Eroding Bankruptcy Court Jurisdiction and Unresolved Questions Following the Bellingham Decision

On Behalf of | Jun 30, 2014 | Uncategorized |

The Supreme Court of the United States issued its long awaited follow up decision to Stern v. Marshall, 564 U.S. ___ (2011). In Stern, the Supreme Court held the U. S. Constitution does not permit a bankruptcy court to enter final judgment on certain bankruptcy related litigation claims – including certain claims which are expressly identified as “core” claims pursuant to 28 U.S.C. Section 157 (b)(2). Instead, a bankruptcy court may only make proposed findings of fact and conclusions of law which then must be reviewed “de novo” by the district court before a final judgment may be entered on the matter. A de novo review, by definition, requires a complete and independent review with no deference to the decision by the lower court. By comparison, prior to Stern, bankruptcy courts were able to issue final judgments on all core claims which then would be subject to review by the appellate court with much greater deference to the lower court’s decision (e.g. findings of fact would only be reversed if they were “clearly erroneous” while issues of law would be reviewed de novo review).

In the recent decision, Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agency, Inc. dated June 9, 2014, the Supreme Court was faced with the question of whether the parties could consent to jurisdiction, and thereby enable a bankruptcy court to issue a final judgment on the matter. By way of background, the Bellingham case involved the Bankruptcy Court granting a motion for summary judgment in favor of the Trustee on a fraudulent transfer claim. The District Court affirmed the Bankruptcy Court’s ruling after a de novo review. The Ninth Circuit Court of Appeals, in addressing the question of jurisdiction, acknowledged that the claims in question were “‘Stern claims,’ i.e., claims designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that way as a constitutional matter.” The Ninth Circuit nevertheless concluded that the parties had impliedly consented to jurisdiction and affirmed the judgment.

Without deciding the issue of consent, the Supreme Court affirmed the judgment issued by the Bankruptcy Court. The Supreme Court based its decision on the fact that the District Court had initially reviewed the judgment de novo – thereby complying with the procedure articulated in Stern for addressing these types of claim (i.e. treating such claims as non-core and requiring the Bankruptcy Court to merely propose findings of fact and conclusions of law to the District Court for de novo review.)

This erosion of jurisdiction for the bankruptcy court will have a significant impact on litigation matters pending before bankruptcy courts across the nation. In practice, litigating these Stern claims would require the bankruptcy court to conduct a trial and then issue its proposed findings of fact and conclusions of law. Thereafter, the district court would be required to conduct an independent de novo review before issuing a final judgment.

The practical effect of these recent rulings is that every matter tried in the bankruptcy court will automatically be “appealed” to the district court to make an independent review of the case. Think about the cost and delay of having both the bankruptcy court and the district court review every matter before a final judgment can be rendered. Moreover, the findings of fact would be reviewed de novo – without the appropriate deference to the trial court that heard the live testimony at trial.

These rulings would also seem to significantly impact the existing appellate process [See, e.g., Federal Rules of Bankruptcy Procedure, Section VIII]. By application, only the district court would have the appropriate jurisdiction to issue a final judgment on these Stern claims. With this, there would no longer be any direct appeals from the bankruptcy court to either the district court or the Bankruptcy Appellate Panel for litigation matters involving Stern claims. The final judgment would necessarily be entered by the district court with any appeals going to the Ninth Circuit.

There are countless other questions that arise from this decision and only time will tell how the Courts handle this. Unfortunately, the question of whether parties can consent to jurisdiction, and thereby enable the bankruptcy court to enter a final judgment, remains unanswered. For the full opinion, please click here.

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