United States: A Baby Step Forward: Executive Benefits Insurance Agency v. Arkison

Last Updated: October 8 2014
Article by Benjamin Rosenblum

In Executive Benefits Insurance Agency v. Arkison, 2014 BL 158582, 189 L. Ed. 2d 83 (2014), a unanimous U.S. Supreme Court took a small step forward in clarifying the contours of a bankruptcy judge's jurisdictional authority. The case explained that when a bankruptcy court is confronted with a claim that is statutorily denominated as "core," but is not constitutionally determinable by a bankruptcy judge under Article III of the U.S. Constitution, the bankruptcy judge should treat such a claim as a non-core "related to" matter that the district court reviews anew. The ruling eliminates any supposed statutory gap created by the Supreme Court's 2011 Stern v. Marshall decision, but Arkison nonetheless leaves many potentially larger jurisdictional and constitutional questions unanswered.

The Dispute

Nicholas Paleveda and his wife owned Bellingham Insurance Agency, Inc. ("Bellingham"). In early 2006, Bellingham became insolvent and ceased operating. A day later, Paleveda used Bellingham's funds to incorporate another insurance agency, Executive Benefits Insurance Agency, Inc. ("EBIA"). Paleveda and others thereafter initiated a scheme to transfer assets from the defunct Bellingham to the new EBIA. In June 2006, Bellingham filed for bankruptcy relief in the Western District of Washington. A chapter 7 bankruptcy trustee, Peter Arkison, was appointed to administer Bellingham's estate. After his appointment, Arkison commenced suit in the bankruptcy court against EBIA and others to, among other things, avoid the fraudulent transfer of Bellingham's assets.

The bankruptcy court rendered summary judgment in favor of Arkison on all claims. EBIA appealed to the district court. On appeal, the district court conducted a de novo review, affirmed the bankruptcy court's decision, and entered judgment for Arkison. EBIA again appealed, this time to the U.S. Court of Appeals for the Ninth Circuit. While the case was pending before the circuit court, the Supreme Court issued its now well-known Stern v. Marshall opinion. In light of Stern, EBIA moved to dismiss the appeal, contending that the bankruptcy court could not have constitutionally determined the fraudulent transfer claims against it.

The Ninth Circuit denied EBIA's motion to dismiss. While it held that the fraudulent conveyance claim was not, under Stern, constitutionally determinable absent consent of the parties, the Ninth Circuit held that EBIA had impliedly consented to the bankruptcy court determining the summary judgment motion. The court also held that the bankruptcy court's ruling on the summary judgment motion could be treated as a report and recommendation subject to de novo review by the district court.

EBIA petitioned for certiorari, identifying two fundamental questions: (i) whether litigants can consent to the exercise of the judicial power of the U.S. by a non-Article III judge in the form of entry of a final, enforceable judgment; and (ii) whether bankruptcy judges have statutory authority to propose findings of fact and conclusions of law in "core" proceedings.

The Supreme Court granted certiorari.

Bankruptcy Jurisdiction in a Stern v. Marshall World

Article III, Section 1 of the U.S. Constitution provides that "[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish." The Article states that such judges "shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services a Compensation, which shall not be diminished during their Continuance in Office."

Given these provisions, the exercise of the "judicial Power of the United States" is vested in so-called Article III judges. Bankruptcy judges, however, are not Article III judges. They do not have life tenure, and their salaries are subject to diminution. Instead, bankruptcy judges are technically authorized under Article I, which governs the legislative branch and authorizes the establishment of a uniform system of federal bankruptcy laws. Under principles of separation of powers, bankruptcy judges cannot exercise the judicial power reserved for Article III judges.

Thirty-two years ago, in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the Supreme Court struck down certain provisions of the Bankruptcy Act of 1978 because it conferred Article III judicial power upon bankruptcy judges who lacked life tenure and protection against salary diminution. After more than two years of delay, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 to fix the statutory infirmity identified in Marathon. The jurisdictional scheme for bankruptcy courts continues in force today. Sort of.

Congress established the jurisdiction of the bankruptcy courts in the Federal Judicial Code, 28 U.S.C. §§ 1 et seq. ("title 28"). As amended in 1984, title 28 provides that the district courts shall have "original and exclusive jurisdiction of all cases under title 11" and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Title 28 further provides that each bankruptcy court is "a unit of the district court" in the federal district where it is located. District courts may—but need not—refer cases and matters within the scope of bankruptcy jurisdiction to the bankruptcy courts.

Title 28's jurisdictional strictures for bankruptcy courts provide that "Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." Thus, a bankruptcy court may enter a final order with respect to all bankruptcy cases before it and all matters within the scope of its "core" jurisdiction. Such a final order is subject to appellate review by the applicable district court or bankruptcy appellate panel (and thereafter, by the applicable court of appeals).

A bankruptcy court may also hear a non-core proceeding that that is "related to" a bankruptcy case, but, absent consent of the litigants, a bankruptcy court cannot enter a final order when exercising related to jurisdiction. Instead, it may issue only a proposed order, which is reviewed de novo by the district court.

In 2011, the Supreme Court in Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594 (2011), shook up the jurisdictional scheme established by statute and declared that a portion of the Federal Judicial Code addressing the bankruptcy courts' core jurisdiction was unconstitutional. According to Stern, the 1984 jurisdictional scheme did not adequately address the Marathon issue, at least not in all instances. Stern held that even though bankruptcy courts are statutorily authorized to enter final judgments on various categories of bankruptcy-related claims, Article III prohibits bankruptcy courts from finally adjudicating certain of those claims. Specifically, Stern ruled that a bankruptcy court lacks constitutional authority under Article III to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim.

While Stern itself purported to be a narrow decision, it has given rise to a great deal of litigation concerning whether or not a particular claim, though statutorily denominated as core, is in fact aclaim that is finally determinable by a bankruptcy judge. Further, in the years since Stern, courts have also struggled with the following issues: (i) how should a bankruptcy court deal with a claim that, while statutorily denominated as core, is not in fact constitutionally determinable by an Article III judge; and (ii) the effect of a party's consent to adjudication of a claim of this nature by a bankruptcy court.

In Executive Benefits Insurance Agency v. Arkison, the Supreme Court teased the bankruptcy community with the possibility of resolving both of these issues, but ultimately decided just the first.

Filling the Statutory Gap

Stern held that some claims, while labeled in the statute as core, may not be adjudicated by a bankruptcy court as a constitutional matter. The existence of such "Stern claims" threatened to create a gap in section 157 of title 28, the statute that addresses the scope of matters that may be heard and determined by a bankruptcy court.

The statute provides a limited menu of options. The entire world of bankruptcy jurisdiction is divided into three categories: (i) bankruptcy cases; (ii) core claims; and (iii) non-core, but "related to" claims. As noted, bankruptcy courts can enter final orders with respect to core matters. Bankruptcy courts may (absent consent) enter only proposed findings of fact and conclusions of law with respect to non-core related to matters. Nowhere does the statute expressly provide for a procedure where a bankruptcy court can enter proposed findings of fact and conclusions of law with respect to a statutorily-denominated core matter; instead, the statute presumes that a bankruptcy court may finally determine all statutorily-denominated core claims. Thus, in a post-Stern world, the question arose—what does a bankruptcy court do with a statutorily core claim that it cannot finally determine under Article III? Stern did not provide the lower courts with any directions on how they should proceed with respect to such Stern claims.

In Arkison, the petitioner, EBIA, asserted that the gap rendered the bankruptcy court powerless to act on Stern claims and that all such claims must be heard by district courts in the first instance. A unanimous Supreme Court disagreed. The statute, according to the Court, permits a Stern claim to proceed before the bankruptcy court as a non-core matter.

To reach this result, the Court first looked to the severability provision contained in the Federal Judgeship Act of 1984 (98 Stat. 344), which provides that "[i]f any provision of this Act or the application thereof . . . is held invalid, the remainder of this Act . . . is not affected thereby." This severability provision was dispositive in the Court's view. This is because, when a court identifies a claim as a Stern claim, it has necessarily "held invalid" the application of the "core" label to such claim, along with the associated procedures. With the "core" option invalidated and unavailable to such a claim, the Court explained, the only other category available is to treat such claim as non-core or "related to" the bankruptcy. Therefore, as a "related to" claim, the bankruptcy court could submit to the district court proposed findings of fact and conclusions of law, which would then be reviewed de novo.

The Court explained that this conclusion is consistent with its general approach to severability—absent statutory text or context to the contrary, Congress generally prefers the Court to give effect to a partially unconstitutional statute than to have no statute at all. Here, nothing indicated to the Court that Congress wished to place Stern claims in "limbo." According to the Court, doing so would unnecessarily change the "division of labor" set out in the statute between bankruptcy judges and district court judges. Having reached this conclusion, the Court easily determined that the fraudulent conveyance claims at issue were non-core "related to" claims as to which the bankruptcy court could submit proposed findings of fact and conclusions of law.

Finally, the Court explained that, although the bankruptcy court did not style its entry of summary judgment as a report and recommendation, and although the district court did not re-label the bankruptcy order as a mere proposed findings of fact and conclusions of law, the district court effectively cured any Stern problem by reviewing the matter de novo and entering a judgment of its own. In essence, EBIA received exactly what it asserted it was entitled to—a de novo review by an Article III judge.

The Open Question of Consent

The Court did not reach the question of whether EBIA could and, in fact, did consent to adjudication of the matter before the bankruptcy court. Because the district court's de novo review and entry of its own final judgment cured any potential error, the question of the litigants' consent to adjudication before the bankruptcy judge did not matter. In other words, the Court did not need to reach the issue of whether the parties consented to the bankruptcy court's final determination of the matter because the bankruptcy court's judgment was reviewed de novo by the district court.

Outlook

Arkison is a welcome clarification of how the bankruptcy statute should allocate work among the bankruptcy and district courts with respect to Stern claims. The opinion, however, does not resolve some of the larger constitutional and jurisdictional questions that have arisen since the Court's last foray into this complicated area of the law. For this, bankruptcy professionals will need to await the next installment from the Supreme Court, which may come in the Court's next term.

In particular, Arkison plugs the potential gap in the statute created by Stern. But Arkison does nothing to help explain which claims, as a constitutional matter, can be finally determined by a bankruptcy judge. Until there is additional guidance, disputes over whether a claim is a Stern claim or not will likely continue to be a fertile source of conflict in bankruptcy cases throughout the country.

In addition, the Arkison Court expressly "reserve[d] ... for another day" the question of "whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim." This question is significant. For example, until there is guidance from the Supreme Court, litigants may feel emboldened to challenge a bankruptcy court's adjudication of "related to" matters when all parties have consented or, for that matter, the propriety of bankruptcy appellate panels (which consist entirely of bankruptcy judges and hear appeals from bankruptcy judges in several circuits). Arguably, the consequences of a ruling by the Court on consent could extend to disputes far beyond the context of bankruptcy law, including such broadly used mechanisms as arbitration and the use of magistrate judges—both of which were discussed during oral argument before the Court.

It bears noting that most, but not all, lower courts had already come to the same conclusion reached by the Supreme Court with respect to the so-called statutory gap. The district courts for two important jurisdictions—the District of Delaware and the Southern District of New York—had issued amended standing orders of reference that expressly provided for bankruptcy courts to issue reports and recommendations with respect to Stern claims. In this sense, Arkison is a helpful step in clarifying the post-Stern world of bankruptcy jurisdiction—but only a baby step.

As it turns out, the lower courts and bankruptcy professionals may not have to wait long for the Court's next step with respect to these issues. Shortly after deciding Arkison, the Court granted certiorari in Wellness Int'l Network v. Sharif, No. 13-935, 2014 BL 182626 (July 1, 2014). That case appears likely to present the issue of consent, and it also provides the Court with an opportunity to define further the post-Stern landscape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions