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Executive Benefits (Stern vs. Marshall 3 Years Later)

In June 2013 the US Supreme Court published an opinion arising from a dispute over the estate of Pierce Marshall – better known as the husband of Anna Nichole Smith. That case, Stern vs. Marshall, gave rise to a surprising decision; namely, that Bankruptcy Courts could not rule on the State-law aspects of a dispute even if they were before the Bankruptcy Court as part of the larger dispute. The operative distinction would henceforth come down to whether or not a dispute qualified as a “core proceeding” (i.e. whether it was the kind of question over which the Bankruptcy Court had jurisdiction).

Since the Stern decision was released in 2011, results across the country have often been inconsistent as Bankruptcy Lawyers and Judges attempt to apply this new set of distinctions and decide whether cases should be heard or referred back to the State Courts. In many cases, Bankruptcy Courts defaulted back to State Courts without much discussion.

In an update and clarification to its Stern vs. Marshall Opinion, the Supreme Court recently decided Executive Benefits vs. Ch. 7 Trustee for Bellingham Ins. Agency(Jun. 09). The opinion answered a number of questions that had arisen in the wake of Stern. In particular, the Supreme Court clarified how Bankruptcy Courts should proceed when faced with “core” claims that were now designated as “non-core” under the Stern standard. These claims fall into the so-called “statutory gap” in the Bankruptcy Code.

In its Opinion the Supreme Court observed that 28 U.S.C. §157(c) does in fact permit “Stern” type claims to proceed before the Bankruptcy Court as non-core claims. How? The Supreme Court explained it this way:

With the “core” category no longer available for the Stern claim at issue, we look to section 157(c)(1) to determine whether the claim may be adjudicated as a non-core claim – specifically, whether it is “not a core proceeding” but is “otherwise related to a case under title 11.

In short the Supreme Court determined that, when faced with a Stern claim, the Bankruptcy Court must now decide whether it satisfies the standards of 28 U.S.C. §157(c)(1). If it doesn’t, the Bankruptcy Court could not hear the claim and had to send it back to State Court. If it did however, the the Bankruptcy Court was to “hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.”

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