Knowing When to Walk Away
Yesterday, the Supreme Court issued a long-awaited ruling in Executive Benefits Ins. Agency v. Arkison, 573 U.S. __ (2014) (sometimes called "Bellingham" for the name of the debtor in the main bankruptcy case).
Bellingham is a follow-up to its decision in Stern v. Marshall, 546 U.S __ (2011), in which the Supreme Court held that Article III of the United States Constitution prohibits Article I Courts from exercising the "judicial power of the United States" to finally adjudicate certain kinds of claims, even if those claims were expressly categorized as "core" proceedings in 28 U.S.C. 157(b)(2).
Bellingham settled a circuit split over the division of labor between Bankruptcy Courts and District Courts when dealing with "Stern-claims," which SCOTUS defines as claims that are statutorily-designated as "core," but which designation is unconstitutional under Stern. The issue is this: if Stern says a Bankruptcy Court cannot enter a final order in a case, can it at least enter proposed findings of fact and conclusions of law subject to de novo review, like it does for non-core, but "related-to" matters? The Ninth Circuit (among others) had held in Bellingham that the structure of the statute would not authorize Bankruptcy Courts to do so, because Bankruptcy Courts are only authorized to enter findings/conclusions in non-core matters. Since fraudulent transfer claims are statutorily core, there is no statutory provision authorizing treating them as non-core simply because Stern applies. Bellingham closed this so-called statutory "gap" by relying on the severability provision in Section 157(d), and by holding that if Stern nullifies the "core" designation, the claim can be considered non-core if it is otherwise related to the bankruptcy case.
If a Stern-claim is independently non-core, SCOTUS held, the Bankruptcy Court is authorized to enter findings/conclusions subject to de novo review by the District Court. Since that is pretty much what the defendant in Bellingham obtained (the Bankruptcy Court called it a "judgment," but the District Court employed de novo review), SCOTUS affirmed the entry of judgment.
This is a narrow holding that avoids the second issue before the Court in Bellingham -- can parties consent (impliedly or explicitly) to a Bankruptcy Court's entry of final judgment? It also raises a host of issues about what bankruptcy de novo review means in practice. Where the District Court is merely reviewing the entry of summary judgment (as in Bellingham), the difference may simply be the level of defference that the District Court affords the Bankruptcy Court. However, a de novo review of a trial may be another animal altogether.
Bankruptcy Courts still cannot conduct jury trials without party consent under 28 U.S.C. 157(e), but where a Stern-claim defendant does not seek a jury trial and the Bankruptcy Court conducts a bench trial, what is that de novo review going to look like? Is the defendant entitled to an entirely new trial before the District Court? If the District Court relies wholesale on a Bankruptcy Court's evidentiary rulings and live-witness credibility determinations, who is really exercising the "judicial power of the United States?"
The contours of de novo review may be the next battleground, and bankruptcy practitioners would do well to study a potential analogy -- de novo review in ERISA benefits cases. There appears to be a split of authority in that world about whether, and under what circumstances, a defendant is entitled to present new evidence at its de novo review hearing. Compare Orndorf v. Paul Revere Life Ins. Co., 404 F.3d 510 (1st Cir. 2005) (not admitting "evidence outside the administrative record even when the denial of benefits is subject to de novo review) and Luby v. Teamsters, Health, Welfare & Pension Funds, 944 F.2d 1176, 1184 (3rd Cir. 1991) ("district court exercising de novo review over an ERISA determination between beneficiary claimants is not limited to the evidence before the funds administrator"). See also Bourgeois v. Local 112 Insulators, 2011 U.S. Dist. LEXIS 51083 n.7 (W.D. La. May 12, 2011) (collecting cases).