United States: Supreme Court Holds That Fraudulent Transfer And Other "Stern Claims" Are To Be Procedurally Treated As "Non-Core" Claims

On June 9, 2014, the United States Supreme Court addressed an issue left open in Stern v. Marshall.¹ Instead of bringing clarity to procedural confusion created by Stern, the Court's opinion in Executive Benefits Insurance Agency v. Arkison may create more questions than it answers.²

Because Stern left the bankruptcy court without authority to enter final judgment on certain matters identified as "core" under 28 U.S.C. § 157(b), including fraudulent transfers and state law counterclaims, courts have struggled with the proper procedure for adjudicating these so-called "Stern claims." While Section 157(c)(1) specifies that, as to "non-core" matters "related to" a bankruptcy case, the bankruptcy courts may submit proposed findings of fact and conclusions of law to the district court for de novo review, Section 157(b) does not explicitly authorize the same procedure for matters defined as "core." As a consequence, many courts have described Stern as creating a "statutory gap" as to the affected "core" matters.

In Arkison, Justice Thomas, writing for a unanimous Court, makes clear that, just like non-core matters under Section 157(c)(1), bankruptcy courts are to submit proposed findings of fact and conclusions of law to the district court for de novo review upon adjudication of a "Stern claim," which, in Arkison, was a fraudulent transfer claim against a non-creditor.

The most obvious question left unaddressed by Arkison, is whether bankruptcy judges have authority to enter final orders by consent of the parties on Stern claims and non-core claims. Lower courts have reached inconsistent opinions on whether parties can consent or agree to have the bankruptcy court enter final orders not subject to de novo review by the district court. Arkison does little to resolve the uncertainty created by Stern and also left unanswered the question of whether the same rule would apply if the fraudulent transfer defendant was a creditor that had filed a proof of claim against the estate. In Arkison, the defendant was not a creditor and had not filed a proof of claim.

As to Stern claims after Arkison, it is very likely that the courts will continue to follow the procedure many have been following, and as described in section 157(c)(1) for non-core claims. That section requires the bankruptcy judge to "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected."

Footnotes

1. Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011).

2. Exec. Benefits Ins. Agency v. Arkison, No. 12-1200, 2014 U.S. Lexis 3993 (Jun. 9, 2014).

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