One June 9, 2014, the Supreme Court issued its opinion in Executive Benefits Insurance Agency v. Arkison, a case of significant interest to bankruptcy scholars, judges, and practitioners. The opinion addresses the gap created by the Court’s 2011 opinion in Stern v. Marshall, in which the Court held that “Article III prohibits Congress from vesting a bankruptcy court with the authority to adjudicate certain claims.” These claims, termed Stern claims, exist where section 157(b)(2) of title 28 of the United States Code characterizes a claim as “core” and authorizes bankruptcy courts to enter final judgments, but Stern prohibits the bankruptcy courts from so doing, leaving bankruptcy courts without any clear direction as to how to proceed with these claims. Stern claims generally arise where the defendant in an adversary proceeding is not a creditor or otherwise involved in the debtor's bankruptcy case. Writing the unanimous opinion for the Court, Justice Thomas summarized the holding as “when, under Stern’s reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court.”
The facts and procedural history of this case, though not uncommon, are important to understanding the Court's decision. Bellingham Insurance Agency , Inc. ("BIA"), filed a voluntary petition under chapter 7 of the Bankruptcy Code. Arkison, the chapter 7 trustee, filed a complaint in the Bankruptcy Court against Executive Benefits Insurance Agency, Inc. ("EBIA"), to avoid and recover fraudulent conveyances under section 544 of the Bankruptcy Code and Washington state law. Arkison filed a motion for summary judgment on all of his claims, and the Bankruptcy Court granted the motion. EBIA appealed the Bankruptcy Court's order granting summary judgment to the District Court. The District Court conducted de novo review, affirmed the Bankruptcy Court's decision, and entered judgment in favor of Arkison. EBIA then appealed to the United State Court of Appeals for the Ninth Circuit.
While EBIA's appeal was pending, the Court issued its decision in Stern. Based on Stern, EBIA moved to dismiss its appeal in the Ninth Circuit for lack of jurisdiction, arguing that Article III did not permit Congress to vest authority in the Bankruptcy Court to finally decide Arkison's fraudulent conveyance claims. The Ninth Circuit denied EBIA's motion and affirmed the District Court. The Ninth Circuit reasoned that Article III does not permit a bankruptcy court to enter final judgment on a Stern claim unless the parties consent, but that EBIA had impliedly consented to the Bankruptcy Court's jurisdiction, allowing the Bankruptcy Court to enter final judgment on the fraudulent conveyance claims. In the alternative, the Ninth Circuit also observed that the Bankruptcy Court's judgment could be treated as proposed findings of fact and conclusions of law, subject to de novo review by the District Court.
Justice Thomas began his decision by providing a brief history of the jurisdiction of bankruptcy courts, examining the periods prior to and following the enactment of the Bankruptcy Code in 1978. Eventually, Justice Thomas reached section 157 of title 28 of the United States Code, the current statute governing the jurisdiction of the bankruptcy courts, and the distinction between "core" and "non-core" claim that the statute creates. Justice Thomas explained the distinction as follows:
The facts and procedural history of this case, though not uncommon, are important to understanding the Court's decision. Bellingham Insurance Agency , Inc. ("BIA"), filed a voluntary petition under chapter 7 of the Bankruptcy Code. Arkison, the chapter 7 trustee, filed a complaint in the Bankruptcy Court against Executive Benefits Insurance Agency, Inc. ("EBIA"), to avoid and recover fraudulent conveyances under section 544 of the Bankruptcy Code and Washington state law. Arkison filed a motion for summary judgment on all of his claims, and the Bankruptcy Court granted the motion. EBIA appealed the Bankruptcy Court's order granting summary judgment to the District Court. The District Court conducted de novo review, affirmed the Bankruptcy Court's decision, and entered judgment in favor of Arkison. EBIA then appealed to the United State Court of Appeals for the Ninth Circuit.
While EBIA's appeal was pending, the Court issued its decision in Stern. Based on Stern, EBIA moved to dismiss its appeal in the Ninth Circuit for lack of jurisdiction, arguing that Article III did not permit Congress to vest authority in the Bankruptcy Court to finally decide Arkison's fraudulent conveyance claims. The Ninth Circuit denied EBIA's motion and affirmed the District Court. The Ninth Circuit reasoned that Article III does not permit a bankruptcy court to enter final judgment on a Stern claim unless the parties consent, but that EBIA had impliedly consented to the Bankruptcy Court's jurisdiction, allowing the Bankruptcy Court to enter final judgment on the fraudulent conveyance claims. In the alternative, the Ninth Circuit also observed that the Bankruptcy Court's judgment could be treated as proposed findings of fact and conclusions of law, subject to de novo review by the District Court.
Justice Thomas began his decision by providing a brief history of the jurisdiction of bankruptcy courts, examining the periods prior to and following the enactment of the Bankruptcy Code in 1978. Eventually, Justice Thomas reached section 157 of title 28 of the United States Code, the current statute governing the jurisdiction of the bankruptcy courts, and the distinction between "core" and "non-core" claim that the statute creates. Justice Thomas explained the distinction as follows:
If a matter is core, the statute empowers the bankruptcy judge to enter final judgment on the claim, subject to appellate review by the district court. If a matter is non-core, and the parties have not consented to final adjudication by the bankruptcy court, the bankruptcy judge must propose findings of fact and conclusions of law. Then, the district court must review the proceeding de novo and enter final judgment.
Justice Thomas also acknowledged that the Court's decision in Stern "made clear that some claims labeled by Congress as 'core' may not be adjudicated by a bankruptcy court in the manner designated by §157(b)," but "Stern did not . . . address how the bankruptcy court should proceed under those circumstances."
The Court rejected the notion that Stern created a gap in the jurisdiction of the bankruptcy courts, one that "renders the bankruptcy courts powerless to act on Stern claims." Rather, the Court determined that "[t]he statute permits Stern claims to proceed as non-core within the meaning of §157(c)," finding that the severability provision of section 151 of title 28 closed the gap, if any, created by Stern claims. Importantly, the Court also found that the procedural posture of this case cured any constitutional deficiencies, as the District Court indeed reviewed the Bankruptcy Court's decision de novo and entered final judgment, affording EBIA the Article III protections that the Court's decision makes clear it was entitled to receive.
Unfortunately, the Court declined to address the arguably more interesting of whether litigants can consent to bankruptcy courts entering final judgments on Stern claims. In a footnote, the Court admits that its decision in this case will likely not be the final word in the Stern saga:
The Court rejected the notion that Stern created a gap in the jurisdiction of the bankruptcy courts, one that "renders the bankruptcy courts powerless to act on Stern claims." Rather, the Court determined that "[t]he statute permits Stern claims to proceed as non-core within the meaning of §157(c)," finding that the severability provision of section 151 of title 28 closed the gap, if any, created by Stern claims. Importantly, the Court also found that the procedural posture of this case cured any constitutional deficiencies, as the District Court indeed reviewed the Bankruptcy Court's decision de novo and entered final judgment, affording EBIA the Article III protections that the Court's decision makes clear it was entitled to receive.
Unfortunately, the Court declined to address the arguably more interesting of whether litigants can consent to bankruptcy courts entering final judgments on Stern claims. In a footnote, the Court admits that its decision in this case will likely not be the final word in the Stern saga:
Because we conclude that EBIA received the de novo review and entry of judgment to which it claims constitutional entitlement, this case does not require us to address whether EBIA in fact consented to the Bankruptcy Court's adjudication of a Stern claim and whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. We reserve that question for another day.
In sum, the Court's decision in Executive Benefits Insurance Agency v. Arkison provides guidance to bankruptcy courts regarding how to handle Stern claims. Notably, in fear of running afoul of Stern, many bankruptcy courts have already implemented the practice outlined by the Court's decision, and for several years now have been reluctant to enter final judgments on suspected Stern claims. Accordingly, the Court's decision should not result in major changes in the day-to-day practice in the bankruptcy courts.
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