Executive Benefits Insurance Agency v. Arkison

Facts

Nicholas Paleveda and Marjorie Ewing, a married couple, operated a series of companies, including Aegis Retirement Income Services, Inc. (“ARIS”) and the Bellingham Insurance Agency, Inc. (“BIA”). The companies were closely related, with Paleveda and Ewing owning 100% of ARIS and 80% of BIA, and Paleveda and Ewing alternating as sole director of ARIS and general manager. ARIS and BIA shared an office and phone number, and ARIS routed all of its income and expenses through BIA, kept joint records with BIA, and declared its income on consolidated tax returns with BIA because ARIS lacked sufficient funds to operate independently.

In early 2006, BIA became insolvent and filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Western District of Washington. In the meantime, BIA had irrevocably assigned the insurance commissions from its largest client to Peter Pearce, a long-time BIA and ARIS employee. Additionally, Paleveda had used BIA funds to incorporate the Executive Benefits Insurance Agency, Inc. (“EBIA”), and Pearce and EBIA deposited $373,291.28 of commission income into an account jointly held by ARIS and EBIA.

Peter Arkison, the Respondent and bankruptcy trustee, sued EBIA and ARIS to recover the commissions deposited into the EBIA/ARIS account, claiming they were fraudulent transfers under the Bankruptcy Code, 11 U.S.C. § 548, and Washington’s Uniform Fraudulent Transfer Act, Wash. Rev. Code § 19.40.041. The bankruptcy court granted summary judgment in favor of Arkison, and concluded that EBIA was liable for BIA’s debts as a corporate successor, and the district court affirmed.

EBIA appealed and invoked Stern v. Marshall in a motion to vacate the bankruptcy court’s judgment for lack of subject-matter jurisdiction. EBIA claimed that the bankruptcy judge could not enter a final judgment on Arkison’s claims. The Ninth Circuit held that the bankruptcy court’s judgment was final because EBIA had consented to the bankruptcy court’s jurisdiction. However, the court also noted that, consistent with Stern v. Marshall, Article III bars bankruptcy courts from entering final judgments in actions brought by a noncreditor without the party’s consent.

EBIA petitioned for a writ of certiorari, which the Supreme Court granted on June 24, 2013.

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Discussion

This case allows the Supreme Court to clarify its holding in Stern v. Marshall. Before Stern, courts assumed that a bankruptcy court could enter a final judgment on “core” matters as codified in the Bankruptcy Code. Stern rejected the idea that Congress granted bankruptcy courts authority to issue final judgments in § 157(b)(1) and (2) actions. In Stern, the Supreme Court narrowly held that a bankruptcy court can preside over actions stemming from bankruptcy but not over state law claims independent of the bankruptcy action. Specifically, the Court held that the Constitution prohibits bankruptcy courts from adjudicating counterclaims to proofs of claims, even though such actions are permissible under 28 U.S.C. § 157(b)(2) as “core” traditional bankruptcy claims. Since Stern, federal courts have divided over bankruptcy courts’ ability to enter final judgments in adversarial proceedings and to preside over other “core” claims.

Arkison’s supporters argue that bankruptcy courts must retain their ability to preside over fraudulent transfer claims because such actions are the only way to adequately restructure the relationship between creditors and debtors in bankruptcy proceedings. Amici in support of Arkison contend that without the ability to rule on fraudulent transfers, bankruptcy courts will be unable to craft sufficient remedies in situations where debtors hide their assets from creditors before declaring bankruptcy. Moreover, amici argue that stripping bankruptcy courts of their ability to adjudicate fraudulent transfer claims would burden creditors with longer delays and add more uncertainty to bankruptcy proceedings. Specifically, Arkison’s supporters warn that district courts would be burdened with adjudicating previously “core” issues, such as fraudulent transfer claims. Aside from causing delays, Arkison’s supporters claim that assigning traditionally core bankruptcy matters to district courts would burden district courts by overcrowding their dockets with unfamiliar bankruptcy cases. Further, Arkison’s supporters claim that speedy resolutions are essential to bankruptcy’s primary purpose – prompt and orderly resolutions of bankruptcy estates for creditors’ benefit.

EBIA’s supporters argue that allowing bankruptcy courts to preside over certain core issues like fraudulent transfers would be unfair and inefficient. According to these amici, including the Robert R. McCormick Foundation, bankruptcy judges lack the constitutional authority and training of Article III judges to adjudicate over claims involving private rights. EBIA’s supporters contend that only district courts have the authority to adjudicate such matters. Additionally, they argue, district courts can delegate preliminary fact-finding and non-binding decision-making to magistrate judges. Supporters of EBIA further argue that magistrate judges are just as capable of handling former core bankruptcy claims, and their authority to do so is well established under 28 U.S.C. § 636. Because magistrate decisions are subject to reconsideration by the district court when they are clearly erroneous and bankruptcy judges are not, amici for EBIA assert that magistrate judges better serve the interests of fair administration of civil justice when presiding over claims requiring an Article III judge.

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Analysis

In this case, the Supreme Court will decide whether a bankruptcy judge can issue a final judgment on a non-core bankruptcy issue when the litigants consent to the judge’s ruling; the Court will also consider whether that consent can be implied. If the Court holds that consent does not authorize bankruptcy judges to issue final judgments or that consent cannot be implied, then the Court will decide whether bankruptcy judges can submit findings of fact and conclusions of law to a district court judge for a “core” proceeding as defined by 28 U.S.C. 157(b).

In Stern v. Marshall, the Supreme Court examined “core” bankruptcy issues under 28 U.S.C. 157(b). The Court determined that judges lack constitutional authority to grant final judgments in certain core proceedings. The categories “core” and “non-core” are exhaustive, which means that Stern did not create another category of bankruptcy claims. Instead, Stern clarified that some statutorily “core” issues are unconstitutional, and must therefore be considered non-core because Congress incorrectly drew the line between core and non-core. However, the Stern holding also suggested that bankruptcy court adjudications can violate the separation of powers doctrine because bankruptcy judges are not Article III judges and do not have the independence and protection of life appointments.

EBIA argues that the constitutional issue raised in Stern cannot be cured by parties consenting to the litigation. Arkison responds that Stern should be construed narrowly, and that the parties’ consent to litigation is constitutional, similar to the workings of federal magistrate courts. EBIA further argues that Stern has left a statutory gap in the bankruptcy statute which does not allow bankruptcy judges to adjudicate certain core issues or to issue findings of fact or law. Arkison argues that there is no statutory gap because although bankruptcy judges cannot grant final judgments on the core issues discussed in Stern, they can give findings of fact and conclusions of law to district court judges for final judgment.

CAN BANKRUPTCY COURTS DECIDE NON-CORE ISSUES WHERE THERE IS PARTY CONSENT?

The first issue for the Court is whether bankruptcy courts can grant final judgments on non-core issues with party consent, and if so, whether that consent can be implied.

EBIA argues that the Article III constitutional violation identified in Stern cannot be cured by individual party consent. EBIA contends that the separation of powers doctrine preserves the respective authority of the separate branches, and even an agreement between branches cannot alter this balance. In EBIA’s view, reallocating power within a branch can violate this doctrine, and because agreements between the branches of government cannot alter the balance of power, neither can individual agreements.EBIA argues that giving non-Article III judges—judges who are not protected by permanent appointment—the power to grant final judgments reallocates power within the judicial branch. EBIA further contends that if consent could cure this breach, it would have to be explicit in the statute; but this protective limitation does not exist in the bankruptcy statute as it does in the Federal Magistrates Act.

Arkison argues that individual party consent can rectify the Article III concern raised in Stern because Article III is concerned with private individual rights more than structural rights, which are not implicated in private party litigation. Furthermore, Arkison explicates the long history of the use of special masters, magistrate judges, and bankruptcy “referees” or judges who are not Article III judges but can grant final judgments. Arkinson contends that modern precedent has supported the continued use of judges in this context, particularly federal magistrate judges, when the parties consent to the litigation. Arkison also asserts that Stern approved this historical practice by recognizing core and non-core bankruptcy issues. Arkison further contends that when there are fatal constitutional flaws in Article III regimes, it is the lack of consent, not the lack of Article III protections such as judge permanency, that raises concerns. Arkison thus emphasizes that there is no Article III violation when magistrate and bankruptcy judges receive parties’ consent to adjudicate their claims.

EBIA argues that if consent authorizes bankruptcy judges to grant final judgments on non-core issues, then the consent must be actual, not implied. EBIA asserts that under the Federal Magistrate Act, consent must be knowing and voluntary, and this same standard should be applied to the bankruptcy courts. EBIA further argues that its consent was not knowing or voluntary here because it was forced on EBIA by the binding Ninth Circuit precedent at the time. In EBIA’s view, a failure to object because of precedent does not constitute voluntary consent. EBIA maintains that a finding of implied consent would contravene Article III principles that require robust protection for litigants.

Conversely, Arkison claims that constitutionally permissible consent can be implied, as it was in Roell v. Withrow, which held that implied consent is sufficient to give federal magistrate judges adjudicatory power. Arkison contends that because EBIA received full Article III consideration through the appeal process, the Court need not reach the consent issue because the procedural posture of this case does not necessitate it. However, Arkison argues that if the Court chooses to decide this issue, EBIA fully consented to jurisdiction by the bankruptcy. In Arkison’s view, EBIA knew that it had to object to the bankruptcy court’s jurisdiction, but failed to do so. Accordingly, Arkison argues that EBIA took a risk, but should not have a second chance simply because they lost.

CAN BANKRUPTCY COURTS ISSUE FINDINGS OF FACT AND LAW ON CORE ISSUES?

If the Court determines that EBIA’s implied consent was not actual consent, the Court will determine whether bankruptcy judges can issue findings of fact and conclusions of law on core bankruptcy issues.

EBIA argues that bankruptcy judges, under 28 U.S.C. § 157, cannot issue proposed findings of fact or conclusions of law in core proceedings. According to EBIA, the statute authorizes bankruptcy judges to issue final judgments, but not proposed findings, in core bankruptcy proceedings. However, EBIA claims, bankruptcy judges can issue proposed findings in non-core proceedings. EBIA asserts that this gap in the statute must be rectified by Congress, not the courts. In EBIA’s view, because Congress overstepped constitutional bounds by writing the statute, only Congress can amend the statute because a judicial correction would violate separation of powers.

Arkison acknowledges that at first glance, there appears to be a statutory gap because the claims made unconstitutional by Stern are still considered core under 28 U.S.C. § 157. However, Arkison asserts that Stern’s holding that “core” and “non-core” are exhaustive categories means that statutorily core claims that are unconstitutional under Stern must be considered “non-core.” Accordingly, Arkison argues that because the claims must be viewed as non-core, there is no statutory gap at all. Moreover, Arkison contends, the statute should be interpreted as allowing bankruptcy judges to enter judgments, rather than requiring final judgments for core issues. Arkison claims that Congress could not have intended to grant bankruptcy courts more power over non-core issues (by allowing bankruptcy courts to issue findings of fact and conclusions of law) than over core issues (by preventing bankruptcy courts from issuing findings of fact and conclusions of law).

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Conclusion

In this case, the Court will determine whether bankruptcy judges can grant final judgments on non-core bankruptcy issues when the parties consent, and if so, whether that consent can be implied. The Court will also decide whether bankruptcy judges can issue findings of fact and conclusions of law on core bankruptcy issues. EBIA argues that bankruptcy judges cannot grant final judgments on non-core bankruptcy issues because party consent cannot cure the Article III constitutional issue that was raised in Stern. If consent can cure this defect, EBIA argues that it cannot be implied. Arkison argues that if there is consent, bankruptcy judges can grant final judgments on non-core issues, and that consent can be implied. Whereas EBIA contends that bankruptcy judges cannot issue finding of facts and conclusions of law on core issues because of a statutory gap created by Stern, Arkison argues that the power to issue these findings is implied in the statute and not affected by Stern. The decision in this case could have wide-ranging implications for the bankruptcy courts, and possibly the federal magistrate system. The Court will have the chance to clarify its holding in Stern, and may urge Congress to enact legislation to fix the bankruptcy courts.

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