The Supreme Court has set the stage to flesh out the practical impact of Stern v. Marshall. On June 24, 2013, the Court granted the petition for cert filed by the defendant in a fraudulent conveyance suit brought by a trustee in Executive Benefits Insurance Agency v. Arkison, No. 12-1200. The case is significant because it squarely raises the issue of whether a party can waive its right to insist on a trial before an Article III tribunal and the related question of whether consent is permissible.
According to the Ninth Circuit, Nicholas Paleveda and his wife “operated a welter of companies,” including Bellingham Insurance Agency, Inc. Although Palveda did not own Bellingham, he served as its CEO and sole director until shortly before its ceased doing business. The day after Bellingham ceased doing business, Palveda used its funds to incorporate Executive Benefits Insurance Agency, Inc. Bellingham also irrevocably assigned its right to receive commissions from its largest client to one of its longtime employees, who subsequently paid them to EBIA.
When Bellingham filed for chapter 7 relief, the trustee sued EBIA for eighteen causes of action, including recovery of fraudulent transfers and voidable preferences and to establish EBIA as a “mere successor” of Bellingham. EBIA filed a jury demand and request to withdraw the reference. However, it asked the Bankruptcy Court to abate these pleadings while it considered motions for summary judgment. The Bankruptcy Court granted summary judgment in favor of the Trustee and entered a money judgment for $373,291.28.
EBIA abandoned its request to withdraw the reference and instead appealed to the District Court. The District Court affirmed the grant of summary judgment.
On appeal to the Ninth Circuit, EBIA asserted for the first time that Stern v. Marshall precluded the Bankruptcy Court from entering a final judgment. The Ninth Circuit solicited amici briefs and received thirteen submissions, including one from the Solicitor General.
The Ninth Circuit Ruling
The Ninth Circuit rendered its decision on December 4, 2012. Matter of Bellingham Insurance Agency, Inc., 702 F.3d 553 (9th Cir. 2012). The Ninth Circuit affirmed the lower court judgments in a manner that placed the waiver/consent issue at center stage. The Court concluded that bankruptcy courts generally lack the power to enter final judgments in fraudulent conveyance suits. The Court stated:
Taken together, Granfinanciera and Stern settle the question of whether bankruptcy courts have the general authority to enter final judgments on fraudulent conveyance claims against noncreditors to the bankruptcy estate. They do not.
Bellingham at 565. This was not a surprising conclusion.
In the alternative, the Court concluded that bankruptcy courts had the authority to submit proposed findings of fact and conclusions of law to the U.S. District Courts in core matters in which they lacked authority to enter a final judgment. This ruling addressed a statutory gap in 28 U.S.C. Sec. 157 which allowed courts to “hear and determine” core proceedings and to submit proposed findings of fact and conclusions to the District Court in non-core proceedings. However, the statutory language did not expressly allow the Bankruptcy Court to submit proposed findings and conclusions to the District Court in core proceedings in which it was not authorized to enter a final judgment. The Court stated:
Our conclusion is consistent with the Stern Court’s tacit approval of bankruptcy courts’ continuing to hear and make recommendations about statutory core proceedings in which entry of final judgment by a non-Article III judge would be unconstitutional.
Bellingham, at 566.
The next section of the opinion is the most difficult part. On the one hand, the Ninth Circuit referred to the right to determination by an Article III tribunal as “waivable.” However, the Court also cited cases about the validity of consent and referred to “implied consent” as well. As a matter of statutory interpretation, the Court found that section 157(c) requires only “consent simpliciter” as opposed to “express consent” as required by section 157(e). The Ninth Circuit ultimately concluded that a party could consent to entry of a final judgment and that EBIA had done so.
Having discussed the constitutional issues at great length, the Court devoted a relatively short discussion before concluding that the summary judgment should be affirmed.
Issues before the Supreme Court
The two issues designated in EBIA’s petition for cert were:
1. Whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III.2. Whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b).
Waiver and Consent
The most intriguing aspect of this case is the role that waiver or consent may play in how the bankruptcy courts administer their dockets. The right to trial by jury is one of the most fundamental rights under the Bill of Rights and yet, it can be waived by failure to make a timely objection. If the right to an article III tribunal can be waived, then bankruptcy courts may proceed as they did prior to Stern so long as no party makes a timely objection. Parties may consent to having a matter heard by a U.S. Magistrate or through binding arbitration. If affirmative consent is required, then the courts will need to implement procedural mechanisms to ensure that consent is granted or denied at an early stage. This is the approach taken by the proposed amendments to Rules 7008, 7012, 7016, 9027 and 9033. The proposed amendments can be found here. Finally, there are some matters which cannot be solved by waiver or consent. Subject matter jurisdiction cannot be created by consent and can be raised at any time. As a result, if Stern is like subject matter jurisdiction, then courts must proceed at their own peril.
The question for the Court will be whether Stern’s Article III mandate is more like the waivable jury demand, consent to a magistrate or subject matter jurisdiction.
Authority to Submit Proposed Findings and Conclusions
If the Court finds that waiver and consent are not available when an Article III tribunal is required, the Court may soften the blow by adopting the Ninth Circuit’s alternate holding that Bankruptcy Courts may submit proposed findings of fact and conclusions of law to the district court. Allowing submission of proposed findings and conclusions will allow the Bankruptcy Courts to continue hearing cases and entering proposed decisions likely to be rubber stamped by the District Courts.
The EBIA case is a good example of how the ability to submit proposed findings and conclusions could protect the Bankruptcy Court. The outcome of the dispute would not have changed based upon whether the Bankruptcy Court was allowed to enter a final judgment or merely submit proposed findings and conclusions to the District Court. The Bankruptcy Court granted summary judgment, finding that there were not any material issues of disputed fact. The District Court reviewed the Bankruptcy Court’s conclusions of law on a de novo basis. Thus, the standard of review for an appeal of a final summary judgment and a de novo review of proposed findings and conclusions would be the same.
Chief Justice Roberts described Stern as a narrow ruling. While the decision relied on some big concepts, it did not flesh out how the ruling would apply as a practical matter. The forthcoming ruling in Executive Benefits Insurance Agency v. Arkison may provide some practical guidance as to how the system can work post-Stern, or perhaps it will just make life more complicated.