Presentation on theme: "An Introduction to Bankruptcy for District Court Law Clerks Presented by S. Martin Teel, Jr. United States Bankruptcy Judge June 18, 2014."— Presentation transcript:
An Introduction to Bankruptcy for District Court Law Clerks Presented by S. Martin Teel, Jr. United States Bankruptcy Judge June 18, 2014
Bankruptcy 101 Bankruptcy Jurisdiction & Authority Bankruptcy Cases in the District Court Recent Issues Re: Bankruptcy Judge Authority Overview 2
Bankruptcy 101: Bankruptcy Goals For Consumers: Bankruptcy laws help people who can no longer pay their creditors get a fresh start—by liquidating assets to pay their debts or by creating a repayment plan. For Businesses: Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation. Discharge: Consumers and businesses may obtain a bankruptcy discharge releasing the debtor from personal liability for certain specified types of debt. The discharge is a permanent statutory injunction. It applies differently depending on the type of case the debtor files. The discharge does not protect co-debtors or collateral securing a debt. * Portions of the content of this “Bankruptcy 101” section are taken from Bankruptcy Basics, a publication of the Bankruptcy Judges Division of the Administrative Office of the U.S. Courts, available online at http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx. 3
Bankruptcy 101: Types of Cases ChapterDescription/Purpose Chapter 7 Liquidation Provides for liquidation of the debtor’s non-exempt property and the distribution of proceeds, and avoidance recoveries, to creditors. But many cases are no-distribution cases. Chapter 11 Reorganization Provides for reorganization via a confirmed plan. The plan may keep a business alive and pay creditors over time, but can be a liquidation plan. Chapter 11 is available to both businesses and individuals. Chapter 13 Adjustment of Debts of Individual With Reg. Income Via obtaining a confirmed plan, the debtor usually attempts to keep property and pay debts over time. Debtor makes plan payments to a trustee who distributes payments to creditors. Chapter 12 Adjustment of Debts of Family Farmer or Fisherman Provides for adjustment of debts of a “family farmer” or “family fisherman.” Chapter 9Provides for reorganization of municipalities. Chapter 15 Ancillary and Other Cross- Border Cases Addresses insolvency cases involving debtors, assets, claimants, and other parties of interest in more than one country. Case may be ancillary to a lead insolvency case in another country. 4
Bankruptcy 101: Estate Property The Bankruptcy Estate: The filing of the petition for bankruptcy relief creates a bankruptcy estate consisting of all legal and equitable interests of the debtor in property as of the case’s commencement. Assets recovered via trustee avoidance powers become estate assets. The bankruptcy court has exclusive jurisdiction over property of the estate. Exemptions: Individual debtors can exempt from the bankruptcy estate certain property, which becomes unreachable by the debtor’s unsecured creditors. Domiciliary rules in the Bankruptcy Code govern which state’s exemption statute can be used. The state statute may “opt out” from allowing the debtor to use 11 U.S.C. § 522(d) exemptions, and limit the debtor to the state’s and other nonbankruptcy law exemptions. When the District of Columbia statute applies, D.C. has not “opted out” and the debtor can choose (i) 11 U.S.C. § 522(d) exemptions or (ii) D.C. exemptions and other nonbankruptcy law exemptions. D.C. exemptions include an unlimited homestead exemption. 5
Bankruptcy 101: Automatic Stay The filing of the bankruptcy petition triggers the automatic stay, a federal injunction. The stay prevents estate property from being dismantled piecemeal by the debtor’s creditors. The stay bars continued collection efforts against the debtor, property of the debtor, and property of the bankruptcy estate. It also bars continuation of litigation against the debtor. There are many exceptions to the automatic stay, and various ways the automatic stay can expire or be terminated. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), in an effort to deter serial bankruptcy filers, contains special provisions regarding application /termination of the stay. 6
Bankruptcy 101: Discharge A bankruptcy discharge voids any judgment based on, and releases the debtor from personal liability for, certain specified types of debts. The discharge is a permanent statutory injunction. – The discharge injunction prevents any legal action or communication with the debtor for the purpose of collecting a discharged debt as a personal obligation of the debtor. – The discharge does not protect co-debtors or collateral securing a debt.
Bankruptcy 101: Reaffirmed Debts An individual debtor may decide to reaffirm a particular debt by entering into a reaffirmation agreement. – In general, a debtor will only reaffirm debts secured by a house or car. The requirements for creating an enforceable reaffirmation agreement are numerous. Often an agreement flunks those requirements. – And the debtor is given a period of time to rescind. A valid reaffirmation agreement may be enforced in any appropriate court after the automatic stay is lifted and is not subject to the discharge injunction.
Bankruptcy 101: Parties Debtor: Individual or organization that has filed a petition for relief, or is the subject of an involuntary petition, under the Bankruptcy Code. Chapter 7, 11, 12, or 13 Trustee: Representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of unsecured creditors. Debtor in Possession: A debtor in a chapter 11 case (exercising the powers of a trustee) unless and until, for cause, the debtor’s possession of the estate is displaced by the appointment of a trustee (a rare occurrence). U.S. Trustee: Officer of the Justice Department responsible for supervising administration of bankruptcy cases (e.g., appoints and monitors chapter trustees). Do not refer to a chapter trustee as the U.S. Trustee and do not refer to the U.S. Trustee as “the trustee.” U.S. Trustee plays an active role in chapter 11 cases (e.g., objecting to excessive fee applications of professionals employed by the debtor in possession or trustee, and objecting to defective plans). 9
Creditors’ Committee: A committee of creditors appointed by the U.S. trustee in Chapter 11 cases and ordinarily consisting of unsecured creditors holding the largest unsecured claims against the debtor. Consults with the “debtor-in-possession” on administration of the case; investigates the debtor’s conduct and operation of the business; participates in formulating a plan of reorganization. 10 Bankruptcy 101: Parties
Bankruptcy 101: Bankruptcy Litigation Litigation in a bankruptcy case is handled according to its classification as an adversary proceeding or a contested matter. Adversary Proceedings (APs): A full-blown lawsuit, similar to a civil action (e.g., commenced by a complaint). Fed. R. Bankr. P. 7001 lists all causes of action that qualify as APs. Involve a plaintiff and a defendant; commenced by filing complaint. Styled as “In re [debtor]: [x] v. [y].” Contested Matters: Generally, any dispute that is not an AP; typically involves more limited issues. Governed by Fed R. Bankr. P. 9014, which sets forth procedures akin to motions practice in civil litigation. Instead of a summons, a notice of opportunity to oppose is required. Commenced by motion or, in some instances, an application or an objection, and decided on relatively short notice. Contested matters may include dismissal or conversion of a case, objections to plan confirmation, objections to claims, objections to exemptions motions for relief from the automatic stay, motions to use cash collateral. 11
Bankruptcy 101: Authorities A variety of statutes and rules apply in bankruptcy cases and proceedings: The Bankruptcy Code enacted in 1978, as amended (not the “Bankruptcy Act”— the precursor of the Bankruptcy Code) Title 28, United States Code (jurisdiction; appointment and power of bankruptcy judges; review of their decisions; filing fees; powers of U.S. Trustee, etc.) Federal Rules of Bankruptcy Procedure Federal Rules of Civil Procedure (incorporated in large part by Fed. R. Bankr. P.) Federal Rules of Evidence District Court Local Bankruptcy Rules Local Bankruptcy Rules of Bankruptcy Court (do not apply in District Court) 12
13 U.S. bankruptcy law has evolved significantly over time: U.S. Constitution: Congress authorized to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” 1898: First permanent Bankruptcy Act. 1978: Current Bankruptcy Code (Bankruptcy Reform Act of 1978) enacted. 1982: In Marathon, Supreme Court held that authority granted to bankruptcy judges under 1978 Act was unconstitutional. 1984: Congress responded to Marathon by enacting Bankruptcy Amendments & Federal Judgeship Act of 1984. 2005: Bankruptcy Abuse Prevention and Consumer Protection Act enacted to prevent fraud and abuse in bankruptcy filings. 2011: Supreme Court issued decision in Stern v. Marshall, a landmark opinion limiting the authority of bankruptcy judges. 2014: Supreme Court will decide Ex. Benefits Ins. Agency v. Arkison (addressing effect of consent on authority of bankruptcy judge to hear Art. III proceeding). Bankruptcy 101: Evolution of Law
14 Bankruptcy 101: The Bankruptcy Court The bankruptcy court is a “unit of the district court.” “In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district.” (28 U.S.C. § 151) Bankruptcy Judges vs. District Judges: nationally, the average ratio is 1:2. (D.C. is 1:15.) The nationwide ratio of bankruptcy judges to circuit judges is 1.8:1. (D.C. is 1:9.) A sampling: Bankruptcy Judges ND Calif.: 24 New York: Northern 3 Southern 10 Eastern 7 Western 3 District Judges ND Calif.: 27 New York: Northern 9 Southern 36 Eastern 26 Western 6
Bankruptcy judges are: Appointed by the court of appeals of the United States for the circuit containing the district in which they are to serve; Appointed to a term of 14 years; Compensated at an annual rate equal to 92% of a district court judge’s salary; and Removable for incompetence, misconduct, neglect of duty, or physical or mental disability. 15 Bankruptcy 101: Bankruptcy Judges
Jurisdiction & Authority: Two Different Issues Subject Matter Jurisdiction v. Bankruptcy Judge’s Authority to Hear or Decide Subject matter jurisdiction over bankruptcy cases or proceedings is that of the District Court. When a Bankruptcy Court hears a bankruptcy case or proceeding, it is exercising the subject matter jurisdiction of the District Court. The authority of the Bankruptcy Judge to hear or decide a case or proceeding is a separate issue!
Expansive Jurisdiction under 1978 Act: Bankruptcy judges had subject matter jurisdiction over: “All civil proceedings arising under title 11 or arising in or related to cases under title 11.” This gave bankruptcy judges the power to decide proceedings based on state and common law. Marathon Problems: The Supreme Court held that the 1978 Act was unconstitutional to the extent that it authorized bankruptcy judges to decide proceedings requiring the exercise of the judicial power of the United States. Debtor sued defendant in bankruptcy court for breach of contract. The Court noted this claim was a “suit at common law” and “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.” Only a federal judge capable of exercising “judicial power” could decide such a claim. The bankruptcy judges created by the 1978 Act lacked life tenure and salary protection. They were not Article III judges and, therefore, could not exercise the judicial power of the United States. Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). 17 Jurisdiction & Authority: Marathon
18 Jurisdiction & Authority: 1984 Act Response to Marathon – The 1984 Act: The Bankruptcy Amendments and Federal Judgeship Act of 1984 changed bankruptcy jurisdiction and authority. A.D. CT. BANKRUPTCY JURISDICTION Under 28 U.S.C. § 1334: (1)District courts have original and exclusive jurisdiction over: (a)All bankruptcy cases; and (b)All the property of the debtor, wherever located, as of the commencement of the case, and property of the estate. (2)District Court have original but not exclusive jurisdiction of all civil proceedings: (a)arising under the Bankruptcy Code; (b)arising in a bankruptcy case; or (c)related to a bankruptcy case.
Jurisdiction & Authority: 1984 Act A.D. CT. BANKRUPTCY JURISDICTION (Continued) (3) Removed Proceedings. Proceedings over which the district court has bankruptcy jurisdiction may be removed to the district court. 28 U.S.C. §§ 1441 and 1452. But District Court Local Bankruptcy Rule 5011-1 has referred such removed proceedings to the bankruptcy court.
Jurisdiction & Authority: 1984 Act Abstention District court (or bankruptcy court exercising the district court’s authority) can abstain from hearing a proceeding. (28 U.S.C. § 1334) Discretionary abstention: District court (or bankruptcy court) may abstain from hearing a proceeding “in the interests of justice, or in the interest of comity with State courts or respect for State law.” Mandatory abstention: District court (or bankruptcy court) shall abstain from hearing a proceeding if: (1)the proceeding is based on a State law or cause of action; (2)the proceeding is “related to” the bankruptcy; (3)but for the bankruptcy, the proceeding could not have been commenced in federal court; (4)an action is already commenced and can be timely adjudicated in a State forum of appropriate jurisdiction; and (5)a party to the proceeding makes a timely motion for abstention. Decisions of district court to abstain are not reviewable on appeal! 20
Under 28 U.S.C. § 157(a), district courts can extend authority to hear cases and proceedings within its bankruptcy jurisdiction to bankruptcy judges. In the District of Columbia, District Court Local Bankruptcy Rule 5011-1 accomplishes this: 21 Jurisdiction & Authority: 1984 Act Pursuant to 28 U.S.C. § 157(a), all cases under Title 11 United States Code and all proceedings arising under Title 11 or arising in or related to a case under Title 11 are referred to the Bankruptcy Judge of this District. “ ”
B.BANKRUPTCY JUDGE AUTHORITY Under 28 U.S.C. § 157 (and disregarding instances in which § 157 violates Article III of the Constitution) bankruptcy judges may: (1)Hear and decide “core” proceedings. “Core” proceedings are those “arising in” or “arising under” the Bankruptcy Code. In general, they relate to a function essential to the administration of the bankruptcy case. (2)Hear “non-core” proceedings and issue proposed findings of fact and conclusions of law for the District Court to review de novo. “Non-core” proceedings—those “related to” the bankruptcy—involve controversies that do not depend on the bankruptcy laws for their existence and could proceed in another court even in the absence of bankruptcy (3)Hear and decide a “non-core” proceeding with the parties’ consent. 22 Jurisdiction & Authority: 1984 Act
Jurisdiction & Authority: Where to File Referred Proceedings? District Court Local Bankr. Rule 5011-provides that “all papers filed in any such [referred] case or proceeding, including the original petition, shall be filed with the Clerk of the Bankruptcy Court” and shall be captioned for the Bankruptcy Court. So, for example, a petition for removal of a bankruptcy-related proceeding from the Superior Court should be filed in the Bankruptcy Court.
Jurisdiction & Authority: Referrals of Civil Actions That Are in the District Court Referral under DCt.LBR 5011-1 does not include any civil action pending in the District Court. In re Croley, 121 B.R. 412 (Bankr. D.D.C. 1990). But the District Court by order may refer the civil action to the Bankruptcy Court. See, e.g., Miller v. District of Columbia, 2007 WL 1748890 (D.D.C. 2007) (Bates, J.)
In the District Court: Three Ways There are three principal ways the District Court sees a bankruptcy case or proceeding: (1) De novo review of non-core proceedings when parties did not consent to entry of a final judgment in the bankruptcy court. 28 U.S.C. § 157(c). (2) Withdrawal of the reference. 28 U.S.C. § 157(d). (3) Appeals. 28 U.S.C. § 158. 25
Generally: The District Court reviews bankruptcy court’s proposed findings of fact and conclusions of law issued in “non-core” proceedings. Standards of Review: District court has considerable discretion in determining how to proceed. (Fed. R. Bankr. P. 9033(d)) District court may “accept, reject, or modify the proposed findings of fact or conclusions of law....” If a party has filed a specific written objection to any portion of the bankruptcy judge’s proposed findings and conclusions, district court must review that portion de novo. District court may, but need not, “receive further evidence, or recommit the matter to the bankruptcy judge with instructions.” 26 In the District Court: De Novo Review
Generally: District court can withdraw a bankruptcy proceeding referred to the bankruptcy court. (28 U.S.C. § 157(d)). Discretionary withdrawal: District court may withdraw, in whole or in part, any case or proceeding on its own motion or on timely motion of any party “for cause shown.” “Cause” includes goals of uniformity in bankruptcy administration, economic use of estate resources, and expediting the bankruptcy process. Mandatory withdrawal: District court must withdraw a proceeding, on timely motion from a party, if it determines that resolution requires consideration of both bankruptcy and “other laws of the United States regulating organizations or activities affecting interstate commerce.” 27 In the District Court: Withdrawal
Supporting Rules: Motion to withdraw the reference filed with the clerk of the bankruptcy court who dockets the motion on bankruptcy court docket and transmits it to the clerk of the district court. D.Ct.LBR 5011-2(a). The motion to withdraw the reference is assigned to “the Chief Judge or the Chief Judge’s designee.” D.Ct.LBR 5011-2(f). Withdrawn matter is assigned randomly unless the Chief Judge determines that exceptional circumstances warrant special assignment. D.Ct.LBR 5011-2(f). The filing of a motion to withdraw does not stay the case or proceeding unless a stay is obtained by filing a motion for stay (ordinarily required to be first sought from the bankruptcy judge). Fed. R. Bankr. P. 5011(c). 28 In the District Court: Withdrawal
In the District Court: Appeals A.THE ROUTE OF APPEAL Routes of appeal from bankruptcy court (28 U.S.C. § 158): (1)To the district court. (2)To the relevant circuit’s bankruptcy appellate panel (“BAP”). The BAP is available only if (i) such a panel exists in the circuit, (ii) the district court judges for the district have authorized the referral of appeals, and (iii) the parties to the appeal consent or are deemed to consent. The BAP is a three-judge panel of bankruptcy judges that hears appeals from decisions of bankruptcy courts in the circuit. (3)Directly to the relevant circuit court of appeals, but only under narrow circumstances. In general, direct appeal must be (i) certified by the applicable lower court or all of the parties, acting jointly, and (ii) authorized by the circuit court. 29
30 A.THE ROUTE OF APPEAL (CONT’D) When a BAP exists: BAP is not a mandatory forum. Parties can elect to have the appeal heard by the district court judges instead of the BAP; election by appellant must be made at the time of filing the notice of appeal. Applicable Rules (1)Appeals to the district court and BAP >> Part VIII of the Federal Rules of Bankruptcy Procedure. (2)Appeals to the court of appeals >> Federal Rules of Appellate Procedure. In the District Court: Appeals
31 In the District Court: Appeals B.WHEN IS AN ORDER APPEALABLE? General rules (28 U.S.C. § 158(a)): (1)Final orders >> Appealable as of right. (2)Interlocutory orders >> Appealable with consent of appellate tribunal. But interlocutory orders increasing or decreasing the exclusivity periods of 11 U.S.C. § 1121 are appealable as of right. Note that the rules of 28 U.S.C. § 158(a) governing bankruptcy appeals do not govern proceedings in which a bankruptcy judge enters proposed findings of fact and conclusions of law. 28 U.S.C. § 157(c), supplemented by Fed. R. Bankr. P. 9033, contains its own review procedures for those proposed findings and conclusions. Whether an order is “final” is a complex question. Outside of bankruptcy, order is final for appeal purposes when decision has been entered that “ends the litigation... and leaves nothing for the court to do but execute the judgment.” Catlin v. United States, 324 U.S. 229, 233 (1945). Finality requirement more liberally/pragmatically construed in unique context of bankruptcy. Orders lifting the automatic stay of 11 U.S.C. § 362 are final orders.
32 In the District Court: Appeals C.PERFECTION OF APPEAL Perfection of the appeal requires the appellant to take specific steps within specified time periods, including: (1)Filing notice of appeal with the clerk of the bankruptcy court within 14 days from the date of entry of the judgment, order, or decree appealed from (Fed. R. Bankr. P. 8002(a)) unless that deadline is enlarged; (2)Identifying issues presented on appeal and defining the record to be considered; (3)Filing appeals briefs; and (4)Paying the appeal fees. Failure to perfect may result in dismissal Failure to take any of the above steps (besides failure to timely file a notice of appeal) is grounds for “such action as the district court or [the BAP] deems appropriate, which may include dismissal of the appeal.” Timely filing of the notice of appeal is jurisdictional; if that step is not timely completed, the reviewing court does not have jurisdiction over the appeal.
C. Perfection of Appeal (continued) Jurisdictional screening prior to determination of merits Before reviewing/determining the merits of the appeal, the court will screen the case for various purposes, including whether the case will undergo oral argument and whether the case has jurisdictional defects warranting dismissal without determination on the merits. 33
34 In the District Court: Appeals D.STANDARDS ON REVIEW District court may “affirm, modify, or reverse” the bankruptcy court’s judgment or “remand with instructions for further proceedings.” General Rules (1)Findings of fact set aside >> only if “clearly erroneous.” “Due regard” given to bankruptcy court’s opportunity to judge credibility of witnesses. (2)Issues of law >> reviewed “de novo.” These standards apply to appellate review of final or dispositive orders of a bankruptcy judge; they do not apply to the district court’s review of a bankruptcy court’s proposed findings of facts and conclusions of law.
35 In the District Court: Appeals E.MOOTNESS Context: In the unique context of bankruptcy, issues may be more likely to become moot between the time of the initial court order and the appeal. To avoid the risk of mootness, litigants may obtain a stay pending appeal. Statutory Mootness: Mootness is codified in the Bankruptcy Code: 11 U.S.C. § 363(m): Appeal of a sale of a bankrupt’s assets to a good faith purchaser is moot, unless the sale and authorization to sell were stayed pending appeal. 11 U.S.C. § 364(e): Appeal of post-petition financing extended to debtor by a good faith lender is moot, unless the financing and the authorization to obtain the financing were stayed pending appeal. Equitable Mootness: Even if the court can fashion effective relief, the appeal may be dismissed if providing the relief would upset a confirmed plan or other court-approved transaction. See In re AOV Indus., Inc., 792 F.2d 1140 (D.C.Cir.1986)
In the District Court: Appeals F.Dismissals The District Court (but not the Bankruptcy Court) can dismiss an appeal for: Untimely notice of appeal. Failure of the appellant to pay the appeal fee (unless leave to proceed in forma pauperis has been granted). In forma pauperis procedures mimic procedures in an appeal from a judgment in a civil action (but with D.Ct. acting as the appellate court). Failure to designate record or issues. DCt.LBR 8006-1. Failure timely to file a brief. DCt.LBR 8009-1. Equitable mootness or statutory mootness.
37 In the District Court: Appeals G.STAYS PENDING APPEAL Purpose: Losing party is entitled to seek a stay of the bankruptcy court’s judgment to maintain the status quo pending appeal. Otherwise, prevailing party is entitled (subject to the automatic 14-day stay of Fed R. Civ. P. 62, made applicable in bankruptcy proceedings ) to treat the bankruptcy court’s judgment as final. Note that Fed. R. Civ. P. 62, which imposes a 14-day stay against execution/enforcement of a judgment, applies in bankruptcy proceedings. But under Fed. R. Bankr. P. 8005, the bankruptcy court can, notwithstanding Fed. R. Civ. P. 62, suspend or order the continuation of proceedings to protect the rights of the parties. Procedure: Ordinarily, the relief must be sought from the bankruptcy judge in the first instance; if denied, the party seeking the stay may seek it from the district court or the BAP. (Fed. R. Bankr. P. 8005) Standard: The standard for granting a stay pending appeal is generally the same as the standard for issuance of a preliminary injunction.
38 Recent Issues Re: Bankruptcy Judge Authority: Stern v. Marshall Stern v. Marshall, 131 S. Ct. 2594 (2011).
Stern v. Marshall 39 J. Howard dies leaving estate to Son (Pierce). Vickie sues Son in TX Probate Court for tortious interference with a gift. Vickie files bankruptcy in CA. Son files claim in the bankruptcy based on defamation. Vickie counterclaims asserting her tortious interference action. Probate Court rules for Son. Vickie gets nothing. District Court Reduces Vickie’s award to $90 million. Bankruptcy Court rules for Vickie awarding her $475 million (time) Question: Which court entered the first final judgment?
40 Statutory Authority: Justice Roberts, writing for the majority, acknowledged that the bankruptcy court had statutory authority to adjudicate Vickie’s counterclaim—the proceeding was statutorily “core.” Under 28 U.S.C. § 157(b)(1), bankruptcy judges can hear and finally determine all “core” proceedings, subject to appellate review. 28 U.S.C. § 157(b)(2)(C) defines “core” proceedings to include “counterclaims by the estate against persons filing claims against the estate.” In Stern, Vickie asserted her tortious interference claim against Pierce in response to his filing a proof of claim against the bankruptcy estate. Stern v. Marshall Answer: The probate court entered the first final judgment; the bankruptcy court did not have constitutional authority to enter judgment for Vickie on her counterclaim for tortious interference.
41 Stern v. Marshall Constitutional Authority: Even though the proceeding was statutorily “core,” Justice Roberts ruled that Article III of the Constitution prohibited entry of final judgment by the bankruptcy court. Article III requires the federal judicial branch to determine suits at “common law, or in equity, or admiralty.” Vickie’s counterclaim was just that—a suit based on state common law. In this respect, it was no different than the breach of contract claim at issue in Marathon. Both claims sought to “augment the bankruptcy estate” and, therefore, had to be decided by an Article III court capable of exercising the judicial power of the United States. What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action. Stern, at 2615. “ ”
42 Katchen : Bankruptcy referee—lacking life tenure and salary protection— could decide a preference claim against a creditor as part of the process of allowing or disallowing the creditor’s claim against the estate. Katchen v. Landy, 382 U.S. 323 (1966). Bankruptcy referees unquestionably had authority to allow or disallow claims against the estate. estate You owe me $50. But I can recover $50 in preferential payments from you! Stern v. Marshall Question: Did Pierce’s filing a proof of claim in the bankruptcy case give the bankruptcy court authority to decide the counterclaim? Consider: claimant
43 The factual and legal determinations required to rule on Vickie’s counterclaim (based on tortious interference) did not completely overlap with Pierce’s proof of claim (based on defamation).x Facts x xxx xxx x Defamation Tortious Interference Judicial Power. Katchen Exception does not apply. Stern v. Marshall Answer: No, Vickie’s counterclaim would not necessarily be resolved in the process of determining Pierce’s claim against the bankruptcy estate. Besides, Pierce’s claim was disallowed long before Vickie’s counterclaim was tried
44 Takeaways from Stern : Even though a proceeding is statutorily “core” under 28 U.S.C. § 157, a bankruptcy judge might not have the constitutional authority to decide it. Writing for the majority in Stern, Justice Roberts stressed the question present was a “narrow” one that did not “meaningfully change the division of labor in the current statute.” Still, some litigants have successfully argued that other “core” proceedings that “augment” the estate, do not “stem from the bankruptcy,” and are not “resolved in the claims allowance process” must be decided by the district court. See, e.g., In re Refco Seurities Litigation, No. 11 Civ. 8250 (JSR), 2012 WL 1622496 (S.D.N.Y. May 9, 2012). Stern v. Marshall
45 Stern’s impact in the district courts: Novel arguments to withdraw the reference based on Stern. Interlocutory appeals to the district court based on bankruptcy judge’s lack of authority to adjudicate certain motions. Increased submissions of proposed findings of fact and rulings of law where the bankruptcy court finds no authority to enter a final order. District courts, it was feared, could anticipate more bankruptcy matters on their dockets. As a practical matter, that fear was overblown. Stern v. Marshall
46 District of Massachusetts Local Rule 206 CORE PROCEEDINGS REQUIRING FINAL ADJUDICATION BY THE DISTRICT COURT If a bankruptcy judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III of the United States Constitution in a particular proceeding referred under L.R. 201 and determined to be a core matter under 28 U.S.C. § 157, the bankruptcy judge shall hear the proceeding and submit proposed findings of fact and conclusions of law to the district court made in compliance with Fed. R. Civ. P. 52(a)(1) in the form of findings and conclusions stated on the record or in an opinion or memorandum of decision. The district judge 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 in accordance with the federal and local rules of bankruptcy procedure. The district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions. The district court may treat any order or judgment of the bankruptcy court as proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order or judgment consistent with Article III of the United States Constitution. Stern v. Marshall Example of a District Court’s Reaction
47 Features of D. Mass. Local Rule 206: First paragraph: Clearly states that the bankruptcy judge is to decide, in the first instance, whether Stern impacts the proceeding at issue. Second paragraph: Incorporates standard of review for proposed findings of fact and conclusions of law in “non-core” proceedings set forth in Fed. R. Bankr. P. 9033(d). Third paragraph: Allows the district court to treat any final order or judgment by the bankruptcy judge as “proposed findings and conclusions” should it conclude independently that the bankruptcy judge lacked constitutional authority to decide the proceeding. Keeps bankruptcy matters in the bankruptcy court. Even when there is no local rule, district courts are treating Stern-type core matters as though they’re non-core. They don’t want a flood of withdrawn APs. Stern v. Marshall
Recent Issues Re: Bankruptcy Judge Authority: Aftermath of Stern v. Marshall 48 Above: Peter H. Arkison, Chapter 7 Trustee of Estate of Bellingham Insurance Agency, Inc. Maybe he’s smiling because it is not every day the Supreme Court, after Stern, upholds a trustee’s recovery, pursuant to a judgment of the bankruptcy court against a non-creditor of $389,474.36 for a fraudulent conveyance (and does so regardless of whether there was consent to the bankruptcy court’s adjudicating the fraudulent conveyance claim).
Recent Issues Re: Bankruptcy Judge Authority: Executive Benefits Ins. Agency v. Arkison (June 9, 2014) Arkison sued Executive Benefits for a fraudulent conveyance. Bankruptcy court granted summary judgment to Arkison, and the district court affirmed. Ninth Circuit holds that under Stern v. Marshall, Article III does not permit a bankruptcy court to enter final judgment on a fraudulent conveyance claim against a noncreditor unless the parties consent. The Ninth Circuit holds that there was implied consent to the bankruptcy court’s deciding the matter, and, notes that, in any event, the bankruptcy court’s ruling could be treated as a proposed ruling which received de novo review. 49
Recent Issues Re: Bankruptcy Judge Authority: Executive Benefits Ins. Agency v. Arkison (June 9, 2014) Supreme Court ducked the consent issue (leaving a split in the circuits, with, e.g., the Fifth Circuit saying that consent does not remove the Article III obstacle to bankruptcy court adjudication). Court ruled that when Article III bars the bankruptcy court from deciding a “core” proceeding under 28 U.S.C. § 157(b), the bankruptcy judge should submit proposed findings of fact and conclusions of law as though the matter were non-core and subject to de novo review under 28 U.S.C. § 157(c)(1). Court ruled that although that procedure was not followed, the judgment was based on a motion for summary judgment, for which review was de novo, and thus Article III was not violated. 50
Recent Issues Re: Bankruptcy Judge Authority: Aftermath of Stern and Arkison Approach in Some District Court LBRs Arkison effectively blesses the approach that is embodied in the LBR of the District of Massachusetts (“The district court may treat any order or judgment of the bankruptcy court as proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order or judgment consistent with Article III of the United States Constitution.”) 51
Recent Issues Re: Bankruptcy Judge Authority: Aftermath of Stern and Arkison Similar Approach Even Without LBR Bankruptcy court may indicate that in the event that Article III barred entry by the bankruptcy court of a final judgment, its decision is to be treated as proposed findings of fact and conclusions of law. Example: In re Stevenson, 2013 WL 8149438 at *1 (Bankr. D.D.C. Jan. 4, 2013), aff’d, 2014 WL 1125353 at *1 n.4 (D.D.C. Mar. 20, 2014), appeal pending (D.C. Cir.) (Case Nos. 14-7048 and 14-7049). 52
Recent Issues Re: Bankruptcy Judge Authority: Aftermath of Stern and Arkison A Wrinkle in That Approach in BAP Circuits Under 28 U.S.C. § 158(c)(1), a failure timely to elect to have the district court hear the appeal results in the appeal being heard by the BAP (if the circuit has a BAP). A BAP does not play the Article III role of reviewing proposed findings of fact and conclusions of law de novo. A bankruptcy court order that “in the event that Article III barred entry by the bankruptcy court of the judgment, the court’s decision is to be treated as proposed findings of fact and conclusions of law” presents an obvious problem in BAP circuits. If the appeal ends up in the BAP for lack of a timely § 158(c)(1) election, does the clerk transmit the bankruptcy court’s ruling as a proposed ruling to the district court as a proposed ruling and its judgment to the BAP for appellate review? 53