Heller Ehrman LLP v. Arnold and Porter, LLP

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re: 	)
)
HELLER EHRMAN LLP, 	)
)
Liquidating Debtor.)
__________________________________)
HELLER EHRMAN LLP, Liquidating 	)
Debtor, 	)
)
Plaintiff, 	)
)
v. 	)
)
ARNOLD & PORTER, LLP, 	)
)
Defendant. 	)
__________________________________)
Bankruptcy Case
No. 08-32514DM
Chapter 11
Adversary Proceeding
No. 10-3203DM
(Consolidated with
Nos. 10-3210; 10-3213;
10-3216; 10-3219; 10-3221;
10-3234; 10-3235; 10-3238;
10-3239; 10-3243; 10-3248;
10-3251; 10-3253; 10-3254;
and 10-3263) 1
RECOMMENDATION OF BANKRUPTCY JUDGE
REGARDING MOTIONS TO WITHDRAW THE REFERENCE
TO: THE UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF CALIFORNIA
I. 	INTRODUCTION
Sixteen law firm defendants have asked the district court
1Defendants in these adversary proceedings are, respectively,
Arnold & Porter, LLP; Davis Wright Tremaine LLP; Foley & Lardner
LLP; Goodwin Procter, LLP; Hogan Lovells; Jones Day; Orrick,
Herrington & Sutcliffe LLP; Patton Boggs LLP; Pillsbury Winthrop
Shaw Pittman LLP; Proskauer Rose, LLP; Sheppard Mullin Richter &
Hampton LLP; Summit Law Group PLLC; Wilmer Cutler Pickering Hale
and Dorr LLP; Winston & Strawn LLP; Cooley Godward LLP; and Hafetz
Necheles & Rocco.
-1-
Signed and Filed: September 28, 2011
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 28, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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withdraw from me the cases pending against them. 	I recommend that
their requests be rejected and the matters left with me. 2 	If
defendants have a right to a jury in the district court, the
Bankruptcy Local Rules have a simple procedure in place that is
entirely consistent with controlling Ninth Circuit authority. 	If
the cases ultimately are to be tried to the court, the Supreme
Court’s recent decision that has sparked this flurry of activity
here and throughout the country has implicitly approved procedures
that may be followed here.
If the matters are core and do not present a constitutional
challenge to my authority, normal appellate rules work fine. 	If
the core matters are constitutionally suspect - a question
certainly not resolved by the Supreme Court - the handling of them
as non-core has been endorsed by the Supreme Count, and is easily
dealt with under established rules.
I have the background and experience in the newly developing
area of substantive law involved and significant familiarity with
the debtor law firm and similar actions involving this plaintiff
and the trustee of another law firm. 	I should keep the cases
through pretrial and dispositive motions, and try those where no
jury right is invoked. 	Withdrawal of the reference at this time
would amount to an unnecessary extension of the narrow holding in
Stern, would be an inefficient use of judicial resources by
2“A Bankruptcy Judge may, on the Judge’s own motion, upon the
filing of a motion [to withdraw the reference] under subparagraph
(a) of this rule, recommend to the District Court whether the case
or proceeding should be withdrawn under 28 U.S.C. § 157(d). 	Such
a recommendation shall be served on the parties to the case or
proceeding and forwarded to the Clerk of the District Court.”
B.L.R. 5011-2(b).
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overburdening the district court and foregoing the services of a
bankruptcy court ready, willing and able to do its job and would
distort the traditional way to challenge and decide the
constitutionality of a federal statute.
II. 	PROCEDURAL BACKGROUND
Plaintiff Heller Ehrman LLP (“Heller”) sued several
defendants in separate but similar adversary proceedings to
recover fraudulent transfers 3. 	Defendants here have filed motions
to withdraw the reference of these proceedings from the bankruptcy
court to the district court (the “Motions”). 4 	Defendants contend
that under Stern v. Marshall, 131 S.Ct. 2594 (2011), bankruptcy
judges do not have the authority to hear and determine fraudulent
transfer actions that are specifically authorized by the
Bankruptcy Code.
I held a status conference on September 12, 2011, that was
attended by counsel for all defendants (twelve of whom had filed
their Motions and three of whom did so later that week) except
Summit Law Group, PLLC. 	Summit filed its Motion on September 19,
2011. 	I suggested, and counsel at the status conference agreed,
that the Motions be consolidated for administration so that they
3The terms “fraudulent transfers” and “fraudulent
conveyances” as quoted in the statute below are used
interchangeably.
4The district court may withdraw the reference “for cause
shown” and must withdraw if resolution of the proceeding “requires
consideration of both title 11 and other laws of the United States
regulating organizations or activities affecting interstate
commerce.” 	28 U.S.C. § 157(d). 	If cause other than Stern has
been alleged, or interstate commerce has been implicated (both
unlikely), I make no recommendation.
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could be presented to one district judge in one proceeding.
Accordingly, by separate order issued concurrently with this
Recommendation, all sixteen Motions are being consolidated, with
this adversary proceeding designated as the lead case. 5 	If Summit
Law Group objects to this procedure it should do so promptly, in
which case the court will amend the consolidation order and
transmit Summit’s motion separately.
When counsel for Heller stated that he would oppose the
Motions, I informed all counsel that I would, sua sponte, make my
recommendation that the Motions be denied as permitted by our
local rules. 	Counsel for Heller has the task of advocating for
his client and no doubt will do so when he opposes the Motions
when it is time. 6 	That is not my role. 	Rather, I make this
recommendation to give the assigned district judge my best
judgment about what I think Stern requires and does not require
and why the adversary proceedings should stay with me for now.
5On September 21, 2011, while I was preparing this
Recommendation, counsel for plaintiff advised my staff that
preliminary settlements had been reached with five defendants, and
there was a possibility that two more defendants will settle.
Those defendants were not identified. 	Even when those settlements
are effective, several Motions will remain.
6B.L.R. 5011-2(d) provides:
(d) 	Scheduling and Briefing.
Unless the assigned District Judge orders otherwise: within 14
days after receiving notice of the assignment to a District Judge
under subsection (c) of this rule, any party objecting to
withdrawal of the reference shall file in the District Court its
opposition brief of not more than ten pages; 14 days thereafter,
any party supporting withdrawal of the reference may file a reply
brief of not more than ten pages; no hearing will be held unless
the assigned District Judge orders otherwise.
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III. 	DISCUSSION
A. 	Summary of Underlying Actions
Heller, the Reorganized Debtor under a confirmed chapter 11
plan, is seeking to recover from the defendant law firms the value
of profits received by them with respect to unfinished business
that was being handled by Heller at the time of its dissolution
and taken to those firms by former Heller partners.
As part of its dissolution process, Heller agreed to waive
its rights under Jewel v. Boxer, 156 Cal. App. 3d 171 (1984), to
recover fees associated with such unfinished business and
generated by its attorneys after their departure. 	Heller now
seeks to avoid what is generally known as the Jewel Waiver as
constituting actual or constructive fraudulent transfers pursuant
to 11 U.S.C. §§ 548 and 550, as well as under California Civil
Code §§ 3439.04, 3439.05, 3439.07 via 11 U.S.C. § 544.
Similar adversary proceedings have been filed in the Heller
case and the Brobeck bankruptcy and resolved by settlement. 	None
has gone to trial. 7
B. 	Law Governing My Authority to Enter Final Judgments
The district courts have original and exclusive jurisdiction
over all bankruptcy cases. 	28 U.S.C. § 1334(a). 	The district
courts also have original but not exclusive jurisdiction over all
proceedings arising under title 11, or arising in or related to
7For a more thorough description of the underlying facts,
theories of recovery and examination of the fraudulent transfer
law in this context, see my prior decisions in Heller Ehrman LLP
v. Arnold & Porter LLP (In re Heller Ehrman LLP), 2011 WL 1539796
(Bankr. N.D. Cal. April 22, 2011) (denying the defendants’ motions
to dismiss) and Greenspan v. Orrick, Harrington & Sutcliffe (In re
Brobeck Phleger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal.
2009).
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cases under title 11. 	28 U.S.C. § 1334(b).
After the Supreme Court held in Northern Pipeline Constr. Co.
v. Marathon Pipe Line Co., 458 U.S. 50 (1982), that bankruptcy
courts could not hear and decide a state law breach of contract
claim, Congress enacted procedures for determining when and to
what extent a bankruptcy court can resolve matters described in 28
U.S.C. § 1334 (a) and (b). 	See 28 U.S.C. § 157 (“Section 157"). 8
A district court may refer such matters to the bankruptcy court.
28 U.S.C. § 157(a). 	Our district court has done so in B.L.R.
5011-1. 9
Section 157(b)(1) of title 28 permits a bankruptcy court to
“hear and determine” all cases and all “core proceedings arising
under title 11, or arising in a case under title 11.” 	A
bankruptcy court can enter orders and judgments in such matters,
subject to appellate review under 28 U.S.C. § 158. 	Subsection
(b)(2) lists examples of “core proceedings,” including
“proceedings to determine, avoid, or recover fraudulent
conveyances” such as in these adversary proceedings before me. 	28
U.S.C. § 157(b)(2)(H). 	“A determination that a proceeding is not
8Section 157 is not a jurisdictional provision. 	Rather, it
provides a mechanism for ascertaining whether a bankruptcy court
can enter final orders and judgments. 	Stern, 131 S.Ct. at 2607
(“Section 157 allocates the authority to enter final judgment
between the bankruptcy court and the district court. [] That
allocation does not implicate questions of subject matter
jurisdiction.”) 	See also Heller v. Gregory Canyon, Ltd., 2011 WL
3878347 at *3 n.4 (Bankr. N.D. Cal. Aug. 30, 2011).
9“Pursuant to 28 U.S.C. § 157(a), all cases under Title 11
and all civil proceedings arising under Title 11 or arising in or
related to a case under Title 11 are referred to the Bankruptcy
Judges of this District, except as provided in B.L.R. 5011-1(b)
[regarding actions that were pending in district court on the date
of the filing of the bankruptcy petition].” 	B.L.R. 5011-1(a).
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a core proceeding shall not be made solely on the basis that its
resolution may be affected by State law.” 	28 U.S.C. § 157(b)(3).
Section 157(b)(3) imposes on me the obligation to determine
whether a matter is core or not. 10 	For the most part the moving
defendants have conceded that the actions against them are core
proceedings, but I have not made a final determination. 	They no
doubt will argue, as was done in Stern, that even though
fraudulent transfer actions are core under the statute, bankruptcy
judges cannot enter final judgments. 	Stated otherwise, they might
denominate these proceedings as “unconstitutional core”
proceedings because of the delegation of authority to bankruptcy
judges. 	If I determine that these are core proceedings, I can
issue a final judgment. The statute says so and Stern does not
hold to the contrary. 	If timely objections to my doing so are
raised before me and preserved on appeal, the district court can
decide the issue on appeal.
Section 157(c)(1) permits a bankruptcy judge to hear non-core
proceedings that are otherwise related to the bankruptcy case. 	28
U.S.C. § 157(c)(1). 	In such non-core, related-to proceedings, a
bankruptcy court “shall submit proposed findings of fact and
conclusions of law to the district court, and any final order or
judgment shall be entered by the district judge after considering
the bankruptcy court’s proposed findings and conclusions and after
reviewing de novo those matters to which any party has timely and
10Section 157(b)(3) of Title 28 states that “the bankruptcy
judge shall determine, on the judge’s own motion or on timely
motion of a party,” whether a proceeding is a “core” one in which
it can enter final judgments. 	28 U.S.C. § 157(b)(3) (emphasis
added).
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specifically objected.” 11 	Id. 	That is exactly what the bankruptcy
court did not do in Stern (discussed below), and exactly why the
judgment it entered was not final. 	It is clear from Stern,
however, that 	the bankruptcy court there should have treated the
matter before it as non-core and adhered to the proposed findings
procedure in Section 157(c)(1) and Fed. R. Bankr. P. 9033. 	In
fact, the district court in Stern treated the bankruptcy judge’s
findings as proposed and modified them. 	The Supreme Court found
no fault with that procedure but simply ruled that the district
court judgment was too late: a Texas probate judgment was entered
between the time of the bankruptcy court’s ruling and the district
court’s judgment and was thus entitled to preclusive effect.
If I keep these matters and the district court on appeal
11Federal Rule of Bankruptcy Procedure 9033 governs the
procedures for a district court’s de novo review of the proposed
findings of fact and conclusions of law of a bankruptcy court in a
non-core proceeding. 	A party must file and serve written
objections within 14 days of service of the findings and must
identify the specific finding or conclusions to which they object
as well as the grounds for such objection. 	The objecting party
must arrange for a prompt transcription of the record for the
review. 	Fed. R. Bankr. P. 9033(a).
“The district court shall make a de novo review upon the
record or, after additional evidence, of any portion of the
bankruptcy judge’s findings of fact or conclusions of law to which
specific written objection has been made in accordance with this
rule. 	The district judge may accept, reject, or modify the
proposed findings of fact or conclusions of law, receive further
evidence, or recommit the matter to the bankruptcy judge with
instructions.” 	Fed. R. Bankr. P. 9033(d).
De novo review therefore does not necessarily require a new
trial; rather, the district court has broad discretion in the
manner in which it conducts its de novo review. 	The notion that
the district judge will have to reinvent the wheel and start all
over is simply not so. 	De novo review might be nothing more than
reviewing the findings and agreeing with them. 	And review of
conclusions of law de novo is exactly the same as the rule of
appellate practice.
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disagrees with my determination that a matter is core, or perhaps
is “unconstitutionally core,” it can simply treat my findings of
fact as “proposed findings” and review them de novo. 	I can
simplify the process by committing that any findings of fact I
make at trial should be treated as proposed if the district court
concludes that I lacked authority actually to enter those
findings.
I also note that in non-core proceedings I can resolve pre-
trial matters, including case-dispositive motions that do not
require factual findings, notwithstanding the absence of consent
from all parties. 	In re Healthcentral.com, 504 F.3d 775, 787 (9th
Cir. 2007). 	In other words, if a proceeding could be disposed of
on uncontested facts, summary judgment would be appropriate. 	The
legal rules are always subject to de novo review. 	There is
absolutely no reason why I would not follow the same procedure if
these matters are found “unconstitutionally core” (viz., non-core)
matters.
C. Stern v. Marshall
1. 	The Holding - and What It Did Not Hold.
Stern is the first Supreme Court decision to address the
constitutionality of any portion of Section 157(b) since its
enactment. 	The Court held that a bankruptcy court cannot enter
final findings of fact with respect to a debtor’s state law
counterclaim against a creditor who had filed a proof of claim
against the bankruptcy estate. 	The court concluded that while
Section 157(b)(2) -- which identifies “counterclaims by the estate
against persons filing claims against the estate” as core –-
conferred statutory authority for the court to hear and determine
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the counterclaim, that portion of the statute was an
unconstitutional allocation of judicial power from Article III
judges to Article I bankruptcy judges:
Article III, § 1, of the Constitution commands that
"[t]he judicial Power of the United States, shall be
vested in one supreme Court, and in such inferior Courts
as the Congress may from time to time ordain and
establish." 	That Article further provides that the
judges of those courts shall hold their offices during
good behavior, without diminution of salary. 	Ibid.
Those requirements of Article III were not honored here.
The Bankruptcy Court in this case exercised the judicial
power of the United States by entering final judgment on
a common law tort claim, even though the judges of such
courts enjoy neither tenure during good behavior nor
salary protection. We conclude that, although the
Bankruptcy Court had the statutory authority to enter
judgment on [the debtor’s] counterclaim, it lacked the
constitutional authority to do so.
Stern, 131 S.Ct. at 2600-01.
Defendants contend that Stern is a game-changer: that I
cannot enter a final judgment in the underlying fraudulent
conveyance actions, notwithstanding the provisions of Section
157(b). 	While dicta in Stern may indicate that fraudulent
transfer actions cannot be finally heard and determined by an
Article I judge, 12 the holding is much narrower.
12The Supreme Court stated that it had concluded in
Granfinanciera v. Nordberg, 492 U.S. 33 (1989), that “Congress
could not constitutionally assign resolution of [a] fraudulent
conveyance action to a non-Article III court.” 	Stern, 131 S.Ct.
at 2614, n.7. “Because neither party asks us to reconsider the
public rights framework for bankruptcy, we follow the same
approach here.” Id. 	In the text accompanying footnote 7, the
Court further stated:
The most recent case in which we considered application
of the public rights exception — and the only case in
which we have considered that doctrine in the bankruptcy
context since Northern Pipeline — is [Granfinanciera].
In Granfinanciera we rejected a bankruptcy trustee’s
argument that a fraudulent conveyance action filed on
behalf of a bankruptcy estate against a noncreditor in a
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The comments in Stern about Granfinanciera do support an
argument that the statutory designation of fraudulent transfer
actions as core may be unconstitutional; however, one could also
extrapolate from statements made in the decision that such a
delegation is not appropriate when section 544(b) and section 548
claims are asserted. 	Id. at 2618 (a matter may be core if “the
action at issue stems from the bankruptcy itself”). 	The bottom
line, though, is that the Supreme Court did not hold in Stern that
bankruptcy judges lack authority to render final judgments on
fraudulent transfer claims. 	In fact, it emphasized -- repeatedly
-- that its holding was narrow and limited to Section 157(b)(2)(C)
(counterclaims). 	Given these express limitations of the holding,
I believe I am still bound by the Ninth Circuit’s holding in In re
Mankin, 823 F.2d 1296 (9th Cir. 1987), that fraudulent transfer
actions are core whether arising directly under section 548 of the
Bankruptcy Code or from state law (but made available to a
bankruptcy proceeding fell within the “public rights”
exception. 	We explained that, “[i]f a statutory right
is not closely intertwined with a federal regulatory
program Congress has power to enact, and if that right
neither belongs to nor exists against the Federal
Government, then it must be adjudicated by an Article
III court.” 	Id., at 54–55, 109 S.Ct. 2782. 	We reasoned
that fraudulent conveyance suits were “quintessentially
suits at common law that more nearly resemble state law
contract claims brought by a bankrupt corporation 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. 	As a
consequence, we concluded that fraudulent conveyance
actions were “more accurately characterized as a private
rather than a public right as we have used those terms
in our Article III decisions.” 	Id., at 55, 109 S.Ct.
2782.
Stern, 131 S.Ct. at 2614.
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bankruptcy estate under section 544(b)) and that Section
157(b)(2)(H) (fraudulent transfers) does not violate Article III
of the Constitution by authorizing bankruptcy judges to decide
them. 13
2. 	The Applicability of Stern To These Proceedings
In concluding that a defendant is entitled to Article III
adjudication of a counterclaim that does not arise under
bankruptcy law and that does necessarily have to be determined in
allowing or disallowing the initial claim, the Supreme Court
explicitly limited the scope of its holding: 	“We conclude today
that Congress, in one isolated respect, exceeded that [Article
III] limitation . . . .” 14 	Id. at 2620. 	This narrow holding “does
13I recognize that the Ninth Circuit’s holding in Mankin was
based on its conclusion that a trustee’s ability to avoid a
fraudulent transfer is a public right, a conclusion that is
contrary to the Supreme Court’s holding in Granfinanciera.
Nonetheless, neither Granfinanciera (which involved a defendant’s
right to a jury trial in a fraudulent conveyance action) nor Stern
overrule Mankin’s holding: that section 157(b)(2)(H) is
constitutional.
14In a thorough and thoughtful analysis of the Stern decision,
the court in In re Salander O’Reilly Galleries, 453 B.R. 106, 115-
116 (Bankr. S.D.N.Y. 2011) pointed out the many instances in which
the Supreme Court indicated that its holding was narrow, stating:
Stern is replete with language emphasizing that the
ruling should be limited to the unique circumstances of
that case, and the ruling does not remove from the
bankruptcy court its jurisdiction over matters directly
related to the estate that can be finally decided in
connection with restructuring debtor and creditor
relations.
Among the examples cited by the Salander O’Reilly court are the
following:
[T]he debtors’ claims in the cases on which [Vickie
Marshall] relies were themselves federal claims under
bankruptcy law, which would be completely resolved in
the bankruptcy process of allowing or disallowing
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not impact a bankruptcy court’s ability to enter a final judgment
in any other type of core proceeding authorized under 28 U.S.C. §
157(b)(2).” 	In re Peacock, 2011 WL 3874461 (Bankr. M.D. Fla.
Sept. 2, 2011); see also In re Safety Harbor Resort and Spa, 2011
WL 3849639 (Bankr. M.D. Fla. 2011) (concluding that actions to
recover preferential transfers remain core).
As observed by the Safety Harbor court and the bankruptcy
court in In re Washington Mut., Inc., 2011 WL 4090757 (Bankr. D.
Del. 2011), the majority in Stern acknowledged that a
determination of whether a matter is core requires a consideration
of “whether the action at issue stems from the bankruptcy itself”
(Stern, 131 S.Ct. at 2618). 	Here, as noted, the fraudulent
transfer actions are authorized by sections 544(b) and 548 of the
Bankruptcy Code.
Moreover, but for the bankruptcy, Heller could not assert
these claims at all. 	As the transferor, it would lack standing
had it not acquired the rights and duties of a trustee as a
debtor-in-possession (and now as the liquidating debtor). 	The
claims. 	Here Vickie’s claim is a state law action
independent of the federal bankruptcy law and not
necessarily resolvable by a ruling on the creditor's
proof of claim in bankruptcy.
Stern, 131 S.Ct. at 2610 (emphasis added); id. at 2618 (“Congress
may not bypass Article III simply because a proceeding may have
some bearing on a bankruptcy case; the question is whether the
action at issue stems from the bankruptcy itself or would
necessarily be resolved in the claims allowance process ”)
(emphasis added); id. at 2619 (“We do not think the removal of
counterclaims such as Vickie’s from core bankruptcy jurisdiction
meaningfully changes the division of labor in the current statute;
we agree with the United States that the question presented here
is a ‘narrow’ one”); id. at 2620 (“We conclude today that
Congress, in one isolated respect, exceeded [the limitations of
Article III] in the Bankruptcy Act of 1984”).
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Ninth Circuit in Mankin drew another important distinction between
fraudulent transfer actions and state law claims like those at
issue in Northern Pipeline and Stern: those claims cannot exist
but for the debtor’s insolvency, its inability to pay debts as
they become due, or its unreasonably small capital –- conditions
which generally result in a bankruptcy.
The contract suit in Northern Pipeline could have been
brought whether or not the plaintiff was bankrupt. 	A
fraudulent conveyance, though, can only exist if the
conveyor is insolvent or about to become insolvent, and
thus is inextricably tied to the bankruptcy scheme. 	See
In re Kaiser, 722 F.2d 1574, 1582 (2d Cir. 1983). 	If a
conveyor enjoys good financial health, a conveyance
cannot harm its creditors, who would thus have no cause
of action to recover transfer.
Mankin, 823 F.2d at 1307 n.4.
As I acknowledged earlier, the Supreme Court has previously
concluded that fraudulent conveyance actions do not involve
“public rights.” 	Granfinanciera, 492 U.S. 33 (1989). 	In Stern,
the Supreme Court reached its “narrow” holding -- purportedly
unlikely to have significant “practical consequences” or “change
all that much” -- by reasoning that the debtor’s claim did not
involve a “public right” and thus could not be delegated to a non-
Article III court for final determination. 	If that reasoning had
been the holding, I would agree that core fraudulent transfer
actions might exceed my authority. 	But the holding was expressly
limited, and given that Heller’s claims do arise from bankruptcy
law (11 U.S.C. §§ 544(b) & 548) and would not exist but for the
bankruptcy (unlike the counterclaims in Stern), I believe that
Stern may not limit my power to enter a final judgment on those
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claims. 	See Safety Harbor, 2011 WL 3849639 at *1; 15 In re
Innovative Comm. Corp., 2011 WL 3439291 (Bankr. D. V.I. Aug. 5,
15The Safety Harbor ably explained why the Stern’s reliance on
Granfinanciera does not mean that fraudulent transfers are no
longer core:
Nor does the Stern Court’s reliance on Granfinanciera
actually limit a bankruptcy court’s jurisdiction to
finally resolve the other core proceedings identified in
section 157(b)(2). 	Understandably, some bankruptcy
courts have expressed concerns about the litigation that
may result due to uncertainties created by Stern with
respect to other types of proceedings defined as core
under section 157(b)(2) that were not at issue in Stern.
To be sure, the Stern Court did explain that
Granfinanciera’s “distinction between actions that seek
‘to augment the bankruptcy estate’ and those that seek
‘a pro rata share of the bankruptcy res’ reaffirms that
Congress may not bypass Article III simply because a
proceeding may have some bearing on a bankruptcy case.”
And the Stern Court did emphasize that the “question is
whether the action at issue stems from the bankruptcy
itself or would necessarily be resolved in the claims
allowance process.” It is understandable that some would
view that language as a new limit on the Court’s
constitutional authority to finally resolve other “core”
proceedings, such as fraudulent conveyance or preference
actions.
But the Stern Court’s use of the word “reaffirm” makes
clear that nothing has changed. 	The sole issue in
Granfinanciera was whether the Seventh Amendment
conferred on petitioners a right to a jury trial in the
face of Congress’ decision to allow a non-Article III
tribunal to adjudicate the claims against them.
Granfinanciera did not hold that bankruptcy courts lack
jurisdiction to enter final judgments on fraudulent
conveyance claims. 	In fact, the Supreme Court went to
great lengths to emphasize that issue was not even
before it in that case. 	As explained in Granfinanciera,
“however helpful it might be for us to adjudge every
pertinent statutory issue presented by the 1978 Act and
the 1984 Amendments, we cannot properly reach out and
decide matters not before us. 	The only question we have
been called upon to answer in this case is whether the
Seventh Amendment grants petitioners a right to a jury
trial.”
Safety Harbor, 2011 WL 3849639 at *10-11.
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2011) (holding that bankruptcy court could enter final judgment on
a section 548 claim, notwithstanding the dicta in Stern, but
entering proposed findings with respect to the state law
fraudulent transfer claims brought by the trustee under section
544).
After Stern, some courts have concluded that they cannot hear
fraudulent conveyance claims as core proceedings. 	They are
focusing on the dicta of Stern, not its holding. 	I believe that
this approach thrusts unnecessary burdens on already overworked
district courts, especially when bankruptcy courts have a
particular expertise in and familiarity with avoidance actions.
If there is a constitutional challenge, as stated previously,
I can deal with it as any trial court should, with the tried and
true appellate procedures in place and the “proposed findings”
alternative for my findings of fact where necessary. 	The record
should be fully developed and the determination of
unconstitutionality reserved as a last resort rather than made so
near the outset of the cases in what may truly be a needless
advisory opinion. 	These adversary proceedings may be resolved by
summary judgment (no facts to find; conclusions of law reviewed de
novo) and even with findings (or proposed findings) favorable to
defendants.
4. 	Authority to Deal with Core Matters.
I disagree with at least one court’s post-Stern holding that
it not only was unable to hear and determine fraudulent transfer
claims designated as core in Section 157(b)(2)(H), but that it
could not enter proposed findings as it could if the claims were
non-core. 	In re Blixseth, 2011 WL 3274042 (Bankr. D. Mont. Aug.
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1, 2011).
The Blixseth court reasoned that the absence of provisions in
title 28 permitting a bankruptcy court to enter proposed findings
in matters designated prevented it from making such findings.
Assuming - as I do not - that fraudulent transfer actions can no
longer constitutionally be tried by a non-Article III judges,
title 28 does not prohibit the use of the proposed findings
procedure. 	The absence of a provision is not a prohibition.
Further, Stern approved exactly such a procedure. 	Similarly, the
fact that Bankruptcy Rule 9033 only mentions non-core proceedings
in no way prohibits following the same procedure in core matters.
In re Emerald Casino, Inc., 2011 WL 3799643 at *1 and n.1 (Bankr.
N.D. Ill. Aug. 26, 2011) (disagreeing with Blixseth and noting
that if a matter is no longer covered by the statutory definition
of core, they can still be non-core and fall fully within the
definition of “related to” proceedings.).
In summary, if the fraudulent transfer claims are ultimately
determined to fall outside the scope of my authority they would
still be related to the bankruptcy case. I could enter proposed
findings and, as stated above, I could determine dispositive
motions that do not require factual findings. 	Healthcentral.com,
504 F.3d at 787. 	Finally, where a right to a jury exists and the
parties do not consent to my presiding, our Bankruptcy Local Rules
provide a simple procedure that once again spares the district
judge from dealing with these specialized cases until it is time
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to call the jury. 16
IV. 	CONCLUSION
For the foregoing reasons, I believe that Stern is
inapplicable and that these matters are core proceedings in which
I can enter a final judgment. 	Even if it were not, I could handle
all pre-trial matters and motions exactly as I have done in other
non-core cases. 	Any findings of fact could be treated as
“proposed” as appropriate. 	I therefore recommend that the
district court deny to motions to withdraw the reference of these
16B.L.R. 9015-2 provides, in part:
9015-2. Jury Trials and Personal Injury and Wrongful Death Claims.
(a) 	Determination of Right.
In any proceeding in which a demand for jury trial is made,
the Bankruptcy Judge shall, upon the motion of one of the parties,
or 	upon 	the 	Bankruptcy 	Judge’s 	own 	motion, 	determine 	whether 	the
demand was timely made and whether the demanding party has a right
to 	a 	jury 	trial. 	The 	Bankruptcy 	Judge 	may, 	on 	the 	Judge’s 	own
motion, 	determine 	that 	there 	is 	no 	right 	to 	a 	jury 	trial 	in 	a
proceeding 	even 	if 	all 	of 	the 	parties 	have 	consented 	to 	a 	jury
trial.
(b) 	Motion and Certification to District Court.
If the Bankruptcy Judge determines that the demand for a jury
trial was timely made and the party has a right to a jury trial, and
if all parties have not filed written consent to a jury trial before
the 	Bankruptcy 	Judge, 	the 	Bankruptcy 	Judge 	shall, 	after 	having
resolved 	all 	pre-trial 	matters, 	including 	dispositive 	motions,
certify to the District Court that the proceeding is to be tried by
a 	jury 	and 	that 	the 	parties 	have 	not 	consented 	to 	a 	jury 	trial 	in
the 	Bankruptcy 	Court, 	and 	shall 	include 	in 	such 	certification, 	a
report of the status of the proceeding and a recommendation on when
the 	matter 	would 	be 	suitable 	for 	withdrawal 	from 	the 	Bankruptcy
Court. 	Upon such certification, the party who has demanded a jury
trial shall promptly file a motion in accordance with B.L.R. 5011-
2(a) for withdrawal of the reference of the proceeding to be tried
to 	a 	jury. 	The 	motion 	and 	the 	certification 	shall 	thereafter 	be
handled in the District Court in accordance with B.L.R. 5011-2(c),
(d) and (e).
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adversary proceedings.
Respectfully submitted
/s/ Dennis Montali
United States Bankruptcy Judge
*** END OF RECOMMENDATION ***
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