June 18, 2013 Articles

A Survey of Cases Interpreting Stern v. Marshall, Part VI

The sixth in a series analyzing trends in interpreting the Stern decision.

By Omar J. Alaniz

This article is the sixth in a multipart series that provides an overview of how courts across the nation are interpreting Stern v. Marshall, 131 S. Ct. 2594 (2011). Read Part I, Part II, Part III, Part IV, and Part V.

This sixth part is a synthesis and discussion of the cases that have meaningfully discussed Stern from January 16, 2013, through May 1, 2013. To avoid redundancy, this article includes citations to Parts I–V of this series and refers to a chart that catalogues all cases that have meaningfully discussed Stern from September 1, 2011, through May 1, 2013.

Avoidance Actions

Since the Stern decision, the issue of whether a bankruptcy court has the constitutional authority to enter final orders on fraudulent transfer claims has garnered the most attention. The courts generally fall into a “expansive” group, holding that the bankruptcy court does not have such authority, and a narrow group, holding the opposite. The reasons supporting those views are discussed at length in Part I at 3–7; Part II at 6–8; Part III at 2–4; Part IV at 5–7; and Part V at 2–4.

For the period from January 16 through May 1, 2013, the courts falling into the expansive group are Kramer v. Mahia, No. 12-MC-794, 2013 WL 1629254 (E.D.N.Y. Apr. 15, 2013); Nisselson v. Salim, No. 12 civ. 92, 2013 WL 1245548 (S.D.N.Y. Mar. 25, 2013). The courts falling into the narrow group are Miller v. Enviro Care, Inc. (In re Rock Structures Excavating, Inc.), No. 2:12-cv-856, 2013 WL 1284969 (D. Utah Mar. 27, 2013); Bakst v. United States (In re Kane & Kane), Adv. No. 10-01022, 2013 WL 1197609 (Bankr. S.D. Fla. Mar. 25, 2013).

If the defendant to an avoidance action had filed a proof of claim, there is general consensus that the bankruptcy court will have constitutional authority to rule on the avoidance action. See Part IV 6–7; Dietz v. Spangenberg, No. 11-2600, 2013 WL 883464 (D. Minn. Mar. 8, 2013), Davis v. R.A. Brooks Trucking, Co., Inc. (In re Quebecor World (USA), Inc.), Adv. No. 1741946, 2013 WL 1741946 (Bankr. S.D.N.Y. Apr. 23, 2013); In re Great Gulfcan Energy Tex., Inc., 488 B.R. 898 (Bankr. S.D. Tex. 2013).

In Goodman v. H.I.G. Capital, LLC (In re Gulf Fleet Holdings, Inc.), Adv. No. 11-05006, 2013 WL 1342751 (Bankr. W.D. La. Apr. 2, 2013), the bankruptcy court dismissed a complaint that included avoidance actions and state law claims, reasoning that an order denying a motion to dismiss in part and granting leave to replead is not a final order. Thus, the court explained, Stern concerns did not arise. See id. at *30.

Adversary Proceedings—Non-Avoidance Actions

The question of whether the bankruptcy court has constitutional authority to enter final orders in turnover and lien avoidance proceedings was the most frequently addressed topic in the period from January 16 through May 1, 2013.

In Geron v. Peebler (In re Pali Holdings, Inc.), Adv. No. 11-02912, 2013 WL 1197670 (Bankr. S.D.N.Y. Mar. 25, 2013), the bankruptcy court determined it had authority to rule in a turnover proceeding. The court reasoned that turnover proceedings are in rem proceedings, which is very different from the scenario in Stern. See id. at *5. The court further explained that turnover proceedings “provide a means for the estate to secure the benefits of property that already is property of the estate.” Id. See also Springel v. Prosser (In re Innovative Commc’ns Corp.), No. 3:11-cv-113, 2013 WL 996367 (D.V.I. Mar. 14, 2013); Rainsdon v. Visser (In re Visser), Adv. No. 12-8043, 2013 WL 1337327 (Bankr. D. Idaho Apr. 1, 2013).

28 U.S.C. § 157(b)(2)(K) provides that the determination of the validity, extent, and priority of liens is a core proceeding. But some litigants have challenged the bankruptcy court’s constitutional authority to determine such matters in the same way that Pierce challenged the bankruptcy court’s authority to hear any counterclaim by the estate despite 28 U.S.C. § 157(b)(2)(C). In GMAC Mortgage, LLC v. Orcutt (In re Orcutt), the district court held that the determination of the validity of a mortgage neither involved substantive rights created by bankruptcy law nor constituted proceedings that by their very nature could arise only in the context of a bankruptcy case. No. 5:12-cv-96, 2012 WL 6552914 (D. Vt. Dec. 13, 2012). On remand, the bankruptcy court maintained its position that it had constitutional authority to determine lien avoidance matters and clarified that the determination was integral to ruling on the defendant’s objection to the debtor’s claim of homestead exemption under section 522(b)(1) of the Bankruptcy Code. See also First Nat’l Bank v. Crescent Elec. Supply Co. (In re Renaissance Hosp. Grand Prairie Inc.), No. 12-10386, 2013 WL 1390868 (5th Cir. 2013) (stating that while Stern’s “in one isolated respect” language may understate the totality of the encroachment on the judicial branch, determination of lien priority is not likely such an encroachment). See also DeGiacomo v. Traverse (In re Traverse), 485 B.R. 815 (B.A.P. 1st Cir. Feb. 4, 2013); Rinaldi v. HSBC Bank USA, N.A. (In re Rinaldi), 487 B.R. 516 (Bankr. E.D. Wis. Feb. 22, 2013); Scotiabank de Puerto Rico v. Perimetro Props., Inc. (In re The Plaza Resort at Palmas, Inc.), 488 B.R. 50 (D.P.R. Mar. 5, 2013).

Consent

The question of whether Stern affected a party’s right to consent under 28 U.S.C. § 157(c)(2)—and, if so, whether consent must be express or implied—is perhaps the second most debated behind the fraudulent transfer issue. The Sixth Circuit in Machine & Fabrication, LLC v. Stone (In re Waldman), 698 F.3d 910 (6th Cir. 2012), and the Ninth Circuit in Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.), 702 F.3d 553 (9th Cir. 2012), created a circuit split. The Sixth Circuit held that a bankruptcy court does not have the constitutional authority to enter a final order on fraud claims that an individual Chapter 11 debtor brought against a creditor even though the creditor arguably consented (expressly and impliedly). See Part IV at 1–2 (discussing Waldman). The district court in Dang v. Bank of America, No. 12-3343, 2013 WL 1683820 (D. Md. Apr. 17, 2013), found Waldman persuasive and held that the litigant could not waive her Article III protections even though the district court determined that she impliedly consented to the bankruptcy court’s adjudication under 28 U.S.C. § 157(c)(2).

The Ninth Circuit in Bellingham Insurance held that consent under section 157(c)(2) may be implied from conduct in litigation. See 2012 WL 6013836, at *12–14. The Ninth Circuit reasoned that the Supreme Court has already ruled on the issue of whether consent can be implied by conduct in litigation under a provision of the Federal Magistrate Act (28 U.S.C. § 636(c)) that is substantially similar to section 157(c)(2). See Roell v. Withrow, 538 U.S. 580 (2003) (“The question is whether consent can be inferred from a party’s conduct during litigation, and we hold that it can be.”). The substantial majority of courts have held that Stern did not render section 157(c)(2) unconstitutional. See Part I at 9–11; Part II at 9–10; Part III at 7–9; Part IV at 4; Part V at 4; Ctr. Operating Co., L.P. v. Base Holdings, LLC (In re Base Holdings, LLC), Civ. No. 3:11-cv-3531, 2013 WL 357607 (N.D. Tex. Jan. 30, 2013) (implied consent).

Contested Matters

During the period from January 16 through May 1, 2013, several courts determined that Stern did not prevent the bankruptcy court from issuing final orders in contested matters: Fire Eagle L.L.C. v. Bischoff (In re Spillman Dev. Grp., Ltd.), 710 F.3d 299 (5th Cir. 2013) (credit bid rights); In re Lupo, No. 12-10617, 2013 WL 1282423 (D. Mass. Mar. 26, 2013) (fee application despite allegations of malpractice); In re David, 487 B.R. 843 (Bankr. S.D. Tex. 2013) (show cause order; imposition of sanctions); In re Smith, No. 12-10142, 2013 WL 665991 (Bankr. D. Vt. Feb. 22, 2013) (claim objection involving § 506 issues); In re Archdiocese of Milwaukee, No. 11-20059, 2013 WL 395133 (Bankr. E.D. Wis. Jan. 31, 2013) (objection to personal injury claim where claimant waived section 157(b)(5) rights).

Counterclaims

Although they are buried in the abundance of post-Stern case law, there are matters to which Stern is unquestionably relevant—matters in which a bankruptcy court must determine whether it has the constitutional authority to rule on a bankruptcy estate’s counterclaims against a creditor’s proof of claim. See, e.g., Heller Small Bus. Lending Corp. v. Smead (In re O’Hanneson), Adv. No. 12-05144, 2013 WL 655158 (N.D. Cal. Feb. 21, 2013) (only basis for core jurisdiction was section 157(b)(2)(C)).

Courts consistently employ the “Stern test” to determine whether the bankruptcy court has constitutional authority to rule on the counterclaim: (1) Does the counterclaim stem from the bankruptcy itself, or (2) is resolution of the counterclaim necessary for resolution of the proof of claim? A court will generally apply this test to each claim in an adversary proceeding. See, e.g., Rinaldi v. HSBC Bank USA, N.A. (In re Rinaldi), 487 B.R. 516 (Bankr. E.D. Wis. Feb. 22, 2013) (holding that the bankruptcy court had constitutional authority to enter final order on some claims in adversary proceeding but not others); Brier Creek Corporate Ctr. Assocs. Ltd. P’ship v. Bank of Am., N.A. (In re Brier Creek Corporate Ctr. Assocs. Ltd. P’ship), Adv. No. 12-00121, 2013 WL 492461 (Bankr. E.D.N.C. Feb. 8, 2013) (same).

Dischargeability

Dischargeability actions present an interesting Stern question. Most would agree that the issue of whether a debt is dischargeable in bankruptcy is a core proceeding. This may be because the matter arises under title 11 (11 U.S.C. § 523) or arises in a title 11 case (i.e., dischargeability has no existence outside a bankruptcy case) and thus is a core proceeding under 28 U.S.C. § 157(b)(1). Dischargeability also implicates a bankruptcy court’s in rem jurisdiction. See Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 362 (2006). But what if the creditor’s claim was not liquidated prior to the bankruptcy filing? Is it constitutionally permissible for the bankruptcy court to enter a final judgment on a non-core claim (e.g., a state law claim) and then determine whether that claim is dischargeable?

The majority of courts have held that the bankruptcy court has constitutional authority to enter a monetary judgment in connection with a dischargeability proceeding even if the claim is based on state law. Part II at 11; Part III at 9–10; Part IV at 10. The primary reason is that several circuits so held prior to Stern, and lower courts are reluctant to read Stern as overruling that authority. See id. But in Rutkowski v. Adas (In re Adas), 488 B.R. 358 (Bankr. N.D. Ill. Mar. 7, 2013), the bankruptcy court held that it would not enter a money judgment despite Seventh Circuit authority (In re Hallahan, 936 F.2d 1496, 1508 (7th Cir. 1991)) permitting it to do so. See also Johnson v. Weihert (In re Weihert), Adv. No. 12-105, 2013 WL 815513 (Bankr. W.D. Wis. Feb. 6, 2013) (holding that it did not have authority to enter money judgment).

In the period from January 16 through May 1, 2013, other courts joined the majority position: Carroll v. Farooqi, 486 B.R. 718 (N.D. Tex. 2013); Countrywide Home Loans, Inc. v. WMC Mortgage Corp. (In re Cowin), Adv. No. 10-03583, 2013 WL 1786026 (Bankr. S.D. Tex. Apr. 25, 2013); S&S Food Corp. v. Sherali (In re Sherali), Adv. No. 12-03198, 2013 WL 1084514 (Bankr. N.D. Tex. Mar. 14, 2013).

Submission of Proposing Findings of Fact and Conclusions of Law in the “Statutory Gap”

The “statutory gap” theory is that Stern has left a third category of matters falling within the bankruptcy court’s jurisdiction: “core but unconstitutional.” The concern is that if a proceeding is “core” under section 157(b) and yet the bankruptcy court is somehow not constitutionally permitted to determine the matter (as in Stern), then section 157(c)(1) does not appear to supply the bankruptcy court with the authority to submit proposed findings of fact and conclusions of law because the statute refers only to non-core matters. This concern has been almost universally rejected in every case decided after September 2011. See Part I at 8–9; Part II at 12–13; Part III at 10–12; Part IV at 10–11; and Part V at 6.

The courts that rejected the statutory gap during the period from January 16 through May 1, 2013, were Dang v. Bank of America, No. 12-3343, 2013 WL 1683820 (D. Md. Apr. 17, 2013); Rothrock v. PNC Bank (In re Parco Merged Media Corp.), No. 2:12-mc-00245, 2013 WL 1314415 (D. Me. Mar. 28, 2013); Kramer v. Mahia, No. 12-MC-794, 2013 WL 1629254 (E.D.N.Y. Apr. 15, 2013); Nisselson v. Salim, No. 12 civ. 92, 2013 WL 1245548 (S.D.N.Y. Mar. 25, 2013); British American Isle of Venice (BVI) Ltd. v. Fullerton (In re British American Insurance Co. Ltd.), Adv. No. 11-03771, 2013 WL 211336 (Bankr. S.D. Fla. Jan. 18, 2013).

Omar J. Alaniz – June 18, 2013