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.
What
Happened
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.
Final
Thoughts
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.
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