U.S. High Court Hears Debate On Jurisdiction, Authority Of Bankruptcy Judges

WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court on Jan. 14 heard oral arguments in a case dealing with 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].

(Transcript available.  Document #80-140122-015T.

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. 

Judgment 

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, and when the Ninth Circuit ruled against EBIA, the agency appealed to the Supreme Court. 

Arguing for EBIA, Douglas Hallward-Driemeier said 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.  The statute violates the separation of powers, and it “carries the force of law that is binding on other courts, binding on the executive branch which must enforce the judgment, and even binding on the legislature which cannot reopen the judgment,” Hallward-Driemeier said. 

Jurisdiction 

Hallward-Driemeier said the judgment at issue in this case was entered by the District Court and was not an exercise of original jurisdiction; rather, it was an exercise of appellate jurisdiction. 

Justice Sonia Sotomayor asked if Hallward-Driemeier was “talking about a mere formality,” in which the only issue is whether a bankruptcy judge — rather than a district judge — entered the final judgment at issue.  The attorney said, “Yes.”

 Justice Sotomayor said the District Court reviewed the case de novo and decided that there were no issues in dispute.  It also concluded that the law “clearly applied the way it did.” 

Hallward-Driemeier said that on appellate review, the District Court had two options:  affirm or reverse the ruling on appeal.  “As an original matter, though, it would have had a third option, which would have been to deny the motion at that time to let the record develop more fully,” he said. 

Article III 

Justice Ruth Bader Ginsburg asked why the District Court would do that if there were no disputed issues.  Hallward-Driemeier said, “I truly believe that on this record, where there clearly were disputes between the two affidavits, that an Article 3 judge would not have entered summary judgment as an original matter.” 

John Pottow, arguing for Arkinson, contended that 28 U.S. Code Section 157(b)(1) is “unambiguous” in his client’s favor because the statute is the provision by which district courts can refer matters to bankruptcy judges. 

Justice Antonin Scalia questioned Pottow’s reading of the statute.  The justice said the statute “does not give the Bankruptcy Court the authority” to enter a recommendation for what has been defined as a core proceeding. 

Pottow said, “I think the textual phrase ‘may hear and determine’ and ‘may enter an order or judgment,’ suggests that they, if referred to by the District Court, may enter a judgment.” 

Consent 

Curtis E. Gannon, assistant to the solicitor general, argued that a party may consent to have a fraudulent conveyance claim determined by a bankruptcy judge, and “even in the absence of consent, principles of severability justify treating such an action as a noncore proceeding in which a Bankruptcy Judge may enter proposed findings of fact and conclusions of law.” 

Moreover, Gannon argued that “even if consent is not adequate to cure the constitutional violation, or if you find that there is not adequate consent on this record, we think that it would still be open to you to find that petitioner has forfeited this constitutional argument.”  

Chief Justice John Roberts said that in the Supreme Court’s ruling in Stern v. Marshall (10-179, U.S. Sup.) [enhanced opinion available to lexis.com subscribers], the court said Congress can't take away the Supreme Court’s authority to decide cases.  But, the chief justice said, Gannon was taking the position that “two parties can come in off the street,” reach an agreement and take that power away from the Supreme Court. 

De Novo Review 

Gannon said, “Depending.”  He went on to add that “in light of a previous reference” from the District Court, and with the consent of the parties, the power of de novo review can be limited. “Obviously that's not what happened here, but we think that the judgment of the decision below should be affirmed,” Gannon said. 

EBIA is represented by Hallward-Driemeier of Ropes & Gray in Washington.  Arkinson is represented by Pottow of the University of Michigan Law School in Ann Arbor, Mich.  Gannon is the assistant to the U.S. solicitor in Washington.

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