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Almost a year ago, Sean Riley and I first discussed Executive Benefits v. Arkison, the latest Supreme Court case to deal with the jurisdiction of United States Bankruptcy Courts.  You can read our summary of the facts and issues in the case here.  In short, the case was a sequel to Stern vs. Marshall, a case that created a great deal of uncertainty surrounding the power of this country's bankruptcy courts.  In Arkison's unanimous opinion, the Supreme Court provided much needed clarity, while punting on a harder question.

 

The first headline out of Arkison is that the "statutory gap" caused by Stern has been closed.  In Stern, the Court held that bankruptcy courts could not enter final orders in matters involving a debtor's state law counter-claim against a creditor.  According to the Court, such actions are the exclusive jurisdiction of the Article III judiciary, from which bankruptcy courts are excluded because bankruptcy court judges do not meet the constitutional requirements, including life time tenure and salary protection.  The "statutory gap" was created because a state law counter-claim is a "core matter" under 28 U.S.C. 157.  Section 157 allows a bankruptcy court to enter final orders in core matters, and file proposed findings of fact and law, subject to de novo review by a federal district court judge, for non-core matters.  The "non-core" process is similar to the process used with federal magistrate judges.  Section 157 does not provide, however, instruction for how bankruptcy courts should proceed when an issue is "core" under section 157, but the Constitution prevents the bankruptcy court from entering a final order.  The Supreme Court's solution was simple, hence the unanimity of their opinion: if a matter is "core" but Article III prevents a bankruptcy court from entering a final order, then a bankruptcy court should treat the matter as "non-core."

 

This was a predictable result for this issue.  The real intrigue surrounding Arkison was the issue of litigant consent.  Section 157 states that a bankruptcy court may enter a final order in a "non-core" matter if, and only if, all parties to the action consent.  Many thought that the Supreme Court would rule that this provision in Section 157 was unconstitutional.  However, the Supreme Court declined to rule on the issue saying, in a footnote, that they would "reserve the question for another day."

 

That day may never come.  The issue of litigant consent only arose in Arkison because one party raised it after both the bankruptcy court and the district court ruled against them.  Unlike most issues, which require lower court review before being raised on appeal, a party may raise jurisdictional issues at any point in the appellate process.  While litigant consent could provide efficiencies in the bankruptcy process, because it does away cost and time associated with the de novo review of a district court judge, those efficiencies would be lost if the losing party simply argued that the bankruptcy court did not have authority to enter the final order, regardless of the losing party's consent.  Is it worth risking the cost of being the next Supreme Court case in order to save the cost of de novo review?  Unlikely.  Perhaps one day we will see parties who are willing to pay the money to be the "test-case" but such costs should be avoided in bankruptcies focused on the successful restructuring of businesses.

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