Adam Lewis’ e-Bulletin re the Supreme Court’s decision in Executive Benefits Ins. Agency v. Arkison

Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest:

SUMMARY

On June 9, 2014, in Executive Benefits Ins. Agency v. Arkison, the United States Supreme Court ruled that, pursuant to 28 U.S.C. § 157(c)(1), a bankruptcy court may make proposed findings of fact and conclusions of law in a Stern “core” proceeding subject to de novo review by an Article III court.    To read the full decision, click here: http://www.supremecourt.gov/opinions/13pdf/13-339_886a.pdf. 

FACTS

The Palavedas owned two companies that began to suffer financial distress.  The Palavedas formed a new company, Executive Benefits Ins. Agency (“EBIA”), to which they transferred assets of the other companies.  The other companies later filed chapter 7 cases. 

The chapter 7 trustee brought an action against EBIA in the bankruptcy court seeking, among other things, to recover the asset transfers as fraudulent conveyances.  After some inconclusive maneuvering between the parties over whether the claims should remain in the bankruptcy court or be transferred to the district court for a jury trial, the trustee moved for summary judgment.  The bankruptcy court granted the motion.  EBIA appealed to the district court, which reviewed the decision de novo.  The district court affirmed. 

EBIA appeal to the Ninth Circuit Court of Appeals.  After EBIA filed its opening brief, the Supreme Court decided Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594 (2011).  Stern held that bankruptcy judges cannot enter a final judgment in certain matters statutorily-designated as “core[1] ” under 28 U.S.C. §§ 157(b)(1) and (2) because they are not Article III judges.  In light of Stern‘s holding, EBIA moved to dismiss the appeal on grounds that the bankruptcy court lacked subject matter jurisdiction over the underlying proceeding and, in turn, the Ninth Circuit lacked jurisdiction over the appeal.  The trustee contended that EBIA had consented to the bankruptcy court’s jurisdiction to enter a final judgment in non-core matters as permitted by 28 U.S.C. § 157(c)(2), which provides that the district court may refer a proceeding related to a case under the Bankruptcy Code to a bankruptcy judge with the consent of the parties. 

The Ninth Circuit affirmed.  Agreeing with the trustee, the Ninth Circuit held that consent could be, and was, implied (and need not be express).  It also found that the district court’s de novo review was consistent with 28 U.S.C. § 157(c)(1), which permits a district court to refer any cases or proceedings under the Bankruptcy Code to bankruptcy judges for the district.  The Supreme Court granted EBIA’s petition for certiorari. 

The Supreme Court affirmed the Ninth Circuit’s decision on the grounds that the proceedings in the bankruptcy and district court effectively comported with section 157(c)(1)’s authority for the bankruptcy court to make proposed findings of fact and conclusions of law, subject to the district court’s de novo review.  The Supreme Court, therefore, found no need to decide whether section 157(c)(2) is itself constitutional and, if so, whether consent may be implied (or must be express). 

REASONING

The Supreme Court assumed that the subject claims were “Stern” claims — claims denominated as “core” under section 157(b) that, under Stern, could not be finally decided by the bankruptcy court absent consent of the parties under section 157(c)(2).  But the Supreme Court concluded that, although the procedure under section 157(c)(1) for a bankruptcy court’s issuing proposed findings and conclusions for the district court’s de novo review in non-core matters is not expressly authorized for Stern “core” matters, the procedure nevertheless is applicable in such instances. 

The severability provisions accompanying the passage of section 157 mean that matters not governed by the “core” provisions of section 157(b) are, in effect, non-core and, thus, subject to section 157(c)(1).  In essence, the Supreme Court can be seen as re-writing “core” in section 157(b) to mean “subject to a final adjudication by the bankruptcy court under Stern and its provenance.”  Anything that does not meet that “test” becomes “non-core” under section 157(c).  The ruling observes that nothing suggests that Congress intended to create the so-called “Stern gap” that would have left certain kinds of claims subject to neither section 157(b) or section 157(c), without a jurisdictional home in bankruptcy jurisprudence (except perhaps at the district court level under 28 U.S.C. § 1334(a), which vests all bankruptcy jurisdiction in the district courts in the first instance).

The Supreme Court then found that EBIA received the appropriate de novo review when the district court applied the standard applicable to review of grants of summary judgment.  As a result, the Supreme Court determined there was no need to decide whether, under section 157(c)(2), EBIA consented to the bankruptcy court’s jurisdiction to decide the matter. 

AUTHOR’S COMMENT

Accepting that Stern made massive inroads on the jurisdiction of bankruptcy courts over important matters and imposed a system of dual de novoassessment of certain cases (first, by the bankruptcy court making proposed findings and conclusions, and second, by the district court reviewing those proposed findings and conclusions), Executive Benefits at least ameliorates the challenging impositions of Stern.  More particularly, this opinion leaves a large class of cases important to bankruptcy court proceedings – essentially, “related-to” cases – available for treatment at the bankruptcy court level in the first instance (except in the cases requiring jury trials by an Article III court), even if it does so by essentially re-writing the definitions of “core” and “non-core” through its severability analysis.  It seems the fundamental jurisdictional issues created by the Supreme Court’s jurisprudence culminating in Stern are now here to stay unless Congress converts bankruptcy judgeships to Article III positions, as – in the author’s opinion – it should. 

No doubt district courts will be relieved that they do not have to try such cases from scratch given their massive dockets and the wide-open scope of what de novo review requires under section 157(c)(1).  That said, it would have been beneficial if the Supreme Court had decided the consent issues.  Although unnecessary, it certainly could have decided that issue as an alternative rationale as the facts and law below position them well for an intelligent decision.  In any event, the effect of the Supreme Court’s decision in regard to the consent issue is to presently leave the Ninth Circuit’s Bellingham decision on consent the law of the circuit. 

These materials were prepared by ILC member Adam A. Lewis (alewis@mofo.com) of Morrison & Foerster LLP, San Francisco, California.  Editorial contributions were provided by ILC member Asa S. Hami of SulmeyerKupetz, a professional corporation.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee
[1]Core proceedings are proceedings or issues that are entirely related to a bankruptcy case and are exclusively granted to a bankruptcy court.  See 28 U.S.C. § 157(b)(2).  Non-core proceedings are those that do not arise under bankruptcy law, even if some of the issues in the case relate to the bankruptcy.  Back