Ninth Circuit Reaffirms its Holding in In re Bellingham that the Parties May Consent to the Bankruptcy Court’s Jurisdiction over “Stern” Claims

In 2012, the Ninth Circuit Court of Appeals ruled in Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553 (9th Cir 2012), that the parties’ consent gives the Bankruptcy Court jurisdiction to enter final judgments regarding “Stern” claims – i.e., claims labeled “core” under 28 USC § 157, but prohibited from proceeding to final judgment in the Bankruptcy Court as a constitutional matter in the absence of consent. Additionally, the Ninth Circuit held that the District Court’s de novo review of the Bankruptcy Court’s judgment in that case could be treated as review of the Bankruptcy Court’s proposed findings of fact and conclusions of law as required for non-core matters.

On appeal in Exec. Benefits Ins. Agency v. Arkison, __ U.S. __, 134 S. Ct. 2165 (2014), the United States Supreme Court did not reach the consent issue, holding only that the Bankruptcy Court generally cannot enter final judgment on “Stern” claims, but must issue findings of fact and conclusions of law for de novo review by the District Court. Although the Bankruptcy Court had failed to follow that process and instead entered a judgment, the Supreme Court agreed with the Ninth Circuit’s reasoning that the District Court’s de novo review cured any potential error caused by the Bankruptcy Court’s entry of a final judgment.

On August 22, 2014, the Ninth Circuit, in Mastro v. Rigby (In re Mastro), No. 13-35209, held that the Supreme Court’s ruling in Arkison did not change the state of the law, as set forth in the 2012 In re Bellingham opinion, regarding the parties’ ability to consent to a Bankruptcy Court’s jurisdiction over “Stern” claims.

Whether the Ninth Circuit’s ruling in Mastro will hold up remains to be seen. On August 25, 2014, the Fifth Circuit Court of Appeals reached the opposite conclusion in Galaz v. Galaz (In re Galaz), No. 13-50781. Following Fifth Circuit precedent, the Court held that consent is ineffective to overcome the constitutional bar to a Bankruptcy Court’s jurisdiction over “Stern” claims. The Supreme Court is expected to address this issue next term in Wellness Int’l Network Ltd. V. Sharif, 727 F3d 751 (7th Cir 2013), cert. granted in part 134 S. Ct. 2901 (2014).

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