On Monday, the United States Supreme Court decided in Executive Benefits Insurance Agency v. Arkison that while bankruptcy courts do not have the power to make final decisions on so-called "Stern claims," they can try or "hear" those disputes and then make a recommendation to the district courts for entry of final judgment. The decision clarified Stern v. Marshall, an earlier Supreme Court case related to Anna Nicole Smith's attempt to secure half of her deceased husband's fortune. That case had decided it was constitutionally impermissible for Congress to grant the bankruptcy courts the power to make the ultimate decision on certain state law claims filed in the bankruptcy courts. Rather, those final decisions must be made by Article III district judges. These and certain common bankruptcy litigation causes of action became known as Stern claims and were in jurisdictional "limbo." Some litigants had argued that the bankruptcy courts did not even have the ability to hear the claims for recommendation to the district courts for final decision.
While the Supreme Court decided that issue on Monday, it declined to address exactly what qualifies as a Stern claim, Instead, it stated it was for the lower courts to decide if the claim was sufficiently related to the bankruptcy to constitute a Stern claim. If the claim is not related to the bankruptcy, it may not even be heard by the bankruptcy court. Not surprisingly, the decision strongly suggested that fraudulent conveyance claims qualify as Stern claims and may be heard by the bankruptcy courts, although the court stated that it was not expressly deciding that issue. The court also refused to decide whether Article III allows the bankruptcy courts to enter final judgments on Stern claims with the consent of the parties.
The legacy of Stern v. Marshall is not over yet, as the Court may address these open questions at a future date. To stay informed on ongoing developments in bankruptcy law, or for questions on how this decision may affect your business, contact your Polsinelli attorney.
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