January 21, 2018

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Supreme Court’s Decision in Bellingham Leaves Key Stern v. Marshall Questions Unanswered

As bankruptcy practitioners will recall, the Supreme Court held in Stern v. Marshall, 564 U.S., 131 S.Ct. 2594, 2620 (2011) that bankruptcy courts, as non-Article III courts, “lack[] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim,” even though Congress had classified these types of proceedings as core – and thus authorized federal bankruptcy courts to hear and decide them.

After Stern, parties litigating state law claims in a bankruptcy court that seemed inclined to favor the opposing side argued that the bankruptcy court lacked jurisdiction to rule in their case, making litigation more expensive and time-consuming. Litigators and bankruptcy courts alike were left wondering what sort of claims really fall in the Stern category and whether parties can consent to jurisdiction and avoid the expense and delay involved in dealing with the uncertainty. Some courts decided there was a “statutory gap” leaving Stern claims in a no man’s land that bankruptcy courts could not touch.

Everyone assumed the Supreme Court was going to clarify these questions when it granted certiorari from the 9th Circuit’s decision in Executive Benefits Insurance Agency v. Arkinson (Bellingham), particularly since there is now a circuit split on the consent question. Unfortunately, the court punted on the first two questions, and resolved only the third, holding that Stern claims can be treated as non-core claims under 28 U.S.C. § 157(c). In other words, the bankruptcy court can submit proposed findings of fact and conclusions of law to the district court for de novo review. 

This leaves parties in the 5th, 6th and 7th Circuits unable to avoid wrangling through consent, and parties in other Circuits, including the 9th, which permits consent, to wonder whether they will encounter problems down the line if they try to clear up confusion now by expressly consenting to bankruptcy court jurisdiction. It is also unclear whether such consent can be implied (from a party’s course of conduct or otherwise), if not expressly granted. Furthermore, what claims must be deemed Stern claims? Presumably the Supreme Court will take another stab at these questions in a few years. In the meantime, expense and delay seem inevitable. 

© 2018 BARNES & THORNBURG LLP

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About this Author

L Rachel Lerman, Financial Attorney, Barnes & Thornburg Law Firm
Partner

L. Rachel Lerman is a partner in Barnes & Thornburg LLP’s Los Angeles office and a member of the firm’s Litigation Department. Formerly a partner at Akin Gump Strauss Hauer & Feld LLP, she focuses on appellate practice and trial strategy in complex civil cases. She has handled writs and appeals in commercial, bankruptcy, patent, trade mark, trade secret, labor, insurance defense, white collar, and family law cases in state and federal courts nationwide. She works regularly with trial counsel on law and motion and trial strategy.

310-284-3871
David M. Powlen, Barnes Thornburg Law firm, Bankruptcy Attorney
Partner

David M. Powlen is a partner in the Wilmington, Delaware office of Barnes & Thornburg LLP. He is a member of the Corporate Department; the Finance, Insolvency and Restructuring Department; the Litigation Department; and the Real Estate Department. He is Co-Chair of the Asset Revitalization Practice Group, and a member of the Financial Institutions and Construction Law Practice Groups. He is former Chair of the Finance, Insolvency and Restructuring Department., and at various times has served as a member of the firm's Management and Non-Legal Affiliates Committees.

Practicing primarily in the areas of financing transactions, business bankruptcies, sales and reorganizations, and complex commercial litigation, Mr. Powlen represents clients in Chapter 11 cases before the bankruptcy courts in Delaware and throughout the United States. He has advised secured creditors, indenture trustees and bondholder groups, official committees of unsecured creditors, parties to leases, franchises, licenses and other types of contracts, debtors and equity holders, asset purchasers and financial sponsors of plans of reorganization, and defendants in adversary proceedings in which alleged preferential payments or other transfers are sought to be avoided. With over 25 years of experience as an attorney, he has led many additional types of assignments involving creditors’ rights, refinancings, restructurings, receiverships, out-of-court arrangements, and other special situations.

Mr. Powlen has served as Co-Chair of the Financial Advisors Committee and Co-Chair of the Investment Banking Committee of the American Bankruptcy Institute, Director for a regional chapter of the Turnaround Management Association, and in leadership positions for various other national, state and local organizations. He is listed in The Best Lawyers in America, and is a Certified Insolvency & Restructuring Advisor (a designation of the Association of Insolvency & Restructuring Advisors).

302-888-4536