On June 9, 2014, the United States Supreme Court issued the decision Executive Benefits Insurance Agency v. Arkinson, Trustee of the Estate of Bellingham Insurance Agency, Inc., which deals with the constitutional limits on bankruptcy judges. The Bellingham decision is the latest chapter in a saga begun by the Supreme Court in the 2011 decision, Stern v. Marshall. The potential effects of Stern and Bellingham on bankruptcy litigation will have a significant impact upon the costs, predictability, strategy and potentially the length of bankruptcy cases.
Fundamentally, Stern is based in the perpetual turf war between the three branches of the federal government: Legislative (created under Article I of the Constitution), Executive (Article II) and Judicial (Article III). Federal judges are appointed by the President and confirmed by the Senate. All federal judges confirmed by the Senate (Supreme Court, court of appeals and district court judges) are known as “Article III” judges. Once Article III judges are confirmed, they are entitled to very important Constitutional protections, including serving for the rest of their lives, if they so choose, and a prohibition on any pay decreases from Congress.
Bankruptcy judges are federal judges, but are not “Article III” judges. Rather, they are appointed by Article III judges sitting on the federal courts of appeal, they do not require Senate confirmation, and they do not enjoy the same Constitutional protections of Article III judges. For example, bankruptcy judges serve 14 year terms, rather than life tenure. The district court automatically refers all bankruptcy matters to the bankruptcy court. When designing bankruptcy courts’ jurisdiction, Congress divided all bankruptcy matters into two buckets: “core” or “non-core.” Core matters deal with essential aspects of bankruptcy, such as confirming a plan of reorganization. A non-core bankruptcy matter might include deciding a contractual dispute with the debtor that was brought before the bankruptcy court merely because it was related in some way to the bankruptcy case. The distinction between the core and non-core buckets is important because it determines whether a bankruptcy judge is entitled to enter a final order. Final orders can be entered by a bankruptcy judge in core matters only. For non-core matters, the bankruptcy judge enters findings of fact and conclusions of law, and the district court is free either to accept the findings and enter an order, or to make its own findings, in essence to try the matter over again at the district court level.
The Supreme Court shook up the bankruptcy court system with the Stern decision. Stern involved counterclaims held by the debtor against one of the debtor’s creditors. A previously unchallenged provision of bankruptcy law deemed such claims as “core.” In Stern, the Supreme Court held that the provision was unconstitutional because it impermissibly allowed a non-Article III judge (the bankruptcy judge) to enter final orders on matters traditionally reserved for determination only by Article III judges. To put it another way, allowing a non-Article III judge to enter such orders would encroach upon the exclusive domain of the third branch of government, and the Supreme Court would not allow that. While the Supreme Court stated that Stern was a “narrow” decision, the case set off a firestorm of cases and articles speculating on the types of matters where a bankruptcy judge is entitled to enter final orders.
Following Stern, some courts held that bankruptcy judges could not even enter proposed findings of fact and conclusions of law on the type of claims addressed in Stern. Rather, those courts reasoned, the bankruptcy judge had to throw up his or her hands and send everything to the district court. This very narrow issue was cleared up in the Bellingham decision. In Bellingham, the Supreme Court held that bankruptcy judges are constitutionally permitted to hear these “Stern claims” and may enter proposed findings of fact and conclusions of law for review by the district court.
The Bellingham decision is particularly notable for questions that the Supreme Court did not answer. What if both parties consent to the entry of a final order by the bankruptcy court? What is a Stern claim, and what is not? Does the entry of an order by the district court make these bankruptcy court issues moot in every situation?
For parties to bankruptcy litigation, these remain open questions. It also means that bankruptcy litigation will remain more complicated, more expensive, more unpredictable and subject to “gotcha” tactics and gamesmanship by the parties. For non-lawyers and for parties who do not litigate frequently in bankruptcy court, that is the unfortunate takeaway from Stern and Bellingham. Stay tuned, the wrestling match between the Supreme Court and Congress over what bankruptcy courts can do is still in the early rounds.