U.S. Supreme Court to Rule on Bankruptcy Judges' Power in 'Core' Proceedings

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on June 24 granted certiorari in a case dealing with the questions of whether Article III of the U.S. Constitution permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent and whether a bankruptcy court may submit proposed findings of fact and conclusions of law for de novo review by a district court in a "core" proceeding under 28 U.S. Code Section 157(b) (Executive Benefits Insurance Agency v. Arkinson, No. 12-1200, U.S. Sup.) (lexis.com subscribers may access Supreme Court briefs 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.

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

The Bankruptcy Court entered summary judgment against EBIA.

EBIA demanded a jury trial and expressly indicated that it did not consent to a jury trial before a bankruptcy judge. The Bankruptcy Court referred the issue to the U.S. District Court for the Western District of Washington, which considered it a withdrawal to the District Court.

'Substantial Evidence'

The District Court refused EBIA's motion to withdraw the case for the sole reason that the Bankruptcy Court had already entered summary judgment against EBIA.

After the District Court refused to accept the case based on EBIA's removal request, EBIA appealed the Bankruptcy Court's final judgment to the District Court. The District Court indicated that the Bankruptcy Court's grant of summary judgment was subject to de novo review, but at the same time invoked a "substantial evidence" standard in reviewing the Bankruptcy Court's findings.

The District Court concluded that EBIA failed to show any error on the part of the Bankruptcy Court and, on that basis, dismissed EBIA's appeal and affirmed the Bankruptcy Court's entry of judgment. EBIA appealed to the Ninth Circuit.

28 U.S. Code Section 157

The Ninth Circuit held that 28 U.S. Code Section 157(c)(1) [an annotated version of this statute is available to lexis.com subscribers] grants bankruptcy judges the authority to issue proposed findings of fact and conclusions of law only in a proceeding that is "'not a core proceeding'" and further that a fraudulent conveyance proceeding does not fall within 28 U.S. Code Section 157(c)(1) because it is "core" under the statute.

The Ninth Circuit determined that the gap should be filled by reading "the power to 'hear and determine' a proceeding" under 28 U.S. Code Section 157(b)(1) to encompass the "more modest power to submit findings of fact and recommendations of law to the district courts."  The panel added that Congress intended to vest bankruptcy judges with "as much adjudicatory power as the Constitution will bear."

Moreover, the Ninth Circuit said EBIA, through its litigation conduct, had "impliedly consented" to adjudication by a bankruptcy judge.

Judicial Power Question

EBIA appealed to the U.S. Supreme Court, arguing that the high court should resolve whether and under what circumstances litigant consent can confer on non-Article III judges authority to exercise the judicial power of the United States.

Furthermore, EBIA maintained that the Supreme Court should resolve the conflict among lower courts on whether bankruptcy judges are statutorily authorized to submit proposed findings of fact and conclusions of law in "core" proceedings.

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

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