Paragon Court Upholds Bankruptcy Courts' Constitutional Authority To Adjudicate Fraudulent Transfer Claims

Author:Mr Matthew K. Kelsey, Samuel A. Newman, J. Eric Wise and Matthew P. Porcelli
Profession:Gibson, Dunn & Crutcher

The Supreme Court's watershed Stern v. Marshall decision altered the division of labor between bankruptcy courts and district courts, establishing that bankruptcy courts lacked authority under Article III of the United States Constitution to enter final orders resolving certain "core" claims notwithstanding Congress's grant of such authority in the Bankruptcy Code.1 A recent decision by the Bankruptcy Court for the District of Delaware in the bankruptcy case of offshore drilling contractor Paragon Offshore2 represents the latest chapter in Stern's ongoing aftermath.3 While Stern focused on a state law tortious interference counterclaim, Paragon involves quintessential bankruptcy causes of action: fraudulent transfer claims held by the debtor's estate.

In Paragon, the court determined that under Stern v. Marshall and related case law, Article III does not preclude bankruptcy courts from entering final orders to resolve fraudulent transfer claims brought by a debtor's successor-in-interest against a defendant that has not asserted a claim against the debtor's estate. In so holding, the bankruptcy court disagreed with prior decisions by the Ninth Circuit and district courts in the Southern District of New York, setting the stage for a continuing battle on appeal and creating the potential for an eventual circuit split on the issue. The decision also provides guidance on the related issue of implied consent to bankruptcy court authority under Stern.

  1. Background And Procedural Context

    The Paragon decision arose in an adversary proceeding brought by a post-confirmation litigation trust (the "Litigation Trust") against Noble Corporation plc ("Noble"), a former parent entity that spun off Paragon Offshore plc and certain of its debtor affiliates (collectively, "Paragon") in an August 2014 transaction (the "Spinoff"). The Litigation Trust brought certain causes of action, including five fraudulent transfer claims, against Noble, alleging that the Spinoff defrauded Paragon's creditors. Specifically, the complaint alleged that Noble used the Spinoff to isolate a fleet of aged offshore drilling rigs in a newly created group of subsidiaries named Paragon Offshore, caused Paragon to incur $1.73 billion of indebtedness, transferred the proceeds to Noble, and distributed Paragon equity to Noble shareholders, leaving limited value behind for Paragon's creditors.

    Paragon commenced voluntary chapter 11 proceedings on February 14, 2016. Shortly after the petition date, the debtors proposed an ultimately unsuccessful plan (the "Failed Plan") that incorporated a settlement agreement between Noble and Paragon (the "Settlement Agreement"). The Settlement Agreement provided broad releases for Noble and affiliated parties in connection...

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