Insights
Supreme Court's Unanimous Executive Benefits Decision
on 06/10/2014
The Supreme Court’s 9-0 decision issued on June 9, 2014 in Executive Benefits Insurance Agency v. Arkison brings a practical analysis to what has been a topic of much discussion around bankruptcy water coolers. Many questions, surrounding “Stern claims” - assert that Congress attempted to define as “core” – continue to remain unanswered following the Supreme Court’s decision (Executive Benefits Insurance Agency v. Arkison, __ U.S. __ (2014)).
In Stern v. Marshall, 131 S. Ct. 2594, 564 U.S. __ (2011), the Court held that Congress unconstitutionally attempted to give bankruptcy judges the power to enter final judgments in cases involving private rights of litigants when those rights were not necessarily adjudicated in the process of ruling on a creditor’s proof of claim. The statute governing the exercise of the bankruptcy courts’ power, 28 U.S.C. § 157, did not provide a mechanism for how to deal with so-called “core” claims that the bankruptcy courts now lack constitutional authority to adjudicate. It simply assumed that bankruptcy courts would hear core matters and enter final orders in them. There was no express fallback position for the event that bankruptcy courts constitutionally could not hear a given core matter.
Unanswered Questions and Executive Benefits
There were two principal post-Stern questions: (1) can a bankruptcy court enter a final order on a Stern claim if the litigants consent, and (2) in the event there is no consent or even if consent is insufficient, what should a bankruptcy court do when presented with such a claim?
Unanswered Questions and Executive Benefits
There were two principal post-Stern questions: (1) can a bankruptcy court enter a final order on a Stern claim if the litigants consent, and (2) in the event there is no consent or even if consent is insufficient, what should a bankruptcy court do when presented with such a claim?
Executive Benefits answers the second question without answering the first. Under Executive Benefits, a core claim that nevertheless must be heard by an Article III judge may be treated as a “non-core” claim under 28 U.S.C. § 157(c), meaning it can be heard by a bankruptcy judge, who may make proposed findings of fact and conclusions of law for review de novo by the district court, just as a federal magistrate would. The Court held that because the statute also contains a severability clause, any provision held to apply to particular circumstances, impermissibly, could still permissively apply to others.
The unanimous narrowly-decided opinion leaves unresolved the issue of whether litigants can consent to a bankruptcy court entering final orders in a core matter that falls outside the bankruptcy courts’ regular jurisdiction. In other words, the question is whether the Constitution creates a private right to have traditional civil cases heard by an independent Article III court, which can be waived, or a structural feature of our federal government requiring Stern-type claims to be finally adjudicated in Article III courts, which thus cannot be waived by agreement.
Implications for the District Courts, Creditors, and Debtors
This is not a trivial matter. While the total volume of bankruptcy filings is down overall nationwide, the number of claims that are potentially within the ambit of Stern is still considerable, and could grow significantly in a different economic climate. District judges could still face a significant increase in their workload—a concern many have voiced since Stern was announced—if they need to review every decision of every bankruptcy court. Since 2012, the Bankruptcy Court for the Northern District of Ohio has averaged about 26,000 cases per year. (By comparison, in 2009, it was more than 38,000.) In the District Court for the Northern District of Ohio, in 2012, the total of all civil filings in every other field of civil litigation combined was 7,265, including multi-district litigation (MDL) filings.
Traditional civil case filings (excluding MDL cases) were only 3,105. While only a small portion of those bankruptcy cases will likely involve Stern-type claims, it will not take a high percentage to create a significant additional burden on district courts, and one which could easily result in a substantially delayed pace of progress in any bankruptcy case in which a Stern claim arises.
Moreover, if avoidance actions such as fraudulent transfer and preference claims are considered Stern claims (the Court in Executive Benefits assumed without deciding that the fraudulent transfer claim before it was a Stern claim), then while most routine no-asset chapter 7 cases will not involve any such claims, a few major chapter 11 cases will involve dozens or even hundreds. Larger commercial cases in Delaware and New York could involve thousands.
If party consent does not allow the bankruptcy court to enter final orders, those orders would not necessarily include agreed orders or settlements. The need to provide de novo review of all such actions that are actually being litigated fully, as well as de novo review of every settlement of most or all avoidance actions (and presumably numerous other core claims that implicate private rights of litigants), is likely to increase the already-significant costs of bankruptcy litigation. While the Supreme Court’s analysis was practical, the implications of its decision may not be.
For more information regarding this advisory, contact Suzana M. Koch, or John P. Hickey.
This Client Advisory is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Client Advisory in any way seems to contradict advice of counsel, counsel’s opinion should control over anything written herein. No attorney client relationship is created or implied by this Client Advisory. © 2014 Brouse McDowell. All rights reserved.
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