Zazzali v. 1031 Exch. Grp. (In re DBSI, Inc.)

• Decision Date: 12 April 2012
• Docket Number: 10–53991(PJW),Bankruptcy No. 08–12687(PJW).Adversary Nos. 10–54648(PJW),10–54882(PJW),10–54995(PJW).,10–53918(PJW),10–54899(PJW),10–55219(PJW),10–54827(PJW)
• Citation: 56 Bankr.Ct.Dec. 97,467 B.R. 767
• Parties: In re DBSI, INC., et al., Debtors.James R. Zazzali, as Trustee for the Debtors' Jointly–Administered Chapter 11 Estates and/or as Litigation Trustee for the DBSI Estate Litigation Trust, Plaintiff, v. 1031 Exchange Group, et al., The Blind Gallery and John Doe 1–10, Air Performance Service, Inc. and John Doe 1–10, Atlas Van Lines, Inc., and John Doe 1–10, Hoefer Wysocki Architects LLC and John Doe 1–10, IBF Group and John Doe 1–10, Brooks & Amaden, Inc. and John Doe 1–10, New West Paving and John Doe 1–10, Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

467 B.R. 767

56 Bankr.Ct.Dec. 97

In re DBSI, INC., et al., Debtors.James R. Zazzali, as Trustee for the Debtors' Jointly–Administered Chapter 11 Estates and/or as Litigation Trustee for the DBSI Estate Litigation Trust, Plaintiff,

v.1031 Exchange Group, et al., The Blind Gallery and John Doe 1–10, Air Performance Service, Inc. and John Doe 1–10, Atlas Van Lines, Inc., and John Doe 1–10, Hoefer Wysocki Architects LLC and John Doe 1–10, IBF Group and John Doe 1–10, Brooks & Amaden, Inc. and John Doe 1–10, New West Paving and John Doe 1–10, Defendants.

Bankruptcy No. 08–12687(PJW).Adversary Nos. 10–54648(PJW)

10–53991(PJW)

10–53918(PJW)

10–54827(PJW)

10–54882(PJW)

10–54899(PJW)

10–55219(PJW)

10–54995(PJW).

United States Bankruptcy Court, D. Delaware.

April 12, 2012.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Christopher Viceconte, Natasha M. Songonuga, Gibbons P.C., Stephen W Spence, Phillips, Goldman & Spence, Wilmington, DE, Dale E. Barney, Mark B. Conlan, Gibbons P.C., Newark, NJ, Steven J. Mitnick, Mitnick & Malzberg, P.C., Frenchtown, NJ, for Plaintiff.

James S. Yoder, White and Williams LLP, John D. Demmy, Esq., Stevens & Lee, P.C., Jami B. Nimeroff, Brown, Stone, Nimeroff, LLC, Wilmington, DE, for Defendants.John Doe 1–10, pro se.

MEMORANDUM OPINION

PETER J. WALSH, Bankruptcy Judge.

This opinion is with regard to motions to dismiss (the “Motions”) filed by certain defendants (the “Movants”) in several adversary proceedings. ¹ (Adv. Proc. No. 10–54648(PJW), Doc. # 146; Adv. Proc. No. 10–53991(PJW), Doc. # 15; Adv. Proc. No. 10–53918(PJW), Doc. # 17; Adv. Proc. No. 10–54827(PJW), Doc. # 15; Adv. Proc. No. 10–54882(PJW), Doc. # 16; Adv. Proc. No. 10–54899(PJW), Doc. # 17; Adv. Proc. No. 10–55219(PJW), Doc. # 16; Adv. Proc. No. 10–54995(PJW), Doc. # 21.) ² Movants have styled their Motions a “Motion to Dismiss in the Absence of Article III Authority to Adjudicate” and argue that this Court “lacks the authority to adjudicate this proceeding per Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989), and 28 U.S.C. § 157(e).” (Adv. Proc. No. 10–54648, Doc. # 146, at 1.) For the reasons described below, I will deny the Motions.

Background

In November 2008, DBSI Inc. (“DBSI”) and several of its affiliates (collectively “Debtors”) filed for bankruptcy protection under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Debtors' plan of liquidation was confirmed in October 2010, naming James R. Zazzali (“Trustee”) as litigation trustee of the DBSI Estate Litigation Trust. (Case No. 08–12687(PJW), Doc. # 5924.)

Shortly after his appointment, Trustee commenced these adversary actions. In the 1031 Exchange Action, Trustee is seeking the avoidance and recovery of fraudulent transfers pursuant to 11 U.S.C. §§ 544 ³, 548 ³, 550 ⁴, and 551 ⁵, and asserting claims for declaratory relief related to federal securities laws, unjust enrichment, rescission of certain agreements between Debtors and defendants, and the disallowance of claims against the bankruptcy estate pursuant to 11 U.S.C. § 502 ⁶. In the Air Performance Action and the Blind Gallery Action, Trustee asserts claims for the avoidance and recovery of preferential transfers under 11 U.S.C. § 547 ⁶, fraudulent transfers under § 548, and post-petition transfers under § 549 ⁷, recovery of the avoided transfers under §§ 550 and 551, and disallowance of claims under § 502. In the remaining actions—the Atlas Vans Action, Brooks & Amaden Action, Hoefer Action, IBF Group Action, and New West Action—Trustee asserts avoidance and recovery claims under §§ 544, 547, 548, 550, and 551, as well as unjust enrichment premised on the avoidance actions.

Jurisdiction

This Court has jurisdiction over these adversary actions pursuant to 28 U.S.C. §§ 1334(b) and 157(a). Section 1334 provides that the district courts have jurisdiction over “all civil proceedings arising under title 11, or arising in or related to cases under title 11,” and section 157 permits the district court to refer any such civil proceedings to the bankruptcy court. 28 U.S.C. §§ 1334(b) & 157(a) (2005).

Section 157 also provides that “[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 ... and may enter appropriate orders and judgments.” 28 U.S.C. § 157(b)(1) (2005). Where the matter is not a core proceeding but is otherwise related to a case under title 11, the bankruptcy court may hear the proceeding but must submit proposed findings of fact and conclusions of law to the district court for de novo review. 28 U.S.C. § 157(c)(1) (2005).

This Court has already determined that these matters involve both core proceedings and non-core proceedings.

Discussion

As the Motions were filed in conjunction with motions to withdraw the reference, Movants ask this Court to dismiss these proceedings if the District Court does not grant the motions to withdraw the reference. (Adv. Proc. No. 10–54648, Doc. # 147, at 3.) In support of their Motions, Movants argue that 1) under Stern, “a bankruptcy court, not being an Article III court, cannot adjudicate an adversary proceeding seeking to recover money from the defendant on causes of action sounding in preference or fraudulent conveyance”; and 2) under Stern and Granfinanciera, these particular adversary actions cannot be adjudicated in this Court because the Movants did not consent to bankruptcy court adjudication, intend to demand a jury trial in their answers to the complaints, and certain of the Movants did not file proofs of claim in the bankruptcy case. ( Id. at 4.)

It is customary—and indeed, necessary—for courts to state the standard of review in evaluating a motion to dismiss. As Movants have admitted here that they have invented this “motion to dismiss for lack of authority to adjudicate” as a procedural device, there is no established standard of review to apply. Essentially, Movants are seeking to have the adversary actions dismissed entirely because, on their reading of Stern, this Court cannot enter final judgments in these proceedings. In so arguing, I find that Movants both misinterpret Stern's narrow holding and do not acknowledge the distinction between the bankruptcy court's ability to hear a proceeding and to adjudicate such proceeding.

The facts of the case and the holding in Stern have been discussed at length by other courts since that opinion was issued, so I will only provide a brief summary of the factual background and decision here. The Stern decision concerned an adversary proceeding arising in the bankruptcy case of Vickie Lynn Marshall (“Vickie”), better known as Anna Nicole Smith. Prior to the commencement of her bankruptcy case, Vickie entered into a dispute in state court with E. Pierce Marshall (“Pierce”), the son of her late husband J. Howard Marshall, over the older Marshall's estate. 131 S.Ct. at 2601. While the state court action was pending, Vickie filed for bankruptcy, and Pierce filed a complaint for defamation and a proof of claim in the bankruptcy case. Id. Vickie then filed a counterclaim for tortious interference, claiming that Pierce had interfered with the elder Marshall's promise to leave a large sum of money to his wife Vickie. Id. The bankruptcy court conducted a bench trial on the action, and entered an order in Vickie's favor. Id. Pierce appealed, arguing that the bankruptcy court could not enter a final order in the action, even though such a counterclaim by the estate is specifically listed as a core proceeding in 28 U.S.C. § 157(b)(2)(C). Id. The appeal reached the Supreme Court, which held that although there was statutory authority in § 157 for the bankruptcy court to finally adjudicate the counterclaim, Article III of the Constitution did not permit such a result. The Court concluded that “[t]he Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.” Id. at 2620.

There has been much debate about the scope of the Stern decision and its effect on the division of labor between the bankruptcy courts and the district courts. In a recent opinion from this Court, Judge Gross noted that as of January 2012, there had been “in excess of 130 cases in which bankruptcy courts have addressed Stern ” and that “the analyses and decisions [were] not consistent.” Burtch v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 466 B.R. 626, 638 n. 7 (Bankr.D.Del.2012). As of the writing of this opinion in April 2012, there are more than 325 decisions citing Stern.

As Judge Gross explained in detail in Direct Response, courts have split between a broad interpretation of Stern and a narrow interpretation. Id. The broad interpretation holds that bankruptcy judges cannot enter final adjudications on avoidance actions because such actions are “quintessentially suits at common law” and thus must be decided by an Article III judge. Id. at 640 (citing Granfinanciera, 492 U.S. at 56, 109 S.Ct. 2782). In contrast, the narrow view restricts Stern's holding to its facts in that the decision “only specifically removed a debtor's state law counterclaims under § 157(b)(2)(C) ... from final adjudicatory authority of the bankruptcy court.” Id. at 641. After an analysis of both interpretations, Judge Gross adopted the narrow interpretation and held that “ Stern does not remove the bankruptcy courts' authority to enter final judgments on other core matters, including the authority to finally adjudicate preference and fraudulent conveyance actions.” Id. at 644.

Though Movants cite several cases from other jurisdictions embracing the broad interpretation of Stern⁸, I am not persuaded that I should follow these decisions. The majority opinion in Stern contains language that could support either...