Executive Benefits Ins. Agency v. Arkison (in Re Bellingham Ins. Agency, Inc.): United States Supreme Court Defines the Statutory Boundaries of Article I Bankruptcy Judges After Stern v. Marshall

• Publication year: 2014
• Author: Donna Parkinson

Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.): United States Supreme Court Defines the Statutory Boundaries of Article I Bankruptcy Judges after Stern v. Marshall

Donna Parkinson

Donna Parkinson is the managing partner of Parkinson Phinney where she focuses on complex bankruptcy and commercial insolvency law issues. She served as Chair of the Business Law Section of the California State Bar (2011-2012) and as Chair of the Insolvency Law Committee, and has been an adjunct professor at the University of the Pacific's McGeorge School of Law teaching bankruptcy law.

I. Introduction

The United States Supreme Court decided Stern v. Marshall¹ in 2011, causing a tsunami of comments on the scope and import of the Supreme Court's opinion. In Stern, the Supreme Court held that an Article I bankruptcy judge did not have Constitutional authority to hear and make a final ruling on a counterclaim filed by a debtor against a third party for tortious interference, even though the Bankruptcy Code described this type of counterclaim as a core claim for which bankruptcy judges could make a final ruling.² These issues were aptly discussed in a previous Business Law News article printed in 2012.³

Recently, the United States Supreme Court decided Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.),⁴ which provided more insight into the Constitutional authority of Article I bankruptcy judges. In Executive Benefits, the Supreme Court held that an Article I bankruptcy judge can make a report and recommendation requesting a final ruling from the district court regarding claims designated as core by 28 U.S.C. § 157(b)(2) but now considered to be non-core under Stern (so-called "Stern claims").⁵ This decision answered the question of what to do with Stern claims, but not whether consent for the bankruptcy judge to hear Stern claims can be inferred from inaction or other waiver by a party.⁶ This article explores the Constitutional and statutory authority for both the Stern and Executive Benefits decisions and how the history of bankruptcy in this country and under old English law has set the stage for both of these decisions. The Executive Benefits decision is discussed, including the Supreme Court's reasoning for its decision. Finally, tips for practitioners are presented in light of the current state of the law regarding a bankruptcy judge's Constitutional authority to make final rulings.

II. Constitutional and Statutory Authority of Article I Judges

Authority for bankruptcy judges to hear and decide cases arises under the United States Constitution and Acts of Congress. Under the United States Constitution, Article III judges, which include those of the United States Supreme Court, federal district courts and courts of appeal, and the United States Court of International Trade, have lifetime tenure and salary guaranties that cannot be altered by the legislative and executive branches of government. This status forms the basis for a presumption of impartiality and immunity to pressure from the other branches of government.⁷ Article I judges, which include bankruptcy judges, magistrate judges, and judges of the United States Court of Claims, on the other hand, are appointed for only a limited term (14 years in the case of bankruptcy judges), and do not have the same salary guaranties.⁸

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The authority of bankruptcy judges to hear bankruptcy cases arises from 28 U.S.C. § 1334, which provides that Article III district courts have original jurisdiction over all bankruptcy cases.⁹ Section 1334 also provides, however, for exclusive jurisdiction of the district court over all bankruptcy cases except those cases "under title 11, or arising in or related to cases under title 11."¹⁰ The Article III district courts, therefore, are authorized to refer all nonexclusive jurisdiction bankruptcy cases to Article I bankruptcy judges.¹¹

The authority enacted by Congress for bankruptcy judges is further refined by permitting those judges to "hear and determine" all cases under title 11 and all "core proceedings arising under title 11, or arising in a case under title 11."¹² Such core proceedings are enumerated in a non-exhaustive list that includes a catchall paragraph for "proceedings affecting liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship . . . ."¹³

On the other hand, bankruptcy judges are only authorized to "submit proposed findings of fact and conclusions of law" to the district court for bankruptcy matters referred by the district court that do not fall within the listed core categories, but that are "related to" a case under title 11.¹⁴ For these non-core matters, the bankruptcy judge issues a report and recommendation for the district court, which then reviews the matter de novo and issues a final ruling.¹⁵ According to title 28, bankruptcy judges are also authorized to make a final ruling on these non-core matters with the consent of the parties.¹⁶

III. Historical View of the Separation of Powers

Making sense of the statutory scheme and the recent Supreme Court decisions requires a look at the history and development of bankruptcy in the United States. The existing statutory scheme is essentially how the bankruptcy world worked from the time of the 1984 Bankruptcy Amendments and Federal Judgeship Act ("1984 Act")¹⁷ until the Stern decision.¹⁸ As noted, in Stern, the Supreme Court held that notwithstanding the designation as core, a counterclaim for tortious interference filed by the debtor or trustee against a party, even one who had filed a proof of claim in a bankruptcy case, could not be the subject of a final ruling by the bankruptcy judge.¹⁹ The Supreme Court in Stern did not, however, explain how the courts should handle claims falling outside of the core designation as a consequence of Stern. Did they fall into the non-core but "related to" category of 28 U.S.C. § 157(c)(1), so that the Article I bankruptcy judge could hear the matter and provide a report and recommendation to the district court for de novo review? There did not appear to be explicit statutory authority for that treatment. Surely the Supreme Court did not expect the district courts to hear all the claims that were no longer core as a consequence of Stern? In fact, in Stern, the Supreme Court noted that it "did not think the removal of counterclaims such as [debtor's] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute . . . ."²⁰ Practitioners had to wait for a decision in Executive Benefits for the answer to this question. But how did these rather convoluted Constitutional questions arise in the first place?

Long before Stern, there were challenges to a bankruptcy judge's authority. Under the Bankruptcy Reform Act of 1978 ("1978 Act"),²¹ bankruptcy judges had authority to determine state law contract claims against a non-creditor of the bankruptcy estate. The U.S. Supreme Court, in Northern Pipeline v. Marathon Pipe Line, held, however, that Congress gave bankruptcy judges authority that was too broad for an Article I judge.²²

After Northern Pipeline, Congress enacted the 1984 Act, giving bankruptcy judges more circumscribed authority that included the current list of core proceedings and the report and recommendation procedure for non-core proceedings.²³ In 1989, however, the U.S. Supreme Court, in Granfinanciera v. Norberg, held that Congress again didn't get it quite right.²⁴ One enumerated core proceeding is a "proceeding to determine, avoid, or recover fraudulent conveyances."²⁵ Before Granfinanciera, the right to a jury trial was considered not to apply in a core proceeding.²⁶ Since fraudulent transfers were an enumerated core proceeding, no jury trial was afforded to defendants in a fraudulent transfer action. Congress only preserved the right to jury trials in personal injury or wrongful death suits.²⁷ Further, a bankruptcy judge could hear a jury trial if the right applied under the Seventh Amendment to the Constitution, and the parties consented to have the matter heard by the Article I bankruptcy judge.²⁸

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The defendant in Granfinanciera requested, and was denied, the right to a jury trial.²⁹ The Supreme Court opined in Granfinanciera that a defendant that had not submitted a claim against the bankruptcy estate did have a right to a jury trial when sued by a debtor or trustee in a bankruptcy case on a fraudulent transfer claim.³⁰ Thus, the designation as a core proceeding for fraudulent transfer claims did not abrogate the right to a jury trial. Did this mean that Article I bankruptcy judges could not hear and determine and issue a final judgment on fraudulent transfer claims? That is, did it mean that fraudulent transfer claims were not really core proceedings? Again, practitioners had to wait for a decision in Executive Benefits for the definitive answer.

But to really understand these weighty Constitutional issues, one must leave the United States and travel back in time to the English legal system from which American bankruptcy law evolved. In the English model, the roles of the bankruptcy trustee and the judge (or referee) were combined. Bankruptcy cases were administered by a bankruptcy commissioner, who had jurisdiction to resolve the validity of creditors' claims.³¹ The bankruptcy commissioner, however, had no jurisdiction over property not already in the bankruptcy estate. To recover property or resolve a dispute over what was, in fact, property of the bankruptcy estate, the commissioner had to file a formal complaint in a court of law to be heard by the Lord Chancellor.³²

The initial Bankruptcy Acts in America in 1841 and 1867 granted federal jurisdiction over all "bankruptcy proceedings."³³ But did that refer to the limited English scope of jurisdiction, or did it encompass suits to recover money or property for the estate? Initial decisions construing the early Acts...