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In re Bellingham Insurance Agency

December 4, 2012

IN THE MATTER OF BELLINGHAM INSURANCE AGENCY, INC., DEBTOR.
EXECUTIVE BENEFITS INSURANCE AGENCY, APPELLANT,
v.
PETER H. ARKISON, TRUSTEE, SOLELY IN HIS CAPACITY AS CHAPTER 7 TRUSTEE OF THE ESTATE OF BELLINGHAM INSURANCE AGENCY, INC., APPELLEE.



Appeal from the United States District Court for the Western District of Washington, Marsha J. Pechman, Chief District Judge, Presiding. D.C. No. 2:10–cv–00929–MJP.

The opinion of the court was delivered by: Paez, Circuit Judge

Argued and Submitted October 13, 2011

Before ALEX KOZINSKI, Chief Judge, RICHARD A. PAEZ, Circuit Judge, and RANER C. COLLINS,*fn1 District Judge.

OPINION

This quotidian bankruptcy case presents a novel question: can a non-Article III bankruptcy judge enter a final judgment in a fraudulent conveyance action against a nonclaimant to the bankruptcy estate? Federal law empowers bankruptcy judges to do so, but we hold that the Constitution forbids it.

The Executive Benefits Insurance Agency suffered an adverse final judgment in a fraudulent conveyance at the hands of a bankruptcy judge. But our decision today is no reprieve, because we also hold that the company consented to the adjudication of the fraudulent conveyance claim by a bankruptcy judge by failing to object until the case reached this court. Thus, unencumbered by constitutional doubts, we review the entry of summary judgment de novo, and affirm.

I.

Nicholas Paleveda and his wife, Marjorie Ewing, operated a welter of companies, including Aegis Retirement Income Services, Inc. ("ARIS") and the Bellingham Insurance Agency, Inc. ("BIA"). ARIS designed and administered defined-benefit pension plans, and BIA sold insurance and annuity products that funded those plans.

BIA and ARIS were closely related: Paleveda owned 100% of ARIS and served as the CEO and sole director of BIA until February 14, 2006, when Ewing took over. Ewing owned 80% of BIA and served as ARIS's general manager. ARIS and BIA shared an office and a phone number. Because ARIS lacked sufficient assets to operate independently, it routed all of its income and expenses through BIA, kept joint accounting records with BIA, and declared its income on consolidated tax returns with BIA.

By early 2006, BIA was insolvent. And though the company ceased operations on January 31, 2006, it did not stop acting entirely. Two weeks after closing its doors, the company irrevocably assigned the insurance commissions from one of its largest clients, the American National Insurance Company, to Peter Pearce, a longtime BIA and ARIS employee who had often acted as a conduit for insurance commissions between BIA and its clients.

The day after BIA stopped operating, Paleveda used BIA funds to incorporate the Executive Benefits Insurance Agency, Inc. ("EBIA"). In 2006, $373,291.28 of commission income earned between January 1 and June 1 was deposited into an account held jointly by ARIS and EBIA. Pearce deposited $123,133.58 and EBIA deposited the remainder. At the end of the year, all of the deposits were credited to EBIA via an "intercompany transfer."*fn2

In the meantime, BIA had filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Washington. The Trustee, Peter Arkison—the Appellee in this case—filed a complaint against EBIA and ARIS in the same court to recover the commissions deposited into the EBIA/ARIS account, which the Trustee alleged to be property of the estate. The complaint alleged eighteen causes of action, including federal- and state-law preferential and fraudulent transfer claims and a claim that EBIA was a successor corporation of BIA and therefore liable for its debts.

The bankruptcy court granted summary judgment in favor of the Trustee, concluding that the deposits into the EBIA/ARIS account were fraudulent conveyances of BIA assets and that EBIA was a "mere successor" of BIA. The bankruptcy court entered a final judgment for $373,291.28.*fn3

EBIA appealed to federal district court. The district court affirmed, holding that the commissions paid into the ARIS/EBIA account were fraudulent transfers under both the Bankruptcy Code, 11 U.S.C. § 548, and Washington's Uniform Fraudulent Transfer Act, Wash. Rev.Code § 19.40.041. The district court also affirmed the bankruptcy court's judgment that EBIA was liable for BIA's debts as a corporate successor.

EBIA appealed. In a motion to dismiss submitted prior to oral argument, EBIA objected for the first time to the bankruptcy judge's entry of final judgment on the Trustee's fraudulent conveyance claims. Styled as a motion to vacate the judgment for lack of subject-matter jurisdiction, and relying on Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the motion argued that the bankruptcy judge was constitutionally proscribed from entering final judgment on the Trustee's claims.*fn4 It is to this vexing constitutional issue that we first turn.

II.

A.

Bankruptcy judges are appointed for terms of 14 years, 28 U.S.C. § 152(a)(1), and their salaries are subject to Congressional diminution. Id. § 153(a). Hence, bankruptcy judges cannot exercise "[t]he judicial Power of the United States," which is vested by the Constitution in courts whose judges enjoy life tenure and salary protection. U.S. Const. art. III, § 1.

Nonetheless, bankruptcy judges enjoy substantial statutory authority. Although the district courts have exclusive jurisdiction over "all cases under title 11," id. § 1334(a), they may refer all of the cases within that broad jurisdiction to bankruptcy judges, id. § 157(a). What the bankruptcy court may do with a given referred proceeding depends on whether the proceeding is denominated a "core" or a "non-core" proceeding. In all "core proceedings arising under title 11, or arising in a case under title 11," a bankruptcy judge has the power to "hear and determine the controversy" and enter final orders, subject only to appellate review. Id. § 157(b)(1). In a non-core proceeding "that is otherwise related to a case under title 11," however, a bankruptcy judge may only "submit proposed findings of fact and conclusions of law to the district court." Id. § 157(c)(1). The entry of final judgment in non-core proceedings is the sole province of Article III judges.

Section 157(b)(2) enumerates sixteen nonexclusive examples of "core proceedings." Among these are "proceedings to determine, avoid, or recover fraudulent conveyances." Id. § 157(b)(2)(H). The bankruptcy judge hearing the Trustee's claim was thus empowered by statute to enter a final judgment. Indeed, until quite recently, the exercise of that statutory power was routine and uncontroversial. See, e.g., Jones v. Schlosberg, No. 04–00571, 2005 WL 6764810, at *5–6 (C.D.Cal.2005) (affirming a bankruptcy court's entry of judgment in a fraudulent conveyance action); see also Duck v. Munn (In re Mankin), 823 F.2d 1296, 1300–01 (9th Cir.1987) (holding that both state- and federal-law fraudulent conveyance actions are core proceedings). But following the Supreme Court's decision in Stern v. Marshall, the view that such judgments are consistent with the Constitution is no longer tenable.

B.

To explain why this is so, we must begin somewhat earlier, with the Supreme Court's epochal decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). The Bankruptcy Reform Act of 1978 invented the modern bankruptcy judge, subject to the same conditions as today: a 14–year term and a mutable salary. Id. at 53, 102 S.Ct. 2858. Northern Pipeline was the Supreme Court's first effort to demarcate the constitutional limits of these judges' authority.

Northern Pipeline filed a Chapter 11 petition for reorganization in a bankruptcy court. Id. at 56, 102 S.Ct. 2858. It then filed a suit against Marathon Pipe Line for a prepetition breach of contract and warranty. Id. Marathon sought to dismiss the suit on the grounds that the claim at issue could only be decided by an Article III judge. Id.

A plurality of the Court agreed that the assignment of Northern Pipeline's state-law claims for resolution by a bankruptcy judge violated Art. III of the Constitution. Id. at 87, 102 S.Ct. 2858 (Brennan, J., plurality opinion); id. at 91, 102 S.Ct. 2858 (Rehnquist, J., concurring in judgment). The plurality admitted to only three exceptions to the rule of Article III adjudication: territorial courts, id. at 64, 102 S.Ct. 2858, military tribunals, id. at 66, 102 S.Ct. 2858, and cases involving "public" as opposed to "private" rights, id. at 67, 102 S.Ct. 2858.*fn5 Outside of the narrowly drawn exceptions for territorial and military courts, the distinction between public and private rights was the crucial determinant of whether a dispute belonged in an Article III court: "Our precedents clearly establish," the Court explained, "that only controversies in the former category may be removed from Art. III courts and delegated to legislative courts or administrative agencies for their determination. Private-rights disputes, on the other hand, lie at the core of the historically recognized judicial power." Id. at 70, 102 S.Ct. 2858 (internal citations and footnote omitted).

While a majority of the Court could not agree on the scope of the public rights exception, a majority did agree that the public rights exception could not justify the adjudication of Northern Pipeline's claims by a non-Article III officer. See id. at 69, 102 S.Ct. 2858 (plurality opinion); id. at 91, 102 S.Ct. 2858 ("To whatever extent different powers granted under [the Bankruptcy Reform] Act might be sustained under the 'public rights' doctrine ... I am satisfied that the adjudication of Northern's lawsuit cannot be so sustained.") (Rehnquist, J., concurring).

Despite consigning the breach of contract and breach of warranty claims at issue to the category of private rights, the Northern Pipeline plurality hinted that some quantum of bankruptcy proceedings might fall within the public rights exception:

[T]he restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages that is at issue in this case. The former may well be a "public right," but the latter obviously is not.

Id. at 71, 102 S.Ct. 2858.

Following the Northern Pipeline decision, Congress amended the statutes governing bankruptcy jurisdiction and bankruptcy judges. See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98–353, 98 Stat. 333 (the "1984 Act"). The legislation enacted, among other reforms, the division of claims in bankruptcy cases into core and non-core proceedings. This distinction was clearly inspired by the Northern Pipeline plurality's dictum that certain proceedings "at the core of the ...


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