United States: Restructuring & Bankrupcty Alert - August 2014 (Executive Benefits v. Arkinson: Supreme Court Continues to Whittle Away at Bankruptcy Court Jurisdiction)

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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