Supreme Court Decides Executive Benefits Insurance Agency v. Arkison

In Executive Benefits Ins. Agency v. Arkison, No. 12-1200, the Supreme Court ruled that when Article III does not permit a bankruptcy court to enter final judgment on a core bankruptcy claim, the bankruptcy court may issue proposed findings and conclusions to be reviewed de novo by a district court.

Before filing for Chapter 7 bankruptcy, Bellingham Insurance Agency ceased operation and transferred certain assets to a new corporation, Executive Benefits Insurance Agency. Arkison, Bellingham's bankruptcy trustee, filed a complaint alleging that the transfers were fraudulent. The bankruptcy court granted summary judgment to the trustee, and the district court affirmed after de novo review. While an appeal was pending in the Ninth Circuit, the Supreme Court decided Stern v. Marshall, which held that a bankruptcy court lacks constitutional authority to enter a final judgment on a debtor's common-law counterclaim for tortious interference, even though the governing statute (28 U.S.C. § 157) allowed bankruptcy courts to enter final judgment in such cases. Executive Benefits moved to dismiss the appeal on the ground that the bankruptcy court lacked the power to enter final judgment on the fraudulent-transfer claim. But the Ninth Circuit affirmed the district court's judgment on two theories: (1) the parties impliedly consented to entry of final judgment by the bankruptcy court, or (2) the district court's de novo review effectively treated the bankruptcy court's judgment as proposed findings of fact and conclusions of law, which would comply with Stern.

The Supreme Court affirmed the Ninth Circuit on the second theory and did not reach the consent theory. The Supreme Court called the claim in this case a "Stern claim," which it defined 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 on bankruptcy court authority. As a general matter, the Constitution allows bankruptcy courts to adjudicate debtor-creditor relationships at the "core" of bankruptcy power, but state-created private rights must be adjudicated by Article III courts. Congress provided in 28 U.S.C. § 157 that certain claims that it labeled "core" claims could be finally decided by bankruptcy courts, while "non-core" claims required the bankruptcy court to issue proposed findings of fact and conclusions of law, on which the Article III district court would review de novo and enter final judgment. Stern held that Article III prohibited bankruptcy courts from entering final judgment on some of the claims that Congress had labeled "core" claims and entrusted to bankruptcy courts for final decision, but Stern did not explain how bankruptcy courts should proceed on those claims. The problem was that 28 U.S.C. § 157 required only claims designated as "non-core" to go through the proposed-findings-of-fact regime, and the trustee's claim against Executive Benefits was designated as a "core" claim under the statute.

The Supreme Court ruled that the severability provision in the bankruptcy statute provides the solution to this problem. When a court identifies a Stern claim, it has determined that a bankruptcy court cannot enter final judgment on that claim even if it is labeled "core" in the bankruptcy statute. In that case, the severability provision permits the bankruptcy court to apply its procedures for non-core proceedings to the Stern claim. The bankruptcy court may hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review, as it does with other non-core proceedings. The Supreme Court went on to hold that the fraudulent-conveyance claims in this case are subject to Stern, so the bankruptcy court was permitted to hear the proceeding, then submit proposed findings and conclusions for de novo review as with non-core claims. The Supreme Court affirmed the Ninth Circuit because the district court reviewed the bankruptcy court's findings and conclusions de novo, which satisfied Article III.

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