U.S. Supreme Court Decision Answers Question Arising Out of Stern vs. Marshall Decision

In Executive Benefits Insurance Agency, petitioner vs. Peter H. Arkison, Chapter 7 Trustee, Case No. 12-1200, 573 U.S. __(2014) the United States Supreme Court ( Court) delivered its opinion as a follow up to its landmark decision in Stern v. Marshall. In Stern v. Marshall, the Court held that even though bankruptcy courts are statutorily authorized to enter final judgments on a class of bankruptcy related claims, Article III of the Constitution prohibits bankruptcy courts from finally adjudicating certain of those claims. Under Stern’s reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy related claim, the relevant statute does permit a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by a federal district court. Because the District Court conducted the de novo review that petitioner demanded, the Court affirmed the judgment of the Court of Appeals upholding the District Court’s decision. The following information has been extracted from the syllabus prepared by the Reporter of Decisions and does not represent the actual written decision by the Court.

Bellingham Insurance Agency, Inc. (BIA), filed a voluntary chapter 7. Peter Arkison, the bankruptcy trustee, filed a complaint in the Bankruptcy Court against petitioner EBIA and others alleging a fraudulent conveyance of assets from BIA to EBIA. The Bankruptcy Court granted summary judgment for the trustee. While EBIA’s appeal to the Ninth Circuit was pending, the Court held that Article III did not permit a Bankruptcy Court to enter a final judgment on a counterclaim for tortious interference, even though final adjudication of that claim by the Bankruptcy Court was authorized by statute. citing Stern v. Marshall.

Under the Bankruptcy Amendments and Federal Judgeship Act of 1984, federal district courts have original jurisdiction in bankruptcy cases and may refer to bankruptcy judges two statutory categories of proceedings: “core” proceedings and “non-core” proceedings. In core proceedings, a bankruptcy judge “may hear and determine … and enter appropriate orders and judgments,” subject to the district court’s traditional appellate review. In non-core proceedings-those that are “not …core” but are “otherwise related to a case under title 11, § 157(c)(1)-final judgment must be entered by the district court after de novo review of the bankruptcy judge’s proposed findings of fact and conclusions of law, except that the bankruptcy judge may enter final judgment if the parties consent.

In Stern, the court held that Article III prohibits Congress from vesting a bankruptcy court with the authority to finally adjudicate the “core” claim of tortious interference. The Court did not, however, address how courts should proceed when they encounter a Stern claim.

Stern claims may proceed as non-core within the meaning of § 157(c). Lower courts have described Stern claims as creating a statutory “gap,” since bankruptcy judges are not explicitly authorized to propose findings of fact and conclusions of law in a core proceeding. “This so-called gap is closed by the Act’s severability provision, which instructs that where a “provision of the Act or [its] application… is held invalid, the remainder of th[e] Act … is not affected thereby…” where a claim otherwise satisfies § 157(c)(1), the bankruptcy court should simply treat the Stern claim as non-core.

Section 157(c)(1)’s procedures apply to the fraudulent conveyance claims by the trustee in this case because the claims assert that property of the bankruptcy estate was improperly removed, they are self-evidently “related to a case under title 11”. Accordingly, they fit within the category of claims governed by § 157(c)(1).

Here, the District Court’s de novo review of the Bankruptcy Court’s order and entry of its own valid final judgment cured any potential error in the Bankruptcy Court’s entry of judgment. EBIA contended that it was constitutionally entitled to review by an Article III court regardless of whether the parties consented to bankruptcy court adjudication. EBIA received the same review from the District Court that it would have received had the Bankruptcy Court treated the claims as non-core proceedings under § 157. Judgment of the Court of Appeals was affirmed. It is important to note that the Court did not decide whether a bankruptcy court can issue final decisions if all parties consent.

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