Did The Supreme Court Finally Explain Marathon And Stern?

The Supreme Court has spoken once again on the limited jurisdiction of the bankruptcy courts, adding to the understanding derived from Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Granfinanciera v. Nordberg, 492 U.S. 33 (1989), Langenkamp v. Culp, 498 U.S. 42 (1990) and Stern v. Marshall, 131 S. Ct. 2594 (2011). Executive Benefits Insurance Agency v. Arkinson, Chapter 7 Trustee of the Estate of Bellingham Insurance Agency, Inc., 573 U.S. __ (2014) is the Supreme Court's fifth significant case exploring bankruptcy court jurisdiction under the Bankruptcy Code.

A brief and simplified history of bankruptcy jurisdiction may be helpful in understanding where we are today. The Bankruptcy Code (the “Code”) became effective in 1978. Before then, bankruptcy was governed by the Bankruptcy Act (the “Act”), which became effective in 1898. Under the Act, bankruptcy judges (called bankruptcy referees until 1974) could hear matters relating to the administration of the estate (such as proof of claim determinations and asset sales) as well as civil proceedings dealing with estate assets in the custody of the estate (called summary jurisdiction). However, bankruptcy judges could not hear civil proceedings between the estate and a third party if the proceeding entailed recovering assets or damages from the third party and the third party had a colorable right or defense (called plenary jurisdiction). So, a state law cause of action against a third party had to be conducted in a federal district court or a state court. The exception to this rule was consent — if the third party consented to the bankruptcy court hearing the litigation, or did not timely object to the bankruptcy court hearing the matter (implied consent), then the bankruptcy court could decide the matter.

In Katchen v. Landy, 382 U.S. 3223 (1965), the Supreme Court extended summary jurisdiction by concluding that if a creditor filed a claim, the bankruptcy court could hear fraudulent conveyance actions as part of the claims objection process. This is because section 57(g) of the Act (now section 502(d) of the Code) provided that the filed claim must be disallowed unless all preferences and fraudulent conveyances had been returned (Katchen was cited approvingly in Marathon and Stern, and therefore almost certainly remains good law). Pursuant to Katchen, the bankruptcy court would have to determine if there was a fraudulent conveyance as part of its deciding whether the claim was to be allowed or disallowed. Absent this Katchen expansion, or the express or implied consent exception discussed above, preference and fraudulent conveyance issues could not be decided by the bankruptcy court.

Congress was concerned that this complicated jurisdictional scheme was delaying the administration of bankruptcy cases and significantly increasing the costs for the estate. Further, the delays caused by the jurisdictional tiffs and the more formal and slower processes of the district or state courts, gave enormous leverage to the third party defendant in settling the matter. As a result, Congress sought to address these issues when drafting the Code, implementing substantial changes. Most significantly, the Code divided cases into three categories: (a) casesarising in the bankruptcy case (those proceedings that are not based on any right expressly created by title 11, but that would have no existence...