Executive Benefits v. Arkinson
Supreme Court Continues to Whittle Away at Bankruptcy
Court Jurisdiction
In Stern v. Marshall,1 the Supreme Court of
the United States held that even though bankruptcy courts are
statutorily authorized to enter final judgment on "core"
bankruptcy related claims, Article III of the Constitution
prohibits bankruptcy courts from finally adjudicating certain of
those claims. Claims falling into this procedural purgatory are now
commonly referred to as "Stern claims."
Stern did not, however, decide how bankruptcy or district
courts should proceed when a "Stern claim" is
identified.
That question has now been answered. In Executive
Benefits Insurance Agency v. Arkinson,2 the Supreme
Court held that when faced with a "Stern claim,"
bankruptcy courts are only permitted to issue proposed findings of
fact and conclusions of law which must be reviewed de novo
by the district court. As set forth below, the implications
of this decision are of significant importance to any active
participant in the bankruptcy courts.
Background
Pursuant to statute, bankruptcy courts are empowered to enter a
final judgment on core claims, subject to appellate review by the
district court.3 If a matter is non-core, however, the
statute only authorizes bankruptcy courts to hear the proceeding
and submit proposed findings of fact and conclusions of law to the
district court.4 The district court must then
review those proposed findings of fact de novo and enter
any final orders or judgments.5 There is one statutory
exception to this rule: If all parties consent, the statute
permits bankruptcy courts to hear and determine and enter
appropriate orders and judgments as if the proceeding were
core.6
Stern made clear that, despite the statutory framework set
forth above, some claims labeled by Congress as "core"
may not be adjudicated by a bankruptcy court. Stern
did not, however, address how the bankruptcy court should proceed
when faced with a Stern claim. Within this vacuum,
many courts and commenters believed that the Stern
decision created a statutory "gap" rendering bankruptcy
courts powerless to act on Stern claims unless the parties
specifically consented to the bankruptcy court's
adjudication.
Executive Benefits Closes the Gap
In Executive Benefits, the Supreme Court clarified
(through a bit of statutory gymnastics) that the so-called
statutory gap was actually filled by the severability
clause7 of the statute, which requires that bankruptcy
courts treat Stern claims -- such as the fraudulent
conveyance claim at issue in Executive Benefits -- as if
they were non-core claims, thus permitting bankruptcy courts to
hear those proceedings and issue proposed findings of fact and
conclusions of law to the district court for de novo
review.
In Executive Benefits, the bankruptcy court granted
summary judgment in favor of the bankruptcy trustee on his
fraudulent conveyance claim against Executive Benefits Insurance
Agency ("EBIA"). EBIA immediately
appealed to the district court, which reviewed de novo the
bankruptcy court's grant of summary judgment for the trustee --
a legal question -- and issued a reasoned opinion affirming the
bankruptcy court. EBIA objected on two grounds: (1) EBIA was
constitutionally entitled to a review of its fraudulent conveyance
claims by an Article III court regardless of whether the parties
consented to adjudication by a bankruptcy court, and (2) even if
the bankruptcy court was permitted to adjudicate its claim with the
consent of the parties, EBIA did not consent.
The Supreme Court held that, although the procedural posture of the
case did not precisely follow the statutory framework, the district
court did conduct a de novo review of the summary judgment
claims. Thus, the Supreme Court held that EBIA received the
same review from the district court that it would have received if
the bankruptcy court had treated the fraudulent conveyance claims
as non-core proceedings. As a result, the Supreme Court
specifically declined 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.
Observations
It is no secret that defendants sued by a debtor often feel that they are behind the eight-ball when litigating in bankruptcy court -- especially in avoidance actions brought under chapter 5 of the Bankruptcy Code. The Supreme Court's decision in Executive Benefits may provide some comfort to future Stern claim defendants. As Executive Benefits makes clear, when faced with a Stern claim, the most a bankruptcy court can do, absent the consent of the parties, is issue proposed findings of fact and conclusions of law for de novo review by the district court. The issue of what constitutes consent, however, remains an open question. Until that issue is resolved, potential Stern claim defendants would be wise to forego filing insignificant proofs of claim in a debtor's bankruptcy case, lest they be deemed to have consented to the bankruptcy court's adjudication of a Stern claim against them. In addition, savvy defendants may be able to strip the bankruptcy court of its ability to issue proposed findings of fact by making a jury demand in any action involving a Stern claim.
Footnotes
1 546 U.S. ____ (2011).
2 573 U.S. ____ (2014).
3 28 U.S.C. §157(b)(1).
4 28 U.S.C. §157(c)(1).
5 Ibid.
6 28 U.S.C. §157(c)(2).
7 98 Stat. 344, note following 28 U.S.C. §151
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