Transcript An Introduction to Bankruptcy for District Court Law Clerks Presented by S. Martin Teel, Jr. United States Bankruptcy Judge June 18, 2014

An Introduction to Bankruptcy for District
Court Law Clerks
Presented by
S. Martin Teel, Jr.
United States Bankruptcy Judge
June 18, 2014
Overview
 Bankruptcy 101
 Bankruptcy Jurisdiction & Authority
 Bankruptcy Cases in the District Court
 Recent Issues Re: Bankruptcy Judge Authority
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
Chapter
Description/Purpose
Chapter 7
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.
Liquidation
Chapter 11
Reorganization
Chapter 13
Adjustment of Debts of
Individual With Reg. Income
Chapter 12
Adjustment of Debts of Family
Farmer or Fisherman
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.
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.
Provides for adjustment of debts of a “family farmer” or “family
fisherman.”
Chapter 9
Provides for reorganization of municipalities.
Chapter 15
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.
Ancillary and Other CrossBorder Cases
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).
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Bankruptcy 101: Parties
 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: 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
Bankruptcy 101: Evolution of Law
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).
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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
District Judges
ND Calif.: 24
New York:
Northern
Southern
Eastern
Western
ND Calif.: 27
New York:
Northern
Southern
Eastern
Western
3
10
7
3
9
36
26
6
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Bankruptcy 101: Bankruptcy Judges
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.
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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!
Jurisdiction & Authority: Marathon

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: 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.
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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
Jurisdiction & Authority: 1984 Act

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:
“
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.
”
21
Jurisdiction & Authority: 1984 Act
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: 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
In the District Court: De Novo Review
 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: Withdrawal
 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: 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
In the District Court: Appeals
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.
30
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.
31
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)
(2)
(3)
(4)

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;
Identifying issues presented on appeal and defining the record to be considered;
Filing appeals briefs; and
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.
32
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
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.
34
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)
35
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.
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.
37
Recent Issues Re: Bankruptcy Judge
Authority: Stern v. Marshall
Stern v. Marshall, 131 S. Ct. 2594 (2011).
38
Stern v. Marshall
J. Howard dies
leaving estate
to Son (Pierce).
Vickie files
bankruptcy in CA.
Son files claim in the
bankruptcy based on
defamation.
Bankruptcy Court rules
for Vickie awarding her
$475 million
Vickie counterclaims
asserting her tortious
interference action.
Vickie sues Son in TX
Probate Court for tortious
interference with a gift.
District Court Reduces
Vickie’s award to $90
million.
Probate Court rules
for Son. Vickie gets
nothing.
(time)
Question: Which court entered the first final judgment?
39
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.
 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.
40
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.
”
41
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:
You owe me $50.
But I can recover $50 in
preferential payments from you!
claimant
estate
 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.
42
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

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).
Judicial Power.
Katchen Exception
does not apply.
Defamation
x
Facts
x
x
x
x
x
x
x
x
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Tortious Interference
43
Stern v. Marshall
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).
44
Stern v. Marshall
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.
45
Stern v. Marshall
Example of a District Court’s Reaction
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.
46
Stern v. Marshall
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.
47
Recent Issues Re: Bankruptcy Judge
Authority: Aftermath of Stern v. Marshall
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).
48
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