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Bankruptcy law has been struggling for several years now with the so-called "Stern problem”—the jurisdictional cloud of doubt that has been cast by the Supreme Court's decision in Stern v. Marshall over much of the work that bankruptcy courts have done routinely for decades. Since Stern was decided, bankruptcy courts and the litigants who appear before them cannot be confident that it is constitutional for non-Article III bankruptcy judges to adjudicate various matters over which there is clear statutory jurisdiction, such as avoidance actions against third party transferees who are not otherwise involved or participating in the bankruptcy case. It is even questionable whether consent by all parties to adjudication before a bankruptcy judge would solve potential jurisdictional defects in Stern-implicated matters.

Nevertheless, despite the long shadow that Stern has cast, bankruptcy courts around the country have continued to operate as they did before, if for no other reason than simply because "the show must go on." As temporary fixes (if not quite solutions) to Stern, bankruptcy courts have mainly been doing two things: (1) issuing, like magistrate judges do, proposed findings of fact and proposed conclusions of law while leaving the final decision for the district judge to make on appeal after de novo review; and (2) obtaining consent from the parties who appear in bankruptcy court to the bankruptcy court's jurisdiction, particularly in cases where Stern is raised or implicated.

Doing one or both of these has allowed bankruptcy courts to continue to function more or less as before—at least ab initio. But always lurking in the background is the risk that an appeal raising a Stern issue could overturn the work of the bankruptcy court below. Such was the situation, for instance, in In re Bellingham Insurance Agency, Inc., a recent decision of the Ninth Circuit reviewing and ultimately affirming an award of summary judgment in favor of a bankruptcy estate in an avoidance action against third parties who, for the first time on appeal, had raised a Stern defense. While the bankruptcy court's work was affirmed by the Ninth Circuit in Bellingham, the parties there and in similar cases around the country have been forced to operate in the jurisdictional twilight zone created by Stern (even as to "core" claims specifically delegated to the bankruptcy courts by statute), and the approach taken by the Ninth Circuit in Bellingham has not been uniformly embraced by other courts.

Thus, when the Supreme Court granted certiorari in Bellingham (recaptioning the case under the name Executive Benefits Insurance Agency v. Arkison), there was great hope in the bankruptcy bar that Stern's scope would be clarified and that the Court would address in particular the jurisdictional effects of the two practices mentioned above, proposed findings/conclusions and consent. Unfortunately, these hopes were not fully realized. For the Court's decision, which affirmed the Ninth Circuit on the narrow ground that the district court had reviewed the bankruptcy court's summary judgment ruling de novo, addresses only the first issue and not the second.


Reprinted with permission of the American Bankruptcy Institute Law Review. Originally published at 22 AM. BANKR. INST. L. REV. 539 (2014).



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