Stern v. Marshall: One Year Later

Transcription

1 Ricky Shelton 1 David Leta Snell & Wilmer L.L.P. 15 West South Temple, Ste Salt Lake City, UT dleta@swlaw.com There is no liberty if the power of judging be not separated from the legislative and executive powers. Montesquieu, Spirit of Laws 181 Few Supreme Court decisions will have a larger impact on the day-to-day work of judges and lawyers [than Stern v. Marshall]. Erwin Chemerinsky Mr. Shelton is a Summer Associate at Snell & Wilmer and a third year law student at the University of Virginia School of Law. I am indebted to him for his assistance on this paper.

2 TABLE OF CONTENTS INTRODUCTION... 1 BACKGROUND... 1 STERN v. MARSHALL... 5 CONFUSION AFTER STERN... 9 NARROW OR BROAD FRAUDULENT TRANSFERS THE ROLE OF THE BANKRUPTCY COURT IN UNCONSTITUTIONAL CORE PROCEEDINGS CONSENT APPROVAL OF SETTLEMENTS EFFECT ON OTHER ARTICLE I COURTS SUBJECT MATTER JURISDICTION CASES IN THE TENTH CIRCUIT CONCLUSION... 25

3 1 INTRODUCTION The federal bankruptcy courts in the United States of America touch people from all walks of life, and affect commercial transactions of all sizes. Thus, the constitutional limit of a bankruptcy court s power is of critical importance to our system of solving financial problems in a just and speedy fashion. Last year, in a landmark case, the Supreme Court of the United States called into question this constitutional power. Since then, courts across the country have been struggling to understand and apply the decision in numerous situations that bankruptcy courts face on a daily basis. This paper will discuss the decision, its background and the resulting aftermath. BACKGROUND The separation of government power is the hallmark of the United States Constitution. The division of power serves two purposes: to safeguard each branch of government from intrusion by the others and to protect individuals from tyranny. 2 In creating three branches of government, the Framers believed it was essential that the judiciary remain truly distinct from both the legislature and the executive. 3 Article III of the Constitution secures the independence of the judiciary. It mandates that [t]he 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. 4 It requires that judges of Article III courts hold their Offices during good Behavior and receive for their Services[ ] a Compensation[ ] [that] shall not be diminished during their tenure. 5 The salary 2 Stern v. Marshall, 131 S.Ct. 2594, 2609 (2011). 3 The Federalist No. 78, p. 466 (C. Rossiter ed. 1961) (A. Hamilton). 4 U.S. Const. art. III, 1. 5 Id.

4 2 and tenure guarantees for Article III judges are an inseparable element of the constitutional system of checks and balances that both defines the power and protects the independence of the Judicial Branch. 6 The autonomy of the judiciary would be compromised if the other branches of government could assign the Government s judicial Power on entities outside Article III. 7 Thus, Congress cannot withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty. 8 The Bankruptcy Code has tested the boundaries of which matters can be withdrawn from Article III courts. Bankruptcy judges do not qualify as Article III judges. Bankruptcy judges are appointed for 14-year terms and can be removed at any time by circuit judicial councils. 9 The salaries of bankruptcy court judges are subject to adjustment under the Federal Salary Act. 10 Because they lack the tenure and salary protections of Article III judges, bankruptcy judges hold less authority. The question of how much authority the Constitution allows bankruptcy judges to possess has proved difficult to answer. The complexity derives from the English bankruptcy model which bifurcated jurisdiction over bankrupt estates into summary and plenary proceedings. Under the supervision of Lord Chancellor, bankruptcy commissioners were authorized to administer bankrupt estates according to in rem jurisdiction. This jurisdiction, also sometimes referred to as a summary proceeding, was limited to a debtor s property that actually found its way into the hands of the commissioners and the estate s representatives. 11 Bankruptcy commissioners, however, could not handle disputes, known as plenary proceedings, regarding what property belonged to the 6 Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 58 (1982). 7 Stern, 131 S.Ct. at Murray s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272, 284 (1856) U.S.C. 152(a)(1) (2006) U.S.C. 153(a) (2006). 11 Ralph Brubaker, Article III's Bleak House (Part I): The Statutory Limits of Bankruptcy Judges' Core Jurisdiction, 31 No. 8 Bankr. L. Letter 1 (Aug. 2011).

5 3 bankrupt estate. Moreover, summary proceedings were more informal and expeditious than plenary proceedings. Thus, the distinction between bankruptcy courts and Article III courts grew out of the English division between summary proceedings brought before a commissioner and plenary proceedings brought before a superior court. Congress adopted the English bankruptcy model in the Bankruptcy Act of Non- Article III bankruptcy commissioners were charged with adjudicating all summary proceedings. The Bankruptcy Act of 1898 designated bankruptcy commissioners as bankruptcy referees. 12 In determining the extent of authority held by these bankruptcy referees, the Supreme Court routinely invoked the plenary/summary distinction: bankruptcy referees could determine summary matters, but plenary matters had to be brought before an Article III judge. 13 When Congress reformed the bankruptcy laws in 1978, it expanded the scope of bankruptcy jurisdiction to include any proceeding related to the bankruptcy case. The broad jurisdictional grant of power to the bankruptcy courts was soon challenged, however. In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., the Supreme Court considered whether bankruptcy judges could constitutionally be vested with jurisdiction to decide [a] statelaw contract claim against an entity that was not otherwise part of the bankruptcy proceedings, 14 and held that the assignment of such state law claims for resolution by bankruptcy judges violates Article III of the Constitution. 15 The Court recognized that Congress could constitutionally assign some matters from Article III courts to legislative courts, but such matters must involve public rights. 16 The Court described public rights as proceedings arising between 12 Bankruptcy referees came to be called judges in See Elizabeth Warren and Jay Lawrence Westbrook, The Law of Debtor and Creditors 800 (6th ed. 2009). 13 E.g., Schoenthal v. Irving Trust Co., 287 U. S. 92 (1932); Katchen v. Landy, 382 U.S. 323 (1966) U.S. 50, 53 (1982). 15 Id. at Id. at

6 4 individuals and the Government in connection with the performance of the constitutional functions of the executive or legislative departments that historically could have been determined exclusively by those branches. 17 Although the Court could not agree on the scope of the public rights exception to Article III, it concluded that the exception did not encompass the state law claim at issue in the case. 18 To comply with the Supreme Court s holding in Northern Pipeline, Congress amended the bankruptcy code in The amended statute separated bankruptcy proceedings into three categories: (1) proceedings that aris[e] under title 11 ; (2) proceedings that arise in a Title 11 case; and (3) proceedings that are related to a case under title Proceedings that arise under the Bankruptcy Code or arise in a bankruptcy case are classified as core proceedings. 21 Proceedings related to the Bankruptcy Code are classified as noncore. 22 Bankruptcy courts are authorized to hear and issue final determinations in all core proceedings. 23 For noncore proceedings, however, bankruptcy courts are only authorized to submit proposed findings of fact and conclusions of law, which then are reviewed de novo by the district court. 24 Only district courts can enter a final order or judgment in noncore proceedings. 25 Although this jurisdictional scheme has governed bankruptcy proceedings for the past thirty years, its constitutionality was undermined last year in Stern v Marshall Id. 18 Id. at ( The distinction between public rights and private rights has not been definitively explained in our precedents. Nor is it necessary to do so in the present cases, for it suffices to observe that a matter of public rights must, at a minimum, arise between the government and others. ) (quoting Ex Parte Bakelite Corp., 279 U.S. 438, 451(1929)). 19 Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No (1984) U.S.C. 157 (2006) (b)(1) (c)(1). 23 Id. 24 Id. 25 Id S.Ct (2011).

7 5 STERN v. MARSHALL The rigid core/noncore dichotomy of bankruptcy proceedings is now very blurry. In Stern v. Marshall, the Supreme Court held that the Bankruptcy Court lacked authority under Article III of the United States Constitution to enter a final judgment on a widow s counterclaim even though her counterclaim constituted a specifically identified core proceeding under the Bankruptcy Code. 27 The implications of this decision remain unclear. In 1991, J. Howard Marshall II (J. Howard), a wealthy oilman, met Vickie Lynn Marshall (Vickie), later known publically as Anna Nicole Smith, at a burlesque bar in Houston, Texas. 28 J. Howard courted Vickie for the next three years, showering her with lavish gifts. J. Howard and Vickie married on June 27, He was eighty-nine years old. She was twenty-six. Thirteen months later, J. Howard died. A decade-long legal battle over his wealth ensued between his wife Vickie and his son E. Pierce Marshall (Pierce). The litigation outlived both parties Pierce died in June 2006 and Vickie died in February The case was carried on by Howard Stern, Executor of Vicki s estate, and Elaine Marshall, Executrix of Pierce s estate. The battle began just prior to J. Howard s death when Vickie brought a claim against Pierce in Texas probate court alleging that Pierce tortuously interfered with her expectancy of an inter vivos gift from J. Howard. A few months later, Vickie filed for Chapter 11 bankruptcy in California. Soon after, Pierce filed an adversary proceeding in Vickie s bankruptcy case alleging defamation. In response, Vickie filed a counterclaim for tortious interference that was identical to the claim Vickie asserted against Pierce in the Texas probate court. Vickie prevailed on her tortious interference claim in the California bankruptcy court, but lost in Texas U.S.C. 157(b)(2). 28 Marshall v. Marshall, 547 U.S. 293, (2006).

8 6 At first glance, the question before the Supreme Court in Stern was straightforward: which court first entered final judgment on Vickie s tortious interference claim? On November 5, 1999, following a bench trial, the California bankruptcy court rendered a decision on the claim and awarded Vickie $475 million in compensatory and punitive damages. The California bankruptcy court asserted that its decision was a final judgment because Vickie s tortious interference counterclaim constituted a core proceeding under 28 U.S.C. 157(b)(2)(C) which states that [c]ore proceedings include counterclaims by the estate against persons filing claims against the estate. Pierce had filed a proof of claim in Vickie s bankruptcy case. After her victory in the California bankruptcy court, Vickie requested that the Texas probate court accord full faith and credit to the judgment of the California bankruptcy court. The Texas court refused, contending that there was no such obligation because the Texas proceeding had commenced before the bankruptcy case was filed. 29 After a five month trial, the Texas jury unanimously rejected Vickie s tortious interference claim. The Texas probate court then entered final judgment in favor of Pierce holding that J. Howard did not intend to give Vickie a gift either prior to or upon his death. Pierce also appealed the decision of the California bankruptcy court to the California District Court, which rejected the bankruptcy court s conclusion that it had core jurisdiction over Vickie s tortious interference claim. The District Court then vacated the bankruptcy court s judgment, reviewed the case de novo, ruled in favor of Vickie and awarded her $90 million in compensatory and punitive damages. Thus, in Stern the Supreme Court had to decide which judgment was the first final judgment entered on Vickie s claim and entitled to preclusive effect the bankruptcy court judgment, or the Texas probate judgment. 29 Id.

9 7 The Supreme Court analyzed the case by addressing two issues: (1) whether the bankruptcy court had the statutory authority under 28 U.S.C. 157(b) to issue a final judgment on Vickie s tortious interference claim; and (2) if so, whether conferring that authority on the bankruptcy court was constitutional. 30 In addressing the statutory issue, the Court found that the definition of a core proceeding in 28 U.S.C. 157(b)(3) was ambiguous. 31 Vickie s claim, however, fell under one of the examples of a core proceeding listed in 157(b)(2)(C), namely, counterclaims by the estate against persons filing claims against the estate as core proceedings. Thus, the Court concluded that 157(b)(2)(C) grants the bankruptcy court statutory authority to enter a final judgment on Vickie s tortious interference counterclaim. Next, the Court addressed the issue of whether 28 U.S.C. 157(b)(2)(C) is constitutional under Article III. On this question, the Court held that Congress could not grant authority to the bankruptcy court over Vickie s counterclaim because it was a private right entitled to adjudication in an Article III court. The Court acknowledged a category of claims, referred to as public rights, which Congress could assign to non-article III courts. The Court defined a public right as a case[ ] in which the claim at issue derives 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. 32 Vickie s claim, however, did not fall within any of the various formulations of the [public rights] concept that appear in this Court s opinions. 33 The Court reached this conclusion based on seven factors: (1)Vickie s claim fell under state common law; 34 (2) it was not completely dependent upon adjudication of a claim 30 Stern, 131 S.Ct at Id. at Id. at Id. at Id. at 2614.

10 8 created by federal law; 35 (3) Pierce did not truly consent to resolution of Vickie s claim in the bankruptcy court proceedings; 36 (4) the asserted authority to decide Vickie s claim is not limited to a particularized area of law ; 37 (5) there was never any reason to believe that the process of adjudicating Pierce s proof of claim would necessarily resolve Vickie s counterclaim; 38 bankruptcy law; 39 (6) the trustee was not asserting a right of recovery created by federal and (7) the Bankruptcy Judge ha[d] the power to enter appropriate orders and judgments including final judgments subject to review only if a party chooses to appeal. 40 Interestingly, the Court did not seem troubled by the fact that the allowance or disallowance of the counterclaim would have a material impact on the amount of assets in Vickie s bankruptcy estate. The Court insisted that its holding was a narrow one. 41 We conclude today that Congress, in one isolated respect, exceeded [the limitations of Article III] in the Bankruptcy Act of Although the Court acknowledged a fail[ure] to provide concrete guidance on the public rights exception to Article III, it held that the authority of a bankruptcy judge to enter a final judgment depends on whether that action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process. 43 The Court predicted that its decision would not meaningfully change[ ] the division of labor between bankruptcy and district courts. 44 So far, that prediction has proved to be wrong. 35 Id. 36 Id. 37 Id. at Id. at Id. at Id. at Id. at Id. 43 Id. at Id. at 2620.

11 9 Justice Scalia, the fifth vote for the majority, wrote a concurrence to simplify the doctrine of public rights. For Justice Scalia, the public rights exception to Article III must at minimum arise between the government and others. 45 He criticized the majority for analyzing the public rights exception under a surfeit of factors that had nothing to do with the text or tradition of Article III. 46 According to Justice Scalia, an Article III judge is required in all federal adjudications, unless there is a firmly established historical practice to the contrary. 47 He acknowledged the possibility that historical practice may permit non-article III judges to process claims against the bankruptcy estate, but did not resolve this issue because the subject had not been briefed. 48 Justice Scalia concluded that Vickie s claim did not fall under the public rights exception because the government wasn t a party to the claim and Vickie failed to point to a historical practice that authorized a non-article III judge to adjudicate a counterclaim such as hers. Thus, Justice Scalia concluded that the bankruptcy court did not have the constitutional authority to enter final judgment on Vickie s tortious interference claim. 49 CONFUSION AFTER STERN Stern sent shock waves through the lower courts. 50 Released in late June 2011, Stern was cited in well over a 100 cases before the end of As one bankruptcy court put it: Unfortunately, Stern has become the mantra of every litigant who, for strategic or tactical reasons, would rather litigate somewhere other than the bankruptcy court. 52 Supreme Court 45 Id. 46 Id. at Id. 48 Id. 49 Id. 50 See, e.g., Meoli v. Huntington National Bank (In re Teleservices Group, Inc.), 2011 WL , 323 (Bankr. W.D. Mich. Aug. 17, 2011) (describing Stern as a bombshell to the bankruptcy system). 51 Frank Volk, First Impressions: Interpreting Stern, Am. Bankr. Inst. L.J., January In re Ambac Financial Group, Inc., No , 2011 WL , at 8 (Bankr. S.D.N.Y. Sept. 23, 2011).

12 10 scholar Erwin Chemerinsky noted, few Supreme Court decisions will have a larger impact on the day-to-day work of judges and lawyers than Stern. 53 The litany of litigation in the wake of Stern has caused enormous confusion in courts throughout the country. 54 Courts have adopted conflicting interpretations of the case and its holding. 55 One judge predicted years of uncertainty in bankruptcy courts because of Stern. 56 The only inevitability at this point is that the case law interpreting Stern will continue to multiply and the issues addressed will become more complex. 57 While Stern has generated a lot of questions, the issue that has been most subject to divergent opinions is how Stern affects the power of a bankruptcy court to adjudicate avoidance actions, such as fraudulent transfer claims. Stern has also cast doubt on several other claims, however, including: the ability of parties to consent to a final judgment in bankruptcy court; the ability of bankruptcy courts to issue proposed findings of fact and conclusions of law on core proceedings where it lacks constitutional power to enter a final judgment; the ability of bankruptcy courts to approve settlements and enter money judgments in nondischargeability cases; and the constitutionality of decisions by other Article I judges, such as magistrates and the Tax Court judges. 53 Erwin Chemerinsky, Enormous Confusion, Nat. L.J., Aug. 29, Id. 55 Compare Meoli v. Huntington National Bank (In re Teleservices Group, Inc.), 2011 WL (Bankr. W.D. Mich. Aug. 17, 2011) (critiquing Stern for providing little to no guidance on what core matter may be appropriately determined by the bankruptcy courts), and In re Bearing Point, Inc., 453 B.R. 486, (Bankr. S.D.N.Y. 2011) (highlighting the difficulties with regard to the consent doctrine and core matters in a post-stern environment), with In re Safety Harbor Resort and Spa, No. 8:10-bk-25886, 2011 Bankr. LEXIS 3238, at *1 (Bankr. M.D. Fla.) ("The Supreme Court's holding in Stern was very narrow."), and Brook v. Ford Motor Credit Co. (In re Peacock), Bankr. No. 8:09-bk CPM, Adv. No. 10-ap CPM, 2011 WL , at *1 (Bankr. M.D. Fla. Sept. 2, 2011) ("The narrow holding in Stern... does not impact a bankruptcy court's ability to enter a final judgment in any other type of core proceeding authorized under 28 U.S.C. 157(b)(2)."). 56 See Meoli v. Huntington National Bank (In re Teleservices Group, Inc.), 2011 WL , 326 (Bankr. W.D. Mich. Aug. 17, 2011). 57 Frank Volk, First Impressions: Interpreting Stern, Am. Bankr. Inst. L.J., January 2012.

13 11 NARROW OR BROAD There is no uniform interpretation of Stern. As one bankruptcy judge observed, one can find decisions supporting broad, narrow, and middle-of-the-road interpretations. 58 Some courts have interpreted Stern narrowly based on the language of the decision. 59 These courts limit Stern to its unique facts Stern only applies to counterclaims like Vickie s that fall under 28 U.S.C. 157(b)(2)(C). Other courts, however, have interpreted Stern more broadly based on the rationale of the decision. 60 Brook v. Ford Motor Credit Co. is an example of the narrow view. 61 A creditor contended that the bankruptcy court lacked constitutional jurisdiction over a trustee s claim that was based solely on state law. The bankruptcy court rejected the creditor s motion to dismiss and reasoned that Stern is limited to precisely [its] facts. 62 The court further explained that the narrow holding in Stern does not impact a bankruptcy court s ability to enter a final judgment in any other type of core proceeding authorized under 28 U.S.C. 157(b)(2). 63 In contrast, other courts have adopted a broad interpretation of Stern by focusing more on its underlying rationale than on its unique facts. These courts have extended the holding of Stern beyond state law counterclaims by reasoning that Stern s cautionary dicta does not overcome its simple logic that core proceedings outside the public rights exception must be finally 58 Liberty Mutual Insurance Co. v. Citron (In re Citron), No , Adv. No , 2011 WL , at 1 n. 1 (Bankr. E.D.N.Y. Oct ). 59 See, e.g., In re Safety Harbor Resort and Spa, 456 B.R. 703 (Bankr. M.D. Fla. 2011) ("This Court agrees with the Stern Court that the decision in Stern does not change all that much. ) (quoting Stern, 131 S. Ct. at 2620); In re Salander O'Reilly Galleries, 453 B.R. 106, 2011 Bankr. LEXIS 2688, at (Bankr. S.D.N.Y. July 18, 2011) (limiting Stern to the unique circumstances of that case ); Kirschner v. Agoglia, et al. (In re Refco Inc.), 461 B.R. 181, 191 (Bankr. S.D.N.Y. Nov. 30, 2011) (refusing to extend Stern to fraudulent conveyances). 60 See, e.g., Kirschner v. Agoglia, 2012 U.S. Dist. LEXIS (S.D.N.Y., May 9, 2012) (extending Stern to fraudulent conveyances). 61 Brook v. Ford Motor Credit Co. (In re Peacock), Bankr. No. 8:09-bk CPM, Adv. No. 10-ap CPM, 2011 WL , at 1 (Bankr. M.D. Fla. Sept. 2, 2011). 62 Id. 63 Id.

14 12 decided by an Article III Court. 64 According to this broad view, identifying a proceeding as core under 28 U.S.C. 157 does not determine whether bankruptcy courts have the authority to issue a final judgment. The inquiry is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process. 65 If not, then the bankruptcy court cannot enter a final judgment on the cause of action. FRAUDULENT TRANSFERS The split between the narrow and broad interpretations of Stern has been most apparent in fraudulent conveyance actions against non-creditors. 28 U.S.C. 157(b)(2)(H) specifically identifies such actions as core proceedings. Courts disagree on whether bankruptcy courts can enter final judgments on fraudulent conveyance actions against non-creditors under Stern. 66 In Kirschner v. Agoglia, the Trustee of a litigation trust filed an adversary proceeding against the Defendants. 67 The Trustee alleged that the Defendants made fraudulent transfers before filing bankruptcy that were recoverable under 11 U.S.C. 544(b). One of the defendants filed a motion to dismiss on the basis that Stern precluded the bankruptcy court from rendering a final judgment. 64 Kirschner v. Agoglia, 2012 U.S. Dist. LEXIS 65148, 15 (S.D.N.Y., May 9, 2012). 65 Stern, 131 S.Ct. at Compare Paloian v. American Express Co. (In re Canopy Financial Inc.), 464 B.R. 770, 2011 U.S. Dist. LEXIS 99804, at 7-8 (N.D. Ill. Sept. 1, 2011), and Hagan v. Freedom Fidelity Management (In re Fife), 2011 Bankr. Lexis 3544, at 1 (Bankr. W.D. Mich. Aug. 22, 2011), adopted by, judgment entered by, 2011 U.S. Dist. LEXIS (D. W.D. Mich. Sept 20, 2011), and Samson v. Blixseth (In re Blixseth), 2011 Bankr. LEXIS 2953, at (Bankr. D. Mont. Aug. 1, 2011) (holding that under Stern bankruptcy court lacks power to issue a final judgment on fraudulent transfer claim), with Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 3764, at (Bankr. N.D. Cal. Sept. 28, 2011), and In re Safety Harbor Resort & Spa, 456 B.R. 703, 2011 Bankr. LEXIS 3238, at 30, (Bankr. M.D. Fla. Aug. 30, 2011), and Miller v. Greenwich Capital Financial Products (In re American Business Financial Services, Inc.), 457 B.R. 314, 2011 Bankr. LEXIS 2806, at 8-9 (Bankr. D. Del. July 28, 2011) (holding that bankruptcy court has power after Stern to issue a final judgment on fraudulent transfer claim); see also Springel v. Prosser (In re Innovative Community Corp.), 2011 Bankr. LEXIS 3040, at (Bankr. D. V.I. Aug. 5, 2011) (bankruptcy court has power to issue final judgment in avoidance proceeding under 11 U.S.C. 548 and 549, but might not under 11 U.S.C. 544). 67 (In re Refco Inc.), 461 B.R. 181 (2011).

15 13 The bankruptcy court denied the motion and reasoned that the claim at issue in Stern stemmed from state law, whereas the Trustee s fraudulent transfer claim flowed from a federal statutory scheme, namely, 11 U.S.C. 544, 547, 548, 549, and 553. In addition, the bankruptcy court held that avoidance claims have been a core aspect of the administration of bankrupt estates since the 18 th Century based on the bankruptcy courts... in rem jurisdiction. 68 The court emphasized the prominent role that statutory avoidance claims have in bankruptcy cases due to their sheer numbers, and their potential effect on recoveries for creditors. 69 The court conceded that the Supreme Court had classified fraudulent conveyance actions as private rights in Granfinanciera, S.A. v. Nordberg, 70 but concluded that Granfinanciera only applied to Seventh Amendment issues regarding the right to a jury trial. In the court s view, Granfinaciera did not restrict the bankruptcy courts power to decide motions to dismiss and summary judgment motions on fraudulent transfer claims on a final basis. 71 Therefore, the court concluded that Article III of the Constitution does not prohibit the bankruptcy courts' determination of fraudulent transfer claims under 11 U.S.C. 544 and 548 by final judgment. 72 On appeal, the United States District Court for the Southern District of New York disagreed. 73 The District Court held that the bankruptcy court lacks the constitutional authority to enter final judgment on the Trustee s claims against the Movants. 74 The District Court reasoned that Granfinanciera could not be confined to Seventh Amendment issues because the Stern Court analogized Vickie s state law tortious interference claim to the fraudulent 68 Id. at 14 (quoting Cent. Va. Cmty. College v. Katz, 547 U.S. 356, (2006)). 69 Id. at U.S. 33 (1989). 71 Id. at Id. at Kirschner v. Agoglia (In re Refco), 2012 U.S. Dist. LEXIS 65148, 15 (S.D.N.Y., May 9, 2012). 74 Id. at 3.

16 14 conveyance claim in Granfinanciera. 75 The court stated that to classify a fraudulent conveyance claim as a public right would be totally at odds with the Stern Court s analogy to Granfinanciera. The court concluded that claims for fraudulent conveyance under New York statutory law that seek to augment the bankruptcy estate are the very type of claim that must be decided by an Article III court. 76 Other courts have applied Stern to preclude final judgments on avoidance actions under 28 U.S.C. 157(b)(2)(H). 77 The Montana bankruptcy court in In re Blixseth is an example of this approach. 78 There, a Chapter 7 trustee filed an adversary proceeding against a debtor s exhusband seeking to set aside a marital settlement and avoid alleged fraudulent and preferential transfers under the Bankruptcy Code and California law. The ex-husband filed a motion to dismiss. The court granted the motion on the basis that Stern required the fraudulent conveyance claims to be heard by a federal district court. The court relied upon Granfinanciera to conclude that fraudulent conveyance claims in bankruptcy do not fall within the public rights exception. 79 The court reasoned that Stern implies that bankruptcy actions tied to the claims allowance process would fall within the public rights exception as integrally related to federal administration of bankruptcy, while actions to augment the estate would not. 80 The court held the fraudulent conveyance claim at issue is a private right because it is essentially a common law claim attempting to augment the estate, 75 Id. at Id. 77 See, e.g., In re Lyondell Chemical Co., No. 11 Civ (DLC), 2012 U.S. Dist. LEXIS 44329, 2012 WL , at 6-9 (S.D.N.Y. Mar. 29, 2012); In re Heller Ehrman LLP, 464 B.R. 348, 354 (N.D. Cal. 2011) ("Stern clearly implied that the bankruptcy court lacks constitutional authority to enter final judgment on... fraudulent conveyance claims...."); In re Coudert Bros. LLP, No (CM), 2011 U.S. Dist. LEXIS , 2011 WL , at 7-9 (S.D.N.Y. Sept. 23, 2011) (holding bankruptcy court lacked constitutional authority to finally decide Trustee's private state law claims, including, inter alia, fraudulent conveyance claim). 78 Samson v. Blixseth (In re Blixseth), 2011 Bankr. LEXIS 2953, at *33-34 (Bankr. D. Mont. Aug. 1, 2011). 79 Id. at Id.

17 15 does not stem from the bankruptcy itself and would not be resolved in the claims allowance process. 81 Thus, the court could not issue a final judgment upon it. In contrast, the court held it could enter final judgment on the equitable subordination and preferential transfer claims because they arise from the Bankruptcy Code and the claims allowance process. 82 The broad interpretation of Stern, as illustrated by the District Court in Kirschner v. Agoglia and by the bankruptcy court in In re Blixseth, is likely to carry the day. The U.S. Department of Justice (DOJ) recently conceded that Stern extends beyond 157(b)(2)(C). The DOJ filed an amicus brief in the Ninth Circuit case of In re Bellingham Insurance Agency Inc. that stated 157(b)(2)(H) is unconstitutional as applied to fraudulent conveyance actions against noncreditors who have not consented to bankruptcy court adjudications. Because the DOJ is charged with defending the constitutionality of acts of Congress, its concession that 157(b)(2)(H) is unconstitutional means that it could find no reasonable argument for the narrow interpretation of Stern adopted in In re Peacock and other courts. This development promises to reshape the debate over the implications of Stern now raging in the bankruptcy courts. 83 THE ROLE OF THE BANKRUPTCY COURT IN UNCONSTITUTIONAL CORE PROCEEDINGS Another question after Stern is whether bankruptcy courts can issue proposed findings of fact and conclusions of law on core claims where it otherwise lacks constitutional power to enter a final judgment. Stern essentially added a third category of bankruptcy cases to the core/noncore dichotomy. The first category consists of core proceedings where the bankruptcy court can constitutionally enter a final judgment. The second consists of noncore proceedings in 81 Id. at Id. 83 Danielle Spinelli & Craig Goldblatt, Bellingham: No Reasonable Argument for Narrow Reading of Stern, Am. Bankr. Inst. L.J., April 14, 2012.

18 16 which the bankruptcy court may submit proposed findings of fact and conclusions of law for de novo review by the District Court. The third new category consists of unconstitutional core proceedings in which the Bankruptcy Court lacks power to enter a final judgment, but the matter is nevertheless specifically identified in 157(b) as a core proceeding. For noncore claims that are related to a bankruptcy proceeding, the statutory authority is clear: the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected. 84 For core claims, however, 28 U.S.C. 157(b)(1) simply provides that a bankruptcy court may enter appropriate orders and judgments. Because 157(b)(1) was enacted before Stern it is unclear whether it authorizes a bankruptcy court to issue reports and recommendations in those core proceedings where the bankruptcy court lacks constitutional authority. Courts have reached opposite conclusions regarding this issue. 85 CONSENT The Stern Court did not directly address whether bankruptcy courts can issue final judgments on core proceedings where it lacks constitutional authority if the parties consent. The Court avoided the issue by concluding that Pierce did not consent to the adjudication of Vickie s (c)(1). 85 Compare Kirschner v. Agoglia, 2012 U.S. Dist. LEXIS (S.D.N.Y., May 9, 2012) (holding that bankruptcy court has authority to conduct proceedings and issue a report and recommendation to the district court), and Earthwise Energy, Inc. v. Crusader Energy Group, Inc. (In re Crusader Energy Group), Case No bjh-11; Adv. Proc. No bjh (Bankr. N.D. Tex. Aug. 25, 2011) (holding that not allowing bankruptcy courts to hear private right core proceedings would render an absurd result contrary to principles of statutory construction), and Gecker v. Flynn (In re Emerald Casino, Inc.), 459 B.R. 298, 300 (Bankr. N.D. Ill. 2011) (rejecting the argument that bankruptcy courts cannot hear and issue proposals on private right core proceedings because of its perverse remedial effect), with Samson v. Blixseth (In re Blixseth), 2011 Bankr. LEXIS 2953 (Bankr. D. Mont. Aug. 1, 2011) (holding that the bankruptcy does not have statutory authority to hear a fraudulent conveyance claim).

19 17 counterclaim. 86 There is no agreement among commentators on this issue U.S.C. 157(c)(2) allows a bankruptcy court to enter final judgment on noncore matters with the consent of the parties. But there is no express statutory authority that permits parties to consent to entry of a final judgment by a bankruptcy court in an unconstitutional core proceeding. Most courts that have addressed the issue have declared that parties may consent to a bankruptcy court s final adjudicatory authority over unconstitutional core proceedings since these cases are like noncore proceedings where consent jurisdiction is allowed. 88 Yet, some judges are not convinced. In In re Bearing Point, Judge Gerber wrote that in Stern the Supreme Court found Pierce's consent inadequate for the bankruptcy judge to determine the counterclaim. 89 Judge Gerber opined that consent may never be sufficient for a bankruptcy judge to issue final judgments on noncore matters. 90 Constitutional law scholar 86 Stern, 131 S. Ct. at Commentators disagree about whether the rational in Stern actually rejects the consent doctrine with regard to core proceedings. Compare Ralph Brubaker, Article III's Bleak House (Part I): The Statutory Limits of Bankruptcy Judges' Core Jurisdiction, 31 No. 8 Bankr. L. Letter 1 (Aug. 2011) (hypothesizing that based on the Supreme Court's reasoning in Stern a bankruptcy court's ability to finally adjudicate core proceedings based on the consent of the litigants will be upheld), with Adam Lewis, Alexandra Steinberg Barrage, Vincent J. Novak & Dina Kushner, Stern v. Marshall: A Jurisdictional Game Changer?, Pratt s J. Bankr. L., September 8, 2011 (concluding that the Stern opinion casts "significant doubt" on the jurisdiction of bankruptcy courts by consent). 88 See, e.g., In re Safety Harbor Resort and Spa, 456 B.R. 703 (Bankr. M.D. Fla. 2011) (holding that parties can still consent--either expressly or impliedly--to a bankruptcy court's jurisdiction after Stern); In re Olde Prairie Block Owner, LLC, 2011 WL , at 1 (Bankr. N. D. Ill. Aug. 25, 2011) (concluding that bankruptcy court can enter a final order on counterclaims asserted by the debtor whether or not they were otherwise resolvable in the claims adjudication process based upon consent of the parties); Stoebner v. PNY Technologies, Inc. (In re Polaroid Corp.), 451 B.R. 493 (Bankr. D. Minn. 2011) (refusing to enter final judgment on state law action in adversary proceeding absent consent); Jones v. Mandel (In re Mandel), 2011 WL , at 3 (Bankr. E.D. Tex. July 12, 2011) (concluding that bankruptcy court did not have constitutional authority to decide a counterclaim in the absence of parties' express consent); NYU Hospitals Center v. HRH Construction, LLC (In re HRH Constr. LLC), No (RDD), 2011 WL , at 6 (Bankr. S.D.N.Y. Aug. 2, 2011) (holding that bankruptcy court can enter a final order on state breach of contract action with consent of the parties); Meoli v. The Huntington National Bank (In re Teleservices Group, Inc.), 456 B.R. 318 (Bankr. W. D. Mich. 2011) (concluding that bankruptcy court would have authority to enter a final order in a fraudulent transfer adversary proceeding if the parties consent); Keybank National Association v. Martinez (In re Martinez), 2011 WL , at 1 (Bankr. N.D. Ohio July 18, 2011) (holding that bankruptcy court can enter final order on state law conversion claim and dischargeability issues with parties' consent). 89 See In re Bearing Point, Inc., 453 B.R. 486, (Bankr. S.D.N.Y. 2011). 90 Id.

20 18 Erwin Chemerinsky came to the same conclusion. 91 It also can be argued that Pierce s consent to which the Supreme Court referred in Stern concerned his defamation claim, not Vickie s tortious interference counterclaim. 92 Further, the constitutionality of 28 U.S.C. 157(c)(2) was not at issue in Stern, and the Court cited to it with approval in reference to the bankruptcy court s determination of Pierce s defamation claim. 93 Thus, it is more likely than not that bankruptcy judges can issue final judgments in core proceedings where it does not have constitutional power if all parties consent. 94 The consent issue is important because if consent forms a basis for a final judgment, the impact of Stern can be mitigated. 95 For example, bankruptcy courts in Florida are developing a mechanism to ensure that parties consent to their jurisdiction. Worried that Stern would waste the resources of the parties and the judiciary, the Bankruptcy Court for the Middle District of Florida amended its Order Setting Pre-trial Conference to require any party objecting to the bankruptcy court s final judgments on any issue must file a motion requesting that the court determine whether the proceeding is a core proceeding. 96 The motion is subject to a time constraint. Failure to file such a motion in a timely manner results in a deemed consent by the parties to the bankruptcy court's entry of a final judgment in the proceeding. The Bankruptcy Court for the Southern District of Florida has adopted a similar procedure Erwin Chemerinsky, Enormous Confusion, Nat. L.J., Aug. 29, Stern, 131 S. Ct. at Id. 94 Roberta Colton & Stephanie Lieb, Is Bankruptcy Court Jurisdiction in Flux Because of Anna Nicole Smith?, 86 Fla. Bar J. 36, 26 (2012) ( Stern simply suggests that consent must be express and not by implication. ). 95 Christopher Lockman, Makalidung s Post: How Stern v. Marshall is Shaking Bankruptcy Court Jurisdiction to its Core, 50 Duq. L. Rev. 125 (2012). 96 Roberta Colton & Stephanie Lieb, Is Bankruptcy Court Jurisdiction in Flux Because of Anna Nicole Smith?, 86 Fla. Bar J. 36, 27 (2012). 97 Id.

21 19 APPROVAL OF SETTLEMENTS Another unanswered question spawned by Stern is whether bankruptcy courts can approve proposed settlements. The bankruptcy court in the Southern District of New York addressed this issue in In re Ambac Financial Group Inc. 98 Certain parties objected to a settlement on the basis that Stern prohibited the bankruptcy court from approving the deal. The court disagreed, distinguishing Stern in the following manner: Here, the Debtor does not seek to try the Derivative Actions in the bankruptcy court. Instead, the Debtor seeks this Court s approval of its disposition of the claims at issue in the Derivative Actions, assets which are property of the Debtor s estate. 99 The court added that whatever Stern may ultimately be held to mean it most certainly does not stand for the proposition that the bankruptcy court cannot approve the compromise and settlement of a claim which is indisputably property of a debtor s estate. 100 At least two other courts have agreed. 101 EFFECT ON OTHER ARTICLE I COURTS The authority of magistrate judges may also be in jeopardy after Stern. For example, the Fifth Circuit sua sponte directed parties to brief the issue of whether, under Stern, a magistrate judge can enter a final judgment in a case tried by consent under 28 U.S.C. 636(c). 102 The court recognized the many similarities of the statutory powers of federal magistrate judges and bankruptcy court judges. Nevertheless, after reviewing the briefs, the court concluded that it could not extend Stern to overturn precedent which established the validity of such consent B.R. 299 (Bankr. S.D.N.Y. 2011). 99 Id. at Id. 101 In re Washington Mutual Inc., No , 2011 WL (Bankr. D. Del. Sept. 13, 2011) (holding that Stern did not prevent the bankruptcy court from entering a confirmation order that included settlement of state law claims under Rule 9019); In re Okwonna-Felix, No , 2011 WL (Bankr. S.D. Tex. Aug. 3, 2011) (holding that the bankruptcy court had authority to approve a settlement under a public rights dispute because the bankruptcy code is a public scheme ). 102 Technical Automation Servs. Corp. v. Liberty Surplus Ins. Corp., No (5th Cir. March 5, 2012).

22 20 jurisdiction. Given Stern s repeated emphasis on its own limited application, the court held that Stern did not undermine 28 U.S.C. 636(c). 103 Some commentators suspect Stern also might undermine other Article I courts, including the Tax Court. 104 The Tax Court is composed of nineteen judges "appointed by the President with the advice and consent of the Senate" and who serve fifteen-year terms. 105 No such challenge to the constitutionality of the Tax Court has been made yet. Even if a challenge were made, the Tax Court would likely be held to be within the public rights exception to Article III because it adjudicates public rights disputes between the government and taxpayers. 106 SUBJECT MATTER JURISDICTION Courts have ruled that Stern does not undermine bankruptcy courts subject matter jurisdiction because 28 U.S.C. 157 is not a jurisdictional statute. 107 If the district court has subject matter jurisdiction pursuant to 28 USC 1334 over a core matter, then pursuant to 157 the bankruptcy court does as well. One court that initially held it lacked subject matter jurisdiction to hear a fraudulent conveyance claim due to Stern overruled itself on the issue three months later Id. at Jolene Tanner, Stern v. Marshall: The Earthquake That Hit the Bankruptcy Courts and the Aftershocks That Followed, 45 Loy. L.A. L. Rev. 587, (2012). 105 I.R.C. 7441, 7443(a)-(e) (2006). 106 Jolene Tanner, Stern v. Marshall: The Earthquake That Hit the Bankruptcy Courts and the Aftershocks That Followed, 45 Loy. L.A. L. Rev. 587, (2012). 107 See Stern, 131 SCt at 2607 ( 157 does not implicate questions of subject matter jurisdiction ); see, e.g., In re Republic Windows & Doors, LLC, 460 BR 511, 514 (Bankr ND Ill 2011); Reed v. Linehan (In re Soporex, Inc.), Adv. No BJH, 2011 Bankr. LEXIS 4695 (Bankr. N.D. Tex. Nov. 28, 2011); Goldstein v. Eby-Brown (In re Universal Mktg., Inc.), 459 B.R. 573, 577 (Bankr. E.D. Pa. 2011); Hagan v. Classic Products Corp. (In re Wilderness Crossings, LLC), Adv. No , 2011 Bankr. LEXIS 5016 (Bankr. W.D. Mich. Nov. 8, 2011). 108 In re Blixseth, 2011 WL , at *1-2 (Bankr D Mont).

23 21 CASES IN THE TENTH CIRCUIT The Tenth Circuit Court of Appeals has not yet ruled on the scope of Stern s holding. Two Tenth Circuit District Courts have cited to Stern, 109 and nineteen Tenth Circuit Bankruptcy Courts cases have cited to Stern. 110 In fifteen of these cases, the courts have merely 109 Childs v. Unified Life Ins. Co., 2011 U.S. Dist. LEXIS , n. 1 (N.D. Okla. Dec. 2, 2011) (granting parties, in light of Stern, the opportunity to withdraw consent to Joint Motion for Approval of Settlement); Mercury Cos. v. FNF Security Acquisition, Inc., 460 B.R. 778, 2011 U.S. Dist. LEXIS (D. Colo. 2011) (holding that Stern allowed bankruptcy courts to adjudicate related to matters with the parties consent). 110 Musich v. Graham (In re Graham), 455 B.R. 227, 2011 Bankr. LEXIS 2670, n. 27 (Bankr. D. Colo. 2011) (holding that bankruptcy court has authority to rule on nondischargeable debt issue even though Stern casts doubt on such authority); Crescent Oil Co. v. Near (In re Crescent Oil Co.), 2011 Bankr. LEXIS 3441, n. 10 (Bankr. D. Kan. Aug. 31, 2011) (citing Stern for proposition that filing a proof of claim or counterclaim does not automatically waive a defendant s right to a jury trial on unrelated claims); In re Chameleon Entertainment Systems, 2011 Bankr. LEXIS 3375, n. 47 (Bankr. D. Colo. Sept. 2, 2011) (noting that issues of the invalidity of a settlement would not be addressed by bankruptcy court even if they were considered core proceedings because of Stern); In re Mitchell, 2011 Bankr. LEXIS 3362, n. 32 (Bankr. D. Colo. Sept. 2, 2011) (noting that issues of the invalidity of a settlement would not be addressed by bankruptcy court even if they were considered core proceedings due to Stern); In re Howarth, 2011 Bankr. LEXIS 3445, n. 9 (Bankr. D. Colo. Sept. 9, 2011) (noting that even if fraud and contract issues were found to be core proceedings the bankruptcy court might not be able to address them in light of Stern); Sender v. Cygan (In re Rivera), 2011 Bankr. LEXIS 3599, *7 (Bankr. D. Colo. Sept. 19, 2011) (citing Stern in support of decision to submit to Colorado Supreme Court an issue of first impression in present case); In re Blakely, 2011 Bankr. LEXIS 3646, n. 20 (Bankr. D. Colo. Sept. 23, 2011) (noting that issues about a testator s intent must be brought before a probate court in light of Stern); Rancher Energy Corp. v. Gas Rock Capital, LLC (In re Rancher Energy Corp.), 2011 Bankr. LEXIS 4236, *10 (Bankr. D. Colo. Nov. 2, 2011) (requiring that parties consent to court s adjudication in order to avoid constitutional issues about jurisdiction raised by Stern); Thompson v. Flagstar Bank, FSB (In re SGD Timber Canyon, LLC), 2011 Bankr. LEXIS 4237, 55 Bankr. Ct. Dec. (LRP) 186, *5 (Bankr. D. Colo. Nov. 3, 2011) (noting that Stern gave rise to jurisdictional concerns but holding that party had a reasonable basis for filing its notice of removal on other grounds); Beard v. Hoopes (In re Hoopes), 2011 Bankr. LEXIS 4441, 1 (Bankr. D. Colo. Nov. 14, 2011) (avoiding Defendant s motion to dismiss under Stern because claim fails under Fed. R. Bankr. P. 7012); Hertzler v. Hoopes (In re Hoopes), 2011 Bankr. LEXIS 4442, 1 (Bankr. D. Colo. Nov. 14, 2011) (holding that Stern does not preclude bankruptcy court from hearing claims for breach of fiduciary duty under mechanics lien statute); Redmond v. Noll (In re Brooke Corp.), 2011 Bankr. LEXIS 5047 (Bankr. D. Kan. Dec. 16, 2011)(holding that Stern does not apply to noncore proceedings); In re Cottonwood Corners Phase V, LLC, 2012 Bankr. LEXIS 550 (Bankr. D.N.M. Feb. 17, 2012) (holding that Stern does not preclude it from confirming a plan that would bind a lender to terms that afford a debtor and its tenants with the functional equivalent of a subordination, non-disturbance, and attornment agreement); Parks v. Consumer Law Assocs., LLC (In re Lewis), 2012 Bankr. LEXIS 1312 (Bankr. D. Kan. Mar. 29, 2012) (holding that it did not have authority to enter final judgment on actions based on disgorgement of fees and violation of the Kansas Consumer Protection Act under Stern); Cohen v. Prop. Owners Comm. of Rancho Ruidoso Valley Estates (In re Cohen), 2012 Bankr. LEXIS 1580, n. 5 (Bankr. D.N.M. Apr. 10, 2012) (recognizing that Stern creates certain exceptions to bankruptcy court s jurisdiction over core proceedings but that such exceptions are not relevant to case at hand); Parks v. Persels & Associates, LLC (In re Kinderknecht), 2012 Bankr. LEXIS 1671 (Bankr. D. Kan. Apr. 13, 2012) (avoiding whether Stern allows it to enter final summary judgment on fraudulent transfer claim because motion for summary judgment was denied on other grounds); Wadsworth v. Baker (In re Delafuente), 2012 Bankr. LEXIS 1887 (Bankr. D. Colo. Apr. 30, 2012) (holding that Stern did not preclude it from hearing fraudulent transfer claims under 28 U.S.C. 157(b)(2)(H) and (E)); Redmond v. Bank of New York Mellon (In re Brooke Corp.), 2012 Bankr. LEXIS 2296 (Bankr. D. Kan. May 15, 2012) (holding that Stern allows it to hear fraudulent transfer claims and enter proposed finding of fact and conclusions of law even if it cannot constitutionally enter final judgment); Vencill v. Spain (In re Spain), 2012 Bankr. LEXIS 2363, n. 2 (Bankr. D.N.M. May 24, 2012) (noting that Stern does not preclude