Page 5 - Corporate Restructuring & Bankruptcy

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Corporate Restructuring & Bankruptcy | MONDAY, MARCH 3, 2014 | S5

ings that would be classiied as “core” for Now enter Arkison.21 The issues raised
purposes of bankruptcy jurisdiction. Section before the court in Arkison were twofold:
157 speciically allows the district courts to (i) whether Article III of the Constitution
refer cases “arising under title 11” to the permits the exercise of the judicial power
bankruptcy judges.11 Additionally, bankruptcy of the United States by bankruptcy courts
judges were authorized to “hear and deter- on the basis of litigant consent, and, if so
mine all cases arising under title 11 and all whether implied consent based on litigant
core proceedings arising under title 11.”12 As conduct is suficient to satisfy Article III;

for “noncore” proceedings, the bankruptcy and (ii) whether a bankruptcy judge may
judge was only authorized to submit indings submit proposed indings of fact and con-
of fact and conclusions of law to the district clusions of law for de novo review by a
court.13
district court in a “core” proceeding under
The “public rights” concept was again 28 U.S.C. §157(b).
addressed in another landmark case, Gran- The procedural history of this case is
inanciera, S.A v. Nordberg.14 In that case, the quite simple and the facts were quite typi-
Supreme Court held that even though Con- cal of a fraudulent conveyance claim. The
gress may authorize adjudication of “public debtor, Bellingham Insurance Agency, iled for
rights” to the bankruptcy court, Congress Chapter 7 relief. At the behest of the debtor’s
lacked the power to strip parties contesting insider, the debtor transferred insurance com-
“private rights” of a Seventh Amendment right missions to a recently formed company, EBIA,
to a jury trial.15 In Graninanciera, the court and then iled its bankruptcy petition. During
ruled that a defendant in a fraudulent transfer the bankruptcy case, the Chapter 7 trustee

proceeding that had not iled a proof of claim sued the debtor under a theory of fraudulent
in a bankruptcy case was entitled to a jury conveyance to recover the assets transferred
trial in an Article III district court because prior to the iling.22
the fraudulent transfer claims brought on The trustee then moved for summary
behalf of the estate were “quintessentially judgment in the bankruptcy court. The bank-
suits at common law that more nearly ruptcy court granted summary judgment in
resemble state-law contract claims brought favor of the trustee, ruling that the deposits
by a bankrupt corporation to augment the into the EBIA account were, in fact, fraudulent
bankruptcy estate than they do creditors’ conveyances.23 EBIA then appealed to federal
hierarchically ordered claims to a pro rata district court, which afirmed the decision of
share of the bankruptcy res.”16
the bankruptcy court.24 EBIA appealed the
This scheme remained in place until just district court’s decision to the U.S. Court
over two years ago when the Supreme Court of the Appeals for the Ninth Circuit. During
decided Stern. In Stern, the court ultimately the pendency of the appeal, and through a

held that Congress could not constitutionally motion to dismiss submitted prior to oral
empower a non-Article III judge to enter a argument before the Ninth Circuit, EBIA
inal judgment on a state law counterclaim objected to the bankruptcy judge’s entry
that is not resolved in the process of ruling of a inal judgment on the trustee’s fraudu-
on a creditor’s proof of claim.17 Instead, only lent conveyance claims. In its motion, EBIA
an Article III court has the power to issue a invoked Stern, arguing that the bankruptcy
inal judgment on such claims, despite the judge was constitutionally precluded from
fact that it is part of a “core” proceeding.18 entering final judgment on the trustee’s
Thus, although the bankruptcy court had the claims.25
statutory authority to enter judgment on the The Ninth Circuit held that EBIA impliedly
counterclaim, the bankruptcy court lacked consented to the jurisdiction of the bankrupt-
the constitutional power to do so. Addition- cy court and afirmed the district court’s hold-
ally, the court emphasized that a Bankruptcy ing.26 Interestingly enough, the Ninth Circuit
judge is constitutionally prohibited from noted that Article III bars bankruptcy courts

entering a inal judgment on certain “core” from entering inal judgments in fraudulent
proceedings. The court noted that Article III is conveyance claims brought by a noncreditor,
“an inseparable element of the constitutional absent litigant consent.27 However, because
system of checks and balances” deining the EBIA consented to the bankruptcy court’s
power and protecting “the independence of jurisdiction, the bankruptcy court could
the Judicial Branch.”19
render a inal judgment.28 In its decision, the
According to the Supreme Court, with Ninth Circuit stated that fraudulent convey-
the exception of those actions that must be ance claims do not fall within the “public”
resolved in the process of ruling on a credi- rights exception addressed in Stern,29 Gran-
tor’s proof of claim or that implicate “pub- inanciera,30 and Northern Pipeline.31 EBIA
lic” as opposed to “private” rights, “[w]hen petitioned for a writ of certiorari, which was
a suit is made of the stuff of the traditional granted.
actions at common law tried by the courts Arkison presents the same jurisdictional
at Westminster in 1789, and is brought with- questions as its predecessors; however, the

in the bounds of federal jurisdiction, the issues are both narrower and more speciic.
responsibility for deciding that suit rests The irst issue Arkison presents is whether
with Article III judges in Article III courts.”20 waiver of the right to an Article III adjudication
Although the court cautioned that its hold- is constitutional in a “core” proceeding. It is
ing in Stern was to be construed narrowly, important to understand where the Supreme
the decision has caused many practitioners Court stands with a closely related issue:
to rethink whether bankruptcy courts have whether litigants can consent to adjudica-
the constitutional authority to hear and tion of a “noncore” claim by a bankruptcy
determine other statutorily codiied “core” judge. Stern addressed this issue and held
actions under 28 U.S.C. §157(b)(2). This is that litigants may consent to the entry of a
commonly referred to as the “gap” created by inal order by a bankruptcy judge of a “non-
Stern.
core” claim.32 »
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