US Supreme Court Rules That Bankruptcy Courts Can Issue Proposed Findings In 'Core' Matters Involving Stern v. Marshall-Type Claims

On June 9, 2014, the US Supreme Court issued a unanimous decision in Executive Benefits Insurance Agency v. Arkison ("Executive Benefits")1 that resolved a fundamental bankruptcy procedural issue that had arisen in the wake of Stern v. Marshall ("Stern").2

In Stern, the debtor filed in the bankruptcy court a common-law counterclaim for tortious interference against a creditor of the estate that was independent in nature from the claim asserted by the creditor in his proof of claim against the estate. The counterclaim constituted a "core" proceeding under the pertinent Judicial Code statutory provision, which also authorized the bankruptcy courts to adjudicate such a core proceeding to a final judgment. In Stern, the Supreme Court ultimately held that Congress had violated Article III of the Constitution by vesting the power to adjudicate the tortious interference counterclaim in a bankruptcy court. Subsequent courts, including several federal appellate courts, have held that fraudulent transfer claims, which are expressly "core" claims under the pertinent jurisdictional statutory provision, also are Stern claims and that, accordingly, bankruptcy courts cannot constitutionally enter a final judgment in fraudulent transfer actions.

In the aftermath of Stern, there has been uncertainty as to the extent to which, if at all, bankruptcy courts can hear (and take any action with respect to) Stern claims. Specifically, the pertinent jurisdictional statute permits bankruptcy courts to propose findings of facts and conclusions of law in "non-core" matters for subsequent de novo review by an Article III court. However, the statute does not expressly provide a similar avenue for Stern claims—claims that are expressly described as "core" in the jurisdictional statute, but which, under Stern, cannot now be finally determined as a constitutional matter by a bankruptcy court. In light of Stern, and this "gap" in the jurisdictional statute, what action, if any, could a bankruptcy court take in actions involving Stern claims?

With respect to newly filed fraudulent transfer actions, for example, did Stern require the actions to be entirely litigated in the first instance before the district court? And with respect to fraudulent transfer actions that already had been litigated entirely before a bankruptcy court, did Stern result in there being no available procedure other than for the district court to restart the proceedings from scratch, including all...