Burr Alert: Evolving Bankruptcy Jurisdiction - Ninth Circuit Rules That Bankruptcy Courts Cannot Enter Final Judgment On Fraudulent Conveyance Claims

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Before the Supreme Court’s seminal ruling in Stern v. Marshall, bankruptcy courts regularly entered final orders in fraudulent conveyance actions and other “core” matters. In Stern v. Marshall, the Supreme Court ruled that despite being statutorily defined as “core” under the bankruptcy code, bankruptcy courts do not have the constitutional power to adjudicate counterclaims to proofs of claim because they are based in state law. Following the same course, the Ninth Circuit recently held in In re Bellingham Insurance Agency, Inc., that a non-Article III bankruptcy judge lacks constitutional authority to enter a final judgment on a fraudulent conveyance action against a nonclaimant to a bankruptcy estate.

In In re Bellingham Insurance Agency, Inc., the debtor (Bellingham Insurance Agency) transferred funds to a closely related entity (Executive Benefits Insurance Agency) shortly before filing its chapter 7 petition. The Trustee filed a complaint against Bellingham alleging that the funds were property of the estate and asserting claims under federal and state law. The bankruptcy court granted summary judgment in favor of the Trustee, finding that Executive Benefits was a corporate successor of Bellingham and therefore liable for its debts.

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