SCOTUS In Review: US Supreme Court Bankruptcy Cases 2014-2015

For the next several days I'll post lightly edited versions of the material I presented over this recent weekend at the North Carolina Bar Association's 38th Annual Bankruptcy Institute. My paper was titled SCOTUS Update: What Have They Done This Time? Even though my paper and remarks focused on the 2014-2015 term, I began with a case decided in the spring of 2014.

I realize that only a few of my readers will find this of interest but ...

I. The Constitution and Title 28: Jurisdiction, Article III, and Consent

Round 1

Before looking at the cases of the recently-completed term, we will return to the 2014–2015 term of the Supreme Court. In June 2014, the Supreme Court decided Executive Benefits Insurance Agency v. Arkison.[1] The Bellingham Insurance Agency had filed for relief under Chapter 7 in June 2006.  Bankruptcy trustee Peter Arkison filed a state-law fraudulent conveyance adversary action pursuant to Bankruptcy Code § 544(b) in the bankruptcy court against an entity affiliated with the debtor, Executive Benefits Insurance Agency. Because the trustee’s claim fell within the definition of “core” under 28 U.S.C. § 157(b)(2)(H), the bankruptcy court exercised the power to grant the trustee’s motion for summary judgment. Executive Benefits appealed on the merits to the district court, which affirmed after “de novo” review.[2]

Shortly after Executive Benefits appealed to the Ninth Circuit, the Supreme Court issued its opinion in Stern v. Marshall,[3] which held that not all Congress declared to be core was core.  In other words, Congress could not create constitutional jurisdiction simply by labeling a matter as a core proceeding.[4] Thus, designating all counterclaims by the estate as core proceedings[5] did not give the bankruptcy court jurisdiction over a “state law action independent of the federal bankruptcy law.”[6] Executive Benefits then moved to dismiss the Arkison's case because the bankruptcy court never had jurisdiction to enter judgment in a non-core “core” action (a so-called Stern claim).[7] The Ninth Circuit denied the motion to dismiss and affirmed the grant of summary judgment on two grounds. The court first held that Executive Benefits consented to the jurisdiction of the bankruptcy court. Second, the court observed that what was thought as the “judgment” of the bankruptcy court could instead be treated as proposed findings of fact and conclusions of law, which had been reviewed de novo by the district court. Such a reconfiguration of reality would satisfy the requirements of Stern. No harm, no foul.

The Supreme Court granted Executive Benefits’ petition for certiorari and unanimously affirmed on the second of the Ninth Circuit’s two grounds. According to the Court, bankruptcy courts should treat Stern claims as if they were “related-to” proceedings under 28 U.S.C. § 157(c)(1) and submit proposed findings and conclusions to the district court, which in turn should give them de novo review and enter judgment. The Court expressly did not consider the question of whether parties could consent to entry of final judgment by the bankruptcy court in a Stern matter.[8]

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[1] 134 S.Ct. 2165 (2014). The modern account of bankruptcy court jurisdiction begins with Katchen v. Landy, 382 U.S. 323 (1966) where the Court held that a bankruptcy judge had jurisdiction to enter judgment on a preference action against a creditor that had filed a proof of claim even when the judgment exceeded the creditor’s claim. The Court drew on Katchen v. Landy in Northern Pipeline v. Marathon Pipeline Co., 458 U.S. 50 (1982) where it held that the bankruptcy court lacked jurisdiction over the debtor’s claim for breach of contract where the defendant had not filed a proof of claim. With the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984 in response to Marathon, Congress specified the jurisdiction of bankruptcy judges with respect to “core proceedings” and listed “allowance or disallowance of claims” as well as “counterclaims by the estate against persons filing claims against the state” as core proceedings. 28 U.S.C. § 157(b)(2)(B) and (C). In turn, 28 U.S.C. § 157(b)(1) provided that bankruptcy judges could “hear and determine . . . all core proceedings . . . .” With respect to non-core proceedings, the powers of a bankruptcy judge extended only to submission of “proposed findings of fact and conclusions of law to the district judge.” 28 U.S.C. § 157(c)(1).

[2] Professor (and former bankruptcy judge) Bruce Markell has questioned the nature of the District Court’s de novo review. See Bruce A. Markell, Homonym Horrors: De Novo Review and Executive Benefits Insurance Agency v. Arkison, 34 Bankr. L. Ltr. 1 (August 2014) (observing that the de novo standard of review from a grant of summary judgment is not the same as the de novo review required by 28 U.S.C. § 157(c)(1)).

[3] 131 S.Ct. 2594 (2011). In Stern, a creditor filed a proof of claim for damages for defamation. In response, the debtor objected to the claim and filed a counterclaim for tortious interference with the expectation of an inheritance. Id. at 2601.

[4] The majority in Stern concluded that Congress could not constitutionally authorize bankruptcy courts to enter judgment the debtor’s counterclaim because it “lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” Id. at 2604. Two factors thus troubled the majority: the debtor’s claim arose under state law and the facts supporting the counterclaim were unrelated to the creditor’s claim.

[5] 28 U.S.C. § 157(b)(2)(C).

[6] 131 S.Ct. at 2611.

[7] 28 U.S.C. § 157(b)(2)(H).

[8] In its discussion of Stern, the opinion by Justice Thomas on several occasions noted that the defendant in that case, like Executive Benefits, was the object of a state-law (counter)claim. See Executive Benefits, 134 S.Ct. at 2171, 2172. Perhaps the majority opinion signaled that a federally-based fraudulent conveyance action might not be a Stern claim. Or perhaps Justice Thomas was foreshadowing what was to become his dissenting opinion in Wellness.