SupremeCourt_178740915_100dpiOn June 9, 2014, the Supreme Court handed down a decision in Executive Benefits Insurance Agency v. Arkison—a case that was expected to answer fundamental questions about the constitutional limits of bankruptcy courts.  The case had the potential to either dramatically reshape, or strongly reaffirm existing fraudulent transfer litigation law and practice.  Instead, in a brief opinion written by Justice Thomas on behalf of a unanimous court, SCOTUS affirmed the decision below on narrow statutory grounds, and explicitly declined to address any of the difficult constitutional questions that plague fraudulent transfer litigation.

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

In its 2011 decision in Stern v. Marshall, the SCOTUS 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.  SCOTUS 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 statutorily granted bankruptcy court’s that authority.

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);
  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 court’s “core” or “non-core” jurisdiction, the bankruptcy court may dismiss the dispute.

The Problems Caused by Stern

SCOTUS’s decision in Stern caused multiple problems.  First, the court did not clearly articulate what types of claims potentially raised a “Stern problem.”  Early decisions suggested that few claims would raise Stern problems, focusing on SCOTUS’s statement that Stern would not “meaningfully chang[e] the division of labor in the statute.”  Other commentators and cases noted, however, that Stern’s logic, taken to its limits, would bar bankruptcy courts from entering final orders on even fraudulent transfer claims.

Second, Stern left an apparent gap in the statutory jurisdictional framework.  What if Congress designated a matter as “core” but, under Stern, a bankruptcy court is constitutionally barred from entering a final order?  Could a bankruptcy court issue even proposed findings of fact and conclusions of law as if the claim were “non-core”?  Could the parties perhaps consent to such a final order by litigating in the bankruptcy court?

In Arkison, the SCOTUS stood poised to answer all of those questions.

The Facts of Arkison

As noted in our prior coverage of Arkison, the facts of Arkison are unremarkable.  Peter Arkison, the chapter 7 trustee for Bellingham Insurance Agency, sued Executive Benefits Insurance Agency (“EBIA”) in bankruptcy court to recover a fraudulent transfer.  The bankruptcy court granted the plaintiff summary judgment and entered a final judgment against EBIA.  On appeal, the district court reviewed the bankruptcy court’s summary judgment order de novo (as is required on an appeal from summary judgment), and affirmed the bankruptcy court’s decision.  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 violated Stern by entering a final judgment on Arkison’s fraudulent transfer claim.  EBIA contended that only an “Article III” court, such as the district court, had authority to enter a final judgment on a fraudulent transfer claim against a non-creditor.  EBIA further argued that, because fraudulent transfer actions are designated as “core” 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 normally would have prohibited the bankruptcy court from issuing a final order on a fraudulent transfer claim.  However, the Ninth Circuit found that EBIA “impliedly consented” to the bankruptcy court’s jurisdiction by litigating before the bankruptcy court without raising an objection.  Additionally, the Ninth Circuit found that the bankruptcy court was at the very least statutorily entitled to enter proposed findings of fact and conclusions of law with respect to the fraudulent transfer claim, and noted that such proposed findings and conclusions would in any event have been reviewed de novo by the district court.  As a result, the Ninth Circuit affirmed the bankruptcy court’s decision.

SCOTUS Grants Certiorari

Following the Ninth Circuit’s ruling, EBIA sought Supreme Court review.  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, such as fraudulent transfer claims, that are statutorily within its “core” jurisdiction; and

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

Neither party asked the Supreme Court to revisit the Ninth Circuit’s conclusion that fraudulent transfer claims raise a Stern problem, and the Supreme Court did not grant review on that question.  Nevertheless, it was widely expected that the Supreme Court would answer that question in addressing the questions that it had agreed to review.

Arkison at SCOTUS

Rather than addressing the broad constitutional questions raised by Arkison—whether fraudulent transfer claims raise a “Stern problem” and whether litigants can consent to final adjudication of “Stern problem” claims by a bankruptcy court—SCOTUS resolved the case on narrow statutory grounds.  In a brief opinion, Justice Thomas rejected the dominant view that “Stern created a ‘gap’ in the bankruptcy [jurisdictional] statute.”  Instead, SCOTUS found that the statute’s “severability provision” allows a court to nullify the “core” label as applied to any claim that raises a Stern problem.  As a result, any claim raising a Stern problem instantly becomes a “non-core” claim as to which a bankruptcy court may issue proposed findings of fact and conclusions of law rather than a final order.

Having ruled on how the jurisdictional statute should function when a Stern problem exists, SCOTUS turned to the particular facts of the Arkison case.  Most important, SCOTUS did not rule that the fraudulent transfer claim at issue (or any fraudulent transfer claim) raises a Stern problem.  Instead, because no party had asked the court to review that question on certiorari, SCOTUS “assume[d] without deciding, that the fraudulent conveyance claims in this case are Stern claims.”  Because SCOTUS did not rule on that issue, the controversy regarding whether, and under what circumstances, fraudulent transfer claims raise a Stern problem will live on.

SCOTUS disposed of the remainder of EBIA’s argument swiftly.  Justice Thomas noted that “[a]t bottom, EBIA argues that it was entitled to have an Article III court review de novo and enter judgment on the fraudulent transfer claims asserted by the trustee.”  However, the bankruptcy court had decided Arkison on summary judgment.  As a result, the district court was required to, and did, review all of the bankruptcy court’s ruling de novo before affirming the bankruptcy court.  Accordingly, EBIA had effectively received exactly the relief it sought: de novo review by an Article III court.  Even if all of EBIA’s arguments were correct and the bankruptcy court was not entitled to enter a final judgment, the district court’s de novo review cured any possible error.  Accordingly, SCOTUS affirmed the judgment of the Ninth Circuit.

Conclusion—Fraudulent Transfer Litigation Likely to Visit SCOTUS Again

The Supreme Court’s ruling in Arkison turned on the procedural posture of the case.  If the bankruptcy court had held a trial on the fraudulent transfer claims rather than decide them on summary judgment, the district court would not have reviewed the bankruptcy court’s ruling de novo, but would instead have been required to review the bankruptcy court’s factual findings only for an “abuse of discretion.”  If that had been the procedural posture in Arkison (as it is in many fraudulent transfer cases), SCOTUS would not have been able to avoid the question of whether litigants can consent (impliedly or otherwise) to a bankruptcy court entering a final judgment on a fraudulent transfer claim.  Additionally, because the Supreme Court did not even decide whether fraudulent transfer claims raise Stern problems in the first place, bankruptcy and district courts may continue to struggle with their appropriate roles in handling fraudulent transfer litigation.  The inevitable result?  More appeals over the intersection of bankruptcy procedure and constitutional law.