Stern Claims and Article Iii Adjudication—the Bankruptcy Judge Knows Best?

Publication year2019

Stern Claims and Article III Adjudication—The Bankruptcy Judge Knows Best?

Laura B. Bartell


Laura B. Bartell*

In Stern v. Marshall1 the Supreme Court concluded that, because bankruptcy judges are not appointed under Article III of the U.S. Constitution, they lack "constitutional authority to enter a final judgment on a state law counterclaim [constituting a core proceeding under 28 U.S.C. § 157(b)(2)(C)2 ] that is not resolved in the process of ruling on a creditor's proof of claim."3 The Court stated that, in deciding whether the bankruptcy court had constitutional authority to hear and decide a core proceeding, "the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process."4 The decision created two immediate questions. First, how should a bankruptcy judge deal with a proceeding that is a core proceeding but which the bankruptcy judge has no power to hear and determine? Second, can the litigants consent to final adjudication of such a core proceeding (a "Stern claim") by the bankruptcy court?

The Judicial Code authorizes bankruptcy judges to "hear and determine" core proceedings under 28 U.S.C. § 157(b)(1). The bankruptcy judge is statutorily authorized to "hear" non-core proceedings and "submit proposed findings of fact and conclusions of law to the district court" for entry of a final order or judgment under 28 U.S.C. § 157(c)(1).5 After the Supreme Court decision in Stern, most courts took the position that Stern claims could be treated as if they were non-core proceedings, and that bankruptcy courts could submit proposed findings of fact and conclusions of law to the district court for those claims despite the lack of statutory authority.6 The Supreme Court ultimately

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validated this approach in Executive Benefits Insurance Agency v. Arkison,7 concluding that "when, under Stern's reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court."8

Whether litigants in a proceeding involving a Stern claim could constitutionally consent to the final adjudication of the claim by a bankruptcy judge, just as litigants could do with respect to non-core proceedings under 28 U.S.C. § 157(c)(2), divided the courts.9 Again, the Supreme Court resolved the dispute in Wellness International Network Ltd. v. Sharif,10 holding that "litigants may validly consent to adjudication by bankruptcy courts"11 so long as that consent is "knowing and voluntary."12

In this Article, I attempt to ascertain how Stern claims have been treated since the Supreme Court decisions in Arkison and Wellness. My first conclusion is that bankruptcy courts find very few core proceedings that they determine are governed by Stern and therefore are beyond their constitutional power to decide. With respect to those few proceedings that they find are Stern claims, most are heard and determined by the bankruptcy judge by litigant consent. Even if the bankruptcy judge concludes it is unable to determine the matter without consent and submits proposed findings of fact and conclusions of law to the district court, the district court almost always adopts those findings of fact and conclusions of law, making the non-Article III bankruptcy court the final decision-maker in substance, while allowing the district court the formal task of entering judgment.

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Therefore, for almost all proceedings for which Stern held that the litigants are constitutionally entitled to a final decision by an Article III judge, the substantive decision is made by the bankruptcy judge, although formally entered by the district court.

A. Scope of the Study

For purposes of my investigation, I first searched in Westlaw for all cases in bankruptcy court13 which mentioned "Stern v. Marshall" from May 26, 2015, the date the Supreme Court decided Wellness, through the end of calendar year 2017. There were 495 such cases. Although many courts were dealing with so-called Stern claims during the four years before Wellness was decided (and the three years before Arkison), they were still grappling with the issues of whether bankruptcy courts had the statutory authority to enter proposed findings of fact and conclusions of law,14 and whether consent permitted them to hear and determine claims they were otherwise constitutionally precluded from deciding.15 Therefore, to obtain a manageable sample, I confined my inquiry to cases decided after those issues were put to rest.16 I then searched for all bankruptcy court cases citing Arkison but not Stern (an additional sixteen cases), or Wellness but not Arkison or Stern (another seventy-five cases), in each case during the same period.

Because many adversary proceedings that may present a claim beyond the bankruptcy court's constitutional power to decide are unreported, I also searched Westlaw for reported decisions of district courts during the same period in which the court was considering a bankruptcy matter, and was reviewing "proposed findings of fact" or a "report and recommendation." I then searched the docket of the bankruptcy court proceeding giving rise to the district court decision and looked at any proposed findings of fact and conclusions of law issued during the period of the study.

I looked for those cases in which the court discussed whether it had the constitutional authority to decide a core matter. There have been conflicting views of the scope of the Stern decision. Many courts adopt the "narrow" view, interpreting Stern as invalidating only 28 U.S.C. § 157(b)(2)(C), leaving all

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other "core" proceedings listed in § 157(b) unaffected.17 Other courts conclude that Stern cast doubt on the constitutionality of other provisions of § 157(b), and absent consent, the bankruptcy court may not constitutionally decide any matter that is based on state law and that is not necessarily resolved in connection with the allowance of an asserted claim.18 For example, some courts take the position that proceedings seeking to recover preferential transfers, also core proceedings under 28 U.S.C. § 157(b)(2)(F), constitute Stern claims,19 while other courts disagree.20 Whichever view a court adopts, I have examined those cases in which that court treats the particular dispute as if it is, or might be, governed by Stern, even if other courts would disagree and would hear and determine the same dispute.

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In most cases, the bankruptcy court transmitted the case to the district court because it determined that the matter before it was non-core.21 In other cases the

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plaintiff sought relief other than a final adjudication of the Stern claim (such as a dismissal under Federal Rule of Civil Procedure Rule 12(b)(6), or ordering remand, or denying summary judgment, or enforcing arbitration, or other interlocutory relief), and therefore the bankruptcy court concluded that it was not subject to the constitutional prohibition of Stern.22 Some cases citing Stern, Arkison, or Wellness did so for reasons other than final determination of a claim

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(such as considerations of motions for withdrawal, arbitration, abstention, dismissal for lack of jurisdiction, request for jury trial, and other relief), and I did not include those cases.

B. The Problem of Finding Stern Claims

After eliminating non-core matters, interlocutory matters, and cases in which an analysis of Stern was not at issue, I then looked at all the remaining cases to see if any of them involved Stern claims. I found that in almost all the remaining cases, hundreds of them, the bankruptcy court concluded that the matter before it was constitutionally core, i.e., statutorily core under 28 U.S.C. § 157(b)(2), and the bankruptcy court had the constitutional power to hear and decide it without litigant consent. The vast majority of those cases involved dischargeability of a debt under 28 U.S.C. § 157(b)(2)(I);23 or allowance or

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claims or exemptions under 28 U.S.C. § 157(b)(2)(B);24 matters on which there cannot be any controversy about the ability of a bankruptcy court to hear and

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determine the dispute. Other issues that were frequently analyzed under the Stern doctrine included core matters listed in almost all the other provisions of 28 U.S.C. § 157(b)(2), including motions for turnover of property of the estate under 28 U.S.C § 157(b)(2)(E);25 motions to avoid preferential transfer under 28

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U.S.C. § 157(b)(2)(F);26 motions with respect to the automatic stay under 28 U.S.C. § 157(b)(2)(G);27 proceedings involving fraudulent transfers under 28 U.S.C. § 157(b)(2)(H);28 objections to discharge and actions seeking revocation of discharge under 28 U.S.C. § 157(b)(2)(J);29 determinations with respect to

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liens under 28 U.S.C. § 157(b)(2)(K);30 disputes regarding plan confirmation, interpretation, or enforcement of a confirmed plan or revocation of confirmation under 28 U.S.C. § 157(b)(2)(L);31 motions to use property of the estate under 28

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U.S.C. § 157(b)(2)(M);32 motions regarding sale of property of the estate under 28 U.S.C. § 157(b)(2)(N);33 and various other disputes that would certainly qualify as core under 28 U.S.C. § 157(b)(2)(A) and (O).34 Even with respect to

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counterclaims by the estate against persons filing claims against the estate, defined as core under 28 U.S.C. § 157(b)(2)(C), which was the section found constitutionally infirm in Stern to the extent that the counterclaim would not "necessarily be resolved in the claims allowance process,"35 the bankruptcy courts found, in most cases, that they could constitutionally decide the

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counterclaim because it was in fact necessary to the resolution of the claim...

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