November 8, 2021

NEVADA STATE COURT’S HAVE CONCURRENT JURISDICTION WITH BANKRUPTCY COURTS OVER FRAUDULENT TRANSFER ACTION

On September 16, 2021, the Nevada Supreme Court, sitting en banc, issued its opinion in the case of Superpumper, Inc. et al. v. Leonard, 137 Nev. Adv. Op. 43 (Sept. 2021), holding that Nevada state district courts have concurrent subject matter jurisdiction with federal bankruptcy courts over fraudulent conveyance actions.

On September 16, 2021, the Nevada Supreme Court, sitting en banc, issued its opinion in the case of Superpumper, Inc. et al. v. Leonard, 137 Nev. Adv. Op. 43 (Sept. 2021), holding that Nevada state district courts have concurrent subject matter jurisdiction with federal bankruptcy courts over fraudulent conveyance actions.  

Background

In 2007, Paul Morabito and Consolidated Nevada Corporation (“CNC”) filed a lawsuit against JH, Inc., Jerry Herbst, and Berry-Hinckley Industries (collectively, the “Herbsts”).  The Herbsts filed counterclaims against Morabito and CNC and ultimately prevailed, obtaining a judgment award of nearly $150 million.  Thereafter, the parties entered into a settlement agreement for $85 million.  Importantly, by that time, Morabito had already moved most assets out of his name to friends and family (through both corporate entities and individuals).  

Morabito and CNC subsequently defaulted on their obligations under the settlement agreement, and as a result, the Herbsts filed: (i) an involuntary bankruptcy petition against Morabito and CNC; and (ii) fraudulent transfer actions in Nevada state district court against the transferees of the assets of Morabito and CNC (collectively, the “Transferrees”).      

The bankruptcy court appointed William “Biff” Leonard as Morabito’s bankruptcy trustee (the “Trustee”), who was subsequently substituted in as the plaintiff in the fraudulent transfer actions.  The automatic stay in the bankruptcy case was then lifted for the Trustee to prosecute the fraudulent transfer actions in state court.  Following an eight-day bench trial, the Nevada state district court avoided all of Morabito’s transfers and awarded the properties to the Trustee.  

The Transferrees appealed to the Nevada Supreme Court, arguing, among other things, that the Nevada state district court did not have subject matter jurisdiction over the fraudulent transfer actions, as that jurisdiction lies solely with the bankruptcy court.  

NV Supreme Court Opinion

Justice Hardesty delivered the unanimous opinion for the Court which held that both Nevada state district courts and federal bankruptcy courts have concurrent jurisdiction over fraudulent transfer actions.  

Justice Hardesty rejected the Transferrees’ arguments that bankruptcy courts have exclusive jurisdiction over “core proceedings” and that a fraudulent conveyance action is a core proceeding.  Importantly, Justice Hardesty noted that whether a matter is “core” or “non-core” has nothing to do with whether a state court has jurisdiction over a matter.  Rather, “core v. non-core proceedings” deal with the relationship between Article I bankruptcy courts and Article III federal district courts and whether a bankruptcy court may enter a final judgment in a matter.  

Additionally, in relying on courts from the Bankruptcy Appellate Pane of the Ninth Circuit and United States Court of Appeals for the Fifth Circuit, the Nevada Supreme Court noted that state and federal courts share concurrent jurisdiction over certain “core” proceedings.  In re McCarthy, 230 B.R. 414, 418 (B.A.P. 9th Cir. 1999) (“The fact that a fraudulent transfer action might be a ‘core proceeding’ under 28 U.S.C. § 157(b)(2) does not equate to exclusive federal jurisdiction.  Rather, there is concurrent federal and state jurisdiction over fraudulent transfer actions and many other core proceedings.”); In re Brady, Tex., Mun. Gas Corp., 936 F.2d 212, 218 (5th Cir. 1991) (“[T]he only aspect of the bankruptcy proceeding over which the district courts and their bankruptcy units have exclusive jurisdiction is the bankruptcy petition itself.  In other matters arising in or related to title 11 cases . . . state courts have concurrent jurisdiction.”).  

Finally, the Nevada Supreme Court also based its decision on that fact that a bankruptcy court’s exercise of jurisdiction is permissive, not mandatory, as 28 U.S.C. § 157(b)(1) provides that a “[b]ankrutpcy court may hear and determine all cases under title 11 and all core proceedings arising under title 11.” (emphasis added).  In concluding that there is no language in the statute or applicable case law that demands that core proceedings be exclusively within the jurisdiction of bankruptcy courts as against state court, the Nevada Supreme Court held that Nevada state district courts and federal bankruptcy courts shared concurrent jurisdiction over the Trustee’s fraudulent conveyance actions.