Constitutional Limits on the Power of Bankruptcy Judges

On  January 9, 2014, the U.S. Supreme Court delivered its decision in the case of  Executive Benefits Insurance Agency v. Arkison. The case presented the question of whether a bankruptcy judge could constitutionally hear the presented fraudulent conveyance claim and per the relevant statute make a report and recommendations to the district court for de novo review and a decision. This question to be decided was whether the statutory powers given to a bankruptcy judge by Congress to allow it to hear this type of case and present a report and recommendation to the district court for it to make its judgment, exceeded the limits of Article III of the Constitution.  
Constitutional and Statutory Background Article III  §1 of the Constitution commands that "[t]he judicial Power of the United States shall be vested in one supreme Court and in such inferior Courts as the Congress may from time to time ordain and establish" and provides that the judges of these constitutional courts "shall hold their Offices during good Behaviour" and "receive for their Services [ ] a Compensation [ ] [that] shall not be dimished" during their tenure. Bankruptcy courts were not created under Article III, but are appointed for 14-year terms by the courts of appeals in their district pursuant to the Bankruptcy Amendments and Federal Judgeship Act of 1984.  
Pursuant to 28 U.S.C. §1334(a) the district courts of the United States, which are Article III courts,  have "original and exclusive jurisdiction in all cases" under the bankruptcy code. However pursuant to 11 U.S.C.  §157 (d), most district courts refer all bankruptcy cases to the bankrkuptcy judges of their district pursuant to a general standing order of reference. Purusant to 11 U.S.C.  §157 (b) and (c),  bankruptcy judge may hear and enter final judgments in "core proceedings arising under title 11, or arising in a case under title 11." But pursuant to 11 U.S.C. §157 (c),  although a bankruptcy judge may determine a referred proceeding that "is not a core proceeding, but ... is other-wise related to a case under title 11", the bankruptcy judge must submit proposed findings of fact and conclusions of law to the district court which then enters final judgment after a de novo review. 
Stern v. Marshall
The case before the Supreme Court is a follow-up to its 2011 decision in Stern v. Marshall. In Stern, the Supreme Court held that as bankrutcy judges are not Article III judges, they do not have the power under Article III of the Constitution to rule on the type of claim presented in Stern, which was a counterclaim for tortious interference.The Court held that even though  "bankruptcy courts are statutorily authorized [by Congress] to enter final judgment on a class of bankruptcy related claims, Article III of the Constitution prohibits bankruptcy courts from finally adjudicating certain of those claims." The claims being referred to was a category of claims deemed "core" matters by Congress. The tortious interference claim presented in Stern was in this class of claims. The Court did not, though, address how bankruptcy courts should proceed when they encounter a Stern claim.
Court's HoldingThe Supreme Court in Executive Benefits Insurance v. Arkison held that when a bankruptcy court is presented with a Stern claim, "the proper course is to issue findings of fact and conclusion of law" which
the district court will then review de novo and enter judgment. That is, a claim such a Stern claim,  may proceed in the bankruptcy court as "non-core" proceedings and the bankruptcy court may only issue findings of fact and conclusion of law to then be send to the district court for de novo review and issuance of judgment.  The Court stated that "[t]his approach accords with the bankruptcy statute and does not implicate the constitutional defect identified by Stern."

Jordan E. Bublick is a Miami Bankruptcy Lawyer with over 25 years of experience in filing Chapter 13 and Chapter 7 Bankruptcy Cases and Mortgage Modifications (305) 891-4055