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The Ninth Circuit Further Limits the Powers of the Bankruptcy Court
In what can only be described as frustrating for Bankruptcy Judges, the Ninth Circuit recently expanded the limitations on bankruptcy judge’s ability to enter final judgments in certain situations. Taking their cue from the Supreme Court’s decision in Stern v. Marshall, which held that bankruptcy courts lack certain Constitutional authority to make a final decision regarding a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim, the Ninth Circuit held in Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.) that bankruptcy courts also lack a Constitutional basis to decide Fraudulent Transfer Claims brought under federal law when the Transferee is not a claimant in the bankruptcy.
Background: Stern v. Marshall
Bankruptcy Court can be a very exciting place, as was true in the bankruptcy case of Anna Nicole Smith. Her bankruptcy filing is what led to the U.S. Supreme Court’s decision in Stern v. Marshall. As many will remember, Anna Nicole Smith was fighting to claim a part of the inheritance left by her deceased husband. When she filed for bankruptcy after losing an unrelated lawsuit, the son of her husband filed a non-discharability action in her case. Anna filed a counterclaim in the bankruptcy case and the bankruptcy court issued a final decision in the matter. That decision was appealed all the way up to the Supreme Court. The Court found that two issues were presented: (1) whether or not Bankruptcy Courts had statutory authority to decide such issues; and if so (2) whether that statutory authority is Constitutional. The Court found that yes, bankruptcy judges do have statutory authority under 28 U.S.C.§157(b), but that the authority given under that statute violated the Constitution. Under Article III, § 1, of the Constitution ,”[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.” That sounds sufficient to lend Constitutional authority because Congress has ordained and established the bankruptcy court. However, Article III goes on to say that the judges of those courts established and ordained by Congress shall hold their seats during good behavior and have salary protection. This language is problematic for bankruptcy courts and their judges because bankruptcy judges do not enjoy either tenure or salary protection. According to the Supreme Court, this limitation on their benefits denies bankruptcy courts the Constitutional authority to decide counter – claims based on state law.
Current Case: Executive Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.)
In the Ninth Circuit’s decision in In re Bellingham Ins. Agency, Inc. the court went even further than Stern and found that bankruptcy judges do not have the Constitutional authority to issue a final judgment on fraudulent transfer actions against parties that have not filed claims in the bankruptcy case. However, the Court did find that these parties can expressly consent to the bankruptcy court’s jurisdiction and can also waive their right to object to that jurisdiction by failing to do so in a timely manner.
What this Means:
Unfortunately this means that some litigation that could have been handled by the bankruptcy court may instead be diverted to District or State Courts. This in turn means more litigation costs and time. Furthermore, if upheld, this ruling could be taken to invalidate many more powers of the bankruptcy court. As of the date of this posting, the case is being appealed to the Supreme Court. If you would like to learn more about bankruptcy court, click here.
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