Supreme Court Clarifies Procedure For Litigation Of So-Called “Non-Core” Or “Stern” Claims In Bankruptcy Court

On June 9, 2014, the United States Supreme Court issued its eagerly awaited decision in Executive Benefits Insurance Agency v. Arkison (In Re Bellingham Insurance Agency), which is commonly referred to as “Bellingham.”

In Stern v. Marshall (a case arising from the infamous relationship between Anna Nicole Smith and J. Howard Marshall), the Supreme Court held that a bankruptcy court did not have jurisdiction to enter final judgment in so-called “non-core” proceedings, which very simply defined are cases that are related to a pending case but do not involve the restructuring of the affairs of the debtor (the so-called “core” proceedings). Examples of non-core proceedings are state law breach of contract claims, tort claims, and non-bankruptcy federal law claims.

The Stern decision created uncertainty because bankruptcy law requires that non-core proceedings be asserted in the bankruptcy case to which they are related. So the question was: How are non-core proceedings to be finally adjudicated when, under Stern, the bankruptcy court cannot enter final judgment in such cases?

The Bellingham decision answers this question. In Bellingham, the Supreme Court held that the procedure for bankruptcy courts to follow to adjudicate non-core claims is for the bankruptcy court to prepare proposed findings of fact and conclusions of law for the district judge. The district judge then will review the bankruptcy court’s proposed findings of fact and conclusions of law de novo and enter final judgment.

While ultimately more time consuming and likely more expensive than many would have liked, the procedure set forth by the Supreme Court in Bellingham now resolves the question left open in Stern as to what procedure the bankruptcy courts should follow to adjudicate non-core claims.

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