Supreme Court Confirms Bankruptcy Court Authority to Issue Reports and Recommendations On Core Matters

Absolute Priority has regularly covered the impact of the Supreme Court’s decision in Stern v. Marshall on the world of bankruptcy litigation.  In Stern, the Supreme Court held that Article III of the United States Constitution prohibits bankruptcy courts from finally adjudicating certain “core” causes of action (often called “Stern claims”), notwithstanding Congress’s explicit grant of such power to the bankruptcy court.

In the wake of Stern, some bankruptcy courts found that they had no authority to hear or consider Stern claims in any capacity.  Most courts, however, decided to hear Stern claims and issue more limited proposed findings of fact and conclusions of law in lieu of final orders.  This approach was sometimes even required by local rules propounded after the Stern decision, including in the District of Delaware and Southern District of New York.  Nonetheless, it was not universally agreed that bankruptcy courts had statutory authority to issue proposed findings of fact and conclusions of law with respect to Stern claims.

This week, the Supreme Court addressed that issue and revisited Stern for the first time in Executive Benefits Insurance Agency v. Arkison, Case No. 12-1200, 573 U.S. ___ (2014).  The Court, in an opinion by Justice Thomas, unanimously held that bankruptcy courts can issue proposed findings of fact and conclusions of law in connection with all Stern claims.

Through its holding, the Supreme Court ratified a practice that has become commonplace in New York and Delaware, among other jurisdictions, and rejected the argument that district courts are required to hear all Stern claims in the first instance—an approach that would have dramatically changed the landscape of bankruptcy litigation.  Unfortunately for bankruptcy practitioners and litigants in bankruptcy cases, however, the Court limited its holding to this narrow issue and declined to rule on certain other questions raised by Stern.  Most notably, the Court declined to rule on (i) whether a bankruptcy court can issue a final order on a Stern claim with the parties’ consent and (ii) whether (or under what circumstances) a fraudulent conveyance claim is a Stern claim.  As a result, bankruptcy courts may be more likely to simply issue reports and recommendations on Stern claims or potential Stern claims, increasing the duration and cost of litigation, even if the parties consent to bankruptcy court jurisdiction.  Given the importance of these issues, hopefully the Supreme Court will have the opportunity to revisit Stern again soon.



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