On Tuesday, January 14, 2014, the Supreme Court heard Executive Benefits Insurance Agency v. Arkison, a case that will settle important questions regarding the limits of bankruptcy judges’ powers.
Bankruptcy litigation is a “complex, fast moving, and specialized area of practice” that was determined by Congress in 1984 to warrant separate system of bankruptcy courts for handling “core” bankruptcy matters. These courts are presided over by specialized judges and their decisions are occasionally reviewed by district court judges. While bankruptcy judges have specialized training and serve limited terms of 14 years, they are neither appointed by the President, nor confirmed by the Senate. Therefore, they do not meet the Constitution’s Article III requirements, and “non-core” bankruptcy matters still have to be heard by full-fledged district court judges. However, this system, as laid out by Congress, has created much confusion for the courts over time, and could very well fall apart after a ruling is made in Executive Benefits.
In 2006, the Bellingham Insurance Company in Washington State declared bankruptcy. Peter Arkison was appointed as a trustee to recover assets for the estate, and he filed a suit against Executive Benefits, alleging that about $400,000 of Bellingham’s assets had been wrongfully passed off to Executive Benefits before the bankruptcy to keep them out of the hands of creditors. This fraudulent transfer claim was heard before a bankruptcy judge, and Executive Benefits, while denying the allegations, did not object to having a bankruptcy judge hearing the dispute. The bankruptcy court ruled in favor of Arkison, and Executive Benefits appealed to the district court, which after applying a de novo standard of review, affirmed the bankruptcy judge’s ruling.
In 2012, Executive Benefits appealed to the Ninth Circuit, by which time a recent Supreme Court ruling in Stern v. Marshall had made clear that the fraudulent transfer action against Executive Benefits was the type of proceeding that constitutionally entitled Executive Benefits to have its case heard by a district court judge instead of a bankruptcy judge in the first instance. Executive Benefits thus sought reversal. However, the Ninth Circuit affirmed the district court’s ruling and reasoned that there were no constitutional issues, since the district judge had heard the case on de novo review. The Ninth Circuit said that this was analogous to what magistrate judges are permitted to do by rendering proposed findings of fact and recommending conclusions of law that are ultimately decided by the district judge independently after de novo review.
Now the questions before the Supreme Court are:
- whether a bankruptcy judge can hear a fraudulent conveyance claim and submit a report and recommendation to a district court for review;
- if the parties can consent to have their case, that would otherwise have to be heard by a district judge, be heard by a bankruptcy judge; and
- if so, does failure to object to having the case heard by a bankruptcy judge constitute implied consent by the parties.