Hasse v. Rainsdon (In re Pringle)

No. 09-41653 (B.A.P. 9th Cir. July 2, 2013)
Affirming the judgment of the bankruptcy court (“BC”), the Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) held that a defendant impliedly consented to the BC’s entry of a final judgment on a trustee’s fraudulent transfer action brought under § 548.
Procedural context:
The BC held that the debtor fraudulently conveyed his residence to the defendant. The defendant appealed the BC’s determination that the debtor has fraudulently transferred his residence. Despite the BAP’s request that the parties address the effect of Stern and Bellingham in post-hearing briefs, the defendant never raised the issue of whether the BC had the constitutional authority to enter a final judgment in the fraudulent transfer action.
Pringle, the debtor, conveyed his residence to his girlfriend, Hasse. The debtor then filed a Chapter 7 bankruptcy petition less than two years later. A trustee was appointed and asked the debtor about the transfer during at the debtor’s § 341(a) meeting. The debtor said he made the transfer because he was being sued for $100,000 on account of an automobile accident and he was concerned that he might lose his home. Based on this information, the trustee filed an adversary proceeding against Hasse, the defendant. Both parties agreed that the trustee’s action was a core proceeding. Neither party addressed in their pleadings whether they consented to the BC’s entry of a final judgment. During discovery, the debtor then said he conveyed his residence to the defendant in exchange for her promise to take care of him for the rest of his life. The debtor was a diabetic. The BAP, sua sponte, raised the issue of whether a BC had constitutional authority to enter a final judgment in a fraudulent transfer action if there was implied consent. Based on the Ninth Circuit’s decision in Bellingham, the BAP concluded that implied consent was sufficient and could be supplied either where a party remains silent about objecting to a BC’s constitutional authority to enter a final judgment and then belatedly raises the issue when a case does not conclude in that party’s favor (i.e., sandbagging) or where a party fails to timely object to a BC’s constitutional authority to enter a final judgment (i.e., forfeiture). The BAP held that implied consent occurs where a party is alerted or held to be alerted of the potential risks of failing to raise a BC’s authority to enter a final judgment; there is then a rebuttable presumption that a party’s failure to act was intentional. Applying this rule, the BAP concluded that the defendant’s counsel should have been aware of her client’s right to refuse consent and demand an Article III forum to determine the fraudulent transfer action because the Ninth Circuit had issued Marshall v. Stern before the defendant answered the trustee’s adversary complaint. Moreover, the Supreme Court also granted certiorari in Stern two months before trial. These developments “alerted the legal world to bankruptcy courts’ possible lack of authority to decide fraudulent transfer actions.” Nevertheless, the defendant “extensively participated in litigation at the BC and on appeal without raising any challenge to the BC’s constitutional authority.” Thus, the BAP concluded that the defendant’s conduct constituted implied consent to the authority of the BC to enter a final judgment. Additionally, the BAP concluded that: (1) the BC was not clearly erroneous in concluding that the debtor had not been given “reasonably equivalent value” in the transfer within the meaning of § 548; (2) it was irrelevant whether the transferred residence could have otherwise been exempted by the debtor because § 522(g) prohibits a debtor from claiming an exemption in property recovered by the trustee to the extent the debtor voluntarily transferred away that property; and (3) there was indicia of fraudulent intent and the BC was not clearly erroneous for alternatively holding that the debtor intentionally (as opposed to constructively) fraudulently transferred the residence.
Markell, Dunn and Jury, bankruptcy judges.

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