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Supreme Court rules on agency bankruptcy case

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The U.S. Supreme Court has handed down a unanimous ruling in a case involving questions about court jurisdiction over the allegations made in an insurance agency bankruptcy case. The ruling in the case, Executive Benefits Insurance Agency vs. Arkison (Supreme Court Case Number 12-1200), may affect how bankruptcy court judges proceed when they decide that Article III of the U.S. Constitution puts some claims outside their jurisdiction.

Executive Benefits Insurance Agency Inc. began doing business in Washington state in February 2006. It filed for bankruptcy court protection in Washington state in June 2006.

Peter Arkison, a bankruptcy court trustee, alleged that the owners of the agency had violated bankruptcy rules by putting assets from another, defunct agency into Executive Benefits Insurance. The bankruptcy court granted summary judgment for the trustee. The agency appealed to a U.S. District Court, which affirmed the bankruptcy court’s decision.

While Executive Benefits Insurance was appealing the ruling, the Supreme Court held in another case, Stern vs. Marshall, that Congress violated Article III requirements in bankruptcy statutes it passed in 1984. Congress decided to let the bankruptcy courts handle many claims, such as claims for tortious interference, that should be reserved for district courts, the Supreme Court held.

Bankruptcy courts can handle “non-core” claims, and give their views on how “core” Stern claims relate to bankruptcy cases, but the district courts have to have the final say on the core Stern claims, the Supreme Court held.

Executive Benefits Insurance asked the 9th U.S. Circuit Court of Appeals to dismiss a tortious interference judgment, arguing that the bankruptcy court had no jurisdiction over the interference claim. The 9th Circuit found that Executive Benefits Insurance had consented to bankruptcy court jurisdiction.

In the new Supreme Court opinion, Justice Thomas writes that the Supreme Court failed to indicate in Stern what parties should do when they find that bankruptcy law gives a bankruptcy court more jurisdiction than the U.S. Constitution allows.

A bankruptcy court should decide which claims are affected by the Stern decision and which aren’t, then handle the claims it’s allowed to handle and leave the Stern claims for the district courts, Thomas writes. In the Executive Benefits Insurance case, the tortious interference claims were, generally, the types of claims that a district court should handle, but they were also clearly related to a bankruptcy case, Thomas writes.

Because the claims were the kinds district courts should handle, but also related to bankruptcy, a bankruptcy court seeing claims like those should have come up with proposed findings of fact and conclusions of law, then sent those findings to a district court with the understanding that the district court could review the findings and conclusions from scratch, Thomas writes. In the Executive Benefits Insurance case, the district court reviewed the bankruptcy court’s findings from scratch, and that cured any possible problems with the fact that the bankruptcy court entered judgment on the tortious interference claims, the Justice writes.


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