United States: Petition For Supreme Court Review Filed In Ninth Circuit's Bellingham Case Highlighting Circuit Splits Post-Stern

The Supreme Court may revisit two of the many questions left open by its much-discussed decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), an opinion famous not only for its subject – the estate of the late actress and model Anna Nicole Smith – but also for redefining the allocation of judicial authority between an Article III federal district court and a bankruptcy court. Appellants have filed a petition for a writ of certiorari seeking review of the Ninth Circuit's decision in Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency), 702 F.3d 553 (9th Cir. Dec. 4, 2012), and asking the nation's highest court to take on two questions about which lower courts have disagreed in the wake of Stern:

  1. Whether Article III permits the exercise of the federal judicial power by non- Article III bankruptcy courts on the basis of litigant consent, and, if so, whether "implied consent" is sufficient to satisfy Article III; and
  2. Whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for review by a district court in a "core" proceeding under 28 U.S.C. § 157(b).

ALLOCATION OF ARTICLE III POWERS AND LITIGANT CONSENT

In Bellingham, the bankruptcy trustee brought a complaint for fraudulent transfer against non-creditor Executive Benefits Insurance Agency ("EBIA") in bankruptcy court. Seeking to recover for the estate, the trustee alleged that EBIA was the successor corporation to the debtor and liable for claims against the debtor. 702 F.3d at 557. The bankruptcy court found for the trustee and held that EBIA was the successor corporation to the debtor and the debtor fraudulently transferred funds to EBIA. Id. After the district court affirmed the bankruptcy court's decision, EBIA appealed to the Ninth Circuit. Id. While the appeal was pending, the Supreme Court issued its de- cision in Stern. Id. On the eve of oral argument, EBIA filed a motion before the circuit court to vacate the judgment, arguing the bankruptcy court did not have constitutional authority to enter final judgment on the trustee's claims. Id. at 568.

Interpreting the Supreme Court's decision in Stern, the Ninth Circuit held that a bankruptcy court, as a "legislative court" created by Congress and not authorized to exercise the judicial power of the United States under Article III of the Constitution, does not have the authority to enter final judgments on fraudulent conveyance claims asserted by non-creditors to a bankruptcy estate. Id. at 565. However, the Ninth Circuit also found that a litigant could waive that right to a hearing by an Article III court in favor of a decision by a bankruptcy court. Id. at 567. Citing Supreme Court precedent, the Ninth Circuit reasoned that Article III provides both structural and personal protections and "as a personal right, Article III's guarantee of an impartial and independent federal adjudication is subject to waiver." Id. at 567 (citing Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 848 (1986)). Ultimately, the Ninth Circuit held that EBIA had indeed waived its right to Article III adjudication by failing to raise a constitutional objection to the bankruptcy court's judgment until after briefing before the Ninth Circuit was complete. Bellingham, 702 F.3d at 568.

In its petition for certiorari, Appellant EBIA points to the conflict between the Ninth Circuit's Bellingham holding and the Sixth Circuit's decision in Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012). There, the Sixth Circuit held exactly the opposite: a litigant cannot waive the constitutional requirement that only Article III judges, not bankruptcy judges, could exercise the federal judicial power of the United States. The Waldman court found that the requirement that federal judiciary power be exercised only by Article III district courts is a structural principal that a litigant did not have power to waive. 698 F.3d at 917 ("This requirement ... is 'an inseparable element of the constitutional system of checks and balances that both defines the power and protects the independence of the Judicial Branch.'" (citing Stern, 131 S. Ct. at 2608)).

ADDRESSING THE "GAP" IN BANKRUPTCY COURT'S AUTHORITY

A bankruptcy judge has authority to "hear and determine" and enter final judgments in all cases under title 11 and all "core" proceedings arising under title 11. 28 U.S.C. § 157(b). Section 157(b) also enumerates sixteen non-exclusive examples of "core" proceedings, including counterclaims by the estate against persons filing claims against the estate and fraudulent conveyance claims. In "non-core" proceedings, a bankruptcy court may submit proposed findings of fact and conclusions of law to the district court, which will then enter final judgment. 28 U.S.C. § 157(c).

In Stern, the Supreme Court held that while bankruptcy courts have statutory authority to enter final judgments on "core" proceedings, they are constitutionally pro hibited from entering a final judgment on certain "core" proceedings — those causes of action that neither derive from nor depend on bankruptcy law derived rights. 131 S. Ct. at 2615. The Court held that a bankruptcy court may only issue final judgments when "the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Id. at 2618. This ruling redefined the scope of a bankruptcy court's constitutional authority and opened an apparent "gap" in its statutory authority. Bellingham, 702 F.3d at 565. Bankruptcy courts cannot issue final judgments in certain "core" proceedings under Article III, but Section 157 only gives authority to submit proposed findings of fact and conclusions of law in "non-core" proceedings. Can a bankruptcy court issue proposed findings of fact and conclusions of law in those "core" proceedings it did not have constitutional authority to finally adjudicate?

Analyzing Supreme Court precedent leading up to the Stern decision, the Ninth Circuit answered affirmatively and held that bankruptcy judges did have the statutory power under 28 U.S.C. § 157 to submit proposed findings of fact and conclusions of law in bankruptcy related "core" proceedings even when the entry of a final judgment is unconstitutional. Bellingham, 702 F.3d at 566. The Ninth Circuit reasoned that the power to "hear and determine" a core proceeding under Section 157(b) "surely encompasses" ... "the more modest power to submit findings of fact and recommendations of law to the district courts" under Section 157(c). Id. at 565. At least one other circuit disagrees.

In its petition for certiorari, EBIA highlights the split between this holding and that of the Seventh Circuit's in In re Ortiz, 665 F.3d 906 (2011). In Ortiz, the Seventh Circuit reasoned that a bankruptcy judge's orders could not function as proposed findings of fact or conclusions of law in a core proceeding under 28 U.S.C. § 157(c). Id. at 915. The Ninth Circuit acknowledged the Ortiz decision but dismissed the Seventh Circuit's analysis as dicta and not thoroughly reasoned. Bellingham, 702 F.3d at 566, n.8.

If the Supreme Court grants certiorari on Bellingham, it may finally resolve these issues and offer both lower federal courts and bankruptcy courts further guidance on the scope of a bankruptcy judge's authority. Appellants filed their petition for writ of certiorari on April 3, 2013. The response is expected by May 3, 2013.

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