Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.)

• Citation: 702 F.3d 553
• Decision Date: 04 December 2012
• Docket Number: No. 11–35162.,11–35162.
• Parties: 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.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

702 F.3d 553

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.

No. 11–35162.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 13, 2011.

Filed Dec. 4, 2012.

Nicholas Arthur Paleveda; Law Offices of Nicholas Paleveda MBA J.D. LL.M, Bellingham, WA, for Appellant.

Denice Moewes; Wood & Jones, Seattle, WA, for Appellee.

Alan Vanderhoff; Vanderhoff Law Group, San Diego, CA, for Amicus Curiae Alan Vanderhoff.

G. Eric Brunstad, Jr.; Dechert LLP, Hartford, CT, for Amicus Curiae G. Eric Brunstad, Jr.

Seth P. Waxman and Craig Goldblatt; Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., for Amici Curiae S. Todd Brown, G. Marcus Cole, Ronald D. Rotunda, and Todd J. Zywicki.

John Anthony Edwards Pottow; University of Michigan Law School, Ann Arbor, MI, for Amicus Curiae John Anthony Edwards Pottow.

Roberta Ann Colton; Trenam Kemker Attorneys, Tampa, FL, for Amicus Curiae the Business Law Section of the Florida Bar.

Paul D. Moore; Duane Morris LLP, Boston, MA, for Amici Curiae New CH YMC Acquisition LLC, Yellowstone Mountain Club, LLC, and Yellowstone Development, LLC.

Lynne F. Riley; Riley Law Group LLC, Boston, MA; and Jessica D. Gabel; Georgia State University College of Law, Atlanta, GA, for Amicus Curiae National Association of Bankruptcy Trustees.

Nathaniel Garrett; Jones Day, San Francisco, CA, for Amicus Curiae Jones Day.

Sarang Vijay Damle and Robert Loeb; U.S. Department of Justice Civil Division, Washington, D.C., for Amicus Curiae United States of America.

Douglas Hallward–Driemeier; Ropes & Gray, LLP, Washington, D.C., for Amicus Curiae Marcia M. Tingley.

Christopher Conant; Conant Law LLC, Denver, CO, for Amicus Curiae Timothy L. Blixseth.

David Anthony Gaston; Law Offices of David Anthony Gaston, San Diego, CA; and Edward Silverman; Sandler Lasry Laube Byer & Valdez, LLP, San Diego, CA, for Amici Curiae Alejandro Diaz–Barba and Martha Margarita Barba de la Torre.

Matthew Rutledge Schultz and Christopher Daniel Sullivan; Trepel Greenfield Sullivan & Draa LLP, San Francisco, CA, for Amicus Curiae Concerned Chapter 7 and 11 Trustees and Plan Administrators.

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.

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

OPINION

PAEZ, Circuit Judge:

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.” ¹

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 $373,291.28.²

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.³ 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...