E-Alert Case Updates

SCOTUS Affirms Bankruptcy Court Authority and Expounds Approach to Adjudicating Stern Claims

Executive Benefits Insurance Agency v. Arkison
--- S. Ct. ---, 59 Bankr. Ct. Dec. 160, 2014 WL 2560461 (Supreme Court of the United States, June 9, 2014)
by Morgan N. Gough, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at http://www.supremecourt.gov/opinions/13pdf/12-1200_2035.pdf.

In Executive Benefits Insurance Agency v. Arkison, the Supreme Court clarified their 2011 holding in Stern v. Marshall, 131 S. Ct. 2594 (2011). Under Stern, bankruptcy courts no longer had the authority to enter judgments in certain “core” bankruptcy claims, a power that Article III of the U.S. Constitution prohibited Congress from vesting in bankruptcy judges. This holding created a class of claims, dubbed “Stern claims,” that were statutorily designated to bankruptcy courts for final adjudication, but were prohibited by Article III from proceeding in that manner. The Stern Court delivered legal conclusions without guiding bankruptcy and federal district courts on how to actually proceed when faced with a Stern claim. This case upheld Stern, in that Article III denies bankruptcy judges the power to enter judgment on particular core matters; however, bankruptcy judges may still hear the claim, treating them as “non-core” claims in that the bankruptcy judge will submit to the federal district court proposed findings of fact and conclusions of law for their de novo review. The Supreme Court affirmed the judgment in favor of the bankruptcy trustee in a unanimous opinion authored by Justice Clarence Thomas.

By way of factual background, Nicolas Paleveda and his wife owned both Aegis Retirement Income Services, Inc. (ARIS) and Bellingham Insurance Agency, Inc. (BIA). BIA was insolvent and ceased operation on January 31, 2006. The following day, Paleveda used BIA funds to incorporate Executive Benefits Insurance Agency, Inc. (EBIA), the petitioner. Paleveda then employed a scheme to transfer assets from BIA to EBIA by depositing money into the joint account held by ARIS and EBIA, which would be credited in full to EBIA by the end of the year. On June 1, 2006, BIA filed a voluntary Chapter 7 bankruptcy petition in the United States District Court for the Western District of Washington. The bankruptcy trustee and respondent, Peter Arkison, filed a complaint in the bankruptcy court against EBIA, alleging that Paleveda fraudulently conveyed BIA assets to EBIA. The bankruptcy court granted summary judgment in favor of Arkison. After de novo review, the federal district court also entered judgment in favor of Arkison. While pending before the Ninth Circuit, Stern was decided, so EBIA moved to dismiss for lack of jurisdiction. The Ninth Circuit held that EBIA impliedly consented to jurisdiction of the bankruptcy court, thereby permitting the bankruptcy court’s adjudication. The Court of Appeals affirmed the lower courts, finding that the bankruptcy court’s judgment could be treated as proposed findings of fact and conclusions of law; since the bankruptcy court’s judgment underwent de novo review by the district court, the labeling of the initial findings was immaterial.

In 1984, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act, which displaces much of the then-expansive authority and jurisdiction of the bankruptcy judges by granting original and exclusive jurisdiction to the federal district courts over all bankruptcy cases. Under the 1984 Act, though, bankruptcy courts retain a role, as federal district courts may refer two categories of matters: “core” and “non-core” proceedings. The non-exhaustive statutory list of what matters qualify as “core” includes claims to recover fraudulent conveyances. “Non-core” matters are those that are “not…core” but are nonetheless related to the bankruptcy case. If the matter is core, then the 1984 Act empowers the bankruptcy judge to enter a final judgment, subject to traditional appellate review in the district court. If a matter is non-core, then the bankruptcy judge may submit proposed findings of fact and conclusions of law to the district court, which must review proceedings de novo and enter a final judgment. As an exception, if all parties consent, a bankruptcy judge may enter final judgment on a non-core matter, thereby treating the proceeding as if it were core.

The Stern court was faced with a constitutional challenge to the statutory designation of a particular matter as being “core,” which then permitted the bankruptcy court to adjudicate the matter to final judgment. The Court agreed that Congress violated Article III by vesting in the bankruptcy courts the authority to finally decide the designated “core” claim; Congress had improperly granted judicial power to the bankruptcy courts. This holding created a statutory “gap” in which a large number of cases commonly heard by the bankruptcy courts fell. For core matters, the bankruptcy courts could no longer adjudicate the case; however, the alternative statutory procedure of submitting proposed findings of fact and conclusions of law applied only to non-core claims and was not expressly authorized as an approach to core proceedings. The statutory gap rendered the bankruptcy court powerless to deal with the frequent Stern claims, threatening a great burden on federal district courts, which were to hear all Stern claims in the first instance.

The Court found that the 1984 Act permitted bankruptcy courts to proceed with Stern claims as if they were non-core claims based on the severability provision in the Act: “If any provision of this Act or the application thereof to any person or circumstance is held invalid, the remainder of this Act, or the application of that provision to persons or circumstances other than those as to which it is held invalid, is not affected thereby.” 28 U.S.C. 151. The plain language was found to close the “gap” because when a court identifies a Stern claim, it has necessarily “held invalid” the “application” of the portion of the Act describing “core” matters and proceedings. The severability clause then provides that the remainder of the Act is unaffected, which includes the provisions governing “non-core” proceedings. Therefore, when faced with a Stern claim, a bankruptcy court may submit proposed findings of fact and conclusions of law to the district court, subject to de novo review and entry of final judgment.

Despite admitting that the case at bar “did not proceed in precisely that fashion,” the Court affirmed the lower courts since the district court did in fact conduct a de novo review of the bankruptcy court’s grant of summary judgment before entering its own judgment in favor of the trustee. EBIA’s argument centered on its entitlement to de novo review by an Article III judge, which is exactly what EBIA received. The Court reasoned that, even if EBIA correctly asserted that the judgment of the bankruptcy court was invalid, the district court cured the error by their de novo review and own entry of judgment. EBIA would have received the same review from the district court whether the bankruptcy court labeled their findings and conclusions as a proposal or a judgment; therefore, there was no error that warranted reversal.