Thursday, December 13, 2012

Stern v. Marshall Circuit Split

As recently posted, the Sixth Circuit Court of Appeals held that Stern vs. Marshall’s limitations on the jurisdiction of bankruptcy courts were not waivable.  On December 4, 2012, the Ninth Circuit Court of Appeals ruled to the contrary. Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc., Debtor).

In Bellingham, EBIA was sued by Trustee Arkinson, alleging various fraudulent transfers and also alter-ego and successor-liability claims.  EBIA initially moved to withdraw the reference on the grounds that it was entitled to a jury trial, but stayed consideration of its motion to permit the Bankruptcy Court to adjudicate the Trustee’s Motion for Summary Judgment.  After the Bankruptcy Court ruled against it, EBIA abandoned the Motion to Withdraw, the District Court dismissed that action and EBIA appealed the summary judgment ruling to the District Court.  EBIA did not raise any objections to subject matter jurisdiction or the power of the Bankruptcy Court to act until the matter reached the Ninth Circuit.

The Ninth Circuit ultimately affirmed the Bankruptcy Court’s granting of summary judgment on the merits but prior to reaching same, it addressed the impact of Stern v. Marshall, concluding that Stern, when combined with prior precedent Grandfinanciara, SA v. Norberg, 492 U.S. 33 (1989), conclusively established that fraudulent conveyance claims do not fall within the public rights exception to Article III Adjudication and therefore cannot be finally adjudicated by the Bankruptcy Court, expressly rejecting that the fraudulent transfer claim should be treated like preference claims which, pursuant to Katchen v. Landy, 382 U.S. 323 (1966), can be litigated in Non-Article III Bankruptcy Court.

Having then reached the same conclusion as the Sixth Circuit in Waldman vs. Stone, as to the judicial power of the Bankruptcy Court, the Ninth Circuit also concluded, as did the Sixth Circuit, that despite the gap in the statutory language, the Bankruptcy Court could submit proposed findings of fact and conclusions of law to the District Court, even though the power to do so in 28 U.S.C. §157(c)(1) was expressly limited to non-core proceedings (fraudulent transfer actions being statutorily designated as core).  However, the Ninth Circuit split from the Sixth Circuit on the important issue of waiver.

The Ninth Circuit began its analysis by looking to practice prior to the 1978 adoption of the Bankruptcy Code when bankruptcy referees could exercise jurisdiction over “summary” matters but not “plenary” suits.  Next, the court noted that the right to an Article III judge in the plenary proceedings could be waived.  The Court further noted that precedent supported the proposition that Article III’s guarantee of adjudication before an Article III judge “served to protect primarily personal, rather than structural interests,” citing Commodity of Future Trading Commission vs. Schor, 478 U.S. 833, 848 (1986).  The Court concluded that waiver was therefore possible.

Turning to the factual matter of whether or not consent had been given, the Court noted that EBIA at first deferred and then withdrew its Motion to Withdraw the Reference.  The Court then decided that Bankruptcy Rule 7008, which required express consent in non-core proceedings, did not prevent implied consent.  The Court looked to the Supreme Court decision in Roell v. Winthrow, 538 U.S. 580 (2003), which determined that implied consent to adjudicate before a magistrate was possible notwithstanding a rule provision to the contrary.  See Slip Op. at 31.  The Court held that the act of seeking to withdraw the reference and then opting to litigation in Bankruptcy Court established consent.  The Court also determined that the fact that Stern was not decided by the Supreme Court until after the appeal was pending would not affect the analysis of consent.

This decision is important because it acknowledges that parties can consent, either expressly or implicitly, to final adjudication in the Bankruptcy Court.  It is also important because it creates a split in the Circuits with the Sixth Circuit decision in Waldman vs. Stone that sets the stage for the Supreme Court to address the issue.  The Court’s Decision is lucid and well-reasoned, and the Court had the benefit of multiple amicus curiae briefs.  So the case will be well positioned if the Supreme Court grants cert.

Karen Lee ("Kitt") Turner
Eckert Seamans Cherin & Mellott
Philadelphia, Pennsylvania

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