Supreme Court Clarifies Stern v. Marshall

Not even Nostradamus could have predicted the profound effect that former Playmate Vickie Lynn Marshall (a/k/a Anna Nicole Smith) would have on the landscape of U.S. bankruptcy court jurisdiction. Nevertheless, two and a half years after the Supreme Court issued its opinion in Stern v. Marshall, questions remained as to what role a bankruptcy court had to hear or adjudicate a claim that was both designated for final adjudication within the Bankruptcy Code and prohibited from such adjudication by the U.S Constitution.

Unlike federal courts, which are creatures of Article III of the Constitution, bankruptcy courts were created by Congress. As such, their jurisdiction – the ability to hear and decide cases and controversies – is limited by statute. Specifically, §157 of the Bankruptcy Code limits the bankruptcy court’s jurisdiction to enter a final judgment on particular claims. These claims, which are specifically listed in the statute, are referred to as “core” proceedings. Other proceedings that are not “core” but are otherwise related to a bankruptcy proceeding are referred to as “non-core” proceedings. For “non-core” proceedings, a bankruptcy court may only submit proposed findings of fact and conclusions of law to a federal district court that possesses ultimate jurisdiction to issue a final judgment and order, except that the bankruptcy court can enter final judgment if both parties consent.

As we discussed in previous posts, Stern raised a troublesome conflict of laws between the Article III federal courts and the Article I legislatively created bankruptcy courts. In Stern, the son of Anna Nicole Smith’s deceased husband filed a claim for fraudulent conveyance against Smith, and she fired back by filing a common law claim for tortious interference. Under §157, counterclaims by the estate are specifically listed as “core” proceedings. In this case, the statute would have permitted the bankruptcy court to enter a final judgment on a purely state law claim.

The Supreme Court in Stern held that Congress did not have the authority under the Constitution to empower bankruptcy judges to decide legal claims that are based entirely on state law – even if such claims were specifically enumerated in the Bankruptcy Code as “core.”

Very soon after Stern was decided, attorneys and judges began to realize that the Stern holding presented a fundamental problem. Bankruptcy courts could enter a final judgment on core proceedings and present findings of fact and conclusions of law on “non-core” proceedings to the federal district courts. What were the courts to do now for the new class of Stern-claims, which were specifically designated by statute to be adjudicated by the bankruptcy court but prohibited by the balance of powers within the Constitution?

In Executive Benefits Ins. Agency v. Arkinson, the Supreme Court succinctly closed the door on the controversy. The court held that when a bankruptcy court is presented with a Stern-claim, the proper course of action is to treat the claim as “non-core” and to issue proposed findings of fact and conclusions of law for de novo review by the appropriate federal district court. In doing so Arkinson closes the gap left by Stern, permits the bankruptcy court to hear non-core proceedings that affect the bankruptcy estate, and preserves the balance of power by divesting the bankruptcy courts of the jurisdiction to enter final judgments on Stern-claims.

With as many questions as Arkinson answered, one remains. The Supreme Court suggested that the bankruptcy courts should treat Stern-claims as “non-core” proceedings, yet bankruptcy courts have long exercised jurisdiction to issue final judgments on “non-core” proceedings upon the consent of both parties. From a constitutional perspective it seems unlikely that the Supreme Court would endorse a grant of Article III jurisdiction to an Article I bankruptcy court simply because the parties consented, but at the very least Arkinson permits litigation to continue on Stern-claims within the pre-Stern venue of the bankruptcy courts, even if it is subject to review by the district court.

 

Topics:  Article I, Article III, Commercial Bankruptcy, Jurisdiction, SCOTUS, Stern v Marshall

Published In: Bankruptcy Updates, Civil Procedure Updates, Conflict of Laws Updates, Constitutional Law Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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