Sign_174561029As we previously discussed, the Supreme Court’s decision in Executive Benefits Insurance Agency v. Arkison, dodged the question of whether litigants can consent to final adjudication of “Stern problem” claims by a bankruptcy court. Two recent decisions in the Fifth and Ninth Circuit have revealed the scope of the uncertainty left in Arkison’s wake and ensure that a circuit split will remain until the Supreme Court revisits this issue.

Arkison Fails to Clarify if Parties Can Consent to “Stern Problem” Claims

The Supreme Court held in its 2011 decision in Stern v. Marshall that bankruptcy courts lack constitutional authority to enter final orders in matters constitutionally reserved to Article III courts (e.g., district courts), regardless of whether Congress statutorily granted bankruptcy courts that authority. Among the questions that arose from this landmark decision were what type of claims would raise “Stern problems” and whether litigants could consent to a bankruptcy court finally adjudicating a “Stern problem” claim.

Commentators and members of the bankruptcy bar expected the Supreme Court to address these questions when it granted certiorari in Arkison. However, the Supreme Court resolved Arkison on narrow statutory grounds and avoided the question of whether litigants can consent to a bankruptcy court entering a final judgment on a “Stern problem” claim. The Supreme Court’s decision—or lack thereof—left courts without guidance as to how to resolve this issue. Without binding Supreme Court precedent, courts have continued to apply the applicable existing circuit precedent and a circuit split has persisted.

Ninth Circuit Weighs In: Parties Can Consent

On August 22, the Ninth Circuit handed down its decision in Mastro v. Rigby. The issue before the Ninth Circuit was whether the bankruptcy court had authority to enter a judgment in a fraudulent transfer action, a “Stern problem” claim, based on the parties’ consent. The Ninth Circuit noted that it had previously considered this precise issue in its decision in In re Bellingham, the decision that was appealed in Arkison. The Ninth Circuit held that its decision in In re Bellingham was still binding precedent as a consequence of the Supreme Court’s narrow decision in Arkison. The Ninth Circuit therefore held that the bankruptcy court had authority to enter a final judgment in the fraudulent transfer action because the parties expressly consented to trial before the bankruptcy court.

Fifth Circuit Weighs In: Parties Cannot Consent

Three days later, on August 25, the Fifth Circuit issued its decision in Galaz v. Galaz. The issue before the Fifth Circuit was whether the bankruptcy court had authority to enter a final judgment in a state law fraudulent transfer action. The Fifth Circuit held that because the Supreme Court has not yet made a final determination regarding the efficacy of consent to support the entering of final judgments in “Stern problem” claims (i.e. the Supreme Court skirted the issue in Arkison), it was bound by its decisions in In re BP RE and In re Frazin, controlling Fifth Circuit precedent: bankruptcy courts cannot finally adjudicate “Stern problem” claims even if the parties have consented to bankruptcy court jurisdiction. Accordingly, the Fifth Circuit held that the bankruptcy court did not have authority to enter a final judgment in the state law fraudulent transfer action and ordered the district court below to review the bankruptcy court’s findings and conclusions de novo.

Hope For Certainty on the Horizon

Since issuing its decision in Arkison, and as noted by the Fifth Circuit in Galaz, the Supreme Court has granted certiorari in Wellness Int’l Network v. Sharif. The Seventh Circuit in Sharif, like the Fifth Circuit in Galaz, held that bankruptcy courts cannot finally adjudicate “Stern problem” claims even if the parties have consented to bankruptcy court jurisdiction. It is expected that a decision in Sharif will finally resolve this open question of bankruptcy court jurisdiction. Oral argument will be heard this fall and a decision will likely follow next spring. While we wait for a decision in Sharif, however, one thing remains clear: the circuit split will remain and inconsistent jurisprudence is inevitable.

Photo of Kelley J. Hails Kelley J. Hails

Kelley Hails focuses her practice on helping banks and other financial institutions with regulatory compliance matters. As part of her regulatory compliance practice, Kelley assists clients in the financial services and mortgage industries as they navigate, implement, and manage compliance with various originating…

Kelley Hails focuses her practice on helping banks and other financial institutions with regulatory compliance matters. As part of her regulatory compliance practice, Kelley assists clients in the financial services and mortgage industries as they navigate, implement, and manage compliance with various originating and servicing obligations imposed on them by federal and state regulators, including the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), TILA-RESPA Integrated Disclosure requirements, Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), Unfair, Deceptive or Abusive Acts or Practices (UDAAP), and other CFPB and state consumer protection requirements. She regularly advises clients on the application of such laws in connection with day-to-day operations, maintenance or development of policies and procedures, product advertising and development, mock regulatory examination reviews, risk assessments, regulatory examinations, and error correction. Kelley also has experience in a variety of commercial lending transactions.

Kelley is fluent in Spanish and assists clients with matters involving Spanish-language needs.