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Stern Claims Should be Treated as Non-Core Under Section 157(c)(1); Ability to Consent Under Section 157(c)(2) Reserved For Another Day

Executive Benefits Insurance Agency v. Arkison, Chapter 7 Trustee of the Estate of Bellingham Insurance Agency, Inc., 573 U.S. ___ (2014)

Writing for a unanimous Court, Justice Thomas explained in Executive Benefits Insurance Agency v. Arkison, 573 U.S. ___ (2014) that a Stern claim (i.e. a proceeding that is defined as core under 28 U.S.C. § 157(b) but that may not, as a constitutional matter, be adjudicated as such) should proceed as non-core within the meaning of section 157(c)(1) so long as it otherwise satisfies the criteria of such section (i.e. “is not a core proceeding but . . . is otherwise related to a case under title 11”).  Importantly, the Court did not address whether Article III allows a bankruptcy court, with the consent of parties, to enter a final judgment on a Stern claim pursuant to section 157(c)(2).

In Arkison, Peter Arkison, a chapter 7 trustee, brought fraudulent conveyance claims in bankruptcy court against Executive Benefits Insurance Agency (“EBIA”). The bankruptcy court granted summary judgment for Arkison on the claims.  EBIA appealed, the district court conducted a de novo review, affirmed the bankruptcy court’s decision, and entered a final judgment for Arkison.  While on appeal to the Ninth Circuit Court of Appeals, the U.S. Supreme Court decided Stern v. Marshall, 564 U.S. ___ (2011), which holds that Article III of the Constitution prohibits bankruptcy courts from adjudicating to finality certain claims statutorily defined as core under section 157(b).  In Arkison, the parties did not dispute that Arkison’s claims were Stern claims.  They disputed how the claims were to be treated by the bankruptcy court under section 157.

Bankruptcy courts are authorized under section 157(b)(1) to hear and determine all core proceedings and enter appropriate orders and judgments, which are then subject to appeal to the district court.  In non-core proceedings, however, bankruptcy courts are instructed under section 157(c)(1) to submit proposed findings of fact and conclusions of law to the district courts, which then review such proposed findings and conclusions de novo and enter a final order or judgment.  Notwithstanding section 157(c)(1), if all parties consent, section 157(c)(2) permits a bankruptcy court to treat non-core claims as core and proceed under section 157(b)(1).

The foregoing provisions do not address the treatment of Stern claims.  Confronted with this statutory gap, the Ninth Circuit Court of Appeals in Arkison affirmed the district court’s decision, holding that either EBIA impliedly consented to the bankruptcy court’s jurisdiction under section 157(c)(2) and thus allowed the bankruptcy court to enter a final order under section 157(b), or that the district court treated the bankruptcy court’s decision as proposed findings of fact and conclusions of law and appropriately reviewed them de novo under section 157(c)(1) and entered final judgment.

In affirming the circuit court’s decision, the Supreme Court held that the statute’s severability provision (98 Stat. 344, note following 28 U.S.C. § 151) permits Stern claims to proceed as non-core within the meaning of section 157(c) as such provision remains unaffected by the Stern decision.  As long as Stern claims satisfy the criteria of section 157(c)(1), bankruptcy courts may proceed under such provision and treat the claims as non-core.

Although through the Arkison decision the Supreme Court blesses bankruptcy courts’ treatment of Stern claims under section 157(c)(1), the Court leaves unaddressed the biting question facing practitioners and lower courts – whether parties may consent under section 157(c)(2) to a bankruptcy court’s final adjudication of Stern claims.  The Court did not find it necessary to address this question as it held the district court’s de novo review of the bankruptcy court’s decision and entry of final judgment proper.  Accordingly, the consent question has been “reserve[d] . . . for another day.”