cbaReport-May14 - page 7

May 2014CBAREPORT
l
7
feature article
B
ankruptcy lawyers and judges
across theUnitedStates are
waiting for adecision thatmight
move thousands of disputes from the
bankruptcy courts to thedistrict courts.
In
ExecutiveBenefits InsuranceAgency
v. Arkison (In reBellingham Insurance
Agency)
, CaseNo. 12-1200, the Supreme
Court faces thequestionofwhether a
party can consent to
give abankruptcy
court powers broader
thanArticle IIImay
arguably allow. Just
three years ago in
Stern v.Marshall
,
131S. Ct. 2594
(2011), theCourt
held that bankruptcy courts donot have
jurisdiction to enter final judgments on
fraudulent conveyance claims against
non-creditors.This reversed longstand-
ingFederal law that suchmatterswere
“core” claims as towhichbankruptcy
courts had jurisdiction to resolve. In
Stern,
the SupremeCourt held that be-
cause thosedisputes involve third-parties
and state law, theywerenot “core”bank-
ruptcy claims andwere thereforeoutside
of bankruptcy jurisdiction.While thede-
cision
couldbe read to stopbankruptcy
courts fromdeciding fraudulent transfer
claims—which are at theheart ofmany
bankruptcies—
Stern
cautioned that the
decision “doesnot change all thatmuch.”
Bankruptcy courts had twoprimary
responses to
Stern
to ensure that not
muchdid change.Manybankruptcy
judges simply submittedproposedfind-
ings of fact and conclusions of law for
final reviewby adistrict court,much
like amagistrate judge.Manydistrict
court judges, naturally, deferred to the
bankruptcy judge’s particular expertise
and affirmed thesedecisions. In this
way,
Stern’s
prohibitiononbankruptcy
court’s enteringfinal judgmentwas fol-
lowedwhile still allowingbankruptcy
courts to retain control over theprincipal
bankruptcy case. Some courts also relied
on consent of the litigants, including
implied consent, to administernon-core
claims.They reasoned that the right to an
Article III judge innon-coreproceedings
was just aswaivable as anyother right.
TheNinthCircuit explicitly approved
of thesepractices in
ExecutiveBenefits
InsuranceAgency v. Arkison (In reBell-
ingham InsuranceAgency),
702F.3d553
(9thCir. 2012). In its decision, theNinth
Circuit explained that thedaybefore
Bellingham ceaseddoingbusiness, its
CEOhadused its funds to incorporate
ExecutiveBenefits InsuranceAgency,
Inc. (“EBIA”)—and then assignedBell-
ingham’s right to receive commissions
from its largest client to an employee that
forwarded the commissions toEBIA.
AfterBellinghamfiled for chapter 7
bankruptcy, the trusteenaturally sued
EBIA to avoid its receipt of commissions
as fraudulent transfers.WhileEBIAdid
initially request tomove the case to the
district court, it then asked thebank-
ruptcy court tofirst decide the trustee’s
pendingmotions for summary judg-
ment.After the court granted summary
judgment to the trustee and entered
amoney judgment, EBIA appealed to
thedistrict court. EBIA then attempted
toget around the summary judgment
decisionby claiming for
thefirst timeon appeal
that thebankruptcy
court didnot have
jurisdiction and that it
didnot consent to such
jurisdiction.
TheNinthCircuit
wasnot pleasedwith
EBIA’s “sandbagging”of thebankruptcy
court andheld that EBIAhad impliedly
consented to entryof afinal judgment
by thebankruptcy judgebecause it had
sat on its right to seekwithdrawal of the
case to thedistrict court until after it
lost on themerits. It thenheld that this
implied consentwas sufficient topreserve
thebankruptcy court’s jurisdiction.The
court held that because
Stern
compared
the right to anArticle III tribunal to the
right to a jury trial under the Seventh
Amendment, that theArticle III right
shouldbe subject towaiver just the
same.Asweknow, despitebeingoneof
ourmost fundamental rights, the right
to a jury trial canbewaivedby failure
tomake a timelyobjection. Similarly,
the SupremeCourt has championed
and expanded arbitration—which also
arguably takes power away fromArticle
III tribunals.What then is theproblem
In
reBellingham InsuranceAgency
: To “Protect” theArticle III Jurisdictionof theDistrictCourts, the Supreme
CourtMayRadicallyAlter theBankruptcySystem (andTossOut theFederalMagistrate SystemToBoot)
By Stephen Lerner &Colter Paulson
If the SupremeCourt agreeswith theFifth,
Sixth, andSeventhCircuits, the consequences
of thesenuances ofArticle III couldbe far-
reaching—andnot just onbankruptcy courts.
Bellingham
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