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Supreme Court Applies its Stern Ruling and Issues a Narrow Decision Holding that Bankruptcy Courts Can Hear, But not Decide, “Stern Claims”

In 2011, the U.S. Supreme Court (the “Court”) issued its noteworthy decision in Stern v. Marshall,1 in which it held that bankruptcy courts lack the constitutional authority to enter a final judgment on a state law counterclaim that is not related to the bankruptcy proceeding. Since Stern, a number of cases have been published - at both the bankruptcy court and court of appeals levels - where Stern jurisdictional issues have been raised and adjudicated. We recently wrote about one on this blog.

The Court, itself, had a chance to consider the implications of Stern in the case of Executive Benefits Ins. Agency v. Arkinson.2 In a unanimous decision written by Justice Clarence Thomas, the Court ruled that where Article III of the U.S. Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy related claim, the bankruptcy court may issue proposed findings of fact and conclusions of law with respect to the claim, to be reviewed de novo by a federal district court.

On June 9, 2014, the Court issued a unanimous decision that is narrow in scope. The Court addressed only the second issue, which deals with statutory construction and interpretation, and put off for another day the question of whether Article III permits a bankruptcy court to enter final judgment on a "Stern" claim with the consent of the parties.

The Court defined a Stern claim as "a claim designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter" because of Article III limits. 28 U.S.C. § 157 identifies certain claims as "core" that Congress decided could be finally decided by bankruptcy courts, while "non-core" claims require bankruptcy courts to issue proposed findings of fact and conclusions of law, on which Article III district courts will review de novo and enter final judgment.

While Stern held that Article III prohibited bankruptcy courts from entering final judgment on some "core" claims, it did not direct bankruptcy judges on how to proceed on such claims. This case provides direction, to a point. The Court determined that while the bankruptcy court could not enter a final judgment on the trustee's fraudulent conveyance claim because of Stern (because although the claim itself may be defined as "core" under 28 U.S.C. § 157, the bankruptcy court lacks constitutional authority to fully adjudicate such a claim3), it could hear the case and issue proposed findings of fact and conclusions of law to the federal district court. The Court explained that:

[W]hen a bankruptcy court is presented with such a claim, the proper course is to issue proposed findings of fact and conclusions of law. The district court will then review the claim de novo and enter judgment. This approach accords with the bankruptcy statute and does not implicate the constitutional defect identified by Stern.

In another part of the opinion the Court further explained its decision:

We hold today that when, under Stern's reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court. Because the District Court in this case conducted the de novo review that petitioner demands, we affirm the judgment of the Court of Appeals upholding the District Court's decision.

Accordingly, bankruptcy courts still have a role to play with respect to Stern claims. But the Court made clear that the role is limited to issuing proposed findings of fact and conclusions of law, to be reviewed de novo by district courts. We wouldn’t be surprised to see the Court grapple with the issue of whether parties can consent to bankruptcy courts adjudicating “Stern” claims next.

The case originated in bankruptcy court and involved a Chapter 7 trustee's fraudulent conveyance actions against Executive Benefits Insurance Agency (EBIA) and other defendants. The trustee filed a motion for summary judgment which was granted by the bankruptcy court, including the fraudulent conveyance claims. EBIA appealed to the district court, which affirmed after reviewing the summary judgment ruling de novo. EBIA then appealed to the U.S. Court of Appeals for the Ninth Circuit. While the appeal was pending, the Court decided Stern. EBIA then moved to dismiss the appeal on the ground that the bankruptcy court lacked the power to enter final judgment on the fraudulent conveyance claim. The Ninth Circuit denied EBIA’s motion and affirmed because (1) the parties impliedly consented to the bankruptcy court's adjudication in the case, and (2) the district court's de novo review effectively treated the bankruptcy court's judgment as proposed findings of fact and conclusions of law under the "non-core" statutory scheme, consistent with Stern.
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1Stern v. Marshall, 131 S. Ct. 2594 (2011).

2Executive Benefits Ins. Agency v. Arkinson, Docket No. 12-1200 (S.C. June 9, 2014).

3Note that the Court did not decide whether a fraudulent conveyance claim is actually a “Stern” claim. Because neither party contested that conclusion its opinion simply assumed, without deciding, that it was a “Stern” claim.

Categories: U.S. Supreme Court

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 concentrates her practice in the areas of Bankruptcy, Finance, Collections, Real Estate, and Commercial Litigation. In the bankruptcy area she represents creditors and Chapter 7 Trustees in all aspects of bankruptcy. Patricia also represents small and mid-sized businesses to large corporations in multi-faceted litigation matters in state and federal court. Her work with financial institutions includes collections, loan workouts, foreclosures, receiverships and various complex banking and finance issues. 

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