In 2011, the US Supreme Court issued its landmark decision in Stern v. Marshall. Turning decades of bankruptcy practice on its head, the Supreme Court held that, even though bankruptcy courts are statutorily authorized to enter final judgments in “core” matters, Article III of the Constitution prohibits them from finally adjudicating certain core matters, such as a debtor’s state law counterclaim against a creditor (so-called “Stern claims”).
As previously reported by Law360’s “Q&A With Aram Ordubegian” (May 20, 2013) and by Arent Fox in its legal alert, “The Stern Legacy: Two Circuits Weigh In” by Jeffrey N. Rothleder (January 2, 2013), Stern v. Marshall has caused courts nationwide to wonder what to do with so-called “Stern claims” that fall in the no-man’s land where the Bankruptcy Code and Article III collide, and what procedures or processes must be implemented to allow district courts to administer justice. Frequent questions have arisen over whether state law-related claims that routinely come up in bankruptcy courts — such as fraudulent transfer avoidance and recovery actions — may now have to be litigated in the bankruptcy courts until a pretrial order is entered, at which point the district court must take over. These questions have resulted in confusion, increased litigation costs, and delay in bankruptcy cases, as well as a steady erosion of the bankruptcy courts’ jurisdiction in the wake of Stern.
Yesterday’s Supreme Court decision in Executive Benefits Insurance Agency v. Peter H. Atkinson upholds the Sterndecision and makes clear that, when a Stern claim is encountered, the proper course of action for the bankruptcy court is to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court. This decision is consistent with the approach taken by courts such as the United States District Court for the District of Delaware, which has issued a standing order allowing the District Court to treat any bankruptcy court order regarding a Stern claim as proposed findings of fact and conclusions of law, and requiring the bankruptcy judge (unless otherwise ordered by the district court) to do so.
However, the Executive Benefits decision ducks the question of whether parties can consent to a bankruptcy court’s entry of final judgment with respect to a Stern claim. Litigants must therefore continue to be vigilant to protect their constitutional rights and have matters heard in the appropriate tribunal. Litigants should also be very wary of granting implied consent or waiving any jurisdictional challenges that they may have in proceedings commenced in bankruptcy courts.