The case of Executive Benefits Insurance Agency v. Arkison (In re Bellingham Ins. Agency), No. 12- 1200, was easily one of the most closely watched bankruptcy cases in many years. Last week’s decision in that case, however, was far less dramatic than some practitioners feared it might be. The Supreme Court answered two important questions regarding the power of bankruptcy courts that it left open three years ago in Stern v. Marshall. In the process, the Court reaffirmed that the bankruptcy courts have an important role to play, even in cases where Article III prevents them from making a final decision.
Under the Bankruptcy Code, bankruptcy courts have power over two types of proceedings: “core” and “non- core.” In “core” proceedings, bankruptcy courts can enter final judgment, subject to deferential review by the district court. Congress has defined “core” proceedings to include, for example, “matters concerning the administration of the estate,” “counterclaims by the estate against persons filing claims against the estate,” and “confirmation of plans.” As for “non-core” proceedings—which are related to the bankruptcy but have a lesser connection—bankruptcy courts are empowered to issue proposed findings of fact and conclusions of law, subject to de novo review and entry of final judgment by the district court.
In Stern v. Marshall, the Court held that there were certain proceedings that were defined as “core” by the statute but that nevertheless fell outside the power of bankruptcy courts in view of the limitations of Article III. Stern itself involved a “counterclaim by the estate against persons filing claims against the estate.” In deciding Stern, the Court left open two important questions: (1) Are there other “core” proceedings that, like the ones at issue in Stern, may not be resolved by bankruptcy courts consistently with Article III? (2) Regardless, how should courts deal with these Stern claims, since the statute does not set forth procedures for addressing them?
This brings us to Arkison. In the proceedings below, the bankruptcy trustee brought a fraudulent conveyance claim against the petitioner, a third party. The bankruptcy court entered summary judgment in favor of the trustee. The petitioner appealed to the district court, which affirmed the bankruptcy court’s decision on de novo review. The petitioner then appealed to the Ninth Circuit. While the case was pending there, the Supreme Court issued its decision in Stern. This prompted the petitioner to move for dismissal for lack of jurisdiction, on the basis that the claim against him was a Stern claim, and the bankruptcy court could not constitutionally enter a final judgment. The Ninth Circuit rejected the motion and affirmed the district court. The Ninth Circuit held that the petitioner had impliedly consented to entry of final judgment by the bankruptcy court—and that, in any event, the district court had reviewed the decision de novo, just as it would have had the bankruptcy court issued proposed findings of fact and conclusions of law.
The Supreme Court affirmed the Ninth Circuit, and in doing so, answered those two questions left open in Stern.
First, the Court held that Stern claims were not limited to the particular type of proceedings at issue there. Rather, the Court defined a Stern claim as any “claim designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter.”
Second, the Court held that Stern claims could be handled by the bankruptcy court in the same manner as “non-core” claims. That is, the bankruptcy court should enter proposed findings of fact and conclusions of law, subject to de novo review and entry of final judgment by the district court. The key to the Court’s ruling was the statutory severability clause. Because the Court had ruled that it would be unconstitutional to treat certain claims are “core” claims as set forth in the statute, those types of claims were, in effect, stricken from the statutory list of “core” proceedings. Because “non-core” proceedings are essentially defined as “everything else” (yet still related to the bankruptcy case), then Stern claims should be treated as “non- core” proceedings. The Court rejected the petitioner’s argument that all Stern claims must be heard in the first instance by the district court.
Notably, the Court did not address the question whether the parties to a Stern claim could consent to having the proceeding heard by and final judgment entered by the bankruptcy court. The Court expressly “reserve[d] that question for another day.”
In Arkison, the Court took a pragmatic approach in its ruling and affirmed what most lower courts believed about Stern claims and the proper procedures for addressing them. The result is that the structure of the federal courts with respect to bankruptcy proceedings has not been upended, and large numbers of claims will not be forced into the district courts in the first instance.