U.S. Supreme Court May Upend Nation’s Bankruptcy System
In a case that has attracted wide-spread national attention in bankruptcy circles, the Supreme Court of the United States will hear oral arguments on January 14, 2014, in the case of Executive Benefits Insurance Agency v. Arkison, Case No. 12-1200, in which the Court may further limit the power of United States bankruptcy judges to decide litigation disputes. The Court could upend the nation’s bankruptcy system by forcing many bankruptcy litigation matters out of the bankruptcy courts and into the federal district courts, where the judges usually lack bankruptcy expertise. The Executive Benefits decision may also call into question the power of the nation’s bankruptcy judges to hear and decide so-called “claw back” claims, which have been used extensively by trustees in Madoff and other cases.
In Executive Benefits, the United States Court of Appeals for the Ninth Circuit, based in San Francisco, which hears appeals from federal courts in California and several other western states, held that under recent U.S. Supreme Court precedent, the Constitution of the United States does not empower bankruptcy judges to enter final orders and judgments in fraudulent transfer actions, a common form of “claw back” claim. Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.), 702 F. 3d 553, 556, 565 (9th Cir. 2012). Rather, the Ninth Circuit held that bankruptcy judges are only Constitutionally empowered to submit proposed findings of fact and conclusions of law to the United States district courts for review and approval and for entry of final judgment. Id. at 566. Despite this Constitutional limitation, the Ninth Circuit went on to rule that the Executive Benefits Insurance Agency, which had been sued by a bankruptcy trustee in a fraudulent transfer “claw back” case in the State of Washington, had nevertheless consented to entry of a final judgment by the bankruptcy judge because it had not challenged the bankruptcy judge’s power to enter final judgment soon enough in the process. Id. at 568-69. The Executive Benefits Insurance Agency sought Supreme Court review of the Ninth Circuit’s decision. The Supreme Court is expected to address the issue of whether parties can consent to a bankruptcy judge entering a final judgment on a fraudulent transfer claim or whether such consent is forbidden by the Constitution. The Court may also take the opportunity to clarify some of its more recent decisions in this area.
Depending upon how the Supreme Court rules, a decision in Executive Benefits could upend years of practice by bankruptcy judges in “claw back” litigation by further eroding their power to decide those matters, potentially adding time and expense to the bankruptcy process and making it more attractive for defendants to seek to transfer “claw back” cases out of the bankruptcy courts and into the federal district courts. A decision in Executive Benefits is expected in June 2014.
Earl M. Forte is a partner at White and Williams, LLP and has worked extensively in bankruptcy litigation matters for over 25 years. He is the author of The Fraudulent Transfer Handbook – A Practical Guide for Lawyers and Their Clients (1st Ed. 2013), available on Amazon.com.