Burr Alert: Supreme Court Set to Rule on Waiver of Article III Rights

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In Exec. Benefits Ins. Agency, Inc. v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553 (9th Cir. 2012), the Ninth Circuit held that a non-creditor defendant waives its right to an Article III hearing by litigating in a bankruptcy court without challenging the court's jurisdiction. In that case, the chapter 7 trustee filed a fraudulent transfer action against a non-creditor that had received a transfer of substantial assets from the chapter 7 debtor. The bankruptcy judge entered summary judgment on behalf of the trustee and the non-creditor defendant appealed, arguing for the first time on appeal that under Stern v. Marshall, 131 S.Ct. 2594 (2011), the bankruptcy court lacked authority to enter a final judgment.

Citing Stern, the Ninth Circuit reasoned that a party should not be able to fully litigate a fraudulent conveyance action before the bankruptcy court and then only raise the question of Article III rights when it does not win. "[T]he consequences of a litigant sandbagging the court - remaining silent about his objection and belatedly raising the error only if the case does not conclude in his favor - can be . . . severe." In re Bellingham, 702 F.3d at 570 (citing Stern, 131 S.Ct. at 2609).

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