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Timestamp: 2019-04-21 15:03:00+00:00

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Editor's Note: The following article, "Use it or Lose it: Waiver of Article III Adjudication in a Post-Stern World," won the prize for second place in the Fifth Annual ABI Bankruptcy Law Student Writing Competition. The article discusses the opinion from In re Bellingham as it relates to, and deviates from, the Stern decision. The author, Ashley Champion, is a student at Georgia State University College of Law. In addition to recognition and publication of her article in the Bankruptcy Litigation Committee Newsletter, Ms. Champion receives a cash award of $1250, sponsored by Jenner & Block LLP, and a one-year ABI membership.
In December 2012, the Ninth Circuit released its much-anticipated opinion in In re Bellingham Insurance Agency, Inc. (Bellingham), creating the first post-Stern v. Marshall circuit split. Perhaps unsurprisingly, the Bellingham court held that after Stern, non-Article III bankruptcy judges lacked the authority to enter final judgments on fraudulent conveyance actions brought against non-creditor third parties to the bankruptcy proceedings. The court reserved its surprise, however, for a question left unresolved by Stern: whether parties may consent to a bankruptcy court entering a final order it otherwise would not have the authority to enter.
In a bold move, the Bellingham court not only answered in the affirmative, but also held that the third party impliedly waived this right to Article III adjudication by failing to challenge the bankruptcy court’s authority to enter final judgment earlier in the proceedings. This holding—that the right to Article III adjudication can be waived—is in direct conflict with the recent sixth circuit case Waldman v. Stone, which held that the constitutional grant of authority is a “structural principle advanced by Article III,” not subject to waiver. As a result, the birth circuit of Stern v. Marshall has created an important circuit split that may ultimately wind its way back to the Supreme Court.
If the Court decides to resolve the newly-created split, the question becomes whether it will endorse the Sixth Circuit or the Ninth Circuit and what consequences its choice will have–both for the Stern decision specifically and waiver of Article III adjudication in general. It appears that a decision from the Supreme Court that follows the Sixth Circuit’s pronouncement would mark the extinction of waiver, while a decision endorsing the Ninth Circuit’s reasoning would undercut Stern v. Marshall’s holding that bankruptcy judges, as non-article III judges, lack authority to enter final judgment in third-party state law claims. This article predicts that Bellingham will likely be reversed under Stern because its finding of implied waiver threatens to create an end-run around Stern that would swallow its holding.
Less than three months before the Bellingham opinion was issued, the Sixth Circuit released its opinion in Waldman v. Stone. In Waldman, Ron Stone—a chapter 11 debtor-in-possession—brought an adversarial proceeding against his principal creditor, Randall Waldman. After a bench trial, the bankruptcy court found that Waldman had fraudulently procured nearly all of Stone’s business assets. To remedy the damage, the court discharged the debts Stone owed Waldman and awarded Stone more than three million dollars in compensatory and punitive damages. After this judgment was entered, Waldman challenged the bankruptcy court’s constitutional authority to enter a final judgment on several grounds.
With regard to the structural principle component, the United States as amicus curiae argued that bankruptcy courts do not threaten encroachment on the authority of the judicial branch because they are housed in the judiciary. Thus, the structural principle—with its roots in separation of powers concerns—was not implicated, leaving only Waldman’s personal right, which he waived. The court rejected this argument as “too narrow a view of the interests preserved by Article III.” It went on to explain that the concern was not so much encroachment by the other branches but rather diminution of the judicial branch. Essentially, the court reasoned that delegating the government’s judicial power to non-Article III entities—such as bankruptcy courts—dilutes the judiciary’s effectiveness in serving in the system of checks and balances, resulting in a “weaker and less independent” judicial branch. It then concluded that while the personal right to Article III adjudication is subject to waiver, this structural principle preserving the strength and independence of the judiciary was “not Waldman’s to waive.” But if this analysis of the structural principle is correct, it seems as though waiver of Article III adjudication in a bankruptcy setting is impossible. Further, such a rule would undermine 28 U.S.C. § 157(c)(2), which allows parties to consent to a bankruptcy court’s entry of a final judgment on non-core matters.  Perhaps that was the Waldman court’s intent all along.
By contrast, the Ninth Circuit held in Bellingham that the right to Article III adjudication is indeed subject to waiver. In Bellingham, Nicholas Palevada and his wife operated several companies, including Aegis Retirement Income Services, Inc. (ARIS) and Bellingham Insurance Agency, Inc. (Bellingham). ARIS and Bellingham shared an office and phone number and were run by Palevada and his wife. ARIS lacked funding to operate independently, so it posted all of its income and expenses through Bellingham, which eventually became insolvent and stopped operating.
The day after Bellingham ceased operation, Palevada used Bellingham funds to incorporate the Executive Benefits Insurance Agency (EBIA), which shared an account jointly with ARIS and over three hundred thousand dollars of commission earned between January and June was deposited into the jointly held account. Shortly after, Bellingham filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. The trustee filed a complaint against EBIA and ARIS to recover the commissions deposited into the joint account. The bankruptcy court granted summary judgment in favor of the trustee, finding that the deposits into the joint account were fraudulent conveyances of Bellingham assets and that EBIA was a mere successor of Bellingham. After losing on appeal to the district court, EBIA appealed to the Ninth Circuit Court of Appeals and, for the first time, objected to the bankruptcy court’s authority to enter final judgment on the fraudulent conveyance claims.
Like Waldman, the Bellingham court held that bankruptcy judges do not have the authority to enter final judgment on fraudulent conveyance actions asserted against non-creditor parties, but it then went on to conclude that EBIA had waived its right to Article III adjudication. First, the court pointed to the history of waiver prior to the Bankruptcy Act of 1978—when the right to an “Article III judge in plenary proceedings could be waived by the litigants.” Next, the court quoted Commodity Futures Trading Commission v. Schor, where the Supreme Court held that “Article III, § 1’s guarantee of an independent and impartial adjudication by the federal judiciary . . . serves to protect primarily personal, rather than structural, interests.” Thus, as primarily a personal right, Article III adjudication is “subject to waiver.” Finally, the court pointed to 28 U.S.C. § 157(c)(2), which “expressly provides that bankruptcy courts may enter final judgments in core proceedings ‘with the consent of all the parties to the proceeding’.” Interestingly, aside from a mere footnote mentioning part of the court’s dicta, the Bellingham court never discussed the Waldman decision in its opinion.
Having concluded that Article III adjudication is subject to waiver, the court then turned to whether EBIA had waived its right. It found that EBIA had impliedly consented to the bankruptcy court’s jurisdiction for two reasons. First, after initially demanding a jury trial, EBIA petitioned the district court to stay its consideration to give the bankruptcy court an opportunity to adjudicate its motion for summary judgment. Second, EBIA failed to challenge the bankruptcy court’s ability to enter final judgment until briefing was complete on its appeal to the Ninth Circuit.
The court then dismissed arguments that Federal Rules of Bankruptcy Procedure 7008 and 7012 preclude implied consent by citing cases holding that a litigant’s actions may suffice to establish consent. Finally, the court compared the language of § 157(e) of the Bankruptcy Code, which requires “express consent of all the parties” to § 157(c) of the Code, which only requires “consent” and concluded that “Congress intended to allow parties to consent by their actions to the authority of bankruptcy courts to enter dispositive orders on any bankruptcy-related claim.” Thus, if consent under § 157(c) allows a bankruptcy judge to finally adjudicate non-core proceedings, it follows that it would permit the same judge to decide a core proceeding where, absent consent, he is otherwise not entitled to enter final judgment.
In order to clarify the scope of Stern and resolve the availability of waiver, the circuit split created by Bellingham and Waldman requires Supreme Court resolution. The Court has three options: go its own way; endorse the Sixth Circuit and overturn Bellingham; or endorse the Ninth Circuit and overturn Waldman. Whatever option the Court elects, a ruling aligned with the Ninth Circuit will erode the foundation of Stern v. Marshall’s holding.
The only way waiver of Article III adjudication can survive in a bankruptcy setting is if the Court either crafts its own rule allowing for it or affirms Bellingham. But an affirmation of Bellingham would undermine Stern by allowing courts to do an end-run around its holding. Bellingham initially followed and even expanded Stern by finding that bankruptcy judges, as non-Article III judges, do not have the authority to enter final judgment on fraudulent conveyance actions against non-creditor third parties to the bankruptcy proceedings. But the Bellingham court then evaded application of its newly announced rule when it found that the right to Article III adjudication serves predominantly to protect personal, rather than structural interests. This exposed a loophole in Stern’s holding and allowed the Bellingham court to find that EBIA had impliedly waived its right to Article III adjudication. Thus, while Bellingham began by holding that the bankruptcy court did not have the authority to enter a final order on the claim, it ended up allowing it to do just that.
Further, the Bellingham court found that EBIA impliedly waived its right to Article III adjudication through its actions, or more specifically, its inaction. This is significant because it carves out an exception to the Stern rule that threatens to swallow it whole. Essentially, after Bellingham, a litigant who fails to protest the bankruptcy court’s authority to enter final judgment on a state law claim early in the proceedings runs the risk of impliedly waiving its right to Article III adjudication through its inaction.
Shifting the burden to the parties to challenge the court’s authority to enter final judgment runs counter to Stern’s assertion that non-Article III judges lack the constitutional authority to enter final judgment. If, as the Stern Court held, the problem is constitutional in nature, bankruptcy courts—not the parties involved—should bear the burden of assessing their authority to enter final judgment under Stern and raise the issue sua sponte if necessary.
By contrast, a rule allowing only for express waiver of the right to Article III adjudication would carve out a much smaller exception to Stern’s prohibition on non-Article III adjudication of non-creditor claims. While the Court may be hostile to any exception based on the strong language regarding Article III and separation of powers concerns in Stern, such a rule is much closer to an exception to the Stern rule the Court would recognize. But the Bellingham holding allowing implied waiver threatens to undermine the force of Stern, stretching the unanswered waiver question into a loophole around the prohibition on final adjudication of third party claims in bankruptcy court.
Waldman’s holding—that adjudication of the fraudulent conveyance claim in bankruptcy court threatened the structural principle protected by Article III adjudication—effectively forecloses the possibility of Article III waiver in bankruptcy. Further, a comparison of Bellingham and Stern exposes the difference in their analyses and highlights the similarities between Waldman and Stern.
Bellingham quoted Stern’s language that § 157 “does not implicate questions of subject matter jurisdiction” as part of its justification for allowing waiver of the right to Article III adjudication—which it characterized as a predominantly personal, rather than structural, interest. But, the Stern Court’s discussion of consent and waiver of the right to Article III adjudication was within the context of a third party that had filed a claim in the bankruptcy case. Thus, when the litigant affirmatively filed the claim, he also consented to adjudication of that claim in the bankruptcy court. But in Bellingham, EBIA was a true non-creditor third party that never affirmatively filed a claim in the bankruptcy court, but rather was subject to an avoidance action initiated by the trustee.
Significantly, Stern did not say that a third party that has not filed a claim might waive his right to Article III adjudication. In fact, Stern can be read to suggest the opposite: the third party litigant in Stern did file a claim, but his apparent consent to adjudication of that claim in the bankruptcy court did not reach the counterclaims asserted by the estate. Moreover, the heart of the Stern Court’s holding is its analysis of Article III as related to the authority of bankruptcy courts. The Stern Court rigidly adhered to the text of Article III in declaring that the power of the judiciary cannot be shared with another branch. Because bankruptcy judges do not meet the Article III requirements of life tenure and protected salary, bankruptcy courts fall outside Article III. It then characterized Article III as “‘an inseparable element of the constitutional system of checks and balances’ that ‘both defines the power and protects the independence of the Judicial Branch.’” Waldman tracks this language in its discussion of the diminution of the judicial branch through the assignment of power to non-Article III judges. Further, the Bellingham court never addressed its apparent conflict with Waldman. For these reasons, it seems the Supreme Court would be hesitant to affirm Bellingham.
This indicates the Stern Court was more aligned with the Waldman court’s perspective: a litigant may not waive the structural component of Article III adjudication because the risk to separation of powers is too great. But such a holding is not as innocuous as it may seem. Even if Waldman is correct and the right to Article III adjudication has both a personal and structural component, it is unlikely courts would ever find the structural component inapplicable in a bankruptcy setting because doing so would diminish the independence and strength of the judicial branch. Indeed, this is the very reasoning employed by the Waldman court in refusing to find waiver.
Stern left open the question of whether parties can waive their right to Article III adjudication. A little over a year after the Stern decision and within three months of each other, the Ninth and Sixth circuits released opinions reaching opposite conclusions on the issue, creating the first post-Stern circuit split. Importantly, both opinions began by finding that, under Stern, the bankruptcy court lacked authority to enter final judgment on the fraudulent conveyance claims asserted against third parties to the case—an expansion of the Stern holding. They diverged, however, on whether such a third party may waive its right to Article III adjudication, with extreme results for waiver. Bellingham created an exception that threatens to swallow the Stern rule by not only permitting express waiver of Article III rights, but also permitting implied waiver of those rights, while Waldman created a rule that threatens to banish Article III waiver from bankruptcy courts altogether. The split created by these opinions is ripe for resolution from the Supreme Court and, perhaps unfortunately, Bellingham will likely be reversed to preserve the efficacy of Stern. If the Court elects to adopt the rule in Waldman, waiver of Article III adjudication will be a thing of the past for bankruptcy courts. As a result, it appears that the doomsday prophecies regarding the wrath of Stern on bankruptcy courts are beginning to come true.
1. Barry A. Chatz & Kevin H. Morse, Stern v. Marshall, A Narrow Ruling Creating Broad Problems in the Bankruptcy Process, Thomson Reuters News & Insight, May 5, 2012, available at http://newsandinsight.thomsonreuters.com/Legal/Insight/2012/05_-_May/Stern_v__Marshall__A_narrow_ruling_creating_broad_problems_in_the_bankruptcy_process/.
2. Bellingham Ins. Agency, Inc. v. Arkin (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553 (9th Cir. 2012).
3. Stern v. Marshall,131 S. Ct. 2594 (2011).
4. Bellingham, 702 F. 3d at 556. This part of the opinion expanded Stern, which held that although 28 U.S.C. § 157(b)(2)(C) permitted the bankruptcy court to enter final judgment on the debtor’s state-law tortious interference counterclaim, Article III of the constitution did not. Stern, 131 S. Ct. at 2608.
5. Bellingham, 702 F. 3d at 566.
6. Waldman v. Stone, 698 F. 3d 910 (6th Cir. 2012).
8. In fact, Executive Benefits Insurance Agency filed a petition for certiorari to the Supreme Court on April 3, 2013.
9. Of course, the Court could elect to adopt a middle ground approach and formulate its own rule concerning waiver.
10. Waldman, 698 F. 3d at 910.
14. Id. at 913. The district court affirmed the bankruptcy court’s discharge of Stone’s debts, but held that the court “lacked authority to award him damages.” Id. This holding conflicts with another Ninth Circuit Bankruptcy Appellate Panel decision, which held that Stern did not preclude the bankruptcy court’s jurisdiction to award damages. Deitz v. Ford (In re Deitz), 469 B.R. 11, 21–22 (9th Cir. B.A.P. 2012). The concurrence in the opinion, however, did note that the previous Ninth Circuit precedent the court relied on may have been overruled by Stern. Id. at 26 (Markell, J. concurring) (“[Stern] may have reshaped the jurisdictional landscape in non-dischargeability actions.”).
16. Waldman, 698 F. 3d at 917.
19. Id. at 918. The court arrived at this conclusion after asserting “Article III, § 1 not only preserves to litigants their interest in an impartial and independent federal adjudication of claims within the judicial power of the United States, but also serves as an inseparable element of the constitutional system of checks and balances.” Id. (quoting Commodity Futures Trading Comm'n. v. Schor, 478 U.S. 833, 850 (1986)).
22. Waldman, 698 F. 3d at 918.
26. The Waldman court did not analyze this concern, stating simply that “the fortuity of Wadlman’s waiver of his own rights does nothing to diminish the bankruptcy court’s authority under § 157(c)(1).” Id. at 922.
27. Bellingham,702 F.3d 553, 566 (9th Cir. 2012).
33. Bellingham, 702 F.3d at 557.
34. Id. The final judgment entered was $373, 291.28. Id.
36. Id. at 565. The court rejected the arguments of several amici that the fraudulent conveyance claim brought by the trustee was distinguishable from the state law counter claim at issue in Stern. Id. at 565 (“That the Trustee asserted a federal-law fraudulent conveyance claim against EBIA is of no moment to our conclusion that the claim is nonadjudicable by a bankruptcy judge.“).
38. Bellingham, 702 F.3d at 567 (citing MacDonald v. Plymouth C’nty Trust Co., 286 U.S. 263, 267).
39. 478 U.S. 833 (1986).
40. Bellingham, 702 F.3d at 567 (quoting Commodity Futures Trading Comm’n v. Schor, 478 U.S. at 848).
42.Id (quoting 28 U.S.C. § 157(c)(2)).
43. Id. at 566, n. 8 (merely mentioning Waldman’s discussion, in dicta, of whether § 157(b)(1) allows entry of proposed findings of fact and conclusions of law). The Bellingham court did distinguish another Sixth Circuit case, Onkyo Europe Elecs GMHV v. Global Technovations, Inc., 694 F.3d 705 (6th Cir. 2012), which held that “the bankruptcy court had constitutional jurisdiction under Stern to adjudicate [a fraudulent transfer claim].” Id. at 562, n. 7. The Bellingham court distinguished Onkyo on the grounds that the court could not rule on the creditor’s proof of claim without first resolving the fraudulent transfer issue. Id. This difference rendered Onkyo “fundamentally unalike” Bellingham in the eyes of the court.
47. Bellingham, 702 F.3d at 569 (citing In re Mann,907 F.2d at 926; accord In re Tex. Gen. Petroleum Corp., 52 F.3d at 1337; Abramowitz v. Palmer, 999 F.2d 1274, 1280 (8th Cir.1993); Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 403 (4th Cir.1992)).
48. Id. The court concluded that “in cases like this one—in which the defendant was aware of its right to withdrawal of the reference but opted instead to litigate before the bankruptcy court—consent is established.” Id. It then went on to reject EBIA’s claim that the Stern opinion was not released until it’s claim was before the Ninth Circuit court and therefore, they did know to challenge the bankruptcy court’s jurisdiction earlier than it did. Id.
50. It seems as though the odds may be stacked against Bellingham just by virtue of its identity as a Ninth Circuit opinion. See, e.g., Carol J. Williams, U.S. Supreme Court Again Rejects Most Decisions by the U.S. 9th Circuit Court of Appeals, N.Y. Times, July 18, 2011, available at http://articles.latimes.com/2011/jul/18/local/la-me-ninth- circuit-scorecard-20110718 (noting that the “Supreme Court overturned the majority of [the 9th Circuit’s] decisions,” which comprised “more than 30% of the 84 cases taken up” that term).
51. Bellingham, 702 F. 3d at 557.
52. Its reasoning—that bankruptcy courts are judicial entities, thus the risk of encroachment on the power of the judicial branch is minimal—is persuasive from a policy standpoint; however, it ignores Stern’s emphasis on the threat to separation of powers inherent in the delegation of judicial power to non-Article III courts.
54. Id. at 565 (quoting Stern v. Marshall, 131 S. Ct. 2607). Unlike Waldman, the Bellingham court was much more willing to decouple the personal interest in Article III adjudication from the structural principle it protects.
55. See id. at 2606–07. And ultimately, the Court concluded that § 157(c)(2)(A) granted the bankruptcy court authority to enter final judgment, but was unconstitutional as applied to state law counterclaims brought against third parties to the bankruptcy case. Id. at 2608.
56. Bellingham, 702 F.3d at 564.
57. Stern, 131 S.Ct. at 2608.
60. Id. at 2609 (quoting Northern Pipeline v. Marathon Pipe Line, 458 U.S. 50, 58 (1982)).
61. Waldman, 698 F.3d at 918.
62. Bellingham presents an opportunity for the Court to limit the effect of Stern and recast it as the narrow holding they characterized it as. Stern, 131 S. Ct. at 260 (“our decision today does not change all that much.”).

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