<i>In re Bellingham Ins. Agency</i>

Stern created a new category of proceedings of “core” but unconstitutional (Stern Proceeding). While Congress has authorized the entry of a final order in these proceedings, Article III of the Constitution prohibits the exercise of such authority. This has generated myriad diverse and, often, contradictory decisions. Significantly, in Bellingham, the Ninth Circuit's decision addressing a Stern Proceeding conflicted with those of the Sixth and Seventh Circuits. The Supreme Court may finally clarify some of the confusion regarding a bankruptcy court's authority acknowledged by Justice Scalia in Stern.

As noted by Justice Scalia, the interaction between Congress's grant of authority to a bankruptcy court and the Supreme Court's interpretation of Article III is clouded by uncertainty. See also Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 91 (1982), (Rehnquist, J., concurring) (characterizing the dissent's view that the Court's prior decisions are “but landmarks on a judicial 'darkling plain' where ignorant armies have clashed by night.”). Congress expanded the jurisdiction of a bankruptcy court with the Bankruptcy Reform Act of 1978 (the 1978 Act). However, in Northern Pipeline, the Court held that the 1978 Act's grant of authority to a bankruptcy court violated Article III. Congress responded with the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA) to remedy these constitutional deficiencies.

Almost 30 years later, the Stern Court determined that Congress failed to adequately address Northern Pipeline's concerns. The complexity and ambiguity of Stern and Northern Pipeline heighten this uncertainty. In Northern Pipeline, the Supreme Court could only muster a plurality to address a bankruptcy court's jurisdiction. Stern's broad and numerous rationales belie its insistence that it is a narrow decision. This muddled history chills the expectation that the Supreme Court will clarify the parameters of a bankruptcy court's authority.

The Circuit Splits

In Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012), the Sixth Circuit concluded that consent cannot cure a bankruptcy court's infirmity to enter a final order in a Stern Proceeding. “[Consent] implicates not only ' personal rights, but also the structural principle advanced by Article III. And that principle is not [an individual's] to waive.” Id. at 918.'

“[T]he Seventh Circuit has implied that bankruptcy courts cannot propose findings of fact and conclusions of law in any proceeding classified as core by ' 157.” Bellingham, 702 F.3d 553, 566 (citing Ortiz v. Aurora Health Care, Inc., 665 F.3d 906, 915 (7th Cir.2011). Ortiz explained that “' 157(c)(1) [submitting Proposed Findings] is expressly limited to 'non-core' proceedings [even when the Constitution prevents the entry of a final order in a 'core' proceeding].” Ortiz 665 F.3d at 915.

In contrast, in Bellingham, the Ninth Circuit concluded that consent permits a bankruptcy court to enter final judgments in proceedings that would otherwise be the exclusive province of Article III judgment. The Ninth Circuit reasoned that “[i]f consent permits a non-Article III judge to decide finally a non-core proceeding, then it surely permits the same judge to decide a core proceeding in which he would, absent consent, be disentitled to enter final judgment. Bellingham, 702 F.3d 567. Second, the Ninth Circuit concluded, Section 157(b)(1) empowers bankruptcy courts to 'hear and determine' ' and that includes the more modest power to submit [Proposed Findings in Stern Proceedings].” Id. at 565.

While the Bellingham appeal was pending before the Supreme Court, the Seventh Circuit joined the fray and found that consent cannot cure a bankruptcy court's infirmity to enter a final order in a Stern Proceeding. Wellness Intern. Network, Ltd. v. Sharif, 2013 WL 4441926 (7th Cir. 2013). The Seventh Circuit explained that “[t]he dual nature of Article III, ' 1, renders notions of waiver and consent more nuanced” and, as such, “it is difficult to separate the “waivable personal safeguard from the nonwaivable structural safeguard.” Id. at 15. Ultimately, the Seventh Circuit concluded that “the Sixth Circuit has the better view under current law.” Id. at 17. Furthermore, the Seventh Circuit reiterated its position in Ortiz. “[I]t is difficult to find a statutory basis on which the district court could rely to treat the bankruptcy court's order [in a Stern Proceeding] as proposed findings and conclusions.” Id. at 17.

Certiorari

The Petitioner in Bellingham sought certiorari regarding the following issues: 1) Whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” is sufficient to satisfy Article III; and 2) Whether a bankruptcy judge may submit propose findings of fact and conclusions of law [where a bankruptcy judge lacks authority to enter a final order] for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b).

The Significance of Granting Certiorari

The combination of Ortiz and Waldman (inability to enter Proposed Finding or Final Order) prevents a bankruptcy court from meaningfully addressing Stern Proceedings (e.g., avoidance actions), which comprise a significant portion of cases that fill its docket. Furthermore, Waldman's reasoning eviscerates section 157(c)(2), which allows for entry of final order in a “non-core” proceeding with consent. Under Waldman, consent cannot overcome the principles advanced by Article III. Similarly, the Federal Magistrates Act of 1968 (the Magistrates Act) relies on consent to authorize a magistrate judge, a non Article III judge, to enter a final order on common law claims. The application of Waldman's reasoning should render this portion of the Magistrates Act unconstitutional.

The majority of courts have followed the Ninth Circuit in granting little, if any credence, to Waldman and Ortiz.

Waldman

Three courts from different districts have already expressly disagreed with Waldman. Respondents Opposition to Petition for Certiorari (Respondent's Opposition), p. 15. Furthermore, in response to Stern, the proposed Bankruptcy Rules 7008 and 7012 require pleadings to contain “whether [the party] consents to entry of final orders or judgment by the bankruptcy court.” These proposed rules do not evince a concern with Waldman.

Ortiz

Prior to Wellness, the only court that appeared to have adopted Ortiz's rationale, later clarified that it did not view Stern as jurisdictional and, as such, Stern does not prevent a bankruptcy court from entering Proposed Findings. See Blixseth v. Brown, 2012 WL 691598, 7 fn. 4 (D.Mont. 2012). Likewise, many orders of reference contradict Ortiz. For example in the Southern District of New York: “The District Court may treat any order of the bankruptcy court [in a core proceeding] as proposed findings of facts and conclusions of law, if entry of that order was not consistent with Article III.” Standing Order M-431, dated Feb. 1, 2012 (Preska, C.J.)

Now, the grant of certiorari requires the consideration of these cases.

Reading the Tea Leaves

Waldman, Ortiz and Wellness are not consistent with Stern's admonition that “Congress, in one isolated respect, exceeded [Article III's] limitation in the Bankruptcy Act of 1984.” Stern at 2620. These cases severely limit a bankruptcy judge's participation in a Stern Proceeding. Likewise, while Stern repeatedly referenced section 157(c)(2) without disapprobation, Waldman calls into question the constitutionality of that section.

Furthermore, in Stern, four out of the nine Justices did not find any constitutional infirmity in the Bankruptcy Code. Only one of the majority must narrowly construe Stern to affirm Bellingham. On the other hand, while the Supreme Court granted certiorari in Bellingham, it denied certiorari for Waldman, cert. denied, 133 S. Ct. 1604 (2013).

Does Past Performance Indicate Future Results?

“In many important ways, the parties who are affected by a legal document are potential adversaries … There is simply no meeting of the minds … There may be [.] many internal disagreements about how a court would apply the contractual terms.”

Antonin Scalia and Bryan A. Garner, Reading Law: The Interpretation of Legal Texts, p. 392 West, 2012.

This quote may well characterize Stern's varied formulations of Article I jurisprudence. There appears to have never been a meeting of the minds among the majority and, as such, the splits among the lower courts are merely a reflection of the divisions among these five Justices. If the Supreme Court continues to be unable to consolidate the Court's multiple rationales in Northern Pipeline and Stern into a cogent doctrine, then any decision in Bellingham may well just add another layer of confusion to this already beleaguered doctrine.

Yitzhak Greenberg is of counsel with Bronstein, Gewirtz & Grossman, LLC, a litigation boutique in New York City. His practice is focused on all aspects of bankruptcy, including the representation of both debtors and creditor. He can be reached at [email protected].

The sheer surfeit of factors that the Court was required to consider in this case should arouse the suspicion that something is seriously amiss with our jurisprudence.

Stern v. Marshall , 131 S.Ct. 2594, 2621, (U.S. 2011) (Scalia, J., concurring).'

On June 24, 2013, the Supreme Court granted certiorari to the appeal in In re Bellingham Ins. Agency, 702 F.3d 553 (9th Cir. 2012). In Stern, the Supreme Court had held that Congress' grant of authority for a bankruptcy court to hear and determine all counterclaims is unconstitutional.

Stern created a new category of proceedings of “core” but unconstitutional (Stern Proceeding). While Congress has authorized the entry of a final order in these proceedings, Article III of the Constitution prohibits the exercise of such authority. This has generated myriad diverse and, often, contradictory decisions. Significantly, in Bellingham, the Ninth Circuit's decision addressing a Stern Proceeding conflicted with those of the Sixth and Seventh Circuits. The Supreme Court may finally clarify some of the confusion regarding a bankruptcy court's authority acknowledged by Justice Scalia in Stern.

As noted by Justice Scalia, the interaction between Congress's grant of authority to a bankruptcy court and the Supreme Court's interpretation of Article III is clouded by uncertainty. See also Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. , 458 U.S. 50, 91 (1982), (Rehnquist, J., concurring) (characterizing the dissent's view that the Court's prior decisions are “but landmarks on a judicial 'darkling plain' where ignorant armies have clashed by night.”). Congress expanded the jurisdiction of a bankruptcy court with the Bankruptcy Reform Act of 1978 (the 1978 Act). However, in Northern Pipeline, the Court held that the 1978 Act's grant of authority to a bankruptcy court violated Article III. Congress responded with the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA) to remedy these constitutional deficiencies.

Almost 30 years later, the Stern Court determined that Congress failed to adequately address Northern Pipeline's concerns. The complexity and ambiguity of Stern and Northern Pipeline heighten this uncertainty. In Northern Pipeline, the Supreme Court could only muster a plurality to address a bankruptcy court's jurisdiction. Stern's broad and numerous rationales belie its insistence that it is a narrow decision. This muddled history chills the expectation that the Supreme Court will clarify the parameters of a bankruptcy court's authority.

The Circuit Splits

In Waldman v. Stone , 698 F.3d 910 (6th Cir. 2012), the Sixth Circuit concluded that consent cannot cure a bankruptcy court's infirmity to enter a final order in a Stern Proceeding. “[Consent] implicates not only ' personal rights, but also the structural principle advanced by Article III. And that principle is not [an individual's] to waive.” Id. at 918.'

“[T]he Seventh Circuit has implied that bankruptcy courts cannot propose findings of fact and conclusions of law in any proceeding classified as core by ' 157.” Bellingham , 702 F.3d 553, 566 (citing Ortiz v. Aurora Health Care, Inc. , 665 F.3d 906, 915 (7th Cir.2011). Ortiz explained that “' 157(c)(1) [submitting Proposed Findings] is expressly limited to 'non-core' proceedings [even when the Constitution prevents the entry of a final order in a 'core' proceeding].” Ortiz 665 F.3d at 915.

In contrast, in Bellingham, the Ninth Circuit concluded that consent permits a bankruptcy court to enter final judgments in proceedings that would otherwise be the exclusive province of Article III judgment. The Ninth Circuit reasoned that “[i]f consent permits a non-Article III judge to decide finally a non-core proceeding, then it surely permits the same judge to decide a core proceeding in which he would, absent consent, be disentitled to enter final judgment. Bellingham, 702 F.3d 567. Second, the Ninth Circuit concluded, Section 157(b)(1) empowers bankruptcy courts to 'hear and determine' ' and that includes the more modest power to submit [Proposed Findings in Stern Proceedings].” Id. at 565.

While the Bellingham appeal was pending before the Supreme Court, the Seventh Circuit joined the fray and found that consent cannot cure a bankruptcy court's infirmity to enter a final order in a Stern Proceeding. Wellness Intern. Network, Ltd. v. Sharif, 2013 WL 4441926 (7th Cir. 2013). The Seventh Circuit explained that “[t]he dual nature of Article III, ' 1, renders notions of waiver and consent more nuanced” and, as such, “it is difficult to separate the “waivable personal safeguard from the nonwaivable structural safeguard.” Id. at 15. Ultimately, the Seventh Circuit concluded that “the Sixth Circuit has the better view under current law.” Id. at 17. Furthermore, the Seventh Circuit reiterated its position in Ortiz. “[I]t is difficult to find a statutory basis on which the district court could rely to treat the bankruptcy court's order [in a Stern Proceeding] as proposed findings and conclusions.” Id. at 17.

Certiorari

The Petitioner in Bellingham sought certiorari regarding the following issues: 1) Whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” is sufficient to satisfy Article III; and 2) Whether a bankruptcy judge may submit propose findings of fact and conclusions of law [where a bankruptcy judge lacks authority to enter a final order] for de novo review by a district court in a “core” proceeding under 28 U.S.C. 157(b).

The Significance of Granting Certiorari

The combination of Ortiz and Waldman (inability to enter Proposed Finding or Final Order) prevents a bankruptcy court from meaningfully addressing Stern Proceedings (e.g., avoidance actions), which comprise a significant portion of cases that fill its docket. Furthermore, Waldman's reasoning eviscerates section 157(c)(2), which allows for entry of final order in a “non-core” proceeding with consent. Under Waldman, consent cannot overcome the principles advanced by Article III. Similarly, the Federal Magistrates Act of 1968 (the Magistrates Act) relies on consent to authorize a magistrate judge, a non Article III judge, to enter a final order on common law claims. The application of Waldman's reasoning should render this portion of the Magistrates Act unconstitutional.

The majority of courts have followed the Ninth Circuit in granting little, if any credence, to Waldman and Ortiz.

Waldman

Three courts from different districts have already expressly disagreed with Waldman. Respondents Opposition to Petition for Certiorari (Respondent's Opposition), p. 15. Furthermore, in response to Stern, the proposed Bankruptcy Rules 7008 and 7012 require pleadings to contain “whether [the party] consents to entry of final orders or judgment by the bankruptcy court.” These proposed rules do not evince a concern with Waldman.

Ortiz

Prior to Wellness, the only court that appeared to have adopted Ortiz's rationale, later clarified that it did not view Stern as jurisdictional and, as such, Stern does not prevent a bankruptcy court from entering Proposed Findings. See Blixseth v. Brown, 2012 WL 691598, 7 fn. 4 (D.Mont. 2012). Likewise, many orders of reference contradict Ortiz. For example in the Southern District of New York: “The District Court may treat any order of the bankruptcy court [in a core proceeding] as proposed findings of facts and conclusions of law, if entry of that order was not consistent with Article III.” Standing Order M-431, dated Feb. 1, 2012 (Preska, C.J.)

Now, the grant of certiorari requires the consideration of these cases.

Reading the Tea Leaves

Waldman, Ortiz and Wellness are not consistent with Stern's admonition that “Congress, in one isolated respect, exceeded [Article III's] limitation in the Bankruptcy Act of 1984.” Stern at 2620. These cases severely limit a bankruptcy judge's participation in a Stern Proceeding. Likewise, while Stern repeatedly referenced section 157(c)(2) without disapprobation, Waldman calls into question the constitutionality of that section.

Furthermore, in Stern, four out of the nine Justices did not find any constitutional infirmity in the Bankruptcy Code. Only one of the majority must narrowly construe Stern to affirm Bellingham. On the other hand, while the Supreme Court granted certiorari in Bellingham, it denied certiorari for Waldman, cert. denied, 133 S. Ct. 1604 (2013).

Does Past Performance Indicate Future Results?

“In many important ways, the parties who are affected by a legal document are potential adversaries … There is simply no meeting of the minds … There may be [.] many internal disagreements about how a court would apply the contractual terms.”

Antonin Scalia and Bryan A. Garner, Reading Law: The Interpretation of Legal Texts, p. 392 West, 2012.

This quote may well characterize Stern's varied formulations of Article I jurisprudence. There appears to have never been a meeting of the minds among the majority and, as such, the splits among the lower courts are merely a reflection of the divisions among these five Justices. If the Supreme Court continues to be unable to consolidate the Court's multiple rationales in Northern Pipeline and Stern into a cogent doctrine, then any decision in Bellingham may well just add another layer of confusion to this already beleaguered doctrine.

Yitzhak Greenberg is of counsel with Bronstein, Gewirtz & Grossman, LLC, a litigation boutique in New York City. His practice is focused on all aspects of bankruptcy, including the representation of both debtors and creditor. He can be reached at [email protected].