U.S. Supreme Court Hears Case on Limits of Bankruptcy Judges’ Powers

On January 14th, 2014, the U.S. Supreme Court heard oral arguments in Executive Benefits Insurance Agency v. Arkison. Because it is being appealed out of the Ninth Circuit, this case is being closely watched by Bay Area Bankruptcy Attorneys, and the Court’s decision could significantly change the role of Bankruptcy Courts.

Executive Benefits follows the 2011 case Stern v. Marshall, which is discussed in a previous post on this blog. In Stern v. Marshall, which involved the bankruptcy of former Playboy Playmate Anna Nicole Smith, the Supreme Court held that Bankruptcy Courts do not have the Constitutional authority to decide compulsory counterclaims based on state law. Compulsory counterclaims are a type of claim referred to in bankruptcy law as a “core proceeding,” because it is based on the core subject matter given to the bankruptcy court by federal law. After Stern v. Marshall, bankruptcy courts cannot issue final judgments in some core proceedings.

Background in Executive Benefits

Nicholas Paleveda and his wife, Marjorie Ewing, owned several closely-linked companies that designed, sold, and administered pension benefits and insurance plans. In 2006, one of the companies become insolvent. Funds from the insolvent company, which proceeded to file Chapter 7 Bankruptcy, were used to create the Executive Benefits Insurance Agency (EBIA). The Chapter 7 Bankruptcy Trustee argued that the transfer of these funds to EBIA was a fraudulent conveyance, and the Bankruptcy Court agreed.

EBIA appealed to the federal district court, which affirmed the judgment of the Bankruptcy Court. EBIA then appealed to the Ninth Circuit and for the first time argued that the bankruptcy judge did not have the constitutional power to have entered a final judgment on the fraudulent conveyance claims and thus the judgment should be vacated. In making this argument, EBIA relied on the Supreme Court’s recent decision in Stern v. Marshall.

The Ninth Circuit held that it was constitutional for the bankruptcy judge could hear fraudulent conveyance claims and submit reports and recommendations to the district court, but that the bankruptcy judge did not have the power to enter a final judgment on a fraudulent conveyance claim without the parties’ consent. The Ninth Circuit held that EBIA had consented to the court’s jurisdiction by not objecting in time. EBIA appealed to the Supreme Court.

Legal Issues before the Court

The Supreme Court is expected to decide two issues:

1) Does the Constitution permit bankruptcy courts to exercise judicial power on the basis of litigant consent, and – if so – whether “implied consent” based on a litigant’s conduct (EBIA’s failure to object, in this case) is sufficient.

2) Whether a bankruptcy judge can submit proposed findings of fact and law for de novo review by a district court in a core proceeding. Although the Supreme Court can sometimes take months to reach a decision after oral arguments, all decisions from this term will published before the Court recesses for the summer, at the latest.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code