This morning, the Supreme Court issued its hotly anticipated decision in Executive Benefits Insurance Agency v. Arkison. Since Stern v. Marshall, issues of bankruptcy courts’ constitutional authority have been debated up and down court systems throughout the country, and have, in one court’s colorful words, generated a “nationwide constipation of case-processing delays.” Although the Supreme Court’s decision today in Arkison ends the discussion on one of these issues, many questions remain.

First, the good news. It seems that the Supreme Court has finally realized that in Stern, it created a new sub-class of bankruptcy issues. Those claims, which the Court now calls “Stern claims,” are claims that would otherwise be “core matters” designated for final adjudication in the bankruptcy court as a statutory matter, but are nonetheless “prohibited from proceeding in that way as a constitutional matter” because the bankruptcy court lacks final constitutional authority over such claims. And thankfully, the Court recognized that in creating that new sub-class of claims, Stern did not provide adequate guidance regarding how such claims should proceed. For example, if those Stern claims cannot be finally decided by a bankruptcy court, can they be subject to reports and recommendations for adoption by the district court? Or is that option only available for true “non-core” claims because the Judicial Code only explicitly grants such authority with respect to non-core claims?

Indeed, several courts have held that there is a “statutory gap” because bankruptcy courts are not explicitly authorized to issue proposed findings of fact and conclusions of law in these core matters as to which bankruptcy courts lack final constitutional authority. Most courts, however, have rejected that approach and permit bankruptcy courts to issue those proposed findings and conclusions in those matters, subject to approval by the district court. The Supreme Court agreed, concluding that such an approach is consistent with the Court’s position regarding “severability” – i.e., that it will “ordinarily give effect to the valid portion of a partially unconstitutional statute so long as it “remains fully operative as a law and so long as it is not evident from the statutory text and context that Congress would have preferred no statute at all” (citations and quotation marks omitted). Accordingly, because nothing made it “evident” that Congress desired to leave these Stern claims “in limbo,” they may be treated as though they are non-core claims.

And now, the bad news. The Supreme Court did not offer much else. Indeed, it specifically noted that the case before it did not require it to address the issue of whether (i) EBIA consented to the bankruptcy court’s adjudication of a Stern claim and (ii) whether Article III of the Constitution permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. Instead, the Court “reserve[d] that question [or those questions?] for another day.” In other words, we still don’t know whether bankruptcy courts can hear and finally determine Stern claims when all parties consent to same, and if so, whether consent may be implied from parties’ conduct, or whether it must be expressly provided.

Moreover, the court declined to address whether fraudulent transfer claims fit within the category of “Stern claims,” or whether bankruptcy courts may issue final judgments in those matters. Instead, it simply noted that “[t]he [Ninth Circuit] Court of Appeals held, and we assume without deciding, that the fraudulent conveyance claims in this case are Sternclaims.” Of course, this does not constitute a decision on the merits of that argument, and parties will undoubtedly continue to aggressively litigate the issue of whether fraudulent transfer claims fit within this category at all.

These undecided issues remain the subject of ongoing circuit splits, and we would welcome additional clarity – and soon – regarding Stern’s implications. The Stern Files team will continue its ongoing analysis of SternArkison, and their progeny (which will, no doubt, be abundant), and further analysis will follow. But for the moment, we’ll reiterate our unanswered questions and hope for more clarity on these and the other questions that will undoubtedly arise in the coming weeks and months:

  • Can parties consent to entry of a final judgment in matters as to which bankruptcy courts otherwise lack final constitutional authority?
  • Can such consent be implied (from a party’s course of conduct or otherwise), or must it be explicitly granted?
  • Are fraudulent transfer actions within the bankruptcy court’s final adjudicatory authority? Preference actions?
  • Just what did the Court mean when it first issued Stern [and now Arkison]?  What is the intended effect on the division of authority between Article III judges and non-Article III judges?