In its recent decision, Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.),1 the Supreme Court reiterated and expanded on the reasoning in Stern v. Marshall2 and made clear that a bankruptcy court may issue reports and recommendations in fraudulent conveyance litigation that by statute is classified as core but that is beyond the adjudicative power of an Article I court. By weighing in authoritatively in the robust ongoing debate about the proper way to apply Stern in practice, the long-awaited pronouncement of the Supreme Court is a helpful step in the direction of greater order and predictability, but the decision is not a giant step. To the disappointment of observers eager for greater clarity, the Court has determined that it does not need to decide whether parties may consent to the entry of final judgments by the bankruptcy court in fraudulent conveyance proceedings.
Under the reasoning of Stern as augmented by Bellingham, such claims can only be finally resolved by the district court, an Article III tribunal. Given the side-stepping of the consent issue in Bellingham, it remains to be seen whether the law will develop to enable parties to consent to the entry of final judgments by bankruptcy courts in core matters that are governed by Stern. This uncertainty is unfortunate. From a systemic perspective, it would be more efficient for the courts that are most directly responsible for the administration and application of the United States Bankruptcy Code to have the unquestioned ability to grant final relief in fraudulent conveyance litigation, disputes that so obviously are within the expertise of these courts.
In its Bellingham opinion, the Supreme Court provided guidance to trial courts and practitioners faced with Stern claims that fall into a statutory "gap." These are claims denominated as "core" that by their nature cannot be decided by an Article I court. This anomaly is an aspect of bifurcated bankruptcy jurisdiction. As the Court stated:
Put simply: 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.
See Bellingham Opinion, at 7.
Justice Thomas, writing for a unanimous Court, then specified how the bankruptcy court should proceed when presented with a Stern claim and made clear that bankruptcy courts were not "powerless to act," as the statutory scheme permits Stern claims to proceed as non-core claims within the meaning of section 157(c). See id. at 9.
The Court went on to explain that while Stern claims cannot be treated as "core" under section 157(b) of the Bankruptcy Code, bankruptcy courts may still adjudicate such claims pursuant to section 157(c) and submit proposed findings of fact and conclusions of law to the district court for de novo review. These procedures are appropriate by virtue of the severability provision in the Bankruptcy Amendments and Federal Judgeship Act of 1984,3 which permits bankruptcy courts to proceed with Stern claims as they would non-core claims and "closes the so-called [statutory] 'gap' created by Stern claims." See id. at 9-10. The Supreme Court also left no doubt that fraudulent conveyance claims are, in fact, Stern claims.4 See id. at 11.
The Bellingham Court narrowly addressed the issue presented in this appeal and found that de novo review by the district court was sufficient to cure any potential constitutional infirmity in the record. Inasmuch as the appeal of Executive Benefits Insurance Agency, Inc. received de novo review—the same standard that would have applied had the bankruptcy court treated the claims as "non-core" under section 157(c)(1)—the Supreme Court found no reason to address the issue of express or implied consent to adjudication by an Article I court.
The Bellingham decision confirms that bankruptcy courts can issue reports and recommendations in core matters that must be decided by an Article III judge but fails to provide meaningful guidance on whether consent is sufficient to overcome the constitutional issues associated with Stern claims. It would have been desirable for the bankruptcy system, and also for the magistrate system, if the Supreme Court had chosen to deal with the consent (and waiver) issues that had been considered by the Ninth Circuit.
In leaving these important questions for another day, bankruptcy courts and parties to litigations with Stern claims do not know whether consent is sufficient to override any potential constitutional issues. It is foreseeable that district courts will be called upon to bear some added burdens until the consent issue is resolved. These burdens may take the form of having to review more cases de novo rather than under an abuse of discretion standard or having to decide motions to withdraw the reference filed by defendants in an effort to avoid the prospect of multiple de novo trials.
The Bellingham decision does not disrupt the bankruptcy system, but it does not do much to fix it either. Our system is not procedurally cumbersome because of Supreme Court decisions but because of the policy choices made by Congress in delegating an Article III workload to Article I tribunals. Pending a clarifying future case that reaches the Supreme Court, the system will continue to function without major distress but burdened with uncertainty as to the judicial power of the bankruptcy courts. That uncertainty may cause greater delay and expense in administering cases that arise under the Bankruptcy Code.
Footnotes
1 Executive Benefits Ins. Agency v. Arkison, No. 12-1200, 573 U.S. __ (June 9, 2014).
2 Stern v. Marshall, No. 10-179, 131 S. Ct. 2594 (June 23, 2011).
3 See 28 U.S.C. § 151 et seq. This Act provides federal courts with original jurisdiction in bankruptcy cases and the power to refer to bankruptcy judges both core and non-core proceedings.
4 The Stern case indicated that a debtor's state law counterclaim against a claimant could be finally adjudicated by a bankruptcy court to the extent that adjudication is tied to the core functions of resolving claims against the debtor. Bellingham states, without qualification, that all fraudulent conveyance claims are Stern claims, and in that respect expresses a more sweeping treatment of Stern claims.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved
