Alert: Supreme Court Clarifies How Bankruptcy Judges Must Proceed

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June 12, 2014

In Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agency, Inc., — U.S. — (June 9, 2014) (Bellingham), the Supreme Court shed light on how bankruptcy judges must proceed when confronted with claims that they cannot finally adjudicate as non-Article III judges.  

In Bellingham, the bankruptcy trustee of Bellingham Insurance Agency, Inc., filed a complaint against Executive Benefits Insurance Agency (EBIA) alleging the fraudulent conveyance of assets from the debtor to EBIA. The bankruptcy court granted summary judgment to the trustee, and EBIA appealed to the district court. The district court affirmed after its own review and entered judgment for the trustee. EBIA then appealed to the Ninth Circuit. While the appeal was pending, the Supreme Court issued its decision in Stern v. Marshall, 564 U.S. —, that Article III of the United States Constitution does not permit a bankruptcy judge to enter final judgment on a tortious interference claim, even though such adjudication was authorized by statute, because bankruptcy judges do not have life tenure and are subject to salary diminishment. In light of Stern, EBIA moved to dismiss the appeal for lack of jurisdiction. The Ninth Circuit rejected the motion and affirmed the district court. The Ninth Circuit acknowledged the fraudulent conveyance claims as so-called “Stern claims” but concluded that EBIA had impliedly consented to bankruptcy court jurisdiction. 

On appeal from the Ninth Circuit, the Supreme Court observed that federal district courts have original jurisdiction in bankruptcy cases and may refer two categories of proceedings to bankruptcy judges: “core” and “non-core” proceedings. In core proceedings, bankruptcy judges “may hear and determine … and enter appropriate orders and judgments,” subject to the district court’s appellate review. In proceedings that are “non-core” but “otherwise related to a case under [the Bankruptcy Code]”, final judgment must be entered by the district court after de novo review of the bankruptcy court’s proposed findings and conclusions, except that the bankruptcy court may enter final judgment if the parties consent. In Stern, the Supreme Court held that the bankruptcy court did not have the authority to finally adjudicate a “core” claim of tortious interference, but did not address how courts should proceed when encountering a “Stern claim.” In Bellingham, the Supreme Court stated that Stern claims may proceed as if they are non-core claims. The court stated that the “gap” created by Stern claims (because bankruptcy judges are not specifically authorized to propose findings or conclusions in a core claim) is closed by the Federal Judgeship Act of 1984’s severability provision, which provides that if the application of a provision of the Act is held invalid, the remainder of the Act is not affected. Accordingly, the Supreme Court held that where a claim otherwise satisfies the non-core claim provision of 11 U.S.C. § 157(c)(1), the bankruptcy court should simply treat the claim as non-core. In doing so, the bankruptcy court “should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.”

The Supreme Court then assumed, without deciding, that the fraudulent conveyance claims at issue were Stern claims, and that the application of the “core” label and procedure was therefore a misnomer. The Court determined that the fraudulent conveyance claims were within the scope of section 157(c)(1) because although they were not “core,” they were nevertheless “related to” a bankruptcy case. The Supreme Court held that the bankruptcy court could accordingly follow the section 157(c)(1) procedure of submitting proposed findings and conclusions to the district court for de novo review. Finally, the Supreme Court noted that when the bankruptcy court entered judgment without articulating whether it was acting pursuant to core or non-core-with-consent procedures, the district court conducted a de novo review on appeal and affirmed the judgment.  As such, the Supreme Court held that EBIA received the same review it would have if the bankruptcy court had treated the claim as non-core, and the district court had reviewed proposed findings and conclusions. Thus, the Supreme Court avoided altogether the issue of whether EBIA had impliedly consented to bankruptcy court jurisdiction.

This case is the first in which the Supreme Court has revisited its ruling in Stern. Although bankruptcy professionals had been anxiously awaiting Bellingham to find out whether parties could impliedly consent to bankruptcy court jurisdiction with regard to Stern claims, the Court artfully dodged that issue. Instead, Bellingham now stands for two propositions: (1) the Federal Judgeship Act of 1984’s severability provision permits bankruptcy judges to propose findings of fact and conclusions of law to the district court for de novo review and entry of judgment with regard to Stern claims, and (2) to the extent a final judgment on a Stern claim has been improperly entered by a bankruptcy judge, if there has been subsequent de novo review and affirmance of that judgment on appeal, appropriate Article III review has been conducted.