Dispelling (Some) of the Darkness of Stern v. Marshall's Bleak House

This uncertainty was further complicated by the question of whether Stern affected a bankruptcy court's jurisdiction. Congress did not explicitly grant a bankruptcy judge the authority to propose findings of fact and conclusions of law in “core” proceedings. One bankruptcy court found it lacked the statutory authority to propose findings of fact and conclusions of law in “core” proceedings and, as such, a bankruptcy court's proposed findings and conclusions could be voided premised upon the bankruptcy judge's lack of subject matter jurisdiction. See In re Blixseth, 2011 WL 3274042, 11-12 (Bankr. D.Mont. 2011). Attempting to benefit from this uncertainty, litigants have deluged district courts with motions to dismiss or motions to withdraw the reference. Thus, Stern has been “weaponized … on the theory that that which is not nailed down gets picked up.” JPMorgan Seeks to Move Lehman's $8.6 Billion Lawsuit, Reuters, Nick Brown Sept. 27, 2012.

While only the Supreme Court (or perhaps Congress) can resolve the uncertainty regarding the application of Stern, the Amended Standing Order provides guidance regarding the interaction between the bankruptcy court and district court, avoiding a great deal of a gamesmanship.

The Standing Order provides:

(i) “any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 are referred to the bankruptcy judges” (irrespective of whether entry of a final order is consistent with Article III);

(ii) “if a bankruptcy judge or district judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III ' the bankruptcy judge .. shall hear the proceeding and submit proposed finding of fact and conclusions of law to the district court”; and

(iii) “the District court may treat any order of the bankruptcy court as proposed findings of facts and conclusions of law in the event the district court concludes that the bankruptcy court could not have entered a final order or judgment consistent with Article III” (implying that Article III considerations are initially determined by a bankruptcy judge).

www.nysb.uscourts.gov/orders/m431.pdf.

Thus, the Amended Standing Order provides: 1) clarity that a bankruptcy judge in the first instance hears all core matters; 2) a procedure to determine whether a bankruptcy judge can constitutionally enter a final order; and 3) a saving clause if a bankruptcy judge's entry of a final order is found inconsistent with Article III.

The Statutory Landscape

Ironically, Congress passed the Federal Judgeship Act of 1984 (the 1984 Act) in an attempt to cure any constitutional infirmity that the Supreme Court found with the Bankruptcy Reform Act of 1978. 28 U.S.C. ' 157 (the Statute) authorizes a bankruptcy judge to enter a final judgment in “all core proceedings arising under title 11, or arising in a case under title 11.” The Statute provides a non-exclusive list of proceedings that are “core,” including “counterclaims by the estate against persons filing claims against the estate.” However, for matters that are not core proceedings but are otherwise related to a case under title 11, absent consent, a bankruptcy judge is limited to “submitting proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters.” For nearly 30 years, bankruptcy judges have entered countless final judgments in “core” proceedings. Now, under Stern v. Marshall, the power of a bankruptcy judge to enter a final judgment in these types of proceedings may no longer pass constitutional muster.

When Anna Met Howard

Howard Marshall II (Howard) married Anna Nicole Smith (Anna) when she was 26 and he was 89. Anna alleged that Pierce Marshall (Pierce), Howard's son, changed Howard's trust to prevent her from being a beneficiary of Howard's estate. While the litigation engendered by the marriage spanned over 15 years, the marriage did not enjoy the same longevity. Howard died a little over one year after the marriage.

Pierce filed what was nearly the most expensive proof of claim in history in Anna's bankruptcy case, alleging that she had slandered him by making statements to the press that he fraudulently excluded her from his father's estate. Pierce also objected to the discharge of the damages. Anna counterclaimed for tortious interference with her rights to Howard's estate. The bankruptcy court granted summary judgment dismissing Pierce's defamation claim and awarded Anna $474,754,134 for her counterclaim.

The Supreme Court found that although “' 157(b)(2)(C) permit[ed] the bankruptcy court to enter final judgment on [Anna's] counterclaim, Article III of the Constitution does not.” Stern v. Marshall, 131 S.Ct. 2594, 2608 (2011). The Court found that “[w]hen a suit is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, the responsibility for deciding that suit rests with Article III judges in Article III courts.” Id. at 2609. Furthermore, the Supreme Court narrowly interpreted the public rights exception, finding that “[t]he claim is instead one under state common law between two private parties [and] [d]oes not “depend on the will of congress.” Id. at 2614

Narrow Holding? The Universe of 'Core But
Unconstitutional'

“The court leaves all of this to be worked out in further litigation, which you can be sure there will be plenty of.” Justices' Ruling Expands Rights of Accused in Plea Bargains, Adam Liptak, March 21, 2012, Nytimes.com. (Justice Anthony Scalia discussing his dissent in two recent Supreme Court decisions addressing the right to competent counsel for plea bargaining). While, to date, hundreds of courts have cited Stern, the Supreme Court emphasized that it did “not think the removal of counterclaims such as [Anna's] from core bankruptcy jurisdiction meaningfully changes the division of labor in the statute.” 131 S. Ct. at 2599. The counterclaim in Stern was a state law cause of action that would not be necessarily be resolved by the determination of Pierce's proof of claim. “Congress, in one isolated respect, exceeded limitation in the Bankruptcy Act of 1984.” Id. at 2620. However, the Supreme Court stated at least seven different rationales for its conclusion. The applications of these rationales have fueled the confusion regarding the scope of its ruling.

One court noted, “[r]easonable people may differ over whether Stern's prohibition on the bankruptcy court's issuance of a final judgment extends to fraudulent transfer claims [which are "core" proceedings pursuant to ' 157(b)(2)].” In re Refco Inc., 461 B.R. 181, 186 (Bankr. S.D.N.Y 2011). Not surprisingly, courts do differ. Some courts and commentators adopted a “narrow” approach, expressing doubt that Stern greatly affects the current statutory scheme; others adopted a broad approach severely limiting a bankruptcy judge's ability to enter final orders. While the majority of case law, addressing issues that remain after Stern, focuses upon avoidance actions, some courts have questioned the ability to enter final orders in bankruptcy matters such as final orders for an asset sale pursuant to 11 U.S.C. ' 363. See In re Naughton, 2011 WL 44794781 (W.D.Mich. 2011).

Mind the Gap: Is There a Gap?

Stern raises the question, “If the Court lacks the constitutional power to issue a final judgment [in a "core" proceeding], does it have statutory or other authority to submit proposed findings of fact and conclusions of law?” Refco, 461 B.R. at 185. While Congress granted authority to a bankruptcy judge to enter a final judgment in a “core” proceeding, “Congress did not anticipate Stern's new category of unconstitutional core proceedings [and only provided] for the bankruptcy judge's filing of proposed findings of fact and conclusions of law in noncore proceedings.” Id.

While one court interpreted Stern as being jurisdictional and found that “[u]nlike in non-core proceedings, a bankruptcy court has no statutory authority to render findings of fact and conclusions of law for core proceedings,” Blixseth, 2011 WL, at 11-12, most courts that addressed the issue hold that Stern is not jurisdictional and a bankruptcy judge
can submit proposed finding and conclusions. But see Blixseth v. Brown, 2012 WL 691598, 7 fn. 4 (D.Mont. March 5, 2012) (“The Bankruptcy Court later [in another ruling] clarified that it does not view Stern as jurisdictional.”). “[I]t would be absurd to conclude that the bankruptcy courts are deprived of jurisdiction [render findings of fact and conclusions of law] over matters designated by Congress as core when ' Congress gave jurisdiction to bankruptcy courts to issue proposed findings of fact and conclusions of law in noncore matters.” Refco 461 B.R. at 193. Moreover, the Supreme Court favorably described the bankruptcy judges' final order being treated as a proposed finding of fact and conclusion of law by the district court in Stern. See In re Heller Ehrman LLP, 464 B.R. 348, 355 (N.D.Cal. 2011). Finally, even under the bankruptcy court's limited jurisdiction under the Bankruptcy Act, which preceded the enactment of the Bankruptcy Code, it could “oversee plenary proceedings.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 57 (1989). However, it should be noted that the Seventh Circuit in dicta, and somewhat cryptically, supported Blyxeth. “As we just concluded, the debtors' claims qualify as core proceedings and therefore do not fit under ' 157(c)(1) [to issue proposed findings of fact or conclusions of law].” In re Ortiz, 665 F.3d 906, 915 (7th Circ. 2011).

Nevertheless, the uncertainty regarding the types of proceedings affected by Stern, coupled with the related jurisdictional question, has resulted in a Bleak House for bankruptcy judges and litigants. The Amended Order of Reference makes it clear that it is the unequivocal position of the District Court for the Southern District of New York that Stern is not jurisdictional.

Disarming Stern

The Amended Standing Order limits the effects of an appeal on a bankruptcy judge's entry of a final order predicated on Stern to a higher level of scrutiny and will not result in the final order being discarded for want of subject matter jurisdiction. On appeal, a district court reviews a final order's findings of fact under a clearly erroneous standard and conclusions of law de novo. In contrast, proposed findings of fact and conclusions of law are reviewed de novo for both the factual findings and legal conclusions. Thus, the result of a successful challenge to a bankruptcy judge's authority to enter a final order under Stern v. Marshall is limited to a higher level of scrutiny by the district court.

Conclusion

The Amended Standing Order minimizes the uncertainty and avoids legal gamesmanship that resulted from Stern. The types of actions that were brought previously in bankruptcy courts remain in bankruptcy courts, allowing the court that has a specific expertise in these issues to address them. The Amended Standing Order limits the tactical benefit stemming from Stern v. Marshall to a potentially higher level of scrutiny on appeal, restricting the effects of Stern to the question of whether a bankruptcy judge had the authority to enter a final order.

The Amended Standing Order provides a model for other district courts to address Stern v. Marshall. The District of Delaware has recently amended its standing order of reference by adopting the provisions similar to the Amended Standing Order. See www.deb.uscourts.gov/LocalRules/GeneralOrders/Standing%20Order20120229.pdf. The adoption of amended orders by Delaware and New York may further enhance their desirability as venues of choice. Debtors may very well hesitate to file their cases in venues where there is procedural uncertainty regarding whether the proceeding should be heard by a district or bankruptcy judge.

Yitzhak Greenberg is currently practicing bankruptcy law in New York. He can be reached at yitzhak [email protected].

The Amended Standing Order of Reference (the Amended Standing Order) issued on Jan. 31, 2012 by the Chief United States District Judge for the Southern District of New York, Judge Loretta Preska has significantly reduced the procedural quagmire and uncertainty faced by attorneys and the courts as a result of Stern v. Marshall , 131 S.Ct. 2594 (2011).

The Supreme Court decision in Stern begins with a quote from Charles Dickens' Bleak House describing the saga of the late Anna Nicole Smith and her counterclaim against the son of her deceased billionaire husband for tortious interference with her rights to the estate of her husband. A divided Supreme Court found Congress' authorization for the bankruptcy judge to hear and determine her counterclaim was unconstitutional, even though the counterclaim was deemed a “core” proceeding by 28 U.S.C. ' 157(b)(2)(c). As a result, the bankruptcy judge lacked the authority to enter a final judgment that awarded nearly half a billion dollars on her counter claim for tortious interference. While the decision resolved the saga of the Marshall estate, it has created a new Bleak House.

The application of Stern calls into question the constitutionality of the other “core” proceedings upon which Congress empowered a bankruptcy judges to enter a final order. “Since its release, a maelstrom of opinions and articles have been written about the scope of Stern, ranging in tone from 'much ado about nothing' to 'the end of the bankruptcy world as we know it.'” In re BankUnited Financial Corp., 462 B.R. 885, 890 (Bankr. S.D.Fla. 2011).

This uncertainty was further complicated by the question of whether Stern affected a bankruptcy court's jurisdiction. Congress did not explicitly grant a bankruptcy judge the authority to propose findings of fact and conclusions of law in “core” proceedings. One bankruptcy court found it lacked the statutory authority to propose findings of fact and conclusions of law in “core” proceedings and, as such, a bankruptcy court's proposed findings and conclusions could be voided premised upon the bankruptcy judge's lack of subject matter jurisdiction. See In re Blixseth, 2011 WL 3274042, 11-12 (Bankr. D.Mont. 2011). Attempting to benefit from this uncertainty, litigants have deluged district courts with motions to dismiss or motions to withdraw the reference. Thus, Stern has been “weaponized … on the theory that that which is not nailed down gets picked up.” JPMorgan Seeks to Move Lehman's $8.6 Billion Lawsuit, Reuters, Nick Brown Sept. 27, 2012.

While only the Supreme Court (or perhaps Congress) can resolve the uncertainty regarding the application of Stern, the Amended Standing Order provides guidance regarding the interaction between the bankruptcy court and district court, avoiding a great deal of a gamesmanship.

The Standing Order provides:

(i) “any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 are referred to the bankruptcy judges” (irrespective of whether entry of a final order is consistent with Article III);

(ii) “if a bankruptcy judge or district judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III ' the bankruptcy judge .. shall hear the proceeding and submit proposed finding of fact and conclusions of law to the district court”; and

(iii) “the District court may treat any order of the bankruptcy court as proposed findings of facts and conclusions of law in the event the district court concludes that the bankruptcy court could not have entered a final order or judgment consistent with Article III” (implying that Article III considerations are initially determined by a bankruptcy judge).

www.nysb.uscourts.gov/orders/m431.pdf.

Thus, the Amended Standing Order provides: 1) clarity that a bankruptcy judge in the first instance hears all core matters; 2) a procedure to determine whether a bankruptcy judge can constitutionally enter a final order; and 3) a saving clause if a bankruptcy judge's entry of a final order is found inconsistent with Article III.

The Statutory Landscape

Ironically, Congress passed the Federal Judgeship Act of 1984 (the 1984 Act) in an attempt to cure any constitutional infirmity that the Supreme Court found with the Bankruptcy Reform Act of 1978. 28 U.S.C. ' 157 (the Statute) authorizes a bankruptcy judge to enter a final judgment in “all core proceedings arising under title 11, or arising in a case under title 11.” The Statute provides a non-exclusive list of proceedings that are “core,” including “counterclaims by the estate against persons filing claims against the estate.” However, for matters that are not core proceedings but are otherwise related to a case under title 11, absent consent, a bankruptcy judge is limited to “submitting proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters.” For nearly 30 years, bankruptcy judges have entered countless final judgments in “core” proceedings. Now, under Stern v. Marshall, the power of a bankruptcy judge to enter a final judgment in these types of proceedings may no longer pass constitutional muster.

When Anna Met Howard

Howard Marshall II (Howard) married Anna Nicole Smith (Anna) when she was 26 and he was 89. Anna alleged that Pierce Marshall (Pierce), Howard's son, changed Howard's trust to prevent her from being a beneficiary of Howard's estate. While the litigation engendered by the marriage spanned over 15 years, the marriage did not enjoy the same longevity. Howard died a little over one year after the marriage.

Pierce filed what was nearly the most expensive proof of claim in history in Anna's bankruptcy case, alleging that she had slandered him by making statements to the press that he fraudulently excluded her from his father's estate. Pierce also objected to the discharge of the damages. Anna counterclaimed for tortious interference with her rights to Howard's estate. The bankruptcy court granted summary judgment dismissing Pierce's defamation claim and awarded Anna $474,754,134 for her counterclaim.

The Supreme Court found that although “' 157(b)(2)(C) permit[ed] the bankruptcy court to enter final judgment on [Anna's] counterclaim, Article III of the Constitution does not.” Stern v. Marshall , 131 S.Ct. 2594, 2608 (2011). The Court found that “[w]hen a suit is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789, the responsibility for deciding that suit rests with Article III judges in Article III courts.” Id. at 2609. Furthermore, the Supreme Court narrowly interpreted the public rights exception, finding that “[t]he claim is instead one under state common law between two private parties [and] [d]oes not “depend on the will of congress.” Id. at 2614

Narrow Holding? The Universe of 'Core But
Unconstitutional'

“The court leaves all of this to be worked out in further litigation, which you can be sure there will be plenty of.” Justices' Ruling Expands Rights of Accused in Plea Bargains, Adam Liptak, March 21, 2012, Nytimes.com. (Justice Anthony Scalia discussing his dissent in two recent Supreme Court decisions addressing the right to competent counsel for plea bargaining). While, to date, hundreds of courts have cited Stern, the Supreme Court emphasized that it did “not think the removal of counterclaims such as [Anna's] from core bankruptcy jurisdiction meaningfully changes the division of labor in the statute.” 131 S. Ct. at 2599. The counterclaim in Stern was a state law cause of action that would not be necessarily be resolved by the determination of Pierce's proof of claim. “Congress, in one isolated respect, exceeded limitation in the Bankruptcy Act of 1984.” Id. at 2620. However, the Supreme Court stated at least seven different rationales for its conclusion. The applications of these rationales have fueled the confusion regarding the scope of its ruling.

One court noted, “[r]easonable people may differ over whether Stern's prohibition on the bankruptcy court's issuance of a final judgment extends to fraudulent transfer claims [which are "core" proceedings pursuant to ' 157(b)(2)].” In re Refco Inc., 461 B.R. 181, 186 (Bankr. S.D.N.Y 2011). Not surprisingly, courts do differ. Some courts and commentators adopted a “narrow” approach, expressing doubt that Stern greatly affects the current statutory scheme; others adopted a broad approach severely limiting a bankruptcy judge's ability to enter final orders. While the majority of case law, addressing issues that remain after Stern, focuses upon avoidance actions, some courts have questioned the ability to enter final orders in bankruptcy matters such as final orders for an asset sale pursuant to 11 U.S.C. ' 363. See In re Naughton, 2011 WL 44794781 (W.D.Mich. 2011).

Mind the Gap: Is There a Gap?

Stern raises the question, “If the Court lacks the constitutional power to issue a final judgment [in a "core" proceeding], does it have statutory or other authority to submit proposed findings of fact and conclusions of law?” Refco, 461 B.R. at 185. While Congress granted authority to a bankruptcy judge to enter a final judgment in a “core” proceeding, “Congress did not anticipate Stern's new category of unconstitutional core proceedings [and only provided] for the bankruptcy judge's filing of proposed findings of fact and conclusions of law in noncore proceedings.” Id.

While one court interpreted Stern as being jurisdictional and found that “[u]nlike in non-core proceedings, a bankruptcy court has no statutory authority to render findings of fact and conclusions of law for core proceedings,” Blixseth, 2011 WL, at 11-12, most courts that addressed the issue hold that Stern is not jurisdictional and a bankruptcy judge
can submit proposed finding and conclusions. But see Blixseth v. Brown, 2012 WL 691598, 7 fn. 4 (D.Mont. March 5, 2012) (“The Bankruptcy Court later [in another ruling] clarified that it does not view Stern as jurisdictional.”). “[I]t would be absurd to conclude that the bankruptcy courts are deprived of jurisdiction [render findings of fact and conclusions of law] over matters designated by Congress as core when ' Congress gave jurisdiction to bankruptcy courts to issue proposed findings of fact and conclusions of law in noncore matters.” Refco 461 B.R. at 193. Moreover, the Supreme Court favorably described the bankruptcy judges' final order being treated as a proposed finding of fact and conclusion of law by the district court in Stern. See In re Heller Ehrman LLP, 464 B.R. 348, 355 (N.D.Cal. 2011). Finally, even under the bankruptcy court's limited jurisdiction under the Bankruptcy Act, which preceded the enactment of the Bankruptcy Code, it could “oversee plenary proceedings.” Granfinanciera, S.A. v. Nordberg , 492 U.S. 33, 57 (1989). However, it should be noted that the Seventh Circuit in dicta, and somewhat cryptically, supported Blyxeth. “As we just concluded, the debtors' claims qualify as core proceedings and therefore do not fit under ' 157(c)(1) [to issue proposed findings of fact or conclusions of law].” In re Ortiz, 665 F.3d 906, 915 (7th Circ. 2011).

Nevertheless, the uncertainty regarding the types of proceedings affected by Stern, coupled with the related jurisdictional question, has resulted in a Bleak House for bankruptcy judges and litigants. The Amended Order of Reference makes it clear that it is the unequivocal position of the District Court for the Southern District of New York that Stern is not jurisdictional.

Disarming Stern

The Amended Standing Order limits the effects of an appeal on a bankruptcy judge's entry of a final order predicated on Stern to a higher level of scrutiny and will not result in the final order being discarded for want of subject matter jurisdiction. On appeal, a district court reviews a final order's findings of fact under a clearly erroneous standard and conclusions of law de novo. In contrast, proposed findings of fact and conclusions of law are reviewed de novo for both the factual findings and legal conclusions. Thus, the result of a successful challenge to a bankruptcy judge's authority to enter a final order under Stern v. Marshall is limited to a higher level of scrutiny by the district court.

Conclusion

The Amended Standing Order minimizes the uncertainty and avoids legal gamesmanship that resulted from Stern. The types of actions that were brought previously in bankruptcy courts remain in bankruptcy courts, allowing the court that has a specific expertise in these issues to address them. The Amended Standing Order limits the tactical benefit stemming from Stern v. Marshall to a potentially higher level of scrutiny on appeal, restricting the effects of Stern to the question of whether a bankruptcy judge had the authority to enter a final order.

The Amended Standing Order provides a model for other district courts to address Stern v. Marshall. The District of Delaware has recently amended its standing order of reference by adopting the provisions similar to the Amended Standing Order. See www.deb.uscourts.gov/LocalRules/GeneralOrders/Standing%20Order20120229.pdf. The adoption of amended orders by Delaware and New York may further enhance their desirability as venues of choice. Debtors may very well hesitate to file their cases in venues where there is procedural uncertainty regarding whether the proceeding should be heard by a district or bankruptcy judge.

Yitzhak Greenberg is currently practicing bankruptcy law in New York. He can be reached at yitzhak [email protected].