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The Ninth Circuit Holds That the Bankruptcy Court Has Authority to Enter Judgment on Stern Claims Based on the Parties' Consent

The Ninth Circuit recently issued the opinion, Mastro v. Rigby, No. 13-35209 (9th Cir. Aug. 22, 2014), which held that the bankruptcy court has authority to enter judgment on Stern claims based on the parties' consent. In this case, Linda Mastro ("Ms. Mastro"), the non-filing spouse of the debtor and a nonclaimant to the bankruptcy estate, appealed the district court's dismissal of her appeal of the bankruptcy court's judgment finding her liable for fraudulently transferring more than $1 million in bankruptcy estate assets. The Ninth Circuit concluded that the district court abused its discretion in dismissing Ms. Mastro's appeal under the fugitive disentitlement doctrine because no necessity justified invoking the rule of disentitlement under the circumstances.

The bankruptcy trustee had been successful in prosecuting a fraudulent conveyance action against Ms. Mastro. Ms. Mastro promptly appeled the judgment entered by the bankruptcy court. However, she went missing when she appealed. Authorities eventually discovered Ms. Mastro was living in France and she was thus indicted on criminal bankruptcy charges arising from the judgment. Due to Ms. Mastro's flight to France, the district court refused to reach the merits of Ms. Mastro's appeal. Rather, the district court dismissed her appeal under the fugitive disentitlement doctrine, finding that "her blatant disregard for the authority of the judicial system renders her ineligible to pursue an appeal."

Ms. Mastro appealed the district court's dismissal of her appeal. The Ninth Circuit first reviewed whether the bankruptcy court and the district court had jurisdiction, holding that the bankruptcy court had authority to enter judgment based on the parties' consent. Specifically, the Ninth Circuit found that the adversary proceeding against Ms. Mastro involved Stern claims. The Ninth Circuit found that after Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) (holding that bankruptcy court generally cannot enter final judgment on Stern claims, or "proceedings that are defined as 'core' under 11 U.S.C. § 157(b) but that may not, as a constitutional matter, be adjudicated as such."), the Ninth Circuit's holding in Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 557 (9th Cir. 2012) (ruling that parties' consent gives bankruptcy court jurisdiction over Stern claims), remained good law. The Ninth Circuit then reviewed whether the district court had abused its discretion in dismissing the appeal under the fugitive disentitlement doctrine. The Ninth Circuit held that the district court had abused its discretion because no necessity justified invoking the rule of disentitlement. The Ninth Circuit declined to hear the merits of the appeal in the first instance and remanded the case to the district court. To see the full opinion, please click here.

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