Supreme Court Clarifies “Stern Claims” in Key Decision on Bankruptcy Court Power

Bellingham Insurance Agency (“Bellingham”) ceased operations in 2006 and subsequently transferred assets and operations to a successor, Executive Benefit Insurance Agency, Inc. (“Executive”). Bellingham filed under Chapter 7 in the Western District of Washington later in 2006 . In 2008, the Bellingham trustee, Peter Arkison (the “Trustee”), filed an adversary proceeding against Executive and other insiders of Bellingham seeking the avoidance of fraudulent transfers, a declaratory judgment that Executive is a successor in interest to Bellingham and substantive consolidation of certain defendant entities. The Bankruptcy Court subsequently granted the Trustee’s motion for summary judgment. The District Court for the District of Washington then affirmed. Importantly, this was done by reviewing the Bankruptcy Court’s decision de novo.

Executive appealed to the 9th Circuit, objecting to the Bankruptcy Court’s jurisdiction to enter a final judgment against them. Executive cited Stern v. Marshall, the 2011 United States Supreme Court decision, for the proposition that Bankruptcy Courts cannot enter final orders on “Stern claims” under 28 U.S.C. § 157. Executive set forth that under Stern, non-Article III courts, such as Bankruptcy Courts, cannot enter final orders on such claims. Executive argued that Stern claims could only be heard and ruled on by District Courts. However, the 9th Circuit rejected this jurisdictional objection on the following grounds: 1) § 157(b)(2) provides Bankruptcy Courts the power to submit recommendations of findings of fact and conclusions of law to District Courts; and 2) in a case with Stern claims such as fraudulent conveyances, parties may consent to the Bankruptcy Court’s entry of a final judgment.

The Supreme Court granted cert to hear a further appeal. In doing so, the court affirmed the 9th Circuit’s 2012 decision in Bellingham while punting on the consent issue raised by that court. Judge Thomas’ opinion did, however, include jurisprudence of bankruptcy court jurisdiction. In doing so, the Supreme Court clarified one part of Stern by performing a statutory analysis of § 157. Stern claims are those deemed to be in a statutory “purgatory” under the Bankruptcy Code, as bankruptcy judges may not propose findings of fact and conclusions of law in core proceedings. However, the Supreme Court went further by comparing Article III requirements with those in the 1984 Bankruptcy Act. Specifically, the Supreme Court cited the Act’s provision on severability – the principle that if one provision of the Act is held to be invalid, the remainder of the Act is unaffected. When a court identifies a Stern claim, § 157(b), governing core claims, is held to be inapplicable. Instead, these claims are governed by § 157(c), which covers non-core proceedings. So, when a claim otherwise satisfies § 157(c)(1) (“a proceeding that is not a core proceeding but is otherwise related to a case under Title 11”), known as a Stern claim, the Supreme Court has decided that Bankruptcy Courts should simply treat Stern claims as non-core. When a claim is treated in this fashion, Bankruptcy Courts can submit proposed findings of fact and conclusions of law as long as the District Court reviews the Bankruptcy Court’s decision de novo. In Bellingham, the fraudulent conveyance claims at issue were obvious Stern claims – they are non-core per § 157(b)(2) but are clearly “related to” a bankruptcy case under § 157(c)(1) because the claims allege the improper removal of property of the estate. Under these circumstances, even though the Bankruptcy Court attempted to enter a final judgment in deciding the fraudulent conveyance matter, since the District Court performed a de novo review of the Bankruptcy Court’s decision, any error was cured.

While the Bellingham decision does not clear up all potential ramifications of Stern, the Supreme Court certainly clarified the process by which Stern claims are adjudicated in similar cases moving forward. If the facts were different, however, we can only guess as to how our nation’s highest court would evaluate them.

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