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Should federal bankruptcy judges be able to enter final judgment on fraudulent conveyance claims against parties without a claim in the case before them? The answer is no, according to the U.S. Court of Appeals for the Ninth Circuit in a closely-watched case decided Tuesday.

The Ninth Circuit's decision doesn’t do much good for the insurance company that challenged the judge's decision, though. The appellate panel found that the Executive Benefits Insurance Agency consented to adjudication of the fraudulent conveyance claims in the bankruptcy court by failing to object until the just before oral arguments in the appeal.

The fraudulent conveyance case, which arose in the Bellingham Insurance Agency Inc. bankruptcy, is one of several recently decided disputes in which courts have struggled to define the scope of the U.S. Supreme Court's June 2011 ruling in Stern v. Marshall. In Stern--a.k.a. the Anna Nicole Smith case--the court found that although a bankruptcy judge had the statutory authority to decide state law claims, the judge lacked the necessary authority under Article III of the Constitution to enter final, binding judgment. In a post at the Bankruptcy Blog, lawyers at Weil, Gotshal & Manges point out that courts have been divided on the question of whether bankruptcy courts have the authority to enter final judgments in fraudulent transfer actions.

Ninth Circuit concluded Tuesday that in a fraudulent conveyance case against a party that hasn't filed a proof of claim in an underlying bankruptcy, bankruptcy judges aren't automatically empowered to enter a final judgment. But that was no reprieve for Executive Benefits Insurance Agency, which faces a $373,291.28 judgment on fraudulent conveyance claims brought by the Bellingham Insurance bankruptcy trustee. Since EBIA didn't bring up the issue of the bankruptcy judge's constitutional authority until the case reached the Ninth Circuit, the panel found that it had waived its right to demand a hearing by an Article III judge.

"EBIA did not simply fail to object to the bankruptcy judge's authority to enter final judgment in the fraudulent conveyance action; it affirmatively assented to suspend its demand for a jury trial in district court to give the bankruptcy judge an opportunity to adjudicate the claim," wrote Ninth Circuit Judge Richard Paez for the unanimous three-judge panel.

In a nod to how convoluted the underlying case is, EBIA was represented at oral argument by Nicholas Paleveda, the former CEO and sole director of Bellingham Insurance. The bankruptcy trustee was represented Denice Moewes at Seattle's Wood & Jones. The appeal attracted amicus briefs from a gaggle of Am Law firms, including Dechert, Jones Day, Ropes & Gray, and Wilmer Cutler Pickering Hale and Dorr.

Wilmer's Craig Goldblatt, who represented a group of scholars that weighed in on the case as amici, called the Ninth Circuit's ruling "a pretty straightforward application" of the Supreme Court's ruling in Stern. Goldblatt said that while he agreed with court's holding that parties can consent to a bankruptcy court's jurisdiction, it's in conflict with this October decision from the Sixth Circuit.