U.S. Supreme Court Says District Court ‘Cured’ Bankruptcy Dispute With De Novo Review

 WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court today unanimously ruled that any potential error made by a bankruptcy court regarding its own judgment in a “core” proceeding under 28 U.S. Code Section 157(b) was “cured” by a district court’s de novo review of the matter because the issue received the same review from the district court that it would have received had the bankruptcy court treated the claims as noncore proceedings (Executive Benefits Insurance Agency v. Arkinson, No. 12-1200, U.S. Sup.) [lexis.com subscribers may access Supreme Court briefs and the opinion for this case].

Bankruptcy

In 2006, Bellingham Insurance Agency Inc. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Western District of Washington, and Peter H. Arkinson was appointed trustee.

Arkinson filed an adversary proceeding against Executive Benefits Insurance Agency (EBIA) in the Bankruptcy Court, contending that it had received fraudulent transfers and was liable for Bellingham's debts as a successor corporation.

The Bankruptcy Court ruled against EBIA.  The agency demanded a jury trial, but it expressly indicated that it did not consent to a jury trial before a bankruptcy judge; therefore, the Bankruptcy Court referred the issue to the U.S. District Court for the Western District of Washington.

Withdrawal

The District Court considered the Bankruptcy Court's move a withdrawal to District Court and refused EBIA's motion to withdraw the case on grounds that the Bankruptcy Court had already entered summary judgment against EBIA.

EBIA appealed to the Ninth Circuit U.S. Court of Appeals, which ruled against it.  EBIA appealed to the Supreme Court.

EBIA contended that the judgment enforced against EBIA was entered by a non-Article III bankruptcy court pursuant to a statute that the U.S. Supreme Court has declared unconstitutional.  Arkinson contended that 28 U.S. Code Section 157(b)(1) is “unambiguous” in his favor because the statute is the provision by which district courts can refer matters to bankruptcy judges.

‘Core’ Proceeding

Justice Clarence Thomas wrote for the Supreme Court that under the Bankruptcy Amendments and Federal Judgeship Act of 1984, federal district courts have original jurisdiction in bankruptcy cases and may refer to bankruptcy judges two statutory categories of proceedings:  “core” proceedings and “non-core” proceedings.

In core proceedings, a bankruptcy judge “may hear and determine . . . and enter appropriate orders and judgments,” subject to the district court’s traditional appellate review, the Supreme Court said.  In noncore proceedings  —  those that are “not . . . core” but are “otherwise related to a case under title 11,” Section 157(c)(1)  —  final judgment must be entered by the district court after de novo review of the bankruptcy judge’s proposed findings of fact and conclusions of law, except that the bankruptcy judge may enter final judgment if the parties consent, the court said.

Stern V. Marshall

In Stern v. Marshall (564 U.S. Sup.), Justice Thomas wrote, the Supreme Court confronted an underlying conflict between the 1984 Act and the requirements of Article III and determined that Article III prohibits Congress from vesting a bankruptcy court with the authority to finally adjudicate the “core” claim of tortious interference.  The court did not, however, address how courts should proceed when they encounter a Stern claim, the Supreme Court said.

When a court identifies a Stern claim, it has “held invalid” the “application” of 28 U.S. Code Section 157(b), the Supreme Court said, and the “remainder” not affected includes 28 U.S. Code Section 157(c), which governs noncore proceedings.

28 U.S. Code Section 157

“Accordingly, where a claim otherwise satisfies §157(c)(1), the bankruptcy court should simply treat the Stern claim as non-core,” Justice Thomas wrote.  This conclusion accords with the Supreme Court’s general approach to severability, which is to give effect to the valid portion of a statute so long as it “remains ‘fully operative as a law,’” the court said.

The court held that 28 U.S. Code Section 157(c)(1)’s procedures apply to the fraudulent

conveyance claims in the case at hand.

The court said that because the claims assert that property of the bankruptcy estate was improperly removed, they are self-evidently “related to a case under title 11” and, accordingly, they “fit comfortably within the category of claims governed by” 28 U.S. Code Section 157(c)(1).

EBIA is represented by Douglas Hallward-Driemeier of Ropes & Gray in Washington.  Arkinson is represented by John Pottow of the University of Michigan Law School in Ann Arbor, Mich.

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