The U.S. Supreme Court Clarifies the Procedure for Unconstitutional “Core” Matters Under Stern v. Marshall in Executive Benefits Ins. Agency v. Arkinson (Bellingham)

by Snell & Wilmer

In 2011, the U.S. Supreme Court decided Stern v. Marshall, 131 S.Ct. 2594. In Stern, the Court was faced with the question of whether the Bankruptcy Court had statutory and Constitutional authority to decide a counterclaim that arose out of common law. Stern involved a defamation suit filed against Vickie Lynn Marshall (a k a Anna Nicole Smith) in her bankruptcy proceedings, and her counterclaim for tortious interference. Marshall won summary judgment on the defamation action and was awarded hundreds of millions of dollars on her counterclaim. The creditor challenged the damage award on the grounds that the Bankruptcy Court did not have jurisdiction to enter a final judgment. While the Supreme Court initially determined that the Bankruptcy Court had statutory authority to determine Marshall’s counterclaim because it was “core” within the meaning of 28 U.S.C. § 157(b), it later held that the Bankruptcy Court lacked Constitutional authority to adjudicate the tortious interference claim because it was a private claim at common law that was required to be decided by Article III judges in Article III Courts. Thus, the Bankruptcy Court was constitutionally prohibited from entering final judgment on this state law claim even though it had statutory authority to do so.

The Stern case left open at least two questions: (1) What procedure should the lower courts follow when 28 U.S.C. § 157(b) says that a matter is “core,” but that matter is outside the constitutional authority of the Bankruptcy Court?; and (2) Can the parties consent to the Bankruptcy Court entering final orders in an unconstitutional “core” proceeding?

In 2012, the Ninth Circuit considered both of these issues in the case of In re Bellingham Insurance Agency, Inc. 702 F.3d 553 (9th Cir. 2012). Bellingham Insurance Agency filed a voluntary petition under Chapter 7 of the Bankruptcy Code in 2006. Shortly before filing its bankruptcy petition, the Debtor used funds to incorporate a new company, Executive Benefits Insurance Agency, Inc., and transferred assets to that entity. The Chapter 7 Trustee sued to recover the fraudulent or preferential transfers. Following Stern, the Ninth Circuit determined that even though the fraudulent/preferential transfer claims were statutorily “core,” the Bankruptcy Court was not constitutionally permitted to enter final judgment on those private claims against a non-creditor. The Court then recognized that this may leave a gap in the procedure for adjudicating core and non-core matters because 28 U.S.C. § 157 did not specifically permit the Bankruptcy Court to submit findings of fact and conclusions of law in statutorily “core” cases. Relying on the power to “hear and determine” core matters provided in § 157(b)(1), the Court determined that the Bankruptcy Court would still have the authority to issue proposed findings of fact and conclusions of law and refer them to the District Court for a de novo review. The Ninth Circuit then went on to determine that the right to a hearing in an Article III Court can be waived and that the defendants in this case had impliedly waived that right. Executive Benefits filed a Writ of Certiorari with the US Supreme Court, which was granted.

On Monday June 9, 2014, the Supreme Court issued its opinion in Executive Benefits Insurance Agency v. Arkinson.[1] The Court first noted that the Ninth Circuit had determined that the fraudulent/preferential transfer claims raised by the Chapter 7 Trustee were Stern claims (i.e., statutorily “core” but constitutionally Article III questions) and that neither party disputed that determination. The Court then relied on the severability provision of the statute when holding that any unconstitutional core claim should be treated as a “non-core” claim under § 157(c). Thus, the Supreme Court held in such cases that the Bankruptcy Court may issue findings of fact and conclusions of law, which the District Court will then review de novo before entering a final judgment.

Because the District Court reviewed the Bankruptcy Court’s grant of summary judgment de novo and had issued its own final judgment, the Supreme Court determined that it would not have to reach the issues of whether the Defendant had consented to the Bankruptcy Court hearing the matter, or, more importantly, whether parties can consent to a Bankruptcy Court, rather than an Article III Court, hearing the Stern issues and entering final judgment. The avoidance of this question is unlikely to have much effect on bankruptcy practitioners because many bankruptcy courts have already been submitting proposed findings of fact and conclusions of law to the Federal District Courts for de novo review before entry of final judgment. See In re Rhodes Companies, 2012 WL 5456084 (D. Nev. 2012) (suggesting this as the appropriate procedure in cases where a jury was not demanded). However, constitutional scholars will likely lament the Court’s failure to answer whether parties can confer jurisdiction on the Bankruptcy Court by consenting to entry of final judgments in unconstitutional “core” proceedings.


[1] See Slip Opinion.

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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