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U.S. Supreme Court clarifies jurisdictional limits on bankruptcy courts, after Stern v. Marshall (but key questions remain . . . )

 

11 June 2014

This bulletin discusses the U.S. Supreme Court’s June 9, 2014, decision in Executive Benefits Insurance Agency v. Arkison.¹  

Executive Benefits provides an important clarification of the Court’s 2011 seminal decision in Stern v. Marshall² (for more information on Stern, click here to view our previous bulletin) in which the Court held that the U.S. bankruptcy court lacked constitutional authority to finally adjudicate state law counterclaims asserted by a debtor against a creditor, no matter that the creditor had filed a complaint and a proof of claim against the debtor in the bankruptcy court and the debtor’s counterclaim was statutorily designated by Congress as a “core” matter for final adjudication in the bankruptcy court under the Bankruptcy Amendments and Federal Judgeship Act of 1984.³ Since Stern, lower courts have frequently grappled with this apparent gap in the bankruptcy court’s jurisdiction.

In Executive Benefits, the Court held that bankruptcy courts have jurisdiction to issue proposed findings of fact and conclusions of law, which remain subject to de novo review by a district court, with respect to “core” matters where the bankruptcy court otherwise lacks constitutional authority (under Stern) to finally adjudicate the dispute (“Stern Claims”).

Implications

In Executive Benefits, the Court upheld Stern’s constitutional limitation on bankruptcy court jurisdiction and approved a means for bankruptcy courts to proceed with hearing and making proposed findings with regard to Stern Claims.  However, Executive Benefits leaves open some key questions. For example, the Court did not address whether a bankruptcy court can render a final determination on a Stern Claim with consent of the parties, and if so, whether implied consent is sufficient. Further, the Court did not decide whether fraudulent transfer claims brought against parties that have not filed a claim constitute Stern claims – the Court only assumed that to be the case as no party challenged that conclusion on appeal of the Circuit Court’s decision. At bottom, the Court’s limited holding recognizes the competence of bankruptcy courts to hear Stern Claims. Nonetheless, we expect further litigation over the scope of bankruptcy courts’ jurisdiction in light of the unanswered questions in the wake of the Executive Benefits decision.

Executive Benefits:  case procedural background

The defendant in Executive Benefits owned and operated Bellingham Insurance Agency, Inc. (BIA), which filed for Chapter 7 bankruptcy in June of 2006.  BIA ceased operations in January of 2006, and the defendant used BIA funds to incorporate Executive Benefits Insurance Agency, Inc. (EBIA) in order to transfer assets from BIA to EBIA prior to BIA’s bankruptcy filing. The Chapter 7 trustee subsequently commenced fraudulent conveyance actions against EBIA and the Bankruptcy Court granted summary judgment.

On appeal by EBIA, the District Court reviewed the Bankruptcy Court’s findings de novo, and affirmed the Bankruptcy Court’s decision to grant summary judgment for the trustee. EBIA then appealed to the Ninth Circuit.  After EBIA filed its opening brief, Stern was decided and EBIA moved to dismiss its appeal in the Ninth Circuit for lack of jurisdiction because, it argued, pursuant to Stern the Bankruptcy Court did not have authority to decide the fraudulent conveyance claims in the first instance. However, the Ninth Circuit affirmed the District Court’s ruling, finding (i) that EBIA had impliedly consented to the Bankruptcy Court’s jurisdiction, which made the Bankruptcy Court’s adjudication of the fraudulent conveyance claim permissible, and (ii) the Bankruptcy Court’s judgment could instead be treated as proposed findings of fact and conclusions of law, subject to de novo review by the District Court.

The Supreme Court declined to address whether implied consent rendered the Bankruptcy Court’s adjudication permissible, but affirmed the Bankruptcy Court’s authority to issue proposed findings of fact and conclusions of law subject to de novo review by the District Court. Because the District Court in this case reviewed the findings of the Bankruptcy Court de novo, the Supreme Court affirmed the summary judgment ruling for the trustee.

 

 
1 Executive Benefits Insurance Agency v. Arkison, 2014 U.S. LEXIS 3993 (U.S. 2014) (Executive Benefits).
2 Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (Stern).
3 28 U.S.C. § 157(b)(2).

 

 

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