On June 9, 2014, the U.S. Supreme Court issued the latest installment in the jurisdictional saga of bankruptcy courts. As the highly anticipated sequel to Stern v. Marshall, which deprived bankruptcy judges of authority to hear certain core proceedings, Executive Benefits Insurance Agency v. Arkison was expected to resolve the oft-litigated issue of whether parties could consent to bankruptcy jurisdiction. Practitioners and scholars eagerly awaited the opinion, anxious to determine exactly how far the Court would go in divesting bankruptcy judges of their authority. However, what the nation received instead was a classic attempt by the Court to dodge the ball on the consent issue.
In a unanimous decision, the Court resolved the Stern gap by allowing litigants to treat Stern claims as noncore proceedings but refused to address the overarching theme of consent. Tucking their reluctance away in a footnote, the Court expressly reserved the question of consent for another time, another case, and another day. This Article, however, argues that a straightforward reading of the plain language in Arkison impliedly resolves the consent issue. In other words, the Supreme Court has lost at its own game of dodge ball. By broadly applying the entire statutory provision of 28 U.S.C. § 157(c)—which includes subsection (c)(2) on consent—to Stern claims, the Court has plainly stated its approval of consent for certain core proceedings. In light of this plain language, this Article proposes two legislative amendments to § 157(b). The first amendment statutorily resolves the Stern gap in accordance with Arkison. The second amendment authorizes consent for core claims related to
* B.A., University of North Carolina at Chapel Hill, 2011; J.D., Wake Forest University School of Law, 2013. The Author wishes to thank Judge Lena M. James of the U.S. Bankruptcy Court for the Middle District of North Carolina for her continued support of this Article and willingness to endure the Author’s obsession with Stern v. Marshall. This Article would not exist without Judge James’s encouragement.
110 Drake Law Review [Vol. 63
bankruptcy proceedings. These amendments provide the necessary clarity and uniformity that bankruptcy courts have so desperately sought in the three years leading up to Arkison. Finally, provided the Court’s implicit authorization of consent in Arkison, this Article espouses the only logical resolution of Wellness International Network, Ltd. v. Sharif, which poses the same question of consent. The Supreme Court will hear and decide Sharif during its October 2014 term.
TABLE OF CONTENTS
Jurisdiction Before Stern................................................................ 114
and 1898.................................................................................. 116
Pipeline Construction Co. v. Marathon Pipe Line Co.............. 119
E.Congress StrikesBack:CoreVersusNoncoreClaims.............. 120
B.Isn’t ItIronic . . . Don’t You Think?: Analyzing126
Lot of Controversy.................................................................. 129
- Much Ado About Nothing: Executive Benefits Insurance
Agency v. Arkison........................................................................... 133
§ 157(b).......................................................................................... 142
C.IfIt’s SoSimple, WhyHasn’t ItBeen Done?........................... 145
2015] Losing at Dodge Ball 111
Rules Fails to Solve the Problem.............................................. 147
- The Upcoming Sequel: Wellness International Network, Ltd. v.
- Previously on Sharif.................................................................. 150
Should Be Decided in Light of Arkison.................................... 153
“It’s funny. All you have to do is say something nobody understands and they’ll do practically anything you want them to.”1
For bankruptcy and civil procedure enthusiasts, speculation over the extent to which the U.S. Supreme Court would divest bankruptcy courts of jurisdiction in Executive Benefits Insurance Agency v. Arkison2 was rampant. In the wake of Stern v. Marshall, which prohibited bankruptcy courts from entering final judgments in certain core proceedings based on state law,3 the status of bankruptcy jurisdiction has become unsettled, undefined, and unknown.4 The once-simple procedural determination is now wrought with confusion and uncertainty as bankruptcy courts struggle to understand and accept their ill-defined boundaries. Enduring this turmoil for three years, practitioners and judges were hopeful that the Court would clarify its Stern analysis in the recent Arkison case.5 Specifically, litigators anxiously awaited an answer to the unsettled question of whether parties could consent to bankruptcy authority.6 Attempting to predict how far the Court would go in restricting the power of bankruptcy courts made the consent issue one of the
- J.D. SALINGER, THE CATCHER IN THE RYE 205 (1951).
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2168 (2014) (discussing the potential Article III prohibition of bankruptcy courts from finally adjudicating certain bankruptcy-related claims).
3. Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011).
- See Arkison, 134 S. Ct. at 2168, 2170.
- See generally Jeffrey A. Wurst & John H. Ruiss, Jr., U.S. Supreme Court: Stage Set for Potential Shift in Bankruptcy Court Jurisdiction, ABF J. (Apr. 2014), http:// www.abfjournal.com/articles/u-s-supreme-court-stage-set-for-potential-shift-in-bankru ptcy-court-jurisdiction/.
- See id.
112 Drake Law Review [Vol. 63
most hotly debated topics of the Court’s term.7 When the decision was announced on June 9, 2014, however, what the nation received was simply another classic attempt by the Supreme Court to dodge the ball.8
Although the Justices unanimously held that bankruptcy courts could “issue proposed findings of fact and conclusions of law” when lacking constitutional authority to enter a final judgment,9 the Court refused to touch on the consent issue with a thirty-nine-and-a-half-foot pole.10 Slyly “reserv[ing] that question for another day,” the Court justified its avoidance by relying on the district court’s review of the bankruptcy court’s judgment.11 Because the claims were reviewed de novo, the case did not require the Court to address the topic of consent.12 In this manner, the Court followed the advice of Patches O’Houlihan by attempting to “dodge, duck, dip, dive, and dodge” the consent ball.13
Unfortunately for the Supreme Court, this repeated practice of avoidance failed to push the Justices past the elimination round. Although the Court expressly refused to determine whether parties could consent to bankruptcy authority, the plain language of the Court’s holding is ironically
- See id. (“[Arkison] is viewed by many practitioners as the most anticipated case to be decided by the Supreme Court this term.”); Doron Kenter, Breaking News: Unanimous Supreme Court Closes Statutory Gap, Leaves Other “Core” Stern Questions For Another Day (Executive Benefits Insurance Agency v. Arkison), WEIL BANKR. BLOG (June 9, 2014), http://business-finance-restructuring.weil.com/jurisdiction/break ing-news-unanimous-supreme-court-closes-statutory-gap-leaves-other-core-stern-quest ions-for-another-day-executive-benefits-insurance-agency-v-arkison/ (describing the Arkison decision as “hotly anticipated”).
- E.g., Eric Daucher, Arkison: A Supreme Dodge, CHADBOURNE (June 23, 2014), http://www.zoneofinsolvencyblog.com/2014/06/arkison-a-supreme-dodge/; G. Ray Warner, The Supremes Dodge Again—Executive Benefits Insurance Agency v. Arkison, NAT’L L. REV. (June 14, 2014), http://www.natlawreview.com/article/supremes-dodge-ag ain-executive-benefits-insurance-agency-v-arkison.
- Arkison, 134 S. Ct. at 2170.
- Id. at 2170 n.4 (“[T]his case does not require us to address . . . whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. We reserve that question for another day.”); Warner, supra note 8 (“We are given no hint as to whether Stern announced a purely private constitutional right that could be waived or a structural rule that could not. Thus, the authority of bankruptcy judges to enter final orders by consent . . . remains under a constitutional cloud.”); Dr. Seuss’ How the Grinch Stole Christmas! (CBS television broadcast Dec. 18, 1966).
- See Arkison, 134 S. Ct. at 2170 n.4.
- See id.
- DODGEBALL: A TRUE UNDERDOG STORY (20th Century Fox 2004).
2015] Losing at Dodge Ball 113
broad enough to decide the very issue it punted. This Article therefore argues that the Supreme Court did in fact approve jurisdiction by consent through repeated references to the comprehensive statutory framework of 28 U.S.C. § 157(c).14 Additionally, in light of the Arkison precedent, this Article proposes two simple legislative amendments to § 157(b) that will resolve the existing ambiguity surrounding consent and Stern, and authorize consent in the context of Stern claims. Finally, given the Supreme Court’s recent grant of certiorari in Wellness International Network, Ltd. v. Sharif,15 this Article articulates the only logical resolution of the consent issue that will not abrogate the plain language of Arkison.
In support of these arguments, the Article is divided into seven substantive Parts. Part II offers a comprehensive understanding of bankruptcy jurisdiction prior to Stern and delineates the distinction between core and noncore proceedings. Part III provides a succinct overview of Stern, focusing principally on the case’s aftermath and consequences. Part III details the immense confusion plaguing bankruptcy and district courts regarding jurisdictional limitations and offers credence to the mantra “no good deed goes unpunished.” Part IV describes the facts and holding of Arkison and highlights the operative language that fuels this Article’s thesis. Part V engages in an extensive discussion of consent. Particularly, Part V argues that the Supreme Court in Arkison impliedly authorized parties to consent to bankruptcy authority and explains why consent is necessary for judicial and economic efficiency. In light of this argument, Part VI proposes two amendments to 28 U.S.C. § 157(b) that will statutorily authorize consent in light of Arkison and help restore clarity to jurisdictional boundaries. Part VII addresses Sharif, the upcoming Supreme Court case, and articulates the only logical outcome of the consent issue given the plain language of Arkison. Finally, Part VIII concludes the Article.
- Arkison, 134 S. Ct. at 2173 (“The statute permits Stern claims to proceed as non- core within the meaning of § 157(c).”); id. (“§ 157(c) may be applied naturally to Stern claims.”). The significance of the applicability of § 157(c), in its entirety, is that § 157(c)(2), notwithstanding the § 157(c)(1) prohibition of adjudication authority in noncore proceedings, allows a bankruptcy judge to enter judgments and orders with the consent of all parties. 28 U.S.C. § 157(c) (2012).
- Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013), cert. granted, 134 S. Ct. 2901 (July 1, 2014).
114 Drake Law Review [Vol. 63
- A TALE AS OLD AS TIME: THE EVOLUTION OF BANKRUPTCY JURISDICTION BEFORE STERN
- Growing Up English
Unsurprisingly, the origin of American bankruptcy law traces its lineage to eighteenth-century English statutes regulating the emerging field of debtor–creditor rights.16 Originating in criminal law, the English bankruptcy system sponsored debtors’ prison and imposed harsh sanctions, including death, against offenders.17 Although the English system softened over time and transformed into a property-based institution, discharges were available solely for commercial traders and were not extended to the general public until the mid-nineteenth century.18 Moreover, debtors were not permitted to initiate bankruptcy proceedings until the 1820s; rather, only creditors could petition the Lord Chancellor for relief.19 This restriction solidified the belief that “[r]elief was not for debtors, but from debtors” and persisted for more than three centuries.20
Upon receiving a petition for relief, the Lord Chancellor in Equity routinely referred the suit to a panel of five commissioners for potential
- See Elmer Dean Martin III, Consent: The Constitutional Basis for Bankruptcy Judge Authority, 19 CAL. BANKR. J. 1, 5 (1991); see also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43 (1989) (“There is no dispute that actions to recover preferential or fraudulent transfers were often brought at law in late 18th-century England.”); Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R. 750, 760 (Bankr. M.D.N.C. 2012) (noting that “[t]he judicial branch of the United States government was based on the English model,” and bankruptcy courts were equity courts in England).
- Katie Drell Grissel, Stern v. Marshall—Digging for Gold and Shaking the Foundation of Bankruptcy Courts (or Not), 72 LA. L. REV. 647, 649 (2012); Charles J. Tabb, The History of Bankruptcy Laws in the United States, 3 AM. BANKR. INST. L. REV. 5, 7 (1995) (explaining that England “was noteworthy for its harsh treatment of defaulting debtors” and that “[i]mprisonment for debt was the order of the day”); Michelle Wright, From Stem to Stern: Navigating Bankruptcy Practice After Stern v. Marshall, 77 MO. L. REV. 1159, 1161 n.19 (2012) (citing G. Eric Brunstad, Jr., Bankruptcy and the Problems of Economic Futility: A Theory on the Unique Role of Bankruptcy Law, 55 BUS. L. 499, 515 (2000)) (noting that punishment for offenders of early English bankruptcy law could include death).
- See Tabb, supra note 17, at 9 (stating that bankruptcy law only applied to traders until the nineteenth century).
- Martin III, supra note 16; Tabb, supra note 17, at 8.
- Tabb, supra note 17, at 8.
2015] Losing at Dodge Ball 115
adjudication, seizure, and distribution of the debtor’s assets.21 “[T]he process mirrored a modern straight liquidation case,” but the lack of discharge permitted creditors to pursue collection remedies against the individual debtor.22 Any dispute over res division, the amount of debt, or the validity of liens was heard by the Chancellor’s court of equity—not the court of law— and appeal could be taken directly to the Lord Chancellor himself.23 In this manner, England promulgated the notion that bankruptcy courts were courts of equity,24 and the Framers federalized this system in Article I of the
Although Article I granted Congress the authority to establish “uniform Laws on the subject of Bankruptcies throughout the United States,”26 this Clause was not exercised until April 4, 1800—more than 11 years following the ratification of the Constitution.27 Representing the first federal bankruptcy statute in the United States, the 1800 Act mirrored English laws by prohibiting debtors from initiating suit, categorizing fraudulent bankruptcy as a criminal offense, and authorizing the district court to appoint commissioners to supervise the bankruptcy process.28 The boundaries of bankruptcy courts were determined by summary jurisdiction—the equivalent of in rem jurisdiction today (i.e., jurisdiction over the estate property).29 The bankruptcy courts did not possess plenary, or in personam, jurisdiction.30 However, despite the recognized need for an
- See Martin III, supra note 16.
- Tabb, supra note 17, at 8.
- Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R. 750, 760 (Bankr. M.D.N.C. 2012) (citing Granfinanciera, S.A. v.
Nordberg, 492 U.S. 33, 43–47 (1989)); Martin III, supra note 16; Wright, supra note 17,
- See In re Freeway Foods of Greensboro, 466 B.R. at 760 (citing Granifinanciera, 492 U.S. at 43).
- See Tabb, supra note 17, at 6–7.
- U.S. CONST. art. I, § 8, cl. 4.
- Tabb, supra note 17, at 14.
- Id. at 14.
- See David E. Leta, Stern v. Marshall Changes the Landscape of Bankruptcy Court Jurisdiction, 26 UTAH B.J., Mar.–Apr. 2013, at 34, 34 (stating that summary jurisdiction “was limited to a debtor’s property that actually found its way into the hands of the commissioners and the estate’s representatives”); see also Joshua C. Gerber, Note, “Why The Fuss?”: Stern v. Marshall and the Supreme Court’s Understanding of Bankruptcy Court Jurisdiction, 78 BROOK. L. REV. 989, 998 (2013) (describing the difference between plenary and summary jurisdiction).
- See Wright, supra note 17, at 1162 (noting that summary jurisdiction is not
116 Drake Law Review [Vol. 63
effective national bankruptcy framework, the 1800 Act was repealed only three years later, and the next bankruptcy act was not promulgated until 1841.31
- Watershed Events: The Bankruptcy Acts of 1841, 1867, and 1898
In contrast to the 1800 Act, which resembled little more than a plagiarized version of English law, the Bankruptcy Act of 1841 (the 1841 Act)32 served as an important mile marker in bankruptcy history.33 Consisting of 17 Sections, the 1841 Act established voluntary bankruptcy proceedings and vested summary jurisdiction over such cases in the district court.34 Assignees replaced commissioners and effectuated the distribution of the debtor’s assets, subject to basic exemptions.35 While bankruptcy jurisdiction was further deemed to be exclusively federal, the bankruptcy assignees were never afforded Article III judicial protection36—a problem which plagues the bankruptcy system to date.37
Following the repeal of the 1841 Act two years later, Congress enacted the Bankruptcy Act of 1867 (the 1867 Act)38 in response to the Panic of
jurisdiction over the individual parties); see also Leta, supra note 29 (noting that plenary proceedings had to be brought before a superior court judge).
- Wright, supra note 17, at 1163.
- See generally Act of Aug. 19, 1841, ch. 9, 5 Stat. 440 (repealed 1843).
- Tabb, supra note 17, at 17 (discussing new developments under the 1841 Act); Wright, supra note 17, at 1163 (discussing the broad authority given to both Congress and bankruptcy courts under the 1841 Act).
- Tabb, supra note 17, at 17; Wright, supra note 17, at 1163 (citing Tabb, supra
note 17, at 17).
- Tabb, supra note 17, at 17.
- Article III of the U.S. Constitution reads,
The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.
U.S. CONST. art. III, § 1.
- Wright, supra note 17, at 1163 (“[B]ankruptcy assignees were not given Article III judicial protections; this problem remains the crux of bankruptcy courts’ jurisdictional problems today.”).
- See generally Act of Mar. 2, 1867, ch. 176, 14 Stat. 517.
2015] Losing at Dodge Ball 117
1857.39 The economic consequences of the Civil War mandated efficient and uniform bankruptcy regulations.40 As part of this legislation, Congress allowed corporations to file for bankruptcy and permitted district courts to hire “registers” to assist with bankruptcy proceedings.41 “The registers replaced the bankruptcy commissioners and were able to adjudicate bankruptcy claims.”42 Nonetheless, Article III status continued to elude these assistants, and the 1867 Act similarly succumbed to weakness and criticism.43
Finally, in 1898, Congress passed the first bankruptcy statute to survive more than a half-decade.44 Remaining in effect for 80 years, the Bankruptcy Act of 1898 (the 1898 Act) “ushered in the modern era of liberal debtor treatment in United States bankruptcy laws.”45 The 1898 Act devoted considerable attention to the details of estate administration, attempting to ensure an equitable and efficient distribution of assets to creditors.46 Additionally, district courts outsourced the majority of administrative work on bankruptcy claims to “referees” who were directly appointed by federal courts.47 As successors to registers under the 1867 Act, referees were initially paid on a fee basis, although this was later substituted with salary compensation.48 Although they still had not obtained Article III status, referees exercised a large portion of the jurisdiction given to district courts and were afforded discretion in their rulings.49 However, notwithstanding the appointment of referees, controversy regarding the distinction between summary and plenary jurisdiction was frequent, and state courts retained
- Wright, supra note 17, at 1164.
- See id.
- Id. at 1164–65 (citing Tabb, supra note 17, at 19).
- Id. at 1165 (citing Tabb, supra note 17, at 19).
- Id. Following the 1867 Act, Congress implemented the Bankruptcy Act of 1874 (the 1874 Act). Id. The 1874 Act, however, did not alter bankruptcy jurisdiction and thus is not discussed in this Article. The 1874 Act similarly failed, giving rise to the Bankruptcy Act of 1898. See id.
- Tabb, supra note 17, at 23; see generally Act of July 1, 1898, ch. 541, 30 Stat. 544.
- Tabb, supra note 17, at 23–24.
- Id. at 25.
- Latoya C. Brown, No More Ping-Pong: The Need for Article III Status in Bankruptcy After Stern v. Marshall, 8 FIU L. REV. 559, 564 (2013) (citing Paul P. Daley
& George W. Shuster, Jr., Bankruptcy Court Jurisdiction, 3 DEPAUL BUS. & COM. L.J. 383, 384–85 (2005)).
- Tabb, supra note 17, at 25.
- See id.
118 Drake Law Review [Vol. 63
concurrent jurisdiction over numerous bankruptcy issues.50
- Not in Kansas Anymore: The Bankruptcy Reform Act of 1978
Despite the longstanding success of the 1898 Act, Congress engaged in a comprehensive overhaul of federal bankruptcy law in 1978.51 This reform process lasted roughly a decade and focused extensively on the status of bankruptcy judges.52 Under the 1898 Act, bankruptcy referees were limited to hearing only specific core matters, which resulted in a “splintered jurisdictional scheme.”53 The Bankruptcy Reform Act of 1978 (the 1978 Act) strove to create a more unified jurisdictional framework in which bankruptcy judges could hear all “matter[s] arising in, or related to” a pending bankruptcy proceeding.54
Given this ambitious goal, the 1978 Act intended to completely eliminate any distinction between summary and plenary jurisdiction.55 Specifically, the 1978 Act discarded the referee system and established a bankruptcy court in each judicial district to be presided over by bankruptcy judges.56 The bankruptcy judges were to be appointed by the President, with the advice and consent of the Senate, for 14-year terms.57 Although the bankruptcy judges did not receive the protection of a guaranteed salary,58 Congress enlarged the scope of jurisdiction for these courts to “all ‘civil proceedings arising under title 11 . . . or arising in or related to cases under
- Gerber, supra note 29, at 999; see generally Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1979).
- See N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 52–53 (1982); Stephanie J. Bentley, Note, Responding to Stern v. Marshall, 29 EMORY BANKR. DEV. J. 145, 168 (2012) (detailing the reformation process, which “included over 106 days of hearings, at least 130 witnesses, over 100 adopted amendments, several hundred written statements and comments, competing bills, and eight distinct drafts” (citing Kenneth N. Klee, Legislative History of the New Bankruptcy Law, 28 DEPAUL L. REV. 941 (1979))).
- Tabb, supra note 17, at 34.
- Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R. 750, 762 (Bankr. M.D.N.C. 2012) (citing N. Pipeline, 458 U.S. at 54).
56. N. Pipeline, 458 U.S. at 53 (quoting 28 U.S.C. § 151(a) (1976 & Supp. IV 1980)).
- Id. (citing §§ 152, 153(a) (1976 & Supp. IV 1980)); Gerber, supra note 29, at 999 (citing §§ 151(a), 152–54 (1982)). Today, bankruptcy judges are not appointed by the President. Rather, each bankruptcy judge is “appointed by the court of appeals of the United States for the circuit in which such district is located.” § 152(a)(1) (2012).
- N. Pipeline, 458 U.S. at 53 (citing § 154 (1976 & Supp. IV 1980)).
2015] Losing at Dodge Ball 119
title 11.’”59 This jurisdictional expansion represented a legislative compromise between the demands of bankruptcy judges to be afforded Article III status and the vigorous opposition to this request by current Article III judges.60 Thus, the 1978 Act granted bankruptcy courts broad jurisdiction without conferring formal Article III powers.61 This grant of authority vested bankruptcy courts “with all of the ‘powers of a court of equity, law, and admiralty,’” with few exceptions.62 The only limit on this authority was the prospect of review by the district court.63
- Oh No You Don’t: Taking a Step Back with Northern Pipeline Construction Co. v. Marathon Pipe Line Co.
Congress’s valiant effort to effectuate a compromise between Article III judges and bankruptcy courts did not go unnoticed for long. The Supreme Court, catching wind of the expansion in bankruptcy court jurisdiction, wasted no time in declaring this action unconstitutional in 1982.64 Engaging in a formalist analysis in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., the Court examined the constitutional structure established by the Framers and determined that judicial power could only be vested in an independent judiciary protected by Article III safeguards.65 Because bankruptcy judges were only appointed to 14-year terms and were subject to a fluctuating salary, there could be “no doubt” that they were not Article III judges.66 With only three exceptions to the Article III requirement for territorial courts, military tribunals, and courts adjudicating public rights,67
59. Id. at 54 (quoting § 1471(b) (1976 & Supp. IV 1980)).
- Gerber, supra note 29, at 1019–20.
- Id. at 1020 (citing DAVID A. SKEEL, JR., DEBT’S DOMINION: A HISTORY OF
BANKRUPTCY LAW IN AMERICA 158 (2001)).
- N. Pipeline, 458 U.S. at 55 (quoting § 1481 (1976 & Supp. IV 1980)).
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2171 (2014) (quoting
N. Pipeline, 458 U.S. at 71–72 & n.26) (noting that the powers of federal bankruptcy judges must be differentiated from Article III adjudication powers).
- N. Pipeline, 458 U.S. at 87.
- See id. at 57–61; see Jillian M. Clouse, Litigant Consent: The Missing Link for Permissible Jurisdiction for Final Judgment in Non-Article III Courts After Stern v. Marshall, 20 AM. U. J. GENDER SOC. POL’Y & L. 899, 903–04 (2012).
- N. Pipeline, 458 U.S. at 60–61; see § 152(a)(2) (2012) (“Each bankruptcy judge shall be appointed for a term of fourteen years . . . .”); see also Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 763 (7th Cir. 2013), cert. granted, 134 S. Ct. 2901 (July 1, 2014) (“[S]ince they are not Article III judges their salaries may be diminished by Congress . . . .”).
- See N. Pipeline, 458 U.S. at 64–70. For each of these three exceptions, the
120 Drake Law Review [Vol. 63
the Court held that bankruptcy judges did not fall within any of these categories to justify their broad jurisdiction.68 Rather, under the 1978 Act, Congress provided bankruptcy judges with rights and privileges that were beyond the permissible scope of legislative creation.69 Specifically,
The Northern Pipeline holding was based primarily on the premise that granting the bankruptcy court such jurisdiction allowed a non-Article III court to adjudicate claims based on state-created private rights arising independent from and antecedent to the bankruptcy proceedings, and involving individuals that would not otherwise be parties to the bankruptcy proceeding.70
Thus, “[i]n a surprising move that caught Congress and bankruptcy lawyers off guard, the Court held that the judicial power vested in bankruptcy judges under the 1978 Act violated Article III and thus was unconstitutional.”71
E. Congress Strikes Back: Core Versus Noncore Claims
Unwilling to sit quietly after the Supreme Court stripped bankruptcy judges of their authority, Congress struck back two years later by passing the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the 1984 Act).72 In an effort to comply with the Court’s holding in Northern Pipeline, Congress delineated two categories of bankruptcy proceedings: “core” and “noncore.”73 Under the 1984 Act, “[b]ankruptcy judges may hear and enter final judgments in ‘all core proceedings arising under title 11, or arising in a case under title 11.’”74 Matters arising in a Title 11 case “are generally
Supreme Court “has recognized certain exceptional powers bestowed upon Congress by the Constitution or by historical consensus” that justify a departure from the Article III requirements. Id. at 70. It is “[o]nly in the face of such an exceptional grant of power” that the Court disposes with Article III safeguards. Id.
- Id. at 71 (“We discern no such exceptional grant of power applicable in the cases before us.”).
- Id. at 87.
- Samson v. Blixseth (In re Blixseth), Bankr. No. 09-60452-7, Adv. No. 10-00088, 2011 WL 3274042, at *3 (Bankr. D. Mont. Aug. 1, 2011) (citing N. Pipeline, 458 U.S. at 84).
- Gerber, supra note 29, at 1000 (footnote omitted); see N. Pipeline, 458 U.S. at
- See generally Bankruptcy Amendments and Federal Judgeship Act of 1984,
Pub. L. No. 98-353, 98 Stat. 333 (1984) (codified in scattered sections of 11 & 28 U.S.C.).
- Leta, supra note 29, at 35 (citing Bankruptcy Amendments and Federal Judgeship Act § 157).
74. Stern v. Marshall, 131 S. Ct. 2594, 2603 (2011) (quoting 28 U.S.C. § 157(b)(1)
2015] Losing at Dodge Ball 121
‘administrative-type matters . . . that could arise only in bankruptcy.’”75 Matters arising under Title 11 typically invoke “a substantive right created by the Bankruptcy Code.”76 When faced with a core proceeding, a bankruptcy court has complete authority to enter a final judgment.77 On the other hand, noncore bankruptcy actions “are simply related to the underlying bankruptcy case.”78 These actions are subsumed under § 157(c) and require adjudication by an Article III court unless the parties consent.79 Thus, when presented with a noncore claim, bankruptcy courts can only issue “proposed findings of fact and conclusions of law” in the absence of consent.80 The proposed findings and conclusions are subsequently reviewed de novo by the district court to the extent “to which any party has timely and specifically objected.”81
In accordance with this statutory scheme, Congress remedied the defects of bankruptcy authority by essentially reinstating the summary– plenary divide.82 Although the categories were renamed and redefined, they nonetheless destroyed the cohesive and unified framework that existed under the 1978 Act.83 However, it is important to note that the core–noncore distinction did not alter the subject matter jurisdiction of bankruptcy
- German Am. Capital Corp. v. Oxley Dev. Co. (In re Oxley Dev. Co.), 493 B.R. 275, 283 (Bankr. N.D. Ga. 2013) (alteration in original) (quoting Cont’l Nat. Bank of Miami v. Sanchez, 170 F.3d 1340, 1348 (11th Cir. 1999)). For example, “objections to proofs of claims and objections to discharge of particular debts” are “[e]xamples of matters that could only arise in a bankruptcy case.” Id. (citing Sanchez, 170 F.3d at 1348).
- Id. (quoting Sanchez, 170 F.3d at 1345) (internal quotation mark omitted). “For example, an action by a trustee to avoid a preferential transfer under 11 U.S.C. § 547 would invoke such a substantive right.” Id. (citing Sanchez, 170 F.3d at 1348).
77. 28 U.S.C. § 157(b)(1).
78. In re Oxley Dev. Co., 493 B.R. at 284 (emphasis added) (citing Stern, 131 S. Ct. at 2605). “A non-core proceeding is ‘related’ to a bankruptcy case only when ‘it affects the amount of property available for distribution or the allocation of property among creditors.’” In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 699–700 (Bankr. N.D. Ill. 2011) (quoting In re Xonics, Inc., 813 F.2d 127, 130 (7th Cir. 1987)).
79. § 157(c).
81. Id. § 157(c)(1).
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2171 (2014) (“The 1984 Act largely restored the bifurcated jurisdictional scheme that existed prior to the 1978 Act.”).
- See id.
122 Drake Law Review [Vol. 63
courts.84 Rather, subject matter jurisdiction exists over any proceeding related to a bankruptcy case, and is set forth in 28 U.S.C. § 1334.85
While the 1984 Act seemingly cured the jurisdictional deficiencies of bankruptcy judges, uncertainty arose over the designation of core versus noncore claims.86 “Determining the proper classification of a proceeding . . . requires the Court to identify the nature of the cause of action itself, and whether the action invokes a right under title 11 or that arose in a case under title 11.”87 As part of this inquiry, the court must look past the formal labels attached to the allegations and examine the substance of the proceedings.88 Even though Congress provided a nonexclusive list of 16 statutorily core matters,89 bankruptcy courts struggled to decipher exactly when they possessed final dispositive authority over state law causes of action.90 However, despite this confusion and the return to a jurisdictional dichotomy, the constitutionality of 28 U.S.C. § 157 remained unchallenged until 2011,
- PNC Bank v. Rolsafe Int’l, LLC (In re Rolsafe Int’l, LLC), 477 B.R. 884, 899 (Bankr. M.D. Fla. 2012) (“Thus, the designation of a claim as ‘core’ or ‘non-core’ is separate from the issue of whether the bankruptcy court even has subject matter jurisdiction in the first place.”); see Burns v. Dennis (In re Se. Materials, Inc.), 467 B.R. 337, 345 (Bankr. M.D.N.C. 2012).
- § 1334(b) (“[T]he district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”); see In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 700 (Bankr. N.D. Ill. 2011) (“Subject matter jurisdiction over bankruptcy cases is conferred by statute on District Courts . . . who may then refer those cases to Bankruptcy Judges . . . .” (citing §§ 157(a), 1334)); see also German Am. Capital Corp. v. Oxley Dev. Co. (In re Oxley Dev. Co.), 493 B.R. 275, 283 (Bankr. N.D. Ga. 2013) (noting that “the subject matter jurisdiction of bankruptcy courts is extremely broad”).
- See Brown, supra note 47, at 562 (citing G. Marcus Cole & Todd J. Zywicki, Anna Nicole Smith Goes Shopping: The New Forum-Shopping Problem in Bankruptcy, 2010 UTAH L. REV. 511, 519–20 (2010)).
- Chesapeake Trust v. Chesapeake Bay Enters., Inc., No. 3:13CV344, 2014 WL 202028, at *3 (E.D. Va. Jan. 17, 2014) (citing Corliss Moore & Assoc., LLC v. Credit Control Servs., Inc., 497 B.R. 219, 224 (E.D. Va. 2013)).
- See Silverman v. A–Z RX LLC (In re Allou Distribs., Inc.), Bankr. No. 8-03- 82321, Adv. No. 04-08369, 2012 WL 6012149, at *8 (Bankr. E.D.N.Y. Dec. 3, 2012)
(requiring bankruptcy courts to look past labels “to determine if constitutional authority exists to enter a final judgment”).
89. § 157(b)(2).
- See, e.g., Chesapeake Trust, 2014 WL 202028, at *2 (citing Corliss Moore, 497
- at 224) (analyzing bankruptcy court jurisdiction); In re Allou Distribs., 2012 WL 6012149, at *7–9 (examining, among other things, constitutional principles and Supreme Court precedent in determining whether the bankruptcy court had authority to enter a final judgment).
2015] Losing at Dodge Ball 123
when the Supreme Court decided Stern.91
- LET’S TALK ABOUT STERN, BABY
- A Brief Recap of an Unforgettable Case
Charles Dickens’s prose quoted in the Supreme Court’s opening paragraph of Stern could not have more accurately foreshadowed the impending confusion that would plague bankruptcy courts over the jurisdictional debate. In a suit that had “become so complicated, that . . . no two . . . lawyers can talk about it for five minutes, without coming to a total disagreement as to all the premises,”92 the Court singlehandedly undermined decades of foundational bankruptcy practices overnight. Splitting 5–4,93 the Court created an unprecedented distinction between statutory and constitutional authority for the adjudication of bankruptcy claims.94 In so doing, the Court once again highlighted the lack of Article III protections available to bankruptcy judges and concluded that even the exercise of core versus noncore jurisdiction was insufficient to pass constitutional muster.95
In Stern, Vickie Lynn Marshall, publicly known as Anna Nicole Smith, “filed a petition for bankruptcy in the Central District of California” following the death of her husband, J. Howard Marshall II.96 Prior to his death, J. Howard signed a living trust and will, both of which excluded Vickie and granted all property to J. Howard’s son, Pierce Marshall.97 In response to these documents, Vickie alleged that Pierce fraudulently induced J. Howard to sign the trust, despite J. Howard’s intention to give Vickie half of the property.98 Following the commencement of Vickie’s bankruptcy case, Pierce filed a complaint for defamation against Vickie, arguing that she
- Burton v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 466 B.R. 626, 640 (Bankr. D. Del. 2012).
- Stern v. Marshall, 131 S. Ct. 2594, 2600 (2011) (alterations in original) (quoting Charles Dickens, Bleak House, in 1 WORKS OF CHARLES DICKENS 4–5 (1891)) (internal quotation mark omitted).
- See id. at 2599.
- See id. at 2600–01 (“We conclude that, although the Bankruptcy Court had the statutory authority to enter judgment . . ., it lacked the constitutional authority to do so.”).
- Id. at 2608 (“Although we conclude that § 157(b)(2)(C) permits the Bankruptcy Court to enter final judgment . . ., Article III of the Constitution does not.”).
96. Id. at 2600–01.
124 Drake Law Review [Vol. 63
induced her lawyers to publicly announce “he had engaged in fraud to gain control of his father’s assets.”99 Vickie responded by asserting truth as a defense and alleged “tortious interference with the gift she expected from J. Howard.”100 The bankruptcy court agreed with Vickie and awarded her $400 million in compensatory damages and $25 million in punitive damages.101 Pierce appealed and argued that the bankruptcy court lacked jurisdiction to decide Vickie’s counterclaim because it was not a core proceeding.102 In light of the conflicting opinions espoused by the district and circuit courts, the Supreme Court granted certiorari.103
The lengthy opinion penned by Chief Justice John Roberts concluded that while Vickie’s tortious interference counterclaim was “a ‘core proceeding’ under the plain text of § 157(b)(2)(C),” the bankruptcy court nonetheless lacked constitutional authority under Article III to adjudicate the claim.104 Returning to the formalist approach105 of Northern Pipeline, the Court explained that Congress could not transgress the basic limitations of Article III.106 As “an inseparable element of the constitutional system of checks and balances,” Article III prohibits the sharing of judicial power with the Executive and Legislative Branches.107 By articulating the defining features of Article III judges, the Constitution guards against the threat of abuse by ensuring that only individuals with “[c]lear heads” and “honest hearts” perform adjudicatory functions.108 However, by delegating bankruptcy proceedings to Article I judges, Congress impermissibly bestowed judicial power on term judges.109 This power, according to the
- See id. at 2603.
104. Id. at 2604, 2608.
- See Erwin Chemerinsky, Formalism Without a Foundation: Stern v. Marshall, 2011 SUP. CT. REV. 183, 185 (2011) (“The only way to understand Stern v. Marshall is to see it as a very formalistic application of legal rules that have developed over more than a century and a half concerning when Congress can vest judicial matters in non-Article III judges.”).
- Stern, 131 S. Ct. at 2609.
- See id. at 2608 (quoting N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458
U.S. 50, 58 (1982)) (internal quotation marks omitted).
- See id. at 2609 (alteration in original) (quoting 1 WORKS OF JAMES WILSON 363 (J. Andrews ed. 1896)) (internal quotation marks omitted).
- See id. (“Article III could [not] serve its purpose . . . if the other branches of the Federal Government could confer the Government’s ‘judicial power’ on entities outside
2015] Losing at Dodge Ball 125
Court, was not Congress’s to sell.110
Moreover, the Court rejected Vickie’s argument that her tortious interference counterclaim was “a matter of ‘public right’” capable of adjudication outside the Article III system.111 Although the contours of the public rights exception have not been concretely defined, the doctrine must involve a claim “derive[d] from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority.”112 While the government need not be a party to the suit, the invoked right must be “integrally related to particular federal government action.”113 As a state law counterclaim implicating no federal rights, Vickie’s alleged claim to relief did not flow from any federal statute or federal regulatory objective.114 Because Article III courts are “experts” at resolving common law counterclaims, Vickie’s counterclaim must be heard within the Article III system, not by Article I tribunals.115
Finally, the Court dismissed Vickie’s argument that bankruptcy courts were adjuncts of district courts under the 1984 Act and thus able to render final judgments on state law claims.116 Adjunct agencies and courts possess limited power to issue orders in specialized areas of law, and these orders must be enforced by the district court.117 Bankruptcy courts, on the other hand, resolve all issues of fact and law on claims related to the underlying bankruptcy proceeding.118 As such, these courts do not make specialized and narrowly confined factual and legal determinations on a single particular area of law.119 Thus, “a bankruptcy court can no more be deemed a mere ‘adjunct’ of the district court than a district court can be deemed such an
- See id.
- Id. at 2611.
- Id. at 2613.
- See id. at 2614.
- Id. at 2615 (internal quotation marks omitted).
- Id. at 2618.
- Id. at 2619 (quoting N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 85 (1982)).
- See id. at 2618–19 (quoting N. Pipeline, 458 U.S. at 91 (Rehnquist, J., concurring)).
- See id.
126 Drake Law Review [Vol. 63
‘adjunct’ of the court of appeals.”120 In this manner, the majority refused to allow an Article I bankruptcy court to decide a core state law cause of action.
- Isn’t It Ironic . . . Don’t You Think?: Analyzing Stern
The irony of Stern cannot be easily overlooked. Amid allegations that “Congress [was] trying to undermine” the constitutional independence of the judiciary, the Supreme Court ignored the essential fact that tortious interference is a state law claim.121 Article III courts, by their nature, possess limited jurisdiction and are not typically proper forums for purely state law causes of action.122 Rather, state law claims are adjudicated in state courts, where the judges are elected, not appointed, and must publicly run for office.123 Bankruptcy judges, on the other hand, are appointed by circuit courts, receive direct appeal to the district courts, possess a salary controlled by the federal government, and can only be removed for cause.124 “Never does the Court explain why allowing a bankruptcy court to issue a final judgment on a state law counterclaim risks undermining judicial independence in any way.”125 Because the claim would not typically be adjudicated by an Article III court, the need for Article III protection is irrelevant.
Moreover, the Court ignores the fundamental fact that Vickie’s tortious interference allegation constituted a compulsory counterclaim.126 By definition, a compulsory counterclaim must be brought within the suit if it “arises out of the [same] transaction or occurrence that is the subject matter of the opposing party’s claim; and does not require adding another party over whom the court cannot acquire jurisdiction.”127 In this case, Vickie’s tortious interference allegation stemmed from the same circumstances as
- Id. at 2619.
- Chemerinsky, supra note 105, at 184–85.
- See U.S. CONST. art. III, § 2, cl. 1.
- See Chemerinsky, supra note 105, at 185 (“State law claims are generally adjudicated by state law judges who rarely have life tenure.”).
- Stern, 131 S. Ct. at 2627 (Breyer, J., dissenting); see 28 U.S.C. § 152(e) (2012);
Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 763 (7th Cir. 2013), cert. granted, 134
S. Ct. 2901 (July 1, 2014) (“[A] bankruptcy judge may be removed ‘for incompetence, misconduct, neglect of duty, or physical or mental disability’ by a majority vote of ‘the judicial council of the circuit in which the judge’s official duty station is located’ . . . .” (quoting § 152(e))).
- Chemerinsky, supra note 105.
- See Stern, 131 S. Ct. at 2621 (Breyer, J., dissenting).
- FED. R. CIV. P. 13(1).
2015] Losing at Dodge Ball 127
Pierce’s defamation claim.128 Specifically, Vickie argued that Pierce fraudulently induced J. Howard to sign a living trust and will that prevented any property from passing to her.129 When these accusations reached the press, Pierce filed a defamation action against Vickie in bankruptcy court.130 In adjudicating this claim, Vickie intended to assert truth as a defense, which would have brought to light whether Pierce engaged in fraudulent behavior.131 If Pierce did commit fraud, Vickie’s tortious interference claim would likely be granted.132 Thus, the same underlying facts and transactions supporting Pierce’s defamation claim simultaneously gave rise to Vickie’s counterclaim.133
Additionally, Pierce had already consented to the jurisdiction of the bankruptcy court.134 Pierce’s first objection to the bankruptcy court’s jurisdiction was made two full years after he filed his claim and after several adverse discovery rulings had been entered against him.135 Although the district court initially agreed to withdraw the reference to the bankruptcy court, it nonetheless returned the proceeding to the bankruptcy judge on the basis of consent.136 According to the district court, Pierce “chose to be a party to that litigation” and even remarked that he was “happy to litigate” in that forum.137 Hence, the bankruptcy court possessed personal jurisdiction over Pierce.138 Therefore, given that both requirements for a compulsory counterclaim were satisfied in this instance, Vickie was obligated to submit her tortious interference claim to the bankruptcy court or risk permanently losing the claim.139
Yet, despite the requirement that Vickie assert her compulsory counterclaim in the bankruptcy court proceeding, the majority stripped the court of its authority to hear the claim.140 Focusing on an irrelevant analysis
- See Stern, 131 S. Ct. at 2601.
- See id.
- See id.
- See id.
- See id.
134. Id. at 2606–08.
- Id. at 2607.
- Id. at 2607–08 (internal quotation marks omitted).
- See id. at 2606–08.
- See supra text accompanying note 127–33.
- Id. at 2620.
128 Drake Law Review [Vol. 63
of Article III, the Court held that only Article III judges could hear suits “made of the stuff of the traditional actions at common law.”141 The Court never articulated how Vickie should have initiated suit on her compulsory counterclaim in federal district court and whether the claim could even constitutionally be adjudicated in that forum. Instead, the Court offered a blanket assertion that state law counterclaims, which are normally adjudicated in state court, cannot be heard by bankruptcy judges who lack life tenure and a permanent salary.142 The Court ignored the blatant fact that this claim had to be brought as part of the bankruptcy proceeding.143 Asserting her counterclaim in a separate forum would have resulted in two different court systems adjudicating the same, identical facts and wasted judicial resources.144
Furthermore, even assuming that the counterclaim implicated Article III jurisdiction, any “intrusion on Article III turf was de minimis, and hence, permissible.”145 As noted by the dissent, bankruptcy courts often adjudicate claims resembling common law actions, and these adjudications have never posed a genuine or serious threat to the separation of powers.146 Functionally, bankruptcy judges are nearly identical to magistrate judges, “whose lack of Article III tenure and compensation protections do not endanger the independence of the Judicial Branch.”147 The majority fails to distinguish between bankruptcy and magistrate judges148 and neglects to explain why an Article I magistrate judge can constitutionally hear common law or state law claims but a bankruptcy judge cannot.149 This artificial distinction between classifications of Article I judges is unjustified and ignored completely in the majority’s opinion. Thus, “Stern . . . is inherently
- Id. at 2609 (quoting N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982) (internal quotation mark omitted) (Rehnquist, J., concurring)).
- See id. at 2609–10 (quoting N. Pipeline, 458 U.S. at 87 n.40) (citing N. Pipeline, 458 U.S. at 53).
- See supra text accompanying notes 126, 140.
- See Stern, 131 S. Ct. at 2630 (Breyer, J., dissenting).
- Brown, supra note 47, at 568 (citing Stern, 131 S. Ct. at 2625–26 (Breyer, J., dissenting)).
- See Stern, 131 S. Ct. at 2626 (Breyer, J., dissenting) (“A grant of authority to a bankruptcy court to adjudicate compulsory counterclaims does not violate any constitutional separation-of-powers principle related to Article III.”).
- Id. at 2627.
- See id. at 2626–27.
- See id.
2015] Losing at Dodge Ball 129
unpersuasive because it is built on a framework that makes little sense.”150
C. The Aftermath of Stern: Confusion, Chaos, and a Whole Lot of Controversy
Due to its incomprehensible reasoning, Stern proceeded to shake and crumble the foundation of bankruptcy law. Although the Supreme Court made clear that its holding was “a ‘narrow’ one” and thus, should not have broad implications,151 Stern nonetheless shattered the sense of complacency that had grown out of the 1984 Act.152 In the six short months following the Stern decision, the case was cited in more than 100 opinions.153 By its one- year anniversary, Stern was referenced in more than 506 decisions and continues to be cited at a rate of 40 cases per month.154 As of December 2014, a brief search on Westlaw revealed more than 1,350 opinions citing Stern. Thus, Stern’s reception has been frenzied and it has created a litany of litigation fueled by disagreement over what the case actually means.155
Specifically, courts have divided into two camps in the wake of Stern. The majority interprets Stern according to its plain language and upholds the Court’s assertion that the opinion is narrow.156 At the far end of this spectrum are courts that limit Stern to its specific facts and decline to extend Stern beyond its unique circumstances.157 According to these latter courts, Stern “does not remove from the bankruptcy court its jurisdiction over matters directly related to the estate that can be finally decided in connection
- Chemerinsky, supra note 105, at 212.
- Stern, 131 S. Ct. at 2620.
- See Gerber, supra note 29, at 1010.
- Leta, supra note 29, at 36.
- Id. “As of February 16, 2013, a little over a year and a half after the Supreme Court handed down Stern v. Marshall, the case had been cited by 705 courts nationwide and by 571 scholarly sources.” Gerber, supra note 29, at 1020–21. “A simple search on Lexis Advance reveals that there are over 1,000 cases citing to Stern and 118 law review articles written about the opinion.” David A. Kazemba, Granting Certiorari on In re Bellingham: A New Case to an Old Problem, 49 GONZ. L. REV. 383, 384 (2013).
- See Brown, supra note 47, at 570.
- Id. at 571 & nn.120–21 (discussing the views of this majority and supplying a number of cases that have applied Stern narrowly).
- Id. at 571; see, e.g., Burton v. Seaport Capital, LLC (In re Direct Response Media, Inc.), 466 B.R. 626, 638 (Bankr. D. Del. 2012) (explaining that the narrow interpretation of Stern limits the case to “the unique set of facts that was before the Supreme Court”); In re Salander O’Reilly Galleries, 453 B.R. 106, 115 (Bankr. S.D.N.Y. 2011) (“Stern is replete with language emphasizing that the ruling should be limited to the unique circumstances of that case . . . .”).
130 Drake Law Review [Vol. 63
with restructuring debtor and creditor relations.”158 Rather, Stern only deprives a bankruptcy court of jurisdiction over state law counterclaims that cannot be finally resolved in the claims-allowance process.159 Nowhere in the opinion does the Court divest bankruptcy courts of jurisdiction over all state law causes of action.160
On the other end of the spectrum, however, are courts that espouse a broad interpretation of Stern and rely heavily on Stern’s reasoning.161 These courts refuse to adjudicate any action that seeks to augment the estate, believing that such an action can only be heard by Article III judges.162 Courts following this reasoning gain justification from the sweeping language used in Stern, particularly the phrase that “traditional actions at common law” must be decided by “Article III judges in Article III courts.”163 At the extreme end of this camp, courts may even refuse to issue proposed findings of fact and conclusions of law on claims they are not constitutionally authorized to hear, even when the parties consent.164 Regardless of which
- In re Salander O’Reilly Galleries, 453 B.R. at 115–16.
- See, e.g., Sundale Assocs., Ltd. v. Fla. Assocs. Capital Enters. (In re Sundale, Ltd.), 499 F. App’x 887, 892–93 (11th Cir. 2012) (“Under the clear language of the decision, the Supreme Court held that bankruptcy courts lack ‘the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.’ Because the underlined phrase is included, it must follow that a bankruptcy court would have jurisdiction to enter final judgment on state law counterclaims that are necessarily resolved in the process of ruling on a creditor’s proof of claim.” (citation omitted) (quoting Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011))); Samson v. Blixseth (In re Blixseth), 463 B.R. 896, 905 (Bankr. D. Mont. 2012) (“The Supreme Court . . . conclude[d] only that bankruptcy courts lack the constitutional authority to enter final judgments on state law counterclaims that are not resolved in the claims allowance process.” (citing Stern, 131 S. Ct. at 2620)); Steinle v. Fall River Vill. Cmtys., LLC (In re CCI Funding I, LLC), Bankr. No. 09-17437, Adv. No. 09-1530, 2012 WL 3070093, at *11 (Bankr. D. Colo. July 30, 2012); Burns v. Dennis (In
re Se. Materials, Inc.), 467 B.R. 337, 348 (Bankr. M.D.N.C. 2012).
- See Wadsworth v. Baker (In re DeLaFuente), Bankr. No. 10-25220, Adv. No. 10911, 2012 WL 1535848, at *3 (Bankr. D. Colo. Apr. 30, 2012) (claiming that Stern dealt only “with a bankruptcy court’s power to enter final, binding judgments as to a certain narrow group of state law actions.” (emphasis added)).
- Brown, supra note 47, at 571.
- Id. at 571–72 (quoting In re Direct Response Media, 466 B.R. at 638).
- Id. at 572; Stern, 131 S. Ct. at 2609.
- See Samson v. Blixseth (In re Blixseth), Bankr. No. 09-60452-7, Adv. No. 10- 00088, 2011 WL 3274042, at *12 (Bankr. D. Mont. Aug. 1, 2011); see also Brown, supra note 47, at 573 (noting that In re Blixseth is, “[t]o date, the broadest interpretation given to Stern”).
2015] Losing at Dodge Ball 131
position a court chooses to adopt, one overarching principle has acquired unanimous support: Stern does not affect a bankruptcy court’s subject matter jurisdiction—only its constitutional authority to adjudicate state law claims.165
Despite the division over Stern’s interpretation, the Supreme Court’s opinion is equally as famous for what it failed to decide. In the aftermath of Stern, two important questions have remained unanswered. First, how should a bankruptcy court treat core proceedings that do not arise in a bankruptcy case or arise under Title 11?166 This inquiry has become known as the Stern gap, in which a specific subset of core proceedings is forced to remain in judicial limbo.167 “No statute directly addresses the issue of the nature of the counterclaim that arose in Stern,” and thus, bankruptcy courts have been left without guidance on how to adjudicate core claims that are related to bankruptcy proceedings.168
Second, can parties consent to bankruptcy court adjudication where such jurisdiction is statutorily but not constitutionally authorized?169 This issue of consent has garnered conflicting opinions and created a circuit split among the Ninth, Sixth, Fifth, and Seventh Circuits.170 The position embraced by the Ninth Circuit is that Stern did not alter the statutory system of final adjudication by consent present in § 157(c)(2).171 Because Stern does
- See, e.g., In re DeLaFuente, 2012 WL 1535848, at *3 (stating that “Stern did not make any rulings as to a bankruptcy court’s subject matter jurisdiction”); In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 700–01 (Bankr. N.D. Ill. 2011) (“Stern addressed only what a Bankruptcy Judge may do once a case is referred to it, not whether that judge has jurisdiction to hear the case at all.” (citing Stern, 131 S. Ct. at 2620)); Liberty Mut. Ins. Co. v. Citron (In re Citron), Bankr. No. 08-71442, Adv. No. 09-8125, 2011 WL 4711942, at *2 (Bankr. E.D.N.Y. Oct. 6, 2011) (“Stern does not deprive a bankruptcy court of subject matter jurisdiction.” (citing Stern, 131 S. Ct. at 2611, 2616)).
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2172–73 (2014); Jolene Tanner, Stern v. Marshall: The Earthquake that Hit the Bankruptcy Courts and the Aftershocks that Followed, 45 LOY. L.A. L. REV. 587, 603 (2012).
- See Arkison, 134 S. Ct. at 2172–73.
- See Tanner, supra note 166.
- See supra text accompanying notes 5–7.
- Kazemba, supra note 154; see infra note 178 and accompanying text; see also Brown, supra note 47, at 583 (“In Stern, the Court also left mixed signals as to the role of consent in bankruptcy proceedings.”).
- Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 569–70 (9th Cir. 2012), aff’d sub nom., Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014); see also Crawford v. Zambrano (In re Zambrano Corp.), 478 B.R. 670, 677 (Bankr. W.D. Pa. 2012) (finding consent sufficient to allow the court to hear
132 Drake Law Review [Vol. 63
not impact subject matter jurisdiction, the ability to consent is a personal, not a structural, right and does not implicate constitutional protections.172 Furthermore, an adverse ruling on parties’ ability to consent would call into question the entire framework of consensual adjudication used by Article I magistrate judges.173 Given that the Supreme Court “has upheld exercise of the Article III judicial power by a magistrate judge . . . with the consent of the parties,”174 a contrary standard for bankruptcy judges would be arbitrary and unjustified. Thus, the Ninth Circuit reasons that adjudication by consent does not offend Article III.
In contrast, the Fifth, Sixth, and Seventh Circuits have found consent insufficient to confer jurisdiction on bankruptcy courts.175 According to these opinions, consent implicates separation of powers, and “notions of consent and waiver cannot be dispositive because the [Article III] limitations serve institutional interests that the parties cannot be expected to protect.”176 In this manner, Article III adjudication is perceived as a structural requirement, not a private right.177 Consent cannot, therefore, be invoked to waive this foundational principle “unless the claim falls within the so-called ‘public rights’ exception to Article III.”178 It was this precise dispute between the Ninth, Fifth, Sixth, and Seventh Circuits that bankruptcy practitioners and
and enter final judgment on both core and noncore claims); Adams Nat’l Bank v. GB Herndon & Assocs., Inc. (In re GB Herndon & Assocs., Inc.), 459 B.R. 148, 160 (Bankr.
D.C. 2011) (“[A] bankruptcy judge’s hearing and determining a matter by the consent of the parties does not offend Article III.”).
- In re Bellingham, 702 F.3d at 567; Clouse, supra note 65, at 914 (explaining that Article III adjudication is a procedural right that can be waived by the parties to avoid a separation of powers issue); see Shaia v. Taylor (In re Connelly), 476 B.R. 223, 233–34 (Bankr. E.D. Va. 2012) (claiming that the ability to consent was explicitly recognized in Stern when the Court stated it was not adjudicating the subject matter jurisdiction of bankruptcy courts).
- Brown, supra note 47, at 584.
- In re GB Herndon & Assocs., Inc., 459 B.R. at 159; accord Peretz v. United States, 501 U.S. 923, 936 (1991).
- See, e.g., Frazin v. Haynes & Boone, LLP (In re Frazin), 732 F.3d 313, 320 n.3 (5th Cir. 2013) (quoting Stern, 131 S. Ct. at 2620; CFTC. v. Schor, 478 U.S. 833, 850–51
(1986)); Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 773 (7th Cir. 2013), cert.
granted, 134 S. Ct. 2901 (July 1, 2014); Waldman v. Stone, 698 F.3d 910, 918 (6th Cir.
- In re Frazin, 732 F.3d at 320 n.3 (quoting Schor, 478 U.S. at 850–51) (internal quotation marks omitted).
- See Waldman, 698 F.3d at 918 (quoting Stern, 131 S. Ct. at 2612).
- Id. (citing Stern, 131 S. Ct. at 2610).
2015] Losing at Dodge Ball 133
judges hoped would be resolved in Arkison.179
- MUCH ADO ABOUT NOTHING: EXECUTIVE BENEFITS INSURANCE AGENCY V. ARKISON
- The Facts and Nothing but the Facts
“Nicolas Paleveda and his wife owned and operated two companies— Aegis Retirement Income Services, Inc. (ARIS), and Bellingham Insurance Agency, Inc. (BIA).”180 These corporations were closely related, and ARIS “routed all of its income and expenses through BIA.”181 In early 2006, however, BIA became insolvent and ceased operations.182 The following day, Paleveda “incorporate[d] Executive Benefits Insurance Agency, Inc. (EBIA),” using BIA funds.183 Thereafter, EBIA deposited $250,157.70 of commission income into a joint account held by ARIS and EBIA.184 Approximately two weeks after closing its doors, BIA had “irrevocably assigned [all] the insurance commissions from . . . the American National Insurance Company, to Peter Pearce, a long-time BIA and ARIS employee.”185 Pearce retained $123,133.58 of these funds and deposited them into the joint account held by ARIS and EBIA, after which all of the funds ($373,291.28) were credited to EBIA as an intercompany transfer.186
“On June 1, 2006, BIA filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Washington.”187 In response, Peter Arkison, the Chapter 7 trustee, initiated a complaint alleging 18 causes of action against EBIA and ARIS, including fraudulent conveyance.188 According to the complaint, “EBIA was a successor corporation of BIA and therefore liable for its debts.”189 Following disagreement over the proper forum for Arkison’s claims, the bankruptcy
- See supra text accompanying notes 5–7.
- Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2168 (2014).
- Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 556 (2012), aff’d sub nom., 134 S. Ct. at 2165.
- Arkison, 134 S. Ct. at 2168–69.
- Id. at 2169.
- See In re Bellingham, 702 F.3d at 557.
- Id. at 556.
- Id. at 557.
- Arkison, 134 S. Ct. at 2169.
- Id.; In re Bellingham, 702 F.3d at 557.
- In re Bellingham, 702 F.3d at 557.
134 Drake Law Review [Vol. 63
court granted summary judgment in favor of Arkison and entered a final judgment for $373,291.28.190 EBIA appealed to the district court.191 Upon conducting a de novo review, the district court affirmed the bankruptcy court’s grant of summary judgment and similarly entered judgment in favor of Arkison.192 Unsatisfied, EBIA appealed to the Ninth Circuit.193
Although the Ninth Circuit determined that the bankruptcy court lacked constitutional authority to adjudicate the fraudulent conveyance claim, its decision was “no reprieve” because the court found that EBIA consented to the bankruptcy court’s jurisdiction.194 In reaching this conclusion, the Ninth Circuit reiterated that “[t]he waivable nature of the allocation of adjudicative authority between bankruptcy courts and Article III courts is well established.”195 Specifically, the court noted that Article III serves to protect personal interests, and any personal right is subject to either express or implied waiver.196 Additionally, the court referred to the permissible jurisdictional waiver for noncore proceedings and reasoned that the same logic “surely permits” adjudication of core proceedings by consent.197 Thus, under the Ninth Circuit’s reasoning, any litigant who fails to timely object to non-Article III jurisdiction has impliedly consented to adjudication in that forum.198 Unsurprisingly, EBIA appealed from this determination of consent.199
- Bridge over Troubled Water: The Supreme Court’s Reasoning
Following the grant of certiorari and oral argument, the Supreme Court affirmed the Ninth Circuit’s judgment on narrow grounds.200 Focusing solely on the question of whether a bankruptcy court could issue proposed findings of fact and conclusions of law in core claims, the Court sought to
- Id.; Arkison, 134 S. Ct. at 2169.
- Arkison, 134 S. Ct. at 2169.
- In re Bellingham, 703 F.3d at 556.
- Id. at 566.
- Id. at 567 (quoting CFTC v. Schor, 478 U.S. 843, 848 (1986)).
- See id.
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2170 (2014).
- See id. at 2175 (holding that “EBIA . . . received the same review from the District Court that it would have received if the Bankruptcy Court had treated the fraudulent conveyance claims as non-core proceedings”).
2015] Losing at Dodge Ball 135
remedy the gap created by Stern.201 However, despite the fact that the parties briefed and argued the issue of consent, the Court refused to address consent in its opinion.202
In bridging the Stern gap, the Supreme Court interpreted § 157(c) as authorizing bankruptcy courts to submit proposed findings and conclusions to the district court for de novo review on statutorily noncore claims.203 According to the Court, “[t]he statute permits Stern claims to proceed as non-core within the meaning of § 157(c).”204 In arriving at this conclusion, the Court referenced the severability provision in 28 U.S.C. § 151, which prevents decisions like Stern from invalidating particular applications of the statute.205 Specifically, when one portion of the statute is deemed unconstitutional, the remainder of the statute is unaffected, thus leaving open additional avenues for adjudication.206 The existence of this severability clause closed the Stern gap by invalidating the core category but leaving open the noncore option.207 The Court explained,
With the “core” category no longer available for the Stern claim at issue, we look to § 157(c)(1) to determine whether the claim may be adjudicated as a non-core claim—specifically, whether it is “not a core proceeding” but is “otherwise related to a case under title 11.” If the claim satisfies the criteria of § 157(c)(1), the bankruptcy court simply treats the claims as non-core: The bankruptcy court should hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment.
The conclusion that the remainder of the statute may continue to apply to Stern claims accords with our general approach to severability. We ordinarily give effect to the valid portion of a partially unconstitutional statute so long as it “remains ‘fully operative as a law,’”
201. See id. at 2168, 2172–73.
202. Id. at 2170 n.4. (“Because we conclude that EBIA received the de novo review and entry of judgment to which it claims constitutional entitlement, this case does not require us to address whether EBIA in fact consented to the Bankruptcy Court’s adjudication of a Stern claim and whether Article III permits a bankruptcy court, with the consent of the parties, to enter final judgment on a Stern claim. We reserve that question for another day.” (citation omitted)).
203. Id. at 2168, 2173.
- Id. at 2173.
- See id.
- See id.
136 Drake Law Review [Vol. 63
and so long as it is not “evident” from the statutory text and context that Congress would have preferred no statute at all. Neither of those concerns applies here. Thus, § 157(c) may be applied naturally to Stern claims.208
Employing this framework, the Court next determined whether
§ 157(c)(1) was applicable to Arkison’s fraudulent conveyance claim.209 The Court assumed, for the purposes of the opinion, that the fraudulent
conveyance claims at issue were Stern causes of action and noted that the claim was to be treated as noncore.210 Nonetheless, the Court found
fraudulent conveyance actions to be “self-evidently” related to bankruptcy proceedings under Title 11.211 In particular, the fraudulent conveyance claim could have had a potential effect on the bankruptcy estate and therefore fell
within the outer bounds of the bankruptcy court’s subject matter jurisdiction.212 As a noncore claim, the bankruptcy court was thus empowered to issue proposed findings of fact and conclusions of law for the
district court’s review.213
Having concluded that the bankruptcy court could constitutionally propose findings of fact and conclusions of law on the fraudulent conveyance claim, the Court analyzed the district court’s interpretation of the bankruptcy court’s judgment.214 Because EBIA did not argue on appeal to the district court that the bankruptcy court lacked constitutional authority to hear the claim, the district court did not review the bankruptcy court’s judgment under Stern.215 However, the district court engaged in a de novo review of the bankruptcy court’s grant of summary judgment and issued a well-reasoned opinion affirming that holding.216 In a separately entered order, the district court granted judgment in favor of Arkison.217 Thus, while
- Id. (citation omitted).
- Id. at 2174.
- See id. (“At bottom, a fraudulent conveyance claim asserts that property that should have been part of the bankruptcy estate and therefore available for distribution to creditors pursuant to Title 11 was improperly removed. That sort of claim is ‘related to a case under title 11’ under any plausible construction of the statutory text, and no party contends otherwise.”).
213. Id. at 2168, 2170.
214. Id. at 2174–75.
- Id. at 2174.
2015] Losing at Dodge Ball 137
the district court did not expressly invoke Stern, EBIA received de novo review of the bankruptcy court’s judgment.218 This de novo review is all EBIA would have been entitled to under a Stern analysis with proposed findings and conclusions.219 Therefore, the district court’s de novo review cured any error committed by the bankruptcy court.220
- READY, SET, DODGE: THE IMPLIED AUTHORIZATION OF CONSENT IN
Although the Supreme Court expressly reserved the question of consent for another time, another case, and another day, Justice Clarence Thomas’s own words impliedly authorize parties to consent to the bankruptcy court’s jurisdiction. According to the Court, Stern claims are permitted “to proceed as non-core within the meaning of § 157(c).”221 However, § 157(c) includes two subsections, with § 157(c)(2) granting bankruptcy courts jurisdiction by consent in noncore claims.222 The Supreme Court did not limit its analysis to § 157(c)(1) alone but rather cited the broader, all-inclusive category of § 157(c).223 This overarching reference thus subsumed consent within the Court’s ruling. By neglecting to specifically refer to § 157(c)(1) alone, the Court’s own language contradicts its refusal to decide the consent issue.224 The plain language of the Court’s holding is expansive enough to decide the issue it punted.
Specifically, the Court stated in its analysis that Stern claims are to be treated as noncore actions.225 Citing the severability clause, the Justices noted that the remainder of the statute was to remain intact even though
§ 157(b) could no longer be applied to Stern claims.226 The remaining applicable provisions of the statute include both subsections in § 157(c).
Both subsections implicate noncore claims that are related to the bankruptcy
- See id.
- See id. at 2175.
- Id. at 2173.
- See generally 28 U.S.C. § 157(c) (2012).
- Arkison, 134 S. Ct. at 2173 (“The statute permits Stern claims to proceed as non- core within the meaning of § 157(c).”); id. (“[Section] 157(c) may be applied naturally to Stern claims.”).
- Compare id. at 2173, with id. at 2170 n.4.
- Id. at 2173.
138 Drake Law Review [Vol. 63
proceeding.227 In its direct language, the Supreme Court held that Stern claims are comparable to noncore claims under the inclusive statutory framework of § 157(c).228 This conclusion was not restricted in any manner solely to the submission of proposed findings of fact and conclusions of law under § 157(c)(1).229 Using the Court’s own “general approach to severability”230 and the plain language command to treat Stern claims as noncore under § 157(c) in its entirety,231 it is impossible to reconcile the Court’s assertion that it did not decide the consent issue.
Furthermore, the Court referenced the applicability of § 157(c) to Stern claims multiple times in the opinion—it was not merely an oversight.232 In particular, the Court stated, (1) the remainder of the statute, which includes
§ 157(c), is not affected by determining that Stern claims fall outside § 157(b) and “may continue to apply to Stern claims”; (2) “§ 157(c) may be applied naturally to Stern claims”; and (3) “[t]he statute permits Stern claims to
proceed as non-core within the meaning of § 157(c).”233 Thus, the Court directly discussed the general applicability of § 157(c), in its entirety, to Stern claims at least three times in the opinion.234 By applying § 157(c) to Stern
claims, subsection (c)(2) is thus included in this application and approved of by the Court. The Court’s failure to carefully limit its statutory reference has impliedly resolved the consent question.
Indeed, the weight of authority supports a finding of jurisdiction by consent.235 As previously noted, Stern did not implicate subject matter jurisdiction but rather referenced a waivable private right.236 Nothing in
- See § 157(c).
- See Arkison, 134 S. Ct. at 2173.
- See id. at 2173–74.
- Id. at 2173.
- See id. at 2173.
- See id. (noting the general applicability of § 157(c) three times).
- See id.
- Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 403 (4th Cir. 1992) (“The substantial weight of authority, indicates that a party can impliedly consent to entry of judgment by the bankruptcy court in a non-core related matter.”); Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R. 750, 770 (Bankr. M.D.N.C. 2012) (“The Supreme Court has repeatedly recognized that parties can agree to be bound by a decision of a court that may lack specific constitutional authority to make a final decision without their consent.”).
- See Jonathan Azoff & Thomas Szaniawski, Stern v. Marshall and the Limits of Consent, AM. BANKR. INST. J., Sept. 2011, at 77 (“The linchpin of the Court’s rationale
2015] Losing at Dodge Ball 139
Stern expressly or impliedly prohibited the parties from consenting to the bankruptcy court’s jurisdiction, and final judgments entered pursuant to consent are still reviewable on appeal by an Article III tribunal.237 Moreover, it is arguable that Stern itself even recognized the constitutionality of consent.238 According to the Bankruptcy Court for the Eastern District of Virginia,
This ability of parties to consent to adjudication by a non-Article III tribunal was explicitly recognized in Stern:
[The allocation of] authority to enter final judgment between the bankruptcy court and the district court . . . does not implicate questions of subject matter jurisdiction. By the same token,
§ 157(b)(5) simply specifies where a particular category of cases should be tried.239
Thus, there is nothing in Stern to justify the proposition that a bankruptcy court’s ability to adjudicate claims by consent has been tarnished.240
In fact, stripping bankruptcy courts of their right to adjudication by consent would represent a drastic departure from the power bankruptcy courts have historically exercised.241 Specifically, eliminating consent as an avenue for claim resolution not only challenges the foundation of the magistrate consent system, but it also represents a broader structural limitation on the power of Article I courts.242 Given that Stern was a narrow
was that § 157(b)(5) is not jurisdictional.”).
- See Adams Nat’l Bank v. GB Herndon & Assocs., Inc. (In re GB Herndon & Assocs., Inc.), 459 B.R. 148, 160 (Bankr. D.C. 2011).
- See Shaia v. Taylor (In re Connelly), 476 B.R. 223, 233 (Bankr. E.D. Va. 2012) (stating that “Stern . . . recognized that such consent can be express or implied” (italics added)).
- Id. (alterations in original) (citation omitted) (quoting Stern v. Marshall, 131 S. Ct. 2594, 2607 (2011)).
- See Roberta A. Colton & Stephanie C. Lieb, Is Bankruptcy Court Jurisdiction in Flux Because of Anna Nicole Smith?, 86 FLA. B.J., Jan. 2012, at 36, 40 (citing In re Safety Harbor Resort & Spa, 456 B.R. 703, 717 (Bankr. M.D. Fla. 2011)); see also Brown, supra note 47, at 584 (explaining that “the commonsensical conclusion is that Stern has left the role of consent intact”).
- See In re GB Herndon, 459 B.R. at 161.
- See In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 701 (Bankr. N.D. Ill. 2011) (“If Stern had destroyed the power of Bankruptcy Judges to enter final judgments by consent in non-core but otherwise related proceedings, that would have called into question the power of Magistrate Judges and other Article I judicial officers to make final adjudication by consent . . . .”).
140 Drake Law Review [Vol. 63
holding that supposedly did not change all that much, it is difficult to foresee the Supreme Court drastically undermining the bankruptcy foundation by disposing of consent. Rather, both Stern and Arkison had the opportunity to declare consent unconstitutional and expressly refrained from doing so. Instead, Stern and Arkison cited § 157(c) with approval, “without suggesting it was constitutionally infirm.”243 Through Arkison’s application of § 157(c) to Stern claims, it logically follows that consent is a permissible avenue for acquiring jurisdiction over claims related to a bankruptcy proceeding. Thus, the law regarding consent is not in a state of flux, as argued by some courts.244 It has instead been approved for application to Stern claims through the Court’s express language and insistence that bankruptcy jurisdiction will remain fundamentally unchanged by its decision in Stern.
Furthermore, this acceptance of consent is necessary to ensure judicial efficiency and promote swift resolution of pending claims.245 By statute, a bankruptcy court may only adjudicate claims that are at least related to the underlying bankruptcy proceeding.246 The phrase “related to” denotes, at a minimum, factual similarity between the bankruptcy case and the pending counterclaim such that the counterclaim may affect the property available for distribution among creditors.247 Having presided over the bankruptcy case from its inception, the bankruptcy judge is familiar with the facts and procedural history of the case and thus is more appropriately able to
- In re GB Herndon, 459 B.R. at 161; accord Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2173 (2014).
- See, e.g., Paloian v. LaSalle Bank Nat’l Ass’n (In re Doctors Hosp. of Hyde Park, Inc.), 507 B.R. 558, 591 (Bankr. N.D. Ill. 2013); see also Kazemba, supra note 154, at 387 (citing Jeremy Fogel & G. Eric Brunstad, Jr., Implications of Stern v. Marshall for Article III and Magistrate Judges, at 0:27:30-0:30:09, 0:55:12-1:01:36 (Federal Judicial Center June 22, 2012)).
- See Gerber, supra note 29, at 1029.
- See Tolliver v. Bank of Am. (In re Tolliver), 464 B.R. 720, 732 (Bankr. E.D. Ky. 2012); Burns v. Dennis (In re Se. Materials, Inc.), 467 B.R. 337, 346 (Bankr. M.D.N.C. 2012) (“If the proceeding in question is not ‘related to’ the bankruptcy, then the bankruptcy court has no jurisdiction to hear the matter at all.”).
- See German Am. Capital Corp. v. Oxley Dev. Co. (In re Oxley Dev. Co.), 493
B.R. 275, 286 (Bankr. N.D. Ga. 2013); In re Tolliver, 464 B.R. at 732 (quoting Michigan Empl’t Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.3d 1132, 1141–42 (6th Cir. 1991)). “The ‘related to’ test is obviously very broad; indeed, the proceeding need not necessarily be against the debtor or the debtor’s property.” PNC Bank v. Rolsafe Int’l, LLC (In re Rolsafe Int’l, LLC), 477 B.R. 884, 894 (Bankr. M.D. Fla. 2012).
2015] Losing at Dodge Ball 141
adjudicate the counterclaim without wasting judicial resources.248 Forcing an Article III judge to hear and decide a state law cause of action premised on the same facts as the bankruptcy case is not only duplicative but also clogs the court system and stalls the bankruptcy proceeding.249 Such a system increases the caseload of district court judges while simultaneously putting bankruptcy cases on hold until the district court enters a final order.250 District courts already face “bulging docket[s],” and removing consent as an avenue for adjudication would have a profoundly negative impact on the judicial system as a whole.251 Entry of judgment by consent is therefore a rational decision by parties who wish to adjudicate their claims quickly, efficiently, and cost-effectively before Article I judges.252
Moreover, permitting a bankruptcy judge to enter final judgment by consent instead of proposing findings of fact and conclusions of law reduces the district court’s work load on appeal.253 When a litigant appeals a bankruptcy court’s final judgment, the district court “reviews the Bankruptcy Judge’s legal conclusions de novo and its findings of fact for clear error.”254 However, when the bankruptcy judge merely proposes findings of fact and legal conclusions, the district court must review all findings and conclusions objected to by the parties under the de novo standard.255 This heightened standard increases the amount of time a district court judge spends on the case and slows the adjudication of other claims within the court system.256 Additionally, when the bankruptcy court only issues proposed findings and conclusions, no final judgment can be entered until the district court has engaged in a de novo review and prepared the
- See Gerber, supra note 29, at 1029.
- See Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP), Bankr. No. 08-32514, Adv. No. 10-3203, 2011 WL 4542512, at *6 (Bankr. N.D. Cal. Sept.
28, 2011) (arguing that Stern “thrusts unnecessary burdens on already overworked
district courts, especially when bankruptcy courts have a particular expertise in and familiarity with” bankruptcy actions).
- See generally In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 701 (Bankr.
N.D. Ill. 2011) (noting that destroying the power of consent for Article I judges would result in “a vast increased burden on the District Judges”).
- Gerber, supra note 29, at 1029.
- In re Olde Prairie Block Owner, 457 B.R. at 700.
- See id.
- Id. (citing Follett Higher Educ. Grp., Inc. v. Berman (In re Berman), 629 F.3d 761, 766 (7th Cir. 2011)).
255. Id. (citing 28 U.S.C. § 157(c)(1) (2012)).
- See id.
142 Drake Law Review [Vol. 63
final order.257 However, allowing bankruptcy courts to issue final judgments by consent limits the number of bankruptcy cases that district court judges must review to those that are appealed. Thus, authorizing adjudication by consent enables the entire judicial framework to run efficiently and mitigates overcrowding at the district court level.
- THE TIMES THEY ARE A-CHANGIN’: PROPOSED AMENDMENTS TO
“Sometimes the questions are complicated and the answers are
Although the Supreme Court impliedly authorized the use of consent to adjudicate Stern claims in Arkison, statutory authority for consent remains elusive.259 According to the plain text of § 157(c), consent is only permissible in noncore proceedings.260 The statute itself is silent on the use of consent in core actions that cannot constitutionally be adjudicated by Article I judges.261 Moreover, while the Court judicially closed the Stern gap by treating Stern claims as noncore proceedings,262 this closure has not yet been reflected in the statutory scheme. Therefore, to enhance the clarity of
§ 157 in light of Stern and statutorily legitimize consent in core proceedings in accordance with Arkison, legislative amendments must be implemented.
These amendments should target § 157(b) to redress the confusion over treating certain core claims as noncore in particular instances. In other
words, although the Court permitted Stern claims to proceed as noncore, the cleaner, simpler solution is to resolve Stern claims under the core umbrella because Stern claims are, by definition, core proceedings related to the
bankruptcy case.263 Addressing Stern claims under § 157(b) negates the need to invoke the severability clause and simplifies the statutory scheme in accordance with the Court’s ruling. Thus, this Part proposes two simple and
effective changes to § 157(b): first, revise subsection (b)(1) to expressly permit bankruptcy courts to enter proposed findings and conclusions in core proceedings; second, create an additional subsection, presumably (b)(4),
- § 157(c)(1) (providing that the bankruptcy court can propose findings of fact and conclusions of law in noncore proceedings, “and any final order or judgment shall be entered by the district judge”).
- THE LUCKY ONE (Village Roadshow Pictures 2012).
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2173–74 (2014).
260. See § 157(c)(2).
- See id.
- See Arkison, 134 S. Ct. at 2172–73.
- See Stern v. Marshall, 131 S. Ct. 2594, 2605 (2011).
2015] Losing at Dodge Ball 143
that authorizes consent in core actions related to the bankruptcy proceeding.
- Making Lemonade Out of Lemons: Amending § 157(b)(1)
The most straightforward amendment Congress can introduce to statutorily eliminate the Stern gap in light of Arkison is a textual revision to
§ 157(b)(1). Currently, it reads,
Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.264
Arkison, however, has made clear that not only may bankruptcy judges enter final judgments in constitutionally and statutorily core proceedings, but they may also propose findings of fact and conclusions of law in statutorily core claims that cannot constitutionally be heard by Article I tribunals.265 As it currently reads, § 157(b)(1) ignores the Arkison holding completely and leaves Stern claims statutorily in limbo.266 While Arkison judicially remedied this gap by resorting to the procedures set forth in § 157(c),267 Congress should nonetheless amend § 157(b)(1) to promote internal consistency in bankruptcy interpretation and express that it is unnecessary to label a certain category of core claims as noncore.
Faced with the need for uniform bankruptcy policies and statutory clarity—particularly following years of Stern confusion—Congress can clear the murky waters with the addition of one simple sentence to subsection (b)(1). Specifically, Congress should include the following language at the end of subsection (b)(1):
In the event that a core claim cannot constitutionally be adjudicated by a bankruptcy judge, the bankruptcy judge is authorized to issue proposed findings of fact and conclusions of law to the district court, which will then enter a final order or judgment after considering the bankruptcy court’s findings and conclusions and after conducting a de novo review of all matters to which any party specifically objected.268
264. § 157(b)(1).
265. Arkison, 134 S. Ct. at 2170, 2173.
266. See § 157(b)(1).
267. Arkison, 134 S. Ct. at 2173.
268. Cf. § 157(c)(1).
144 Drake Law Review [Vol. 63
This language tracks the phraseology of subsection (c)(1), which permits bankruptcy courts to issue proposed findings and conclusions in noncore claims.269 The internal consistency between these two subsections is paramount, given the Supreme Court’s assertion that Stern claims should be treated as noncore.270 Through this simple textual addition, Congress not only statutorily eliminates the Stern gap, but it also promotes similarity between bankruptcy caselaw and statutory authority. It is this predictability and clarity that bankruptcy practitioners and judges have desperately sought since Stern’s release in 2011.
- I’m Just a Bill: Creating Subsection (b)(4) to Authorize Consent
In addition to amending subsection (b)(1) to statutorily close the Stern gap, Congress should also authorize consent to core claims through creation of subsection (b)(4). Given the implied authorization of consent in Arkison and the necessity of consent for efficient judicial administration of claims, it is extremely unlikely the Supreme Court will declare consent unconstitutional in the future. The implications on the magistrate system of consent, which have been consistently upheld by the Court, further guard against the possibility of consent becoming an unconstitutional avenue for adjudication.271 Thus, congressional acceptance of consent for core claims is warranted in light of Arkison and would resolve the circuit split in favor of the Ninth Circuit.272
Particularly, the language of subsection (b)(4) should mirror that of subsection (c)(2), given the desirability for uniform consent procedures in both core and noncore claims. For efficiency purposes, it does not make sense to alter the consent procedures for core claims simply because they arise under Title 11 or in a Title 11 case. Rather, core and noncore proceedings should be treated identically in their requirements for consent.273 Thus, subsection (b)(4) should be implemented with the
- See Arkison, 134 S. Ct. at 2170, 2173.
- See, e.g., In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 701 (Bankr. N.D. Ill. 2011) (discussing the implications of invalidating consent); Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP), Bankr. No. 08-32514, Adv. No. 10- 3203, 2011 WL 4542512, at *6 (Bankr. N.D. Cal. Sept. 28, 2011).
- See supra Part III.C.
- See Bayonne Med. Ctr. v. Bayonne/Omni Devs. (In re Bayonne Med. Ctr.), Bankr. No. 07-15195, Adv. No. 09-1689, 2011 WL 5900960, at *7 (Bankr. D.N.J. Nov. 1,
2011) (noting that the “gap” in consent “would logically and appropriately be filled by judicial extension of § 157(c)(2)” to include core claims).
2015] Losing at Dodge Ball 145
Notwithstanding the provisions of subsection (b)(1), the district court, with the consent of all the parties to a proceeding, may refer a core proceeding related to a bankruptcy case to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.
The addition of this subsection with language mirroring subsection (c)(1) is critical for bankruptcy judges to statutorily adjudicate core proceedings falling outside their constitutional authority. Because the Supreme Court has not declared consent in noncore proceedings unconstitutional, it is unlikely that this same language would create a constitutional question for core claims. Moreover, provided that the Court expressly stated that all of the provisions of § 157(c) apply to Stern claims,274 it is a logical progression to amend subsection (b)(1) and create subsection (b)(4) to directly address Stern claims, instead of muddying the waters by applying § 157(c) to certain statutorily core claims. By implementing two simple amendments to § 157(b), Congress can clarify the jurisdiction of bankruptcy courts and resolve the Stern gap without having to apply statutory authority that is not directly on point.
- If It’s So Simple, Why Hasn’t It Been Done?
Although amendment of § 157(b) appears to be an obvious solution in the aftermath of Stern, the undeniable question arises as to why Congress did not take legislative action in the three years leading up to Arkison. Section 157 has remained unchanged despite the Supreme Court’s division of core claims into constitutional and unconstitutional categories. Moreover, there appears to be no congressional movement on an amendment and no proposed legislative changes in the works. Why has Congress been complacent in ignoring the self-evident solution of a statutory amendment?
The primary argument against statutory reformation appears to be the historical fact that Congress has already struck out twice with the Bankruptcy Act.275 Congress’s first longstanding comprehensive attempt to codify bankruptcy rules was the 1978 Act.276 However, the Supreme Court quickly declared the 1978 Act’s grant of authority to bankruptcy courts
- See Arkison, 134 S. Ct. at 2173.
- See supra Part II.
- Gerber, supra note 29, at 999.
146 Drake Law Review [Vol. 63
unconstitutional.277 In an attempt to remedy this defect, Congress divided bankruptcy jurisdiction into core versus noncore claims with the 1984 Act.278 While the 1984 Act went unchallenged for two decades, the Supreme Court eventually distinguished between constitutionally and unconstitutionally core claims.279 Requiring that claims be both statutorily and constitutionally core to invoke Article I jurisdiction, the Court disrupted the jurisdictional homeostasis that Congress desperately sought to achieve with the 1984 Act. Thus, in light of the Court’s recent holdings in Stern and Arkison, it is unsurprising that Congress has refused to step up to the plate and strike out a third time.
Additionally, practitioners aptly highlight that legislative change is a deliberately slow process, particularly when trying to resolve a conflict on which so many courts have differed.280 Even the Justices themselves could not unanimously agree in Stern to follow the formalist analysis of Northern Pipeline and differentiate between two classes of core claims.281 It is arguable that Congress is waiting for more pointed and express guidance from the Supreme Court before attempting to reform § 157. Furthermore, because the Court judicially closed the Stern gap and impliedly authorized consent,282 Congress may not perceive any benefit in amending § 157. With the continued development of caselaw on the subject, Congress may feel that it gains nothing by proposing an amendment and may see bankruptcy authority as a litigation puzzle the Supreme Court will eventually decipher.
The problem with these arguments, however, is that they neglect the reality that the current status of bankruptcy jurisdiction is marked by chaos, confusion, and misunderstanding.283 The Supreme Court’s division of core
- Id. (citing N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 50 (1982)).
- See Leta, supra note 29, at 35; see also 28 U.S.C. § 157 (2012).
- See Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011).
- See Brianne J. Gorod, The Collateral Consequences of Ex Post Judicial Review, 88 WASH. L. REV. 903, 955 (2013) (“Significantly, though, much of the reason that legislative and regulatory action is generally slow in coming is a function not of constitutional imperative, but of Congress’s own making . . . .”); see also Robert Misner, Minimalism, Desuetude, and Fornication, 35 WILLAMETTE L. REV. 1, 40 n.243 (1999) (referring “to bicameralism as a ‘stalling’ mechanism” that “simply slow[s] down the progress of a legislative proposal”).
- The vote in Stern was 5-4. See Stern, 131 S. Ct. at 2599; McElwee v. Scarff Bros., Inc. (In re McElwee), 469 B.R. 566, 572 (Bankr. M.D. Pa. 2012).
- See supra Part V.
- See Kazemba, supra note 154, at 387; Erwin Chemerinsky, Stern v. Marshall:
2015] Losing at Dodge Ball 147
claims into two camps does not mirror the congressionally approved statutory framework.284 These differing standards have resulted in conflicting interpretations and implementation among the courts, and thus the unified system of bankruptcy law is beginning to fall apart piece by piece. By adding a commonsensical interpretation of Stern and Arkison to § 157, Congress can mitigate judicial confusion and provide informative guidance to the courts. Given that Congress is responsible for the division of core and noncore claims, it should take responsibility and modify the statute in accordance with Supreme Court precedent.
Furthermore, the Supreme Court has provided Congress with ample guidance to reform § 157. With the Arkison decision, the Court clarified how unconstitutionally core claims should be adjudicated and arguably approved consent for Stern claims.285 Given these rulings, it is unlikely Congress would strike out a third time by amending § 157. Rather, the necessity for revision and clarity outweighs any potential backlash by the Court. Congress should therefore step up to the plate again and bring cohesion and uniformity back to the Bankruptcy Act.
- Not Good Enough: Why Amending Local Bankruptcy Rules Fails to Solve the Problem
While Congress never took action to amend § 157 in the wake of Stern, local bankruptcy courts and the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the U. S. (the Committee) issued proposed rules to resolve the Stern gap and consent question.286 The most commonly implemented resolution involved disintegration of the core and noncore categories and required parties to “expressly state in their pleadings whether they consent[ed] to a final judgment by the bankruptcy court.”287 Although only noncore proceedings previously required these express recitations of consent, the uncertainty created by Stern prompted bankruptcy courts to use
Uncertain Reach & Implications, RECEIVERSHIP NEWS (Spring 2012), http://www.receiv ers.org/recnews/ArticlePage.php?id=192 (stating that Stern “creat[ed] great confusion in bankruptcy proceedings across the country”).
284. Compare 28 U.S.C. § 157 (2012), with Stern, 131 S. Ct. at 2603–04.
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2170, 2173 (2014).
- Lori Yount, Litigant Consent as a Constitutional Threat: Reconsidering the Jurisdiction of Magistrate Courts After Stern v. Marshall, 55 S. TEX. L. REV. 197, 216–17 (2013).
- Id. at 216.
148 Drake Law Review [Vol. 63
extra caution and mandate a statement of consent in all proceedings.288 The jurisdictions adopting this proposed framework almost unanimously incorporated the language used by the District Court for the Southern District of New York.289 Specifically,
In the local rules passed in April 2012, the southern district of New York required that any “complaint, counterclaim, cross-claim, or third-party complaint [that] contains a statement that the proceeding or any part of it is core . . . shall contain a statement that the pleader does or does not consent to the entry of final orders or judgment by the bankruptcy judge.” This same rule applies to any responsive pleadings asserting that the proceedings are core. If a party files a notice of removal, it also must state whether it consents to a final judgment by a bankruptcy court.290
By implementing this terminology, bankruptcy courts sought to address the consent issue to avoid appeals based on jurisdictional deficiencies.
Additionally, in light of New York’s blueprint for local rule amendments, the Committee took New York’s rules a step further and “eliminat[ed] the distinction between core and noncore issues in adversary proceedings.”291 The Committee’s proposed amendments intended to alter the Bankruptcy Rules in three ways:
First, the terms core and non-core will be removed from Rules 7008, 7012, 9027, and 9033 to avoid possible confusion in light of Stern. Second, parties in all bankruptcy proceedings (including removed actions) will be required to state whether they do or do not consent to entry of final orders or judgment by the bankruptcy judge. Third, Rule 7016, which governs pretrial procedures, will be amended to direct bankruptcy courts to decide the proper treatment of proceedings.292
In this manner, the Committee perceived its amendments as adding clarity to the jurisdictional framework of bankruptcy courts and believed eliminating the arbitrary core–noncore distinction would resolve the Stern
- See id. at 216–17.
- See id. at 217.
- Id. (alterations in original) (footnotes omitted).
- Id. (citing COMM. ON RULES OF PRACTICE AND PROCEDURE OF THE JUDICIAL CONFERENCE OF THE U. S., PRELIMINARY DRAFT OF PROPOSED AMENDMENTS TO THE FEDERAL RULES OF APPELLATE, BANKRUPTCY, AND CRIMINAL PROCEDURE, AND THE
FEDERAL RULES OF EVIDENCE 28, 40–41 (2012), available at http://www.uscourts.gov/ uscourts/rules/rules-published-comment.pdf [hereinafter PRELIMINARY DRAFT]).
- PRELIMINARY DRAFT, supra note 291, at 28.
2015] Losing at Dodge Ball 149
Although the Committee’s amendments were well-intentioned, they were never officially adopted. Given that the Supreme Court resolved the Stern gap within the current dichotomous framework of core–noncore claims, eliminating these categories through proposed rules is unnecessary and can only add further confusion to an already complex subject. In other words, because the Court has affirmed that there are two statutory categories of bankruptcy claims (i.e., Stern claims do not represent a third category of proceedings stuck in judicial limbo), proposed amendments that discard these labels do so in the face of Supreme Court precedent that has upheld the constitutionality of this division. Such an action strays from the Court’s holding in Arkison and would make it impossible for bankruptcy courts to decipher which system to follow. Provided that Arkison dictates how to close the Stern gap, it is likely that the Committee will eliminate the proposed amendments and return to the drawing board. Given that the Committee’s proposed amendments are likely unnecessary and irrelevant, the timing is right for Congress to enact a comprehensive amendment to §
157 that negates the need for piecemeal local rule revisions. Such overarching congressional action is the only way to ensure uniformity in the bankruptcy system. Therefore, it is time to amend § 157 in accordance with Supreme Court precedent.
- THE UPCOMING SEQUEL: WELLNESS INTERNATIONAL NETWORK, LTD. V. SHARIF
Although the Supreme Court impliedly settled the consent issue in Arkison,294 and Congress possesses sufficient guidance to amend § 157(b), the Court nonetheless granted certiorari in Wellness International Network, Ltd. v. Sharif to resolve the circuit split over consent and waiver.295 By granting certiorari on the final day of the Court’s term, the Court has set the stage for another highly anticipated bankruptcy decision during the October 2014 session.296 However, given that the plain language of the Court’s
- See id.
- See supra Part V.
- See generally Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013),
cert. granted, 134 S. Ct. 2901 (July 1, 2014).
- See Steven Neuner, Supreme Court Now Decides to Answer the Questions it Ducked in Arkison—What Can a Bankruptcy Court Decide, When and How?, NEUNER
& VENTURA LLP (July 2, 2014), http://www.nv-njlaw.com/supreme-court-now-decides-
150 Drake Law Review [Vol. 63
Arkison opinion authorized parties to consent to adjudication of Stern claims in bankruptcy court, it is unlikely that this appeal will materially impact the bankruptcy system.
- Previously on Sharif . . .
With a factual history that is almost as contentious as Stern, Sharif is “a decade-long saga spanning two circuits.”297 Revolving around a dispute between Richard Sharif and his three “judgment creditors, Wellness International Network, Ltd., Ralph Oats, and Cathy Oats (collectively, “WIN”),”298 the case poses two questions: first, is a constitutional objection based on Stern waivable;299 and second, does a bankruptcy judge have constitutional authority to enter final judgment on an alter ego claim?300 The Seventh Circuit answered both questions in the negative.301
The events precipitating this appeal “began when Sharif entered into distributorship contracts with WIN for the sale of health and wellness products.”302 Subsequent to executing this agreement, Sharif sued WIN in the U.S. District Court for the Northern District of Illinois for running an alleged pyramid scheme.303 Although this suit was dismissed, Sharif refiled his complaint in the U.S. District Court for the Northern District of Texas and proceeded to ignore all of WIN’s discovery requests.304 In light of Sharif’s noncompliance, the court “granted summary judgment for WIN, and the Fifth Circuit affirmed.”305 On remand, WIN received a judgment for
$655,596.13 in attorney’s fees as a sanction against Sharif.306
d-how/; see also M. Jonathan Hayes, Bellingham-Stern Issues Continue at the Supreme Court, CENT. DIST. INSIDER (July 1, 2014), http://www.centraldistrictinsider.com/2014/ 07/01/bellingham-stern-issues-continue-at-the-supreme-court/.
- Sharif, 727 F.3d at 754.
- See id. at 767–73.
- See id. at 773–76.
- Id. at 773, 775–76. Given that the focus of this Article is on consent, this Part will not address the Seventh Circuit’s reasoning regarding whether a bankruptcy court can enter final judgment on an alter ego claim. For an analysis of this issue, see id. at 773–76.
- Id. at 755.
- Id. at 755–56.
- Id. at 756.
2015] Losing at Dodge Ball 151
In an attempt to collect on this award, “WIN served Sharif with post- judgment discovery requests,” which went unanswered.307 Following Sharif’s repeated refusal to comply with discovery orders, he was arrested and held in civil contempt.308 Two weeks later, Sharif filed a voluntary Chapter 7 petition for bankruptcy in the U.S. District Court for the Northern District of Illinois and listed WIN as a creditor.309 At the § 341 creditors’ meeting, Sharif admitted that he lied on a loan application to Washington Mutual, on which he claimed he owned multimillion-dollar assets.310 Sharif proceeded to inform WIN and the trustee “that he never had owned the Loan Assets; rather, those assets were owned by the Soad Wattar Trust, of which [he] was trustee.”311
“WIN subsequently initiated an adversary proceeding in the bankruptcy court,” asserting five causes of action against Sharif, including a claim that Soad Wattar Trust was Sharif’s alter ego.312 Unsurprisingly, Sharif violated numerous discovery orders and failed to appear for his initial deposition.313 In response to Sharif’s disobedient behavior, the bankruptcy court entered default judgment in favor of WIN on all five counts of the complaint.314 Sharif appealed to the district court, which affirmed the bankruptcy court’s judgment.315 In affirming, the court “concluded that objections based on the bankruptcy court’s authority to enter a final judgment are waivable because they do not implicate subject-matter jurisdiction” and that these claims had been waived in this case.316 Sharif appealed this determination to the Seventh Circuit.317
- Can’t Touch This: The Seventh Circuit Says “No” to Consent
In a decision that sided with the Sixth Circuit instead of the Ninth Circuit, the Seventh Circuit held that bankruptcy courts did not have
- Id. at 756–57.
- Id. at 757.
- See id.
- Id. at 758.
- Id. at 759–60.
- Id. at 760.
- See id.
152 Drake Law Review [Vol. 63
authority to adjudicate Stern claims by consent.318 Mirroring the analysis in Stern, the court first determined that the bankruptcy court had statutory authority under § 157(b) to enter a final judgment on all five claims in WIN’s complaint.319 However, after reiterating that “Stern does not implicate subject-matter jurisdiction, the circuit court nonetheless found Sharif could not waive the objection to the bankruptcy court’s constitutional authority to enter final judgment because the objection was not his alone to waive.”320 Specifically, the court distinguished between two separate interests protected by the judicial system; namely, a litigant’s personal right to adjudication by an Article III judge and the systemic guarantee of an independent and impartial judiciary.321 Because the provisions of Article III, Section One were designed to ensure the separation of powers, these requirements are not subject to waiver.322
While the court conceded that § 157(c)(2) permits parties to consent to a final judgment in noncore proceedings, the court did “not think that this inexorably leads to the conclusion that parties may consent to final adjudication of a core proceeding by a bankruptcy judge or waive a Stern objection.”323 According to the Seventh Circuit, the Supreme Court has not yet ruled on the constitutionality of § 157(c), and the statutory framework for noncore proceedings fundamentally differs from that of core proceedings.324 In particular, the court noted that the district court enters final judgment in noncore proceedings whereas the bankruptcy court enters final judgment in core actions.325 Thus, because of this structural difference between the two subsections, the court determined that Article III interests are not as fundamentally implicated with consent in noncore proceedings as they are for consent in core proceedings.326 In light of this reasoning, the
- See id. at 771, 773 (“We think the Sixth Circuit has the better view under current law.”); Yount, supra note 286, at 213 (“[T]he Seventh Circuit Court of Appeals found that the Sixth Circuit’s Waldman opinion contains the more persuasive argument.” (citing Sharif, 727 F.3d at 761)).
- See Sharif, 727 F.3d at 766 (recognizing that all of the claims are core proceedings). Because Sharif only objected to the core categorization of the alter ego claim on appeal, the Seventh Circuit presumed the claim was core. See id. at 762.
- Yount, supra note 286, at 214–15 (citing Sharif, 727 F.3d at 769).
- See Sharif, 727 F.3d at 768.
322. Id. at 769 (quoting CFTC v. Schor, 478 U.S. 833, 850–51 (1986)).
- Id. at 772.
- See id.
2015] Losing at Dodge Ball 153
court “h[e]ld that under current law a litigant may not waive an Article III,
§ 1, objection to a bankruptcy court’s entry of final judgment in a core proceeding.”327
- Lolly, Lolly, Lolly, Get Your Logic Here: How Sharif Should Be Decided in Light of Arkison
The Supreme Court’s decision in Arkison has negated the need to address consent in Sharif. While the Court vigorously maintained that it did not adjudicate the consent question,328 the broad reference to § 157(c) in its entirety suggests otherwise.329 The Supreme Court cannot write in its opinion that everything above us is blue and then claim it did not determine the color of the sky. The blunt reality is that the Court has already concluded the consent issue, even if unintentionally.
Provided the ruling in Arkison, the most logical course of action is for the Supreme Court to hold that litigants may waive their right to adjudication by an Article III judge and consent to the bankruptcy court’s authority. The necessity for this holding cannot be overstated. First, if the Court finds that consent violates Article III and is unconstitutional, it would be impossible to implement the holding of Arkison—specifically, that all provisions of § 157(c) are to be applied to Stern claims.330 If consent is deemed unconstitutional, clearly § 157(c)(2) cannot be enforced for core actions related to bankruptcy proceedings. Thus, a contrary ruling would invalidate the plain language of Arkison.
Second, as discussed above,331 an adverse decision on consent would greatly impact the magistrate system, which functions largely on consent and waiver.332 Current caselaw expressly permits parties to consent to adjudication before a magistrate judge, and consent can even be implied.333
- Id. at 773.
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2170 n.4 (2014).
- See id. at 2173.
- See id.
- See supra Part IV.
- See 28 U.S.C. § 636(c)(1) (2012) (“Upon the consent of the parties, a full-time United States magistrate judge . . . may conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court . . . .”); see also In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 701 (Bankr. N.D. Ill. 2011).
- Katherine Riley, The Constitutionality of Consent After Stern v. Marshall: Splitting the Circuits, 32 CAL. BANKR. J. 551, 559 (2013) (“Final adjudication via consent
154 Drake Law Review [Vol. 63
This consent permits the magistrate judge to enter a final judgment on the case and is subject to appeal to the district court—in certain circumstances— and the court of appeals.334 Invalidating consent in the context of bankruptcy courts would implicitly call into question the magistrate framework.335 A logical extension of the Court’s decision would be to remove consent as an avenue of adjudication for magistrate judges as well. Such an action would flood the district courts not only with bankruptcy cases but with cases from magistrate courts. The increased caseload would subsequently delay the resolution of claims, strain judicial resources, and overwhelm the district courts.336 These consequences cannot be the rational result of Stern, which was meant to be a narrow holding.337
Finally, refusing to allow parties to consent to bankruptcy authority opens the floodgate for “every losing litigant . . . to appeal any judgment in a state law-based core proceeding on the grounds that the bankruptcy court lacked constitutional authority to enter judgment.”338 The fact that a challenge to bankruptcy authority cannot be waived means that the issue can be raised at any point in the litigation, even for the first time on appeal.339 While this structure is necessary to ensure constitutional safeguards for subject matter jurisdiction, Stern made perfectly clear that a bankruptcy court’s constitutional authority to adjudicate a claim does not invoke subject matter jurisdiction.340 Therefore, giving parties an unlimited ability to appeal
of the parties is a well-established practice among bankruptcy courts, magistrates, and arbitrators.”); see Roell v. Withrow, 538 U.S. 580, 583–84 (2003).
- See § 636(b)(1)(A)–(C) (describing two circumstances for district court review).
Upon entry of judgment in any case referred under paragraph (1) of this subsection, an aggrieved party may appeal directly to the appropriate United States court of appeals from the judgment of the magistrate judge in the same manner as an appeal from any other judgment of a district court.
Id. § 636(c)(3).
- See In re Olde Prairie Block Owner, 457 B.R. at 701.
- See Gerber, supra note 29, at 1029 (“If consent were found unconstitutional, it could have profound consequences on the efficiency of the federal judicial system.”).
- Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011) (“[W]e agree with the United States that the question presented here is a ‘narrow’ one.”).
- Francis J. Higgins & John S. Delnero, Stern v. Marshall, Act III—Will the Supreme Court Follow the Seventh Circuit’s Lead in Wellness Int’l Network, Ltd. v. Sharif or Go Even Further in Limiting Bankruptcy Court Power?, 12 PRATT’S J. BANKR. L. 679, 694 (2013).
- See id. at 695.
- See Stern, 131 S. Ct. at 2607.
2015] Losing at Dodge Ball 155
the bankruptcy court’s authority is not only unnecessary but also risks substantially increasing the number of appeals to the district courts. The reality is that the judicial system cannot handle such an influx of cases. Thus, the only logical avenue for the Supreme Court is to affirm the plain language of Arkison and allow parties to consent to the bankruptcy court’s authority.
In the wake of Stern, few topics have been as heavily litigated as that of bankruptcy jurisdiction. Spawning countless appeals, thousands of citations, and repeated headaches, Stern represented every bankruptcy judge’s nightmare. By delineating two categories of core claims, Stern unintentionally created a gap in which unconstitutionally core proceedings were left hanging in judicial limbo with no guidance on their adjudication. However, the fog created by Stern has recently begun to dissipate with the Supreme Court’s most recent jurisdictional decision in Arkison. Holding that Stern claims should be treated as noncore for purposes of adjudication, Arkison bridged the Stern gap and reaffirmed the validity of the core– noncore dichotomy.341 Yet, despite this resolution, the Court expressly declined to answer the hotly anticipated question of whether parties can consent to bankruptcy jurisdiction in Stern claims.342
Although the Supreme Court plainly stated its refusal to address consent, the broad language used throughout the Arkison opinion paints a different story. The Court’s repeated reference to the applicability of
§ 157(c) in its entirety to Stern claims arguably resolves the consent question. Specifically, by failing to limit its holding and analysis to § 157(c)(1), the Court impliedly authorized the use of consent—present in § 157(c)(2)—to
Stern claims. The careless drafting of the opinion has resulted in the Court losing at its own attempted game of dodge ball; the plain language of the decision is broad enough to solve the very issue the Court declined to
Given this implied authorization of consent and resolution of the Stern gap, it is time Congress amended § 157 to reflect these changes in the law and clarify the statutory jurisdiction of bankruptcy courts. The debate over Stern claims and the constitutionality of consent has plagued bankruptcy judges long enough. The decision in Arkison not only provides guidance to Congress in implementing these amendments but also mandates statutory revision to ensure uniformity in jurisdictional determinations. As it currently
- See Exec. Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2172–73 (2014).
- Id. at 2170 n.4.
156 Drake Law Review [Vol. 63
stands, the statutory framework does not reflect the division between constitutional and unconstitutional core claims and thus continues to place these causes of action in judicial limbo. It is time for Congress to revise the statutory structure of bankruptcy jurisdiction to conform to Supreme Court precedent. Only then will the circuit split regarding consent be fully resolved and the confusion over Stern substantially mitigated. It is therefore unwise to afford Congress the same opportunity to dodge the ball on consent.