Supreme Court Clarifies Bankruptcy Court Jurisdiction over Stern Claims, But Declines to Rule on Issue of Consent

In 2011, the Supreme Court issued a decision that shook up the bankruptcy world. In Stern v. Marshall, 131 S. Ct. 2594 (2011), the United States Supreme Court held that because they were not created under Article III of the Constitution, bankruptcy courts lack constitutional authority to enter final judgments on common law counterclaims that are independent of the federal bankruptcy laws, even if such claims constitute “core proceedings” as defined by 28 U.S.C. § 157.

Recognizing that Stern v. Marshall left certain questions unanswered, the Supreme Court granted certiorari after the Ninth Circuit Court of Appeals created a Circuit Court split by issuing its opinion in Executive Benefits Insurance Agency (“EBIA”) v. Arkinson (In re Bellingham), 702 F. 3d 553 (9th Cir. 2012) The Supreme Court was petitioned for certiorari in In re Bellingham to answer the following questions left open by the Court’s holding in Stern v. Marshall:

  1. May a bankruptcy judge hear a fraudulent conveyance claim against a non-creditor—a “core” proceeding—and submit proposed findings of fact and conclusion of law for de novo review by a district court under 28 U.S.C. 157(b); and
  2. In a “core but unconstitutional” (Stern) situation, may a litigant’s consent to the entry of a final judgment by a non-Article III bankruptcy judge satisfy the requirements of Article III; and, if so, does the litigant’s failure to object to the bankruptcy judge’s entry of a final judgment amount to implied consent?

In its unanimous decision issued June 9, 2014, the Supreme Court affirmed the Ninth Circuit Court of Appeals. The Court explained that although the 28 U.S.C. § 157 does not explicitly permit bankruptcy courts to issue proposed findings of fact and conclusions of law on “core” claims, the severability provision provides that if a provision of the statute is held invalid, then the reminder of the statute shall not be affected. Therefore, “core” claims that the bankruptcy court lacks the constitutional authority to hear under Stern v. Marshall may be treated as “non-core” claims under 28 U.S.C. § 157(c), and the bankruptcy court may simply enter proposed findings of fact and conclusions of law on those claims.

The Supreme Court demurred on the consent issue, stating that it did not have to address “whether EBIA in fact consented to the Bankruptcy Court’s adjudication of a Stern claim and whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. We reserve that question for another day.” In re Bellingham, —U.S.—, 2014 U.S. LEXIS 3993, n. 4 (June 9, 2014). This new Supreme Court decision thus does not overturn the Sixth Circuit’s proclamation in Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012), that parties may not consent to entry of final judgment on common-law claims that do not arise from the federal bankruptcy laws, “non-core” claims, as the Article III “structural concern” is not the parties’ to waive. In short, In re Bellingham does not fundamentally alter Stern, and those who bring common-law claims in a Sixth Circuit bankruptcy court have the right to adjudication of those claims by an Article III court.

Amanda Narvaes

Amanda P. Narvaes, a Partner, joined Drew Cooper & Anding in 2011. Ms. Narvaes is a civil litigator in the areas of complex commercial litigation, lender liability, copyright litigation, and consumer protection. She graduated cum laude from Carleton College with a bachelor’s degree in history. She earned her law degree at WMU-Thomas M. Cooley Law School, graduating magna cum laude, and received Cooley’s Distinguished Student Award. Ms. Narvaes represents clients before Michigan trial courts across the state and in the Michigan Court of Appeals, and before the United States District Courts for the Western and Eastern District of Michigan. Ms. Narvaes has been a guest speaker in Ron Foster’s “Litigation for Paralegals” class. Ms. Narvaes discusses differences between Federal civil discovery rules and Michigan civil discovery rules.