Contributed by Doron P. Kenter.
It is with some trepidation that we add once again to the stream of commentary on the implications of the Supreme Court’s decision in Stern v. Marshall, but the decision (actually it’s just a “recommendation,” as we’ll explain below) of the United States Bankruptcy Court for the Northern District of Indiana on a motion for withdrawal of the reference in Manning v. The Methodist Hospitals, Inc. (In re Merrillville Surgery Center, LLC) is simply too good to let pass.
In Manning, the defendant in an adversary proceeding to recover fraudulent transfers and preferences moved to withdraw the reference, arguing that withdrawal was warranted on two grounds: (1) the defendant was entitled to a jury trial, and the bankruptcy court was not authorized to conduct such trials and (2) in light of Stern, the bankruptcy court lacked constitutional authority to adjudicate actions for fraudulent conveyances.
Under applicable local rules, the bankruptcy court issued a report and recommendation to the district court, which would ultimately rule on the motion for withdrawal of the reference.   The bankruptcy court recommended quite sternly (pun intended) that the reference should be withdrawn because the defendant was entitled to a jury trial on both the fraudulent transfer and preference claims asserted, and because there was no standing order of reference allowing the bankruptcy court to conduct a jury trial.  That decision on issue number one should have promptly flushed the case out of the bankruptcy court, but the bankruptcy court continued with a lengthy discussion of issue number two, cautioning the parties, the district court, and anyone else who might be reading that the Stern analysis, if the district court were to reach it,  should be approached with great care because an overbroad reading of the Supreme Court’s decision risks clogging the district court’s docket with core bankruptcy matters.
The bankruptcy court recognized that a detailed analysis of Stern was not appropriate in the context of the recommendation, but nevertheless paused to address certain concerns regarding the Stern decision.  First, the bankruptcy court noted that Stern, which “essentially came out of the blue,” has generated a “nationwide constipation of case-processing delays” due to myriad motions to withdraw the reference.  The bankruptcy court went on to suggest that these delays have been fueled by a “constant stream of intellectual diarrhea-like commentary (oxymoron intended)” as to Stern’s implications.  The only certainty to come from these commentaries, the court suggested, was that Stern has been viewed as “incredibly ambiguous” (emphasis in original) by nearly every such commentator, counsel, and court.  (We hope Judge Klingeberger wasn’t referring to the Blog with his colorful metacommentary.  For those who may have missed it, our Stern search tool allows readers to filter out the dreck and see how courts have applied Stern in various contexts.)
Notwithstanding its refusal to undertake a detailed analysis of Stern, the court then went on to note that it may be instructive to review the “discrete aspects” of the case.  The court noted that “the majority decision in Stern dealt only with the exercise of final judgment authority under 28 U.S.C. § 157(b)(2)(C) under the circumstances of the case” and that the decision “VERY CLEARLY LIMITED its scope, and left intact bankruptcy courts’ authority to act under 28 U.S.C. § 157(c)” (i.e., to issue reports and recommendations in non-core matters) (emphasis in original).  The court, noting that it falls into the “strict constructionist, limited reading of Stern camp” (emphasis in original), suggested that the divergent theories regarding Stern are based on each court’s projection of its own views of the issues raised by Stern onto substantive issues that were not, in fact, addressed in the Stern decision, and observed that the “narrow” reading of Stern is properly based on the Supreme Court’s own limiting language at the end of its majority opinion.  In light of that reading, the bankruptcy court suggested that actions pursuant to the avoidance provisions of chapter 5 of the Bankruptcy Code (including actions to recover fraudulent transfers and preferences pursuant to sections 544, 547, and 548 of the Bankruptcy Code) have traditionally been viewed as “civil proceeding[s] arising under Title 11, because the statutory premises for such [actions] are provided exclusively by Title 11,” and that they are thus within the bankruptcy courts’ final adjudicative authority.
The court next turned to the ramifications of any decision by the district court with respect to future proceedings.  Noting that it was not a “turf defender,” the court warned that any determination that Stern deprives bankruptcy courts of the authority to issue final judgments (or even reports and recommendation) in matters that had traditionally been handled in bankruptcy court would result in a “significant increase” in the district court’s workload by creating that many more cases that the bankruptcy court would be constitutionally barred from hearing and/or determining.
Lastly, in response to plaintiff’s suggestion that, even after withdrawal of the reference,  the bankruptcy court should continue to handle all pretrial matters – “in essence packaging the case to the District Court for trial” – the bankruptcy court warned that this half-pregnant approach to jurisdiction was not tenable.  Judge Klingeberger stated his view that “withdrawal of the reference means all matters involved in the case are withdrawn to the District Court, leaving the United States Bankruptcy Court with no further authority with respect to the case whatsoever.”  Indeed, the court went so far as to suggest that “[b]ecause of my view as to [the] lack of any continuing authority of the United States Bankruptcy Court to perform any function in a case in which reference has been withdrawn . . . if I were to be directed by the District Court to perform a Magistrate Judge-like role in a withdrawn case, I would respectfully decline to do so.”
Judge Klingeberger’s recommendation in Manning is a colorful and candid expression of concerns raised by many about overbroad application of Stern.  Whether it proves to be a mild laxative that eases the blockage as litigants and courts grapple with Stern, or a more dramatic purgative, remains to be seen.