On June 9, 2014, in Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.),1 a much-anticipated decision, the Supreme Court addressed how bankruptcy courts should adjudicate so-called Stern claims. Stern claims are “core” claims over which bankruptcy courts have statutory authority to enter orders and judgments,2 but which authority the Supreme Court previously held in Stern v. Marshall3 was not permitted (at least with respect to certain issues) under Article III of the United States Constitution. The Bellingham Court unanimously agreed that bankruptcy courts are permitted to issue decisions on such Stern claims to be reviewed de novo by the applicable district courts.4 The Court did not, however, provide much additional guidance regarding what constitute Stern claims or whether the parties can agree to different procedures.5
- Factual Background and Procedural History
Aegis Retirement Income Services, Inc., and Bellingham Insurance Agency, Inc. (“BIA”), as well as debtor Executive Benefits Insurance Agency, Inc. (“EBIA”), were jointly owned by Nicolas Paleveda, who eventually transferred BIA’s assets to EBIA with no value received by BIA in exchange. In 2006, following such transfer, BIA filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Washington. Peter Arkison was appointed Chapter 7 trustee and filed a complaint against EBIA to avoid the transfer of assets from BIA to EBIA as a fraudulent conveyance.6
The Bankruptcy Court granted summary judgment for the trustee on the fraudulent conveyance claims, and EBIA appealed. The United States District Court for the Western District of Washington affirmed the Bankruptcy Court’s decision and entered judgment for the trustee, and EBIA appealed to the United States Court of Appeals for the Ninth Circuit.7
At this point in the litigation, the Supreme Court came down with its decision in Stern v. Marshall8 that “Article III of the Constitution did not permit a bankruptcy court to enter final judgment on a counterclaim for tortious interference…even though final adjudication of that claim by the Bankruptcy Court was authorized by statute.”9 EBIA moved to dismiss its case on appeal for lack of jurisdiction based on a similar argument. The Court of Appeals subsequently denied this motion to dismiss and affirmed the District Court’s decision, concluding that EBIA consented to the Bankruptcy Court’s jurisdiction by failing to object, even though Stern v. Marshall had not yet been decided.10
- The Supreme Court’s Decision
The Supreme Court affirmed the Court of Appeals’ decision on narrow grounds, based on an analysis of legislative history and statutory interpretation.11 Specifically, the Court noted that the bankruptcy scheme bifurcates matters into “core” and “non-core” proceedings, and bankruptcy judges are authorized to “hear and determine” core proceedings and “enter appropriate orders and [final] judgments” on them.12 Non-core proceedings, however, include “proceedings that are ‘not…core’ but are ‘otherwise related to a case under title 11,’”13 and for non-core proceedings, bankruptcy courts may hear them and issue proposed findings of fact and conclusions of law that must then be reviewed de novo by district courts before a final order or judgment can be entered,14 provided that parties may consent to a bankruptcy court’s jurisdiction to “‘enter appropriate orders and judgments’ as if the proceeding were core.”15 Recognizing that the Stern Court addressed a conflict between this bankruptcy scheme and Article III of the Constitution, and while that case clarified that some claims labeled by Congress as “core” may not be adjudicated to a final judgment by a bankruptcy court, it did not address how bankruptcy courts should proceed on Stern claims brought before them.16
First, the Court accepted the Court of Appeals’ holding that the state law fraudulent conveyance claims at issue were Stern claims. Then, because the District Court had reviewed the summary judgment ruling of the Bankruptcy Court de novo, essentially the same procedure provided for the handling of non-core claims by bankruptcy courts, the Court found the lower courts’ rulings appropriate. Finally, the Court endorsed that de novo review process for bankruptcy courts to make decisions on Stern claims.17 The Court explicitly opted not to address whether EBIA did in fact consent to the Bankruptcy Court’s jurisdiction (as found in the Court of Appeals) and, if it had consented, whether the Bankruptcy Court could have entered a final judgment, leaving those issues unresolved.18
- Significance of the Decision
Stern v. Marshall created more questions than answers, and although the Bellingham decision provides procedures for bankruptcy courts to use in handling Stern claims, it leaves many open questions, including what are the universe of Stern claims that bankruptcy courts cannot finally adjudicate and whether parties may consent to the final adjudication of Stern claims by bankruptcy courts.
