SCOTUS Closes Statutory Gap In Bellingham

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). A .pdf of the slip opinion can be found here.

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...