“How was I supposed to know that something wasn’t right here … Show me how you want it to be.  Tell me baby ‘cause I need to know now…” – Britney Spears

We’ve previously covered the controversial decision of the Sixth Circuit Court of Appeals inWaldman v. Stone, along with the circuit split that it helped to precipitate (speaking of which, we’re anxiously awaiting resolution of Wellness International Networks v. Sharif!).  In another previous post, we discussed the challenges inherent in the wake of Stern v. Marshall, especially insofar as district courts assessing reports and recommendations issued by bankruptcy courts (or decisions that were subsequently “deemed” reports and recommendation for purposes of appellate review) must undertake a de novo review of those “Stern-type” matters.  In this installment of the Stern Files, we report on the sequel toWaldman, in which the Sixth Circuit considered the standard of review to be applied to a district court’s de novo review of matters as to which bankruptcy courts do not have final constitutional authority.  

The sordid facts underlying the Waldman case need not be repeated in full here.  In brief, though, Ron Stone was forced to file a bankruptcy petition and subsequently asserted fraud claims in bankruptcy court against his former business partner, Randall Waldman.  After the bankruptcy court entered a final judgment in favor of Stone, the Sixth Circuit vacated that judgment, having concluded that the bankruptcy court lacked final constitutional authority over the claim and instead, should offer proposed findings of fact and conclusions of law for de novo review by the district court.

On remand, the district court considered the bankruptcy court’s proposed findings and conclusions, adopting some and rejecting others, and entered its own judgment in Stone’s favor.  Waldman then appealed again, arguing that the district court had failed to review de novo the bankruptcy court’s proposed findings and conclusions.  Among a host of other arguments, Waldman contended that the district court, in its de novo review, was required to receive additional evidence from the parties.

Summarily dispatching with this argument, the Sixth Circuit looked to Rule 9033(d) of the Federal Rules of Bankruptcy Procedure, which provides that, in a de novo review, the district court “shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge’s findings of fact or conclusions of law to which specific written objection has been made . . . ” and “may accept, reject, or modify the proposed findings of fact or conclusions of law [or] receive further evidence. . . .”  Notwithstanding the first clause, which provides that the district court “shall” undertake a de novo review, the Sixth Circuit explained that Bankruptcy Rule 9033 plainly gives district courts the discretion, but not the obligation, to entertain and consider additional evidence. Indeed, the rule specifically notes that the district court “may … receive further evidence” – the language is plainly permissive, rather than mandatory.

As courts continue to struggle with the questions posed by Stern and its progeny, questions will continue to be asked regarding just what is meant by de novo review.  The Sixth Circuit, at least, has held that this means “to review without giving deference … or any presumption of correctness to the lower court.”  But the nature of that de novo review does not necessarily mean an entirely new trial and opportunity to introduce evidence – and the district court is at least permitted to limit itself to the record before it, including, for example, the bankruptcy court’s decisions regarding admissibility of evidence.  Moreover, as a practical matter, the district court might arguably be influenced (albeit not compelled) by the bankruptcy court’s assessments of witnesses’ credibility, in light of the fact that the bankruptcy court had the benefit of seeing the live testimony.  As de novo appellate review continues to proliferate in jurisdictions that have interpreted Stern to limit bankruptcy courts’ constitutional authority, we continue to grapple with the contours of that review process and of ensuring a complete and efficient resolution of many matters arising in, or related to, bankruptcy cases.