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Supreme Court Wellness Decision Resolves Issue of Whether Parties Can Consent to Bankruptcy Court Jurisdiction

The recent Supreme Court case of Wellness International Network, Ltd. v. Sharif, – U.S. ___ , No. 13-935 (May 26, 2015) resolved the issue of whether litigants in the Bankruptcy Court can consent to have the Bankruptcy Court decide matters that otherwise would need to be decided by the U.S. District Court.

The Wellness decision resolved an issue that remained undecided since the Court’s prior ruling in Stern v. Marshall, 564 U.S. _ , 131 S.Ct. 2594 (2011), as to whether litigants can consent to having a Bankruptcy Court decide a matter which otherwise would need to be decided by a U.S. District Court judge. The Stern Court had found that the Bankruptcy Court did not have authority to adjudicate counterclaims based on state law.

The Wellness Court distinguished the Stern decision as involving a case in which the parties did not consent to Bankruptcy Court jurisdiction.

It is important to note that the Court in Wellness found that consent does not have to be express and may be implied, but must still be knowing and voluntary, and that parties need to be notified of the right to refuse non-Article III adjudication. The Court indicated that it is a good practice to obtain express consent.

The Wellness decision is particularly relevant to defendants in fraudulent conveyance actions. Trustees and debtors-in-possession routinely file preference and fraudulent avoidance actions against recipients of pre-bankruptcy payments. The Bankruptcy Code gives trustees the right to avoid preferential transfers in section 548 and fraudulent transfers in 548. In addition, it gives trustees and debtors-in-possession the right to utilize state law fraudulent conveyance claims under section 544(b), which typically have a longer reach back period. When New York law applies such claims are brought under Article 10 of New York Debtor & Creditor Law § 270 et seq.

Based on the Wellness decision, the ability of Bankruptcy Courts to hear state law fraudulent conveyance claims when parties expressly consent will no longer be in doubt. Also, consent may be implied as long as it is deemed knowing and voluntary. For tactical and strategic reasons defendants may wish to have fraudulent conveyance claims adjudicated in jury trials in U.S. District Court rather than heard without a jury in the Bankruptcy Court.

The attorneys at Starr & Starr, PLLC, have extensive experience and success in obtaining withdraw of the reference from the Bankruptcy Court to the U.S. District Court in fraudulent conveyances actions.

If you are faced with fraudulent conveyance claims brought by trustees or debtor-in-possession in the U.S. Bankruptcy Court and would like to discuss your options, please contact us at 888-867-8165 or by email at info@starrandstarr.com to schedule a consultation.

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