Bridging the Gap
Since June of 2011 hundreds of cases, law reviews and treatises have discussed Stern v. Marshall. Almost universally, commentators and jurists touched upon the perceived “statutory gap” in the limited jurisdiction of bankruptcy courts, which they believe exists because of the Supreme Court’s holding in Stern.
No one questions the jurisdiction exists for core proceedings under 28 U.S.C. 157(b), or even to hear non-core matters where the court submits proposed findings of fact and conclusions of law to the district court under 28 U.S.C. § 157(c)(1). Stern seemingly left open, though, the question whether bankruptcy court possesses the constitutional authority to hear and determine cases that do not fit within either of these categories – they fall in the “statutory gap.”
However, even before the Supreme Court’s ruling in the recent case of Executive Benefits Insurance Agency v. Arkison (In re Bellingham), many bankruptcy courts weighing in on the issue have held that when dealing with these so-called “Stern claims,” bankruptcy courts may provide proposed findings of fact and conclusions of law. Many district courts weighing in on the issue have treated bankruptcy courts’ (allegedly final) orders on Stern claims as proposed findings of fact and conclusions of law. Some courts (including the Bankruptcy Court for the Southern District of New York) have even adopted local rules to bridge the gap.
The Supreme Court addressed the “statutory gap” in Bellingham. In Bellingham, the debtor filed Chapter 7 and the trustee filed a fraudulent conveyance complaint naming certain related non-debtor entities as defendants. The bankruptcy court granted summary judgment in favor of the trustee. The district court affirmed the bankruptcy court’s decision as did the United States Court of Appeals for the Ninth Circuit.
The Supreme Court granted certiorari to address the “statutory gap.” In doing so, the court pointed out that the statute’s severability provision instructs that when a portion of the bankruptcy code is held invalid – as is necessarily done when a “Stern” claim falls into the statutory gap – the remainder of the statute remains intact and the Stern claim becomes non-core. What Bellingham made explicitly clear is that every claim brought in a bankruptcy court will necessarily fall into either § 157(b) or § 157(c). As a result, the Court resolved the open question by stating that there is no “gap.”
While the Court’s ruling in Bellingham did close off one avenue of uncertainty arising from the Stern case, 1 it left intact the actual manner in which debtors and creditors interact in bankruptcy. Bankruptcy courts can still enter proposed findings of fact and conclusions of law on these Stern claims, and the parties to such suits can have the confidence that the judgments obtained are valid and enforceable.
1 Notably, the Court did not address other areas of uncertainly arising from Stern. For example, the Supreme Court did not decide whether a fraudulent transfer action against a defendant that had not filed a proof of claim could constitutionally be treated as a core proceeding, even though 28 US.C. 157(b) so categorizes it. Rather, the Court assumed without deciding (since no party to the appeal argued otherwise) that such a fraudulent transfer action would be noncore. Also, the Court did not address whether, even if the parties consent, the bankruptcy court could constitutionally enter final judgment in a noncore proceeding or in a proceeding which is improperly designated by statute as core.