Bankruptcy Judges Can Hear “Stern” Issues! (Sort of): Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agent, Inc.

Bankruptcy Judges Can Hear “Stern” Issues! (Sort of)

Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agent, Inc.

Published on June 11, 2014 by: Ian M. Falcone

On June 10, 2014, the Supreme Court issued its decision in Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agent, Inc. 573 U.S. ___ (2014) that answered the question, “Can a bankruptcy court hear a Stern issue?”  (a “Stern” issue is one that otherwise appears to be a core issue but is based solely on state law rights – a fraudulent conveyance outside the scope of §548 is a good example) The answer is a resounding “sort of.”  

In 1982, Northern Pipeline Constr. Co. Marathon Pipe Line Co., 458 U.S. 50 (1982) the Supreme Court struck down the Bankruptcy Act of 1978 because it attempted to grant certain judicial powers to bankruptcy judges who did not meet the definition of Article III judges (no life tenure, no protection against salary diminution).  Congress subsequently enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984, which attempted to fix this problem by making the bankruptcy courts a division of the district courts (thereby effectively granting Article III powers to the bankruptcy court).

Stern v. Marshall, 131 S.Ct. 2594 (2011) reminded us that Article III of the constitution prohibits Congress from granting bankruptcy courts (non Article III judges) from deciding issues that are not true “core” issues under 11 U.S.C. 157(b).  More importantly, the lack of jurisdiction cannot be cured by legislation.

Since the Stern decision, it has been unclear whether the bankruptcy court has any authority to hear issues such as fraudulent conveyances, that are otherwise “core” issues were it not for the fact that they involve only state law rights. Executive Benefits answers that question.

In Executive Benefits, the trustee asserted that prior to the bankruptcy case, the debtor (Bellingham Insurance Agency, Inc.) had fraudulently conveyed certain assets to Executive Benefits Insurance Agency, Inc. who was not a creditor in the case.  The trustee pursued the fraudulent transfer claims in the bankruptcy court, which ruled in its favor.  Executive Benefits appealed and the district court affirmed (holding that that the bankruptcy court’s decision could be treated as proposed findings of fact and conclusions of law).

The Supreme Court affirmed the district court’s decision stating that although the bankruptcy court could not render a final decision, its decision was reviewed de novo by the district court whose affirmance was sufficient to constitute the final judgment for Article III purposes.  Thus, Executive Benefits confirms that the bankruptcy court can hear Stern issues.   However, their “decisions” are merely findings of fact and conclusions of law that, in compliance with 28 USC 157(b), must be reviewed de novo by the district courts to be considered a final order.

While this is helpful and resolves many concerns, Executive Benefits expressly reserves and does not decide whether litigants can consent to the jurisdiction of the bankruptcy courts subject only to appellate review by the district courts.  We will have to wait for another case to answer that question.