Restructuring

Co-authored by Kyle J. Ortiz and Doron P. Kenter.

“If ye continue in the faith grounded and settled, and be not moved away from the hope of [EBIA v. Arkison]. . .”

– Colossians 1:23, King James version (as revised)

Earlier this year, we at the Stern Files expressed our disappointment with the Supreme Court’s limited decision in Executive Benefits Insurance Agency v. Arkison and all of the questions it left unanswered (especially the question of whether the right to Article III adjudication of “Stern claims” could be waived with the parties’ consent). But less than a month later, our sadness was transformed to joy when the Supreme Court granted certiorari in Wellness Int’l Network v. Sharif and promised to revisit the “core” questions raised by Stern v. Marshall and its progeny.
While we all eagerly await the Supreme Court’s thoughts on the consent question (or some other narrow decision based on a tangential point that manages to skirt the central questions for bankruptcy professionals), the Ninth Circuit Court of Appeals once again saw fit to reiterate its position in a concise four page decision in GBBY EWA Ltd. P’ship v. Finance Factors, Ltd. (9th Cir. July 30, 2014). In that case, at the “eleventh hour,” GBBY appealed from the district court’s affirmance of the bankruptcy court’s entry of a final order in a foreclosure action, arguing that the bankruptcy court lacked both (i) subject matter jurisdiction and (ii) authority to “decide [the] case in light of the Supreme Court’s decision in Stern.”
The Ninth Circuit found that the bankruptcy court had subject matter jurisdiction over the underlying action because it shared factually interdependent claims with an ancillary action brought before the bankruptcy court to enforce a settlement agreement that had been approved by the bankruptcy court. The Ninth Circuit, in an unpublished opinion but in no uncertain terms, decided to go further:

[U]nlike subject matter jurisdiction, the guarantee of an Article III hearing is “subject to waiver” because the right “protect[s] primarily personal rather than structural, interests.”

The Ninth Circuit went on to cite Arkison for the proposition that when the “allocation of authority between the bankruptcy courts and district courts” is in question, the issue of consent is dispositive,” concluding that because the appellant had “consented to the bankruptcy court’s authority to enter final orders or judgment, there was no constitutional infirmity in the bankruptcy court entertaining this action.” The Ninth Circuit, apparently taking a cue from the Supreme Court, did not address whether this consent had to be express or could be implied.
Thus, as we await further guidance from the Supreme Court, the Ninth Circuit – which first gave us Stern (and later, Arkison) and which first created the circuit split on the consent issue – has made it clear that even though it is the only circuit to have affirmatively stated that consent can cure the apparent constitutional infirmities raised by a bankruptcy court entering a final order on a Stern claim, it remains steadfast in its position in this regard. While we remain curious to see whether any other circuits will weigh in on these issues before the Supreme Court resolves these important open questions, it is refreshing to see that the circuit courts continue to devote meaningful attention to these central constitutional issues that affect so many of us in the bankruptcy arena. May it be so for the Supreme Court in Wellness Int’l v. Sharif.