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Fifth Circuit Says No Thanks, The Forthcoming Supreme Court Ruling in Executive Benefits Insurance A

May 1, 2014 by Tyson A. Crist, Partner
On January 14 of this year I wrote about the oral arguments before the Supreme Court in Executive Benefits Insurance Agency v. Arkison, Case No. 12-1200.  This case is effectively the sequel to the Supreme Court’s landmark decision on bankruptcy jurisdiction in Stern v. Marshall, 131 S. Ct. 2594 (2011).  A decision in Arkison is anticipated by the end of June.  The primary question posed is whether parties can consent to a bankruptcy court’s final resolution of a claim that is not “core” to administration of the bankruptcy given the restrictions in Article III of the Constitution, which are not well-defined.
If all of this seems a bit too scholarly, consider that the National Bankruptcy Conference issued a report on the forthcoming Arkison ruling, which concludes that extending Stern to constitutionally invalidate the current, statutory ability of parties to consent to final adjudications by bankruptcy courts “would be a stunning and costly alteration of bankruptcy procedure.”  S. Elizabeth Gibson & Jonathan M. Landers, Executive Benefits Insurance Agency v. Arkison: Does Party Consent Render Bankruptcy Court Adjudication Constitutionally Valid?, at 16 (Dec. 2013), available at Consent%20White%20Paper.pdf.  This means increased time and costs to parties involved in various types of bankruptcy litigation, including but not limited to state law claims (tort and contract), claims for fraudulent transfers and other types of claims to which Stern may be expanded.  It also highlights why so many interest groups have opposed such an extension of Stern.
On November 11, 2013, two months before Arkison was argued, the Fifth Circuit Court of Appeals issued a decision on precisely the same issue.  The Fifth Circuit joined the Sixth and Seventh Circuits in deciding that a bankruptcy court lacks constitutional authority to enter a final judgment on non-core state tort and contract claims (over the sale of a car dealership), even when the debtor has consented to jurisdiction.  BP RE, L.P. v. RML Waxahachie Dodge, L.L.C. (In the Matter of BP RE, L.P.), 735 F.3d 279 (5th Cir. 2013).  The Fifth Circuit relied upon Stern and subsequent decisions by the Sixth and Ninth Circuits to reach the conclusion that the bankruptcy court lacked constitutional authority to enter a final judgment.  Id. at 285-86.  However, with respect to whether litigant consent can cure this constitutional deficiency, the Fifth Circuit adopted “the compelling and thorough reasoning of Waldman [the Sixth Circuit decision], which held that parties cannot consent to such circumvention of Article III that impinges on the structural interests of the Judicial Branch.”  Id. at 286.  At the same time, the Fifth Circuit “acknowledge[d] that the Ninth Circuit’s opinion in [Arkison] is in conflict on the issue of consent,” but opined that Arkison “misses the mark, however, because Stern . . . did not reach the constitutional issue as to waiver” and because Arkison “disregards the critical structural interests underlying Article III.”  Id. at 287.  In short, because this involves the structural aspect of Article III, parties cannot cure it by consent—by waiving their personal rights.  The Fifth Circuit also observed that even though “the strict holding of Stern limits bankruptcy-court authority ‘in one isolated respect,’ . . . its ‘sweeping’ reasoning . . . is broad . . . .”  Id. at 291 (citing Frazin v. Haynes & Boone (In re Frazin), 732 F.3d 313, 319 (5th Cir. 2013)).
Interestingly, the Fifth Circuit noted that its decision was not in conflict with its prior decision upholding the ability of federal magistrates to issue final adjudications based on the consent of parties because “although there are similarities between the magistrate-judge and bankruptcy statutory schemes, they are distinct, and Stern’s was a narrow holding not affecting magistrate judges.”  Id. at 288, n.11 (citing Technical Automation Servs. Corp. v Liberty Surplus Ins. Corp., 673 F.3d 399, 407 (5th Cir. 2012)).
Over a month after Arkison was argued, a petition for rehearing of the BP RE, L.P. decision was denied by a vote of 8 to 6, with the dissenters wanting to wait for the Supreme Court’s forthcoming ruling, which will almost certainly govern the outcome of this issue.  In the Matter of BP RE, L.P., 744 F.3d 1371 (5th Cir. 2014).
One of the dissenting judges wrote to state that this case presented “an enbancworthy issue” because “the role of consent in delineating the scope of Article III is before the Supreme Court and I would be loath to anticipate its answer.”  Id. at 1372.  He also noted that there is “significance to examining any rationale that might logically extend to precluding magistrate judges from entering judgment with parties’ consent” and that, as it stands, the Fifth Circuit’s decision in BP RE, L.P. is in tension with its prior decision upholding a magistrate judge’s ability to enter a final decision with consent of the parties, Technical Automation Services Corp., 673 F.3d at 407.  Thus, in the Fifth Circuit, a magistrate judge can constitutionally enter a final judgment with party consent under 28 U.S.C. § 636(c)(1), but under 28 U.S.C. § 157(c)(2) a bankruptcy judge cannot.
The Supreme Court will almost certainly have to address the tension between courts allowing magistrate judges, but not bankruptcy judges, to issue final judgments based on party consent.  Had the Fifth Circuit waited for the Supreme Court to weigh in on these “weighty constitutional boundaries,” the Arkison case would have been binding on and given guidance to the Fifth Circuit.  BP RE, L.P., 744 F.3d at 1373.  Moreover, it could prove the Fifth Circuit’s decision to have been improvident.  The majority of the Fifth Circuit judges, however, were not persuaded.
So, at least for now, if you find yourself a litigant within the Fifth, Sixth or Seventh Circuits, know that you cannot consent to a bankruptcy judge issuing a final judgment on a “non-core” claim.  What constitutes such a claim is beyond the bounds of this blog, but non-core claims are commonly tort or contract claims arising under state law or fraudulent transfer claims arising under state law and the bankruptcy code.  For more in-depth discussion please see Tyson A. Crist, Stern v. Marshall: Application of the Supreme Court’s Landmark Decision in the Lower Courts, 86 Am. Bankr. L. J. 627 (2012).
For more information, contact Tyson Crist at (614) 462-2243 or or any member of Ice Miller’s Bankruptcy and Financial Restructuring Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

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