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Can Bankruptcy Court Litigant Waive His Article III Guarantee of an Impartial and Independent Federal Adjudication a/k/a the Stern Objection?

The Circuits Are Spilt.

 

By:  Elizabeth M. Lally

August, 2013

 

            Since the Supreme Court issued it ruling in the case of Stern v. Marshall, 131 S. Ct. 2594 (2011), bankruptcy judges and practitioners across the county have been asking themselves, “What does Stern v. Marshall mean?”  On one side of the spectrum you have those who believe that Stern v. Marshall stands for nothing more than the proposition that a bankruptcy court judge, when faced solely with a non-core, state-law claim does not have jurisdiction to enter final findings of fact, conclusions of law, or a final order. On the other side of the spectrum you have those who believe that Stern v. Marshall stands for the proposition that a bankruptcy judge, without more,  never has the authority enter final findings of fact, conclusions of law, or a final order in any case that contains any cause of action that might be classified as a non-core proceeding.

 

            The First, Second, and Eleventh’s circuits have read the Stern v. Marshall tea-leaves narrowly.  See, DiVittorio v. HSBC Bank USA (In re DiVittorio), 670 F.3d 273, 282 n.4 (1st Cir. 2012) (Holding that Stern v. Marshall is limited in scope and inapplicable to a Truth in Lending rescission action, when the bankruptcy court’s resolution of that action was necessary to its determination of the secured creditor’s motion for relief from stay); Pfizer, Inc. v. Law Offices of Peter G. Angelos (In re Quigley Co., Inc.), 676 F.3d 45 (2nd Cir. 2012) (Holding that Stern v. Marshall is narrow and has no application to a bankruptcy court injunction issued to stay litigation against the debtor’s parent company in aid of the automatic stay); and Sundale, Ltd. v. Florida Associates Capital Enterprises, LLC (In re Sundale, Ltd), __ F 3d __ (Case No. 12-11450 11th Cir. 11/29/12) (Holding that Stern v. Marshall involved a “permissive” state law counterclaim to a proof of claim, and has no application when the counterclaim is “mandatory,” i.e. arising from the same facts and occurrences, as in loan payment recoupment claims asserted in response to a secured creditor’s action to determine the validity, extent and priority of its lien).

 

            The Sixth Circuit, however, has determined that   Stern v. Marshall is broad and far reaching. See Waldman v. Stone, 689 F.3d 910 (6th Cir. 2012), 2012 WL 5275241 (6th Cir. Oct. 26, 2012) (“When a debtor pleads an action arising only under state-law, as in Northern Pipeline; or when the debtor pleads an action that would augment the bankrupt estate… but would not necessarily be resolved in the claims allowance process…then the bankruptcy court is constitutionally prohibited from entering final judgment.’”).

            Finally, the Ninth Circuit has taken a middle of the road approach, finding that although Stern v. Marshall applied to a bankruptcy court’s determination of a fraudulent transfer case under 11 U.S.C. §548 against a non-creditor, the bankruptcy court could still issue final findings of fact and rulings of law on the claim when the defendant had failed to object or indicate a lack of consent to such hearing, until the final judgment was challenged on appeal. Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.), 702 F.3d 553 (9th Cir. 2012).

 

            The Seventh Circuit Court of Appeals has confirmed its belief that the issue addressed in Stern v. Marshall is “narrow,” but has yet to issue a ruling fully outlining its opinion on how far Stern v. Marshall reaches into a bankruptcy court’s jurisdiction to issue final findings of fact and rulings of law. See Ortiz v. Aurora Health Care, Inc., 665 F.3d 906 (7th Cir. 2011) (Analogizing a class action law suit in bankruptcy court by debtors who had their health care records disclosed without their permission in previous bankruptcy proceedings, and holding that the claims at issue were "based on a state law that is independent of the federal  bankruptcy law and not necessarily resolvable by a ruling on the creditor's proof of claim in bankruptcy”). In dicta, the Seventh Circuit Court of Appeals has also indicated an intent to read Stern v. Marshall narrowly and in line with the Eleventh Circuit, stating, “[t]he Supreme Court held in that case that bankruptcy judges may not enter final judgments on common law claims that are independent of federal bankruptcy law.”  In re USA Baby, Inc., 674 F.3d 882, 883-884 (7th Cir. 2012).  Additionally, there is support for the argument that the bankruptcy court lacks the constitutional authority to enter a final judgment on a cause of action based solely on state law. Gibson v. Tucker (In re G&S Livestock Co.), 478 B.R. 906, 908 (S.D. Ind. 2012) (Finding that the bankruptcy court lacked the constitutional authority to enter final judgment on the trustee's fraudulent conveyance claim against the defendants where the trustee’s complaint plead only Indiana state law claims against the defendants).

 

            In order to accommodate Stern v. Marshall, the Advisory Committee on Bankruptcy Rules for the Judicial Conference of the United States proposed amendments to Bankruptcy Rules 7008, 7012, 7016, 9027, and 9033 to address the “inefficiencies” of Stern v. Marshall, in order to require each party to state affirmatively whether or not the party consents to the bankruptcy court’s final determination of facts and final rulings, with opportunities for consent at the pleading stage (Fed. R. Bankr. P. 7008 & 7012), if the case is removed from another court (Fed. R. Bankr. P. 9027), and at pre-trial conferences (Fed. R. Bankr. P. 7016). The proposed rules also eliminate any requirement that the parties state whether each count is “core” or “non-core”. Proposed Fed. R. Bankr. P. 9033 follows this trend in eliminating any reference to 28 U.S.C. §157(c)(1) with respect to proposed findings and rulings issued by a bankruptcy court, thus acknowledging that proposed findings and rulings may be required in “core” matters as well as “non-core” matters.  Additionally, the prosed amendments remove the terms core and non-core from Federal Rules 7008, 7012, 9027, and 9033 to avoid possible confusion in light of Stern.

 

            Locally, the Southern District of Indiana has ruled that a litigant can expressly or implicitly waive Article III’s guarantee of an impartial and independent federal adjudication. In Gibson v. Tucker (In re G&S Livestock Co.), 478 B.R. 906, 908 (S.D. Ind. 2012), the Court held that “it is possible for a litigant to consent to a bankruptcy court entering final judgment” by failing to raise the issue until appeal, and that by allowing defendants to invalidate the adverse judgment  of the Bankruptcy Court would allow defendants to “ sandbag” the District Court, the Bankruptcy Court, and the Trustee “by only raising the issue because the case did not conclude in their favor.”  Gibson v. Tucker, 478 B.R. 906, 917.

 

            The Bankruptcy Court for the Southern District of Indiana has also amended its Local Rules in late 2012 to allow bankruptcy litigations to acquiesce to the jurisdiction of the bankruptcy court to enter final findings of fact, conclusions of law, or a final order a in non-core proceedings and / or for bankruptcy judges to raise their “non-jurisdiction” over an issue sue sponte. See Local Rules B-7008-1, 7012-1, 9027-1, and 9033-1.

 

Disclaimer

 

These materials are intended for general informational purposes only.  Accordingly, they should not be construed as legal advice or legal opinion on any specific facts or circumstances.   Instead, you are urged to consult counsel on any specific legal questions you may have concerning your situation.

RUBIN & LEVIN, P.C.    |    342 Massachusetts Avenue    |   Indianapolis, IN  46204     |  www.rubin-levin.com

 

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