial of this adversary proceeding heard by a bankruptcy judge. Bankr. Dkt. No. 1316. The Defendant did not file a consent within the time set by this bankruptcy judge, July 29, 2011. See 28 U.S.C. § 158(e); Fed. R. Bankr. P. 9015(b).
Before undertaking any consideration of the merits of the parties' motions, I must determine what authority the bankruptcy court has with respect to this dispute. This requires a careful reading of the Supreme Court's decision in Stern v. Marshall to ascertain the scope of the bankruptcy court's authority. The question before the Court in Stern was whether an Article I bankruptcy judge may hear and determine a state law counterclaim filed by a debtor in response to a proof of claim filedagainst the bankruptcy estate. Section 157(b)(2)(C) expressly provides that "counterclaims by the estate against persons filing claims against the estate" are "core proceedings" which bankruptcy judges may hear and determine, i.e., enter a final order or judgment subject only to appellate review. 28 U.S.C. § 157(b)(2)(C). Nevertheless, the Supreme Court held that although the bankruptcy courts have express statutory authority to enter judgment on a debtor's counterclaim, they lack constitutional authority to do so. 131 S. Ct. at 2603-20. This court must determine the effect of that holding upon this complaint to recover fraudulent conveyances and preferential transfers.
Just as counterclaims filed in response to proofs of claim are core proceedings, proceedings to determine, avoid, or recover fraudulent conveyances and preferential transfers are among the proceedings listed as "core proceedings" by Congress. 28 U.S.C. § 157(b)(2)(F) and (H). There is no question that the bankruptcy courts have statutory authority to hear and determine the types of actions which are the subject of the complaint in this adversary proceeding. 28 U.S.C. § 157(b)(1).2 Further, preferential transfers in all instances and fraudulent conveyances in some instances may be recovered pursuant to federal bankruptcy law. See 11 U.S.C. §§ 547 and 548. As the result of the Court's decision in Stern, however, the fact that Congress has designated a particular type of proceeding as "core" is insufficient. The bankruptcy courts cannot rely upon the core/non-core distinction to determine whether they may hear and finally determine a particular cause of action. Instead they must determine whether the statutory authority delegated to them by Congress is within the constitutional guidelines provided by Stern. This is the analysis that must be undertaken in thiscase before there can be any consideration of the merits of the complaint pursuant to the motions for summary judgment.
The Supreme Court determined in Stern that...
To continue reading
Request your trial