Delaware District Court Denies Interlocutory Appeal on Stern Claims

Introduction

Bankruptcy courts are often asked to determine the state law rights of debtors and claimants alike.  However, the Supreme Court in 2011 held that the non-Article III courts (i.e., bankruptcy courts) generally do not hold constitutional authority to enter final judgments on state common law claims, despite being conferred with statutory authority under 11 U.S.C. § 157(b)(1) to decide “core” bankruptcy matters.   Stern v. Marshall, 564 U.S. 462, 482-87 (2011).  The category of claims covered by the Supreme Court’s opinion subsequently became known as Stern claims, which spawned numerous opinions surrounding when a bankruptcy court has constitutional–not statutory–authority to adjudicate claims or issues involving state common law.

A fraudulent transfer claim is a typical example of a “core” bankruptcy matter that generally cannot be adjudicated to final judgment by a bankruptcy court, despite statutory authority.   See 11 U.S.C. § 157(b)(2)(H) (making a fraudulent transfer claim a “core” matter); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 55-56 (1989).

While the holdings in Stern and Granfinanciera seem fairly clear, what remains uncertain is how and when a claimant can assert its Stern rights in the middle of a lengthy and complex adversary proceeding.

In Paragon Litigation Trust v. Noble Corporation PLC (In re Paragon Offshore PLC), Misc. No. 19-mc-00078 (D. Del. April 9, 2020), a Delaware District Court recently dismissed an interlocutory appeal of a ruling denying a defendant’s motion to determine that the bankruptcy court lacked jurisdiction to enter a final judgment on certain fraudulent transfer claims, which were blended with several other non-fraudulent transfer claims in a post-confirmation adversary proceeding brought by a litigation trust.  The District Court primarily based its decision on the issue of whether the immediate appeal of the ruling materially advanced the ultimate termination of the litigation.

Interlocutory Appeal Standard

28 U.S.C. § 158(a)(3) confers authority upon a district court to hear appeals from interlocutory orders and decrees entered by bankruptcy courts.  Typically, district courts follow the same standards used to grant interlocutory appeals of district court orders to federal courts of appeals under 28 U.S.C. § 1292(b).

Under the standards of section 1292(b), an interlocutory appeal is permitted only when the order at issue (1) involves a controlling question of law upon which there is (2) substantial ground for difference of opinion as to its correctness, and (3) if appealed immediately, may materially advance the ultimate termination of the litigation See 28 U.S.C. § 1292(b) (emphasis added); Katz v. Carte Blanche Corp., 496 F.2d 747, 754 (3d Cir. 1974).  Generally, an interlocutory appeal under § 1292(b) is appropriate only when the party seeking leave to appeal “establishes exceptional circumstances [to] justify a departure from the basic policy of postponing review until after the entry of final judgment.”  In re Del. and Hudson Ry. Co., 96 B.R. 469, 472-73 (D. Del. 1989), aff’d, 884 F.2d 1383 (3d Cir. 1989).

Analysis

In Paragon Offshore, the District Court focused on the third prong of section 1292(b); whether the appeal materially advanced the ultimate termination of litigation.  Courts place “particular weight” on this factor in determining whether to permit an interlocutory appeal.  See In re Facebook, Inc., IPO Sec. & Derivative Litig., 986 F. Supp. 2d 524, 531 (S.D.N.Y. 2014) (internal quotation marks omitted).

An interlocutory appeal materially advances litigation if it “(1) eliminate[s] the need for trial, (2) eliminate[s] complex issues so as to simplify the trial, or (3) eliminate[s] issues to make discovery easier and less costly.”  Orson, Inc. v. Miramax Film Corp., 867 F. Supp. 319, 322 (E.D. Pa. 1994).

Addressing this prong, the Defendant argued that its motion to determine jurisdiction was important to avoid possible conflicting rulings resulting from differing standards or other procedural complexities arising from Plaintiff’s various claims.  As all eight counts in the adversary complaint turned on identical facts, the Defendant pressed that the immediate appeal would promote judicial efficiency by avoiding later confusion as to differing standards of review, which could place the District Court in an “awkward litigation posture,” because three non-fraudulent transfer claims would be reviewed de novo (if the Bankruptcy Court’s proposed findings were challenged), see 28 U.S.C. § 157(c)(1), while the factual findings for the fraudulent transfer claims would be reviewed only for clear error, see Fed. R. Bankr. P. 7052.  The Defendant suggested that this uncertainty could impact proceedings in the Bankruptcy Court and, in particular, how the parties prepared for their presentations of fact and expert witnesses at trial.

The Plaintiff countered that the resolution of the Stern issues had only one limited effect on the litigation: it determined the standard of appellate review that could apply after trial.  But, Plaintiff contended that whether the District Court decided that issue now or later had no impact on how this case would be tried in the Bankruptcy Court.  Indeed, as the Plaintiff observed, the District Court has a standing order providing that such Court may treat any order of the Bankruptcy Court as proposed findings of fact and conclusions of law in the event it was subsequently determined that such final order or judgment was not consistent with Article III of the United States Constitution.  See Amended Standing Order of Reference in re Standing Order of Reference Re: Title 11 (D. Del. Feb. 29, 2012).

The District Court in Paragon Offshore ultimately agreed with the Plaintiff that the Defendant failed to show that appellate review now of the Bankruptcy Court’s interlocutory ruling on jurisdiction materially advanced the litigation. The District Court found that deciding the standard of review on interlocutory appeal could not have any impact on discovery, trial, or any other significant aspect of further proceedings in the Bankruptcy Court.  Whatever standard of review ultimately applied, and regardless of whether the District Court decided that question now or later, discovery and trial would proceed in the same manner, on the same issues, and on the same timetable.  After trial, if any party filed a post-trial appeal, the time would come when the District Court would ultimately have to determine its standard of review.

Thus, based on the third prong of section 1292(b), the District Court held that the Defendant did not have a right to an interlocutory appeal. See, e.g., Dal-Tile Int’l, Inc. v. Color Tile, Inc., 203 B.R. 554, 557 (D. Del. 1996) (denying interlocutory review after determining that “[i]mmediate appeal from this order will not materially advance the ultimate termination of this litigation,” without discussion of other § 1292(b) factors); First Am. Bank of N.Y. v. Century Glove, Inc., 64 B.R. 958, 962 (D. Del. 1986) (denying interlocutory review even where “Court conclude[d] that there [was] a substantial ground for difference of opinion”).

Takeaway

Having endured nine years of litigation over how a bankruptcy court should treat Stern claims, it is not difficult to see why the District Court in Paragon Offshore was willing to allow the Bankruptcy Court some leeway in adjudicating “core” matters that historically have been left to bankruptcy courts to decide.  While the debate over the treatment of Stern claims is likely not over, the Opinion nonetheless provides some guidance as to how litigants should, or should not, attempt to protect their constitutional rights in adversary proceedings in a post-Stern era–at least in Delaware courts.  Add the Paragon Offshore Opinion to the list of opinions that attempt to narrow the broad application of the Supreme Court’s holding in Stern.

Partner at FisherBroyles, LLP