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Opinion analysis: Bankruptcy judges, attorneys breathe sigh of relief as Court affirms bankruptcy court authority

The Court’s decision Monday in Executive Benefits Insurance Agency v. Arkison helps to mitigate the procedural disarray into which the Court threw the bankruptcy process three years ago in Stern v. Marshall. The Court in Stern invalidated a jurisdictional provision of the Bankruptcy Code that included a counterclaim brought by the estate against a third party within the group of “core proceedings” that are the responsibility of the bankruptcy courts.  Only an Article III judge can resolve such a dispute, the Stern Court held.

The issue in this case is whether, after Stern, a bankruptcy court can try those cases (the Court calls them “Stern claims”) as “non-core” proceedings, submitting proposed findings of fact and conclusions of law to the district court for its review. The contrary possibility, apparently, is that the bankruptcy courts cannot deal with those claims at all, at least until Congress tries yet again to revise the Bankruptcy Code to the Court’s satisfaction.  In that event, the district courts themselves would handle all those cases in the first instance. Because Stern claims take up a great deal of the time of the nation’s 350-odd bankruptcy judges, shifting all of those cases to the docket of the 650-odd district courts would wreak major havoc with the federal judicial process.

Moreover, as the discussion at oral argument suggested, the case has important implications beyond the bankruptcy process:  if bankruptcy courts cannot adjudicate Stern claims subject to district court review, it is not at all obvious how the Court could justify the routinized use of magistrates prevalent in the district courts.

But not to worry.  Justice Thomas’s opinion for a unanimous Court sweeps all those difficulties aside.  First, it rejected out of hand the idea that its invalidation of statutory “core” proceedings for Stern claims left bankruptcy courts powerless to adjudicate them under any process.  Rather, trying to give effect to the portion of the statute that remains in effect, and doubting the idea “that Congress would have preferred no statute at all” to apply to Stern claims, the Court concluded that bankruptcy courts can simply treat Stern claims as non-core claims and adjudicate them on that basis.

That still left the problem that the bankruptcy court in this case (acting before the Court decided Stern) adjudicated the matter at hand as a core proceeding and purported to enter a final judgment.  On that point, the Court thought it enough that the district court reviewed the matter de novo.   In the Court’s view, this “[i]n effect” provided “the same review” the claim would have received even under the approved-this-day post-Stern process.  In sum, when an Article III court entered the final, operative judgment, it “cured any error” in the pre-Stern process that the bankruptcy court had followed.

Putting the practical considerations to the side, presumably the most important part of the decision going forward will be the holding that de novo review by the district court cures any Article III deficiency in earlier proceedings.  It says nothing about whether the Constitution requires an Article III process in the first instance for any party that insists on such a hearing, but it eliminates the difficulty of post-hoc challenges to jurisdiction like the one raised here.

PLAIN-LANGUAGE SUMMARY: Bankruptcy courts are not supposed to decide disputes in which the bankrupt is trying to recover money from someone who is not a creditor of the bankrupt.  Congress said that they could, but the Supreme Court held a few years ago in a case called Stern v. Marshall that the Constitution prohibits this.  What happened here is that the bankruptcy court nevertheless decided the case.  When Stern came down, the district court responded by looking over the case from scratch (“de novo”).  The Supreme Court says that if the district court reviews the case “de novo,” then it is no problem that the bankruptcy court decides the case in the first place.

Recommended Citation: Ronald Mann, Opinion analysis: Bankruptcy judges, attorneys breathe sigh of relief as Court affirms bankruptcy court authority, SCOTUSblog (Jun. 10, 2014, 10:07 AM),