SupremeCourt_178740915_100dpiAfter January 14’s oral argument in Executive Benefits Insurance Agency v. Arkison, the big question appears to be not whether the Supreme Court will scale back bankruptcy court power over fraudulent transfer actions, but how drastic the new limitations will be.  Our previous discussions of Arkison appear here and here.


The facts of Arkison are relatively straightforward: Peter Arkison, the chapter 7 trustee for Bellingham Insurance Agency, sued Executive Benefits Insurance Agency (“EBIA”) in the United States Bankruptcy Court for the Western District of Washington for the recovery of a fraudulent transfer.  The bankruptcy court granted summary judgment in favor of Arkison and entered a final judgment against EBIA.  EBIA appealed to the United States District Court for the Western District of Washington, which reviewed the bankruptcy court’s summary judgment order de novo, and affirmed that decision in full.  EBIA again appealed, this time to the United States Court of Appeals for the Ninth Circuit.

Before the Ninth Circuit, EBIA argued, for the first time, that the bankruptcy court exceeded its Constitutional authority, as limited by the Supreme Court’s decision in Stern v. Marshall, by entering a final judgment on Arkison’s fraudulent transfer claim.  Instead, EBIA contended that only an “Article III” court, such as the district court, had authority to enter a final judgment.  EBIA further argued that the bankruptcy court was prohibited from even issuing “proposed findings of fact and conclusions of law” for de novo consideration by the district court.

The Ninth Circuit partially agreed with EBIA, and held that Stern v. Marshall normally would have prohibited the bankruptcy court from issuing a final order on a fraudulent transfer claim.  However, the court found that EBIA “impliedly consented” to the bankruptcy court’s jurisdiction by litigating before the bankruptcy court without raising an objection.

The Ninth Circuit also rejected EBIA’s argument that the bankruptcy court lacked authority to, if necessary, issue proposed findings of fact and conclusions of law on a fraudulent transfer claim.  Although Congress did not specifically empower bankruptcy courts to issue proposed findings and conclusions on fraudulent transfer claims, it instead gave them the greater broader power to issue final judgments on those actions.  According to the Ninth Circuit, Congress’s decision to grant bankruptcy courts that greater power—having not anticipated that they would be unable to exercise it because of the limitations subsequently imposed by Stern v. Marshall—demonstrated that Congress intended for bankruptcy courts to have the maximum adjudicatory power constitutionally permissible with respect to fraudulent transfer claims, including the lesser power of issuing proposed findings of fact and conclusions of law.

As a result, the Ninth Circuit affirmed the bankruptcy court’s decision finding EBIA liable on Arkison’s fraudulent transfer claim.

Following the Ninth Circuit’s decision, EBIA filed a petition for a writ of certiorari with the Supreme Court of the United States.  The Supreme Court granted certiorari and agreed  to consider two questions:

(1)   Can a bankruptcy court issue proposed findings of fact and conclusions of law in disputes that are within its “core” jurisdiction, such as fraudulent transfer claims; and

(2)   Can litigants consent to a bankruptcy court finally adjudicating a matter that is otherwise required to be decided by an Article III court?  If so, in what circumstances?

A Divided Supreme Court

Although it is always difficult to gauge the likely outcome of a Supreme Court case from observing oral argument, certain Justices’ questioning brought two opposing viewpoints into sharp relief.  On one side of the debate, Justice Breyer’s questioning reflected his apparent view that Stern should be construed narrowly and bankruptcy court statutory authority construed broadly.  On the other side of the debate, Chief Justice Roberts and Justice Scalia took the position that Stern should be interpreted broadly and bankruptcy court statutory authority construed literally and narrowly.

Breyer and Scalia Spar Over Statutory Meaning

On the first issue, Justice Breyer strongly suggested that he views the language of the statute that addresses when a bankruptcy court may issue proposed findings of fact and conclusions of law as ambiguous, which would require the court to determine Congress’s intent.  Justice Breyer’s questions further suggested that he strongly believes that Congress decision to grant bankruptcy court’s the broad power to enter final judgments on issues within their core jurisdiction, including fraudulent transfer claims, demonstrated that it intended bankruptcy courts to have the lesser power of issuing proposed findings of facts and conclusions of law with respect to core matters.

Justice Scalia sharply disagreed, suggesting that the statute is unambiguous and simply does not provide bankruptcy judges with the power to enter proposed findings of fact and conclusions of law as to core matters.  In his apparent view, regardless of whether Congress would have given bankruptcy judges that power had they appreciated the constitutional flaw in the statute, they plainly did not do so.

Several other Justices’ comments suggested that their views fall somewhere in between the poles staked-out by Justices Breyer and Scalia.  In particular, Justices Sotomayor and Kagan focused on whether the statutes designation of fraudulent transfer actions as “core” could be severed in a way that would preserve bankruptcy court power.  Justice Alito noted that, because Arkison was decided on summary judgment, the district court had granted full de novo review, meaning that, at least under the particular facts of Arkison, perhaps no party had been harmed by the bankruptcy court hearing the case in the first instance.

The Chief Justice Stands up for Article III

On the second question presented, Justice Breyer’s questioning suggested that he viewed litigant consent (whether express or implied) as an acceptable basis for a bankruptcy court to resolve a dispute that would normally be reserved for an Article III court.

Having remained silent for the first half of the argument, Chief Justice Roberts finally interjected, stating that the fundamental question raised by the case is whether litigant consent can overcome the structural Constitutional defect inherent in permitting bankruptcy courts to resolve issues properly reserved for Article III courts.  The Chief Justice’s follow-up questions then left little doubt as to where he stood on that issue, as he rhetorically queried why, if Congress cannot constitutionally infringe the prerogatives of Article III courts, mere litigants should be permitted to do so.  As he went on to explain, the separation of powers among the executive, judicial and legislative branches of the Federal government is a fundamental structural feature of the Constitution.  According to the Chief Justice, while litigants are free to surrender their right to have a matter heard by an Article III court, they are not free to transfer the Article III adjudicatory power to bankruptcy courts.  Justice Scalia appeared to broadly share the Chief Justice’s views.

Bankruptcy Courts Destined for Narrowed Authority?

Interestingly, despite arguing for a relatively narrow interpretation of Stern, even Justice Breyer began his questioning by acknowledging that, absent consent of the litigants, Stern would bar bankruptcy courts from issuing final orders on fraudulent transfer actions.  The remaining Justices spent little to no time discussing whether fraudulent transfer claims are fundamentally the types of claims reserved to Article III courts, having (apparently) already determined that they are.  Given the amount of debate that question engendered in the lower courts following the Supreme Court’s decision in Stern (with many courts concluding that fraudulent transfer claims may properly be decided by non-Article III courts), the Supreme Court’s apparent unanimity on the issue is striking.  Regardless of whether Justice Breyer on the one hand, or Chief Justice Roberts and Justice Scalia on the other, prevail, there appears to be a substantial likelihood that the Supreme Court will issue a ruling denying bankruptcy courts the authority, absent litigant consent, to issue final orders on fraudulent transfer claims.

Broader Reach, But Not Unlimited

The Justices’ questioning, and the litigants responses to those questions, also showed that Arkison has the potential to reach far beyond the bankruptcy courts.  As Justices Kagan and Alito noted, significant portions of any decision establishing Constitutional limits on the power of bankruptcy judges could also apply to other non-Article III judges, such as magistrate judges.  For example, a ruling that a bankruptcy court may not enter a final judgment on a matter properly reserved for an Article III judge, even with litigant consent, would presumably also prevent federal magistrate judges (who regularly enter orders under precisely those circumstances) from doing so.

Justice Kagan also suggested that a maximalist interpretation of Stern might impair the power of independent arbitrators to resolve disputes with the consent of the parties.  Chief Justice Roberts, however, quickly rejected that line of reasoning, pointing out that a arbitrator’s decision has no force until brought to an Article III court for enforcement in accordance with general principles of contract law.

Regardless of outcome, the Supreme Court’s decision in Arkison is likely to shake up the bankruptcy litigation world and (finally) provide some certainty on the scope Stern.  We will continue to follow the case over the coming months and will provide a further update when an opinion is issued.