At 10 a.m. Tuesday, the Supreme Court will return, in a one-hour oral argument, to its exploration of constitutional limits on the power of federal bankruptcy judges, in a sequel to its decision two years ago in Stern v. Marshall.  In Executive Benefits Insurance Agency v. Arkison, arguing for a Washington State business firm will be Douglas Hallward-Driemeier of the Washington, D.C., office of the Ropes & Gray law firm.  Representing the bankruptcy trustee in the case will be John A. E. Pottow of Ann Arbor, Michigan, a law professor at the University of Michigan, dividing time with Curtis E. Gannon, an Assistant to the U.S. Solicitor General, representing the federal government as an amicus in support of the trustee.

A basic principle of constitutional law is that the power of federal courts is controlled, sometimes quite strictly, by Article III.  They have limited, not open-ended, authority.  Off and on over the past three decades, the Supreme Court has been an energetic guardian of those limits, from time to time reminding Congress that it, too, must respect those restrictions — especially when Congress experiments with giving power to judges who are not life-tenured jurists under Article III, such as bankruptcy judges.

Now, in a new case, the Court will be deciding whether lower federal courts, too, need a reminder of those limits.

The Court startled the world of bankruptcy law two years ago, with its bold decision in Stern v. Marshall, striking down a provision that Congress had adopted to try to get around an earlier Court ruling on the subject, in 1982.  This time, the Court is confronted with a federal appeals court’s inventive approach to easing the impact of the decision in Stern.

In discussing the Stern decision, the first task is to get around the popular notion that it was not so much a decision about bankruptcy law as about how a topless dancer and actress lost out in her bid to claim tens of millions of dollars from the estate of a Texas oil tycoon to whom she was briefly married.  Stern‘s actual importance as a bankruptcy decision, though, is hard to exaggerate.

Although it is risky to try to simplify bankruptcy law, the new case can be seen as a test of whether a party before a bankruptcy court can give it broader powers than Article III normally would allow, just by giving its consent or by forfeiting its right to consent and thus implying that it does not object.

If Congress can’t expand the authority of bankruptcy judges by legislation, can litigants do it just by the way they litigate?  A strict constructionist of the Constitution would say no; the case of Executive Benefits Insurance Agency v. Arkison will test how strict the Supreme Court will be.

To understand what’s at stake, start with something basic about federal courts’ authority  in bankruptcy cases, especially in the wake of the Stern decision.

If a case is a dispute about private rights — say, two parties making competing claims to the assets of an estate, customarily governed by state inheritance law (as in the Stern case) – that is a “core proceeding.”  The Supreme Court ruled that that can only be decided by a full-fledged Article III judge, and so bankruptcy court judges (who serve limited terms) do not qualify and thus they cannot issue a final and binding decision in such a case.

If, however, a dispute involves public rights — that is, a case in which a federal agency or a federal regulatory regime is involved – that is a “non-core proceeding” and bankruptcy judges can decide it.  In the Stern case, the Supreme Court noted that it had long allowed Congress to hand off such disputes to non-Article III agencies or judge-like officers who do not serve for life.

The Court made clear that it will never be easy to enlarge a bankruptcy judge’s power by just changing the label on the type of case, commenting that if judicial power could be taken from Article III courts that way, then Article III “would be transformed from the guardian of individual liberty and separation of powers the Court has long recognized into mere wishful thinking.”

In the new case now before the Justices, an insurance firm in the state of Washington moved, when its case reached the U.S. Court of Appeals for the Ninth Circuit in a bankruptcy appeal, to take advantage of the then-new Stern ruling.  Executive Benefits Insurance Agency argued that the bankruptcy judge lacked the authority to decide a dispute over the assets of related firms, when the judge ruled in favor of a bankruptcy trustee and against Executive Benefits.

Here is how the case had unfolded up to that point:

A business firm named Bellingham Insurance Agency had become insolvent by early 2006.  It had been handling all of the business of a related firm, Aegis Retirement Income Services.  After Bellingham closed its doors, it assigned to a longtime employee the insurance commissions that had been paid by one of their largest clients.

A new firm was set up, and given the name Executive Benefits Insurance Agency.

Some $373,291 in funds were shifted to it by the end of 2006 in what was called an “intercompany transfer.”   In the meantime, Bellingham had filed for bankruptcy, supervised by trustee Peter Arkison.  The trustee filed a claim against Executive Benefits, arguing that the transfer to it of the funds of the related firms was a fraudulent transfer, to keep it away from creditors of Bellingham.

The trustee also asserted that Executive Benefits was merely a successor to Bellingham, so it was responsible for that firm’s debts.   The bankruptcy judge ruled for the trustee, finding a fraudulent transfer and ordering Executive Benefits to hand over the full amount of the transferred funds.

Executive Benefits challenged that ruling before the regular district court, but the district judge upheld the bankruptcy court’s decision, about both the fraudulent transfer and Executive Benefits’ liability for the bankrupt firm’s debts.

Executive Benefits then pursued its appeal to the Ninth Circuit and, following the Supreme Court’s Stern decision, claimed that the bankruptcy court had been without power to decide the case against Executive Benefits.

The Ninth Circuit found that the transfer of funds in this case did not involve a “public rights” claim, but was at the center of a core proceeding.  Because it found that the Stern decision had taken away the bankruptcy judge’s power to rule in a final way, the court of appeals concluded that the judge at least could make findings and recommend a decision to the district court.

Normally, it said, the party losing before a bankruptcy court had a right to contest a decision there by appealing to the district court, but the Ninth Circuit said that right could be waived.  It went on to rule that, by waiting so long to challenge the bankruptcy judge’s ruling as a violation of Article III, Executive Benefits had given implied consent that the bankruptcy court ruling was final and binding.  It accused Executive Benefits of trying to “sandbag” the courts by delaying its constitutional challenge.

The Ninth Circuit also ruled that, when consent of the parties is lacking, a bankruptcy court can treat a core proceeding as non-core, and make a finding and recommendations to a district court.   It went on to uphold the two rulings against Executive Benefits.

Executive Benefits, arguing that “there is considerable confusion in the lower courts in the wake of Stern,” took the case to the Supreme Court.  It asked the Court to rule that bankruptcy judges cannot gain enlarged powers, despite Article III’s limitations, merely by consent by a party in the case, that implied consent would not be sufficient anyway, and that a bankruptcy judge has no power in a case like this to propose findings and recommend a decision to a district court.

Trustee Arkison urged the Court to deny review, arguing that a separate provision of bankruptcy law does permit the parties to consent to a bankruptcy judge’s power to rule on a private rights proceeding, and that Executive Benefits in effect was asking the Court to strike that down.  The question of whether Executive Benefits did give implied consent to the bankruptcy court’s power to rule is simply a fact-specific issue, Arkison contended.

The trustee also argued that Executive Benefits’ challenge to the bankruptcy judge’s power to make findings and a recommendation to a district court was an “arcane” issue not worthy of the Court’s time, on which there actually was no split in the appeals courts.

The Court granted review of the case on June 24.

Executive Benefits’ brief on the merits closely tracks the arguments in made in seeking Supreme Court review: Article III bars bankruptcy judges from making final rulings on private claims, consent of the parties cannot cure that constitutional defect, if consent plays any role it must be knowing and voluntary and thus cannot be implied, and bankruptcy law forbids judges of those courts from making findings and proposing recommendations in “core proceedings.”

Trustee Arkison’s merits brief opens with a negative portrayal of the conduct of the individuals involved in creating Executive Benefits, suggesting that the transfer of the Bellingham assets to that new firm was only a sham.  The brief also lays out a full exploration of the role of non-judges throughout the history of U.S. bankruptcy law since 1800, and defends the bankruptcy system as one built largely upon the consent of the parties.  Within that regime, it contended, it is not at all unusual to waive legal rights that a party might have, as part of consenting to its procedures.

The trustee likens the bankruptcy system to that of magistrate judges, at least implying that a ruling against the procedure used in this case would imperil the role of those valuable sub-judges in the judicial system.

The Justice Department has entered the case to buttress the trustee’s arguments, mainly contending that, while Executive Benefits had an Article III right to have the case against it decided by a regular judge, that was only “a waivable personal right.”

The government merits brief echoed the Ninth Circuit’s complaint about the courts being “sandbagged” by Executive Benefits’ litigation conduct.  And it undertook to fully justify treating a core proceeding as a non-core proceeding, arguing that such a switch is a form of severing what is barred by Article III from what is allowed.

The trustee appears to have a decided edge in amici support, with a wide array of business and legal organizations, and several collections of bankruptcy trustees, as well as seven states on its side.   Among the trustees supporting Arkison’s arguments is Irving H. Picard, who is overseeing the liquidation of investment adviser Bernard L. Madoff’s estate in the wake of Madoff’s famous “Ponzi scheme” that bilked investors of perhaps $20 billion.  Picard expressed concern about overloading district courts in bankruptcy proceedings if bankruptcy judges’ powers are pared down.

Executive Benefits drew the support of business entities involved in other bankruptcy cases, a group of Florida business lawyers, and two charitable foundations that have been sued by creditors over alleged fraudulent transfers in the Tribune media empire’s financial maneuverings.

Analysis

This case provides the Court with its first opportunity to expand — or cut back — on the apparently sweeping judgment it made in Stern v. Marshall about the need to protect the Article III judiciary from tinkering with its authority.   Chief Justice John G. Roberts, Jr.’s opinion for the majority in that decision was a clear command that, in this constitutional realm, evasion of Article III commits comes with a heavy burden of justification.

Executive Benefits has sought to make its case into a near clone of Stern v. Marshall, and it has sought energetically to raise an alarm of another perceived threat to the integrity of the regular federal courts.  The oral argument in the case may reveal how persuasive that effort has been.

The trustee in this case, and the Justice Department on his side, have gone to considerable lengths to suggest that there is no evasion here, that what the Ninth Circuit has done is merely to make an accommodation within the bankruptcy system as it has traditionally functioned.

If the Court insists on keeping the discussion of this case within the Article III realm, specifically as it applies to bankruptcy “core proceedings,” its ultimate ruling may not pose a threat to other forms of non-judge resolution of private disputes within the federal system — such as the regime of the magistrate judges.

But if it accepts the implied invitation to look beyond bankruptcy cases, to see that the principles that would probably have to be invoked to rule for Executive Benefits would imperil these alternative dispute-resolution mechanisms, it may feel a need to hesitate.

Posted in Executive Benefits Insurance Agency v. Arkison, Analysis, Featured, Merits Cases

Recommended Citation: Lyle Denniston, Argument preview: A sequel to Stern, SCOTUSblog (Jan. 12, 2014, 12:09 AM), http://www.scotusblog.com/2014/01/argument-preview-a-sequel-to-stern/