On June 24, 2013, the Supreme Court of the United States agreed to hear an appeal that will determine the future of fraudulent transfer litigation before all United States bankruptcy courts. In Executive Benefits Insurance Agency v. Arkison, SCOTUS will determine just how much its prior decision in Stern v. Marshall limits bankruptcy court authority in fraudulent transfer litigation.

Review of Stern v. Marshall: Constitutional Limits on Power of Bankruptcy Courts

In its 2011 decision in Stern v. Marshall, the Supreme Court shook up the bankruptcy litigation world by holding that bankruptcy courts lack constitutional authority to enter final orders in certain types of disputes, despite Congress expressly granting such authority to the bankruptcy courts. Specifically, the Supreme Court ruled that Article I courts (e.g. bankruptcy courts) may not enter final orders on matters constitutionally reserved to Article III courts (e.g., district courts), regardless of whether Congress has attempted to grant them authority to issue final orders in such matters.

By statute, a bankruptcy court considering a dispute is permitted do one of three things:

1. If a dispute falls within the bankruptcy court’s statutory “core” jurisdiction, the bankruptcy court may issue a “final order” that disposes of the matter (which can generally be appealed to a district court or other Article III court); or
2. If a dispute falls within the bankruptcy court’s statutory “non-core” jurisdiction, the bankruptcy court may propose findings of fact and conclusions of law, which are merely a recommendation to a district court as to what order it should enter; or
3. If a dispute does not fall within either the bankruptcy courts “core” or “non-core” jurisdiction, the bankruptcy court may dismiss the dispute.

The Problem Caused by Stern

SCOTUS’s decision in Stern left an apparent gap in that statutory framework. What if Congress has designated a matter as “core” but, under Stern, a bankruptcy court is constitutionally barred from entering a final order? Can the bankruptcy court issue even proposed findings of fact and conclusions of law? Or is the bankruptcy court obliged to remain silent? A recent decision out of the United States Court of Appeals for the Ninth Circuit aimed to address those very questions.

Case Now Before SCOTUS

In Executive Benefits Insurance Agency v. Arkison, the appellant argued that the bankruptcy court lacked authority to enter a final judgment on a fraudulent transfer claim. While the appellant acknowledged that the claim was statutorily core, it contended that the bankruptcy court was barred from entering a final order under the holding of Stern.

Further, the appellant argued that, because fraudulent transfer claims are designated as “core,” the bankruptcy court could not even issue proposed findings of fact and recommendations to the district court because, read literally, the statute only permits a bankruptcy court to issue proposed findings of fact and conclusions of law on matters that are not designated as “core.”

The Ninth Circuit partially agreed with the appellant’s first argument, and held that Stern v. Marshall would normally prohibit the bankruptcy court from issuing a final order. However, the court found that the appellant “impliedly consented” to the bankruptcy court’s jurisdiction through its litigation conduct.

Moreover, the Ninth Circuit squarely rejected the appellant’s second argument, and explained that Congress granted bankruptcy courts as much adjudicatory power with respect to “core” matters as the Constitution will permit. The Ninth Circuit therefore concluded that, by granting bankruptcy courts the power to enter final orders on core matters, Congress implicitly also granted them the more modest power to issue proposed findings of fact and conclusions of law on core matters.

Not to be deterred, the appellant filed a petition for a writ of certiorari with the Supreme Court of the United States. Not surprisingly, given the amount of litigation that Stern has spawned, the Supreme Court granted the petition and will hear argument on two issues:

1. Can a bankruptcy court issue proposed findings of fact and conclusions of law in a “core” proceeding; and
2. Can litigant conduct constitute “consent” to bankruptcy court jurisdiction on matters otherwise required to be decided by Article III courts? If so, in what circumstances?

Although oral argument has not yet been scheduled, we can expect that it is only a matter of months before we have a definitive answer to some of the questions that have plagued fraudulent transfer litigation since Stern was handed down in 2011.