Restructuring

Contributed by Doron P. Kenter.

“Come on, come on, come on / [Cite] this [case] to twenty people / Add your name, don’t break the cycle” — Chumbawumba

Have Stern issues proliferated so much that they interfere with entry of default judgments?  Are magistrate judges more qualified than bankruptcy judges to conduct hearings and issue reports and recommendations regarding matters as to which bankruptcy judges simply lack authority to enter a final judgment?  A recent proceeding in the United States District Court for the Northern District of Alabama suggests that Stern v. Marshall continues to be a wrench in the gears of the legal process, even in the absence of objection or direct Stern-based challenges.
In Leo v. Hunter (In re Ashley), the chapter 7 trustee filed a complaint against a contractor who failed to perform under his contract with the debtors.  The claims alleged in that complaint were non-core, but “related to” the debtors’ joint bankruptcy cases.  After the defendant failed to answer or otherwise defend the allegations, the trustee moved for entry of a default judgment, itemizing the damages at $81,235.  In connection with the hearing to consider entry of the default judgment, the bankruptcy court observed that it believed that it lacked constitutional authority to enter a final judgment for money damages in the matter, pursuant to Stern v. Marshall.  Accordingly, the trustee moved to withdraw the reference so that the district court could enter a final judgment.
Upon consideration of the motion to withdraw the reference, the district court agreed that the bankruptcy court lacked constitutional authority to enter a final judgment, and accordingly withdrew the reference.  After the withdrawal, however, the district court referred the matter to a magistrate judge to conduct a hearing regarding the amount of the damages sought by the trustee.  The district court reasoned that, because the breach of contract claim was unliquidated (rather than for a liquidated “sum certain”), Rule 55 of the Federal Rules of Civil Procedure required that the trustee seek entry of the default judgment from “the court,” after a hearing on the issue instead of a default judgment on the pleadings, which could otherwise be entered by “the clerk [of court].”  Accordingly, after the district court referred the matter to the magistrate judge, the magistrate judge conducted a hearing and submitted a report and recommendation that the district court enter a judgment in the trustee’s favor in the amount set forth in his complaint, plus attorneys’ fees.  The district court then adopted that report and recommendation without further discussion.
It is puzzling that the district court withdrew the reference to the bankruptcy court, only to then refer the matter to a magistrate judge to conduct a hearing and submit a report and recommendation.  Perhaps some judges (and litigants) have been so spooked by Stern v. Marshall that they can no longer take comfort in late-stage proceedings in the bankruptcy court, preferring to have judgments liquidated and entered by an Article III court, so that any such judgments are immune from subsequent attacks pursuant to Stern.  Indeed, Judge Hughes has taken this position in several cases, in which he has chosen to submit reports and recommendations regarding default judgments in core matters, so as to ensure a certainty and finality of any such judgments.
Leo v. Hunter, however, is even more puzzling because it involved a non-core matter – as to which bankruptcy courts did not have authority to enter final judgments even before Stern v. Marshall, pursuant to 28 U.S.C. § 157(c)(1).  In such matters, regardless of Stern, the U.S. Code requires (and permits) bankruptcy judges to issue proposed findings of fact and conclusions of law, which must then be adopted by the district court.  Indeed, Stern only dealt with core matters as to which bankruptcy courts lacked constitutional authority to enter a final judgment.  Notwithstanding its inapplicability to Leo v. Hunter, Stern has created such a whirlwind of litigation and doubt that a default judgment had to be kicked from the bankruptcy court to the district court, from the district court to a magistrate judge, and from the magistrate judge to the district court for entry of the final judgment.  Absent such fear and doubt, the bankruptcy court could have conducted a short hearing regarding the simple question of damages and issued a report and recommendation, which would have been adopted by the district court.
Someday, we may receive further guidance on the Supreme Court’s intent regarding bankruptcy court’s authority over core and non-core matters, but for the time being, we’ll continue to deal with the confusion and case-processing delays precipitated by Stern v. Marshall.
Remember to use our search tool, which will help you to sort through the mountain of judicial musing that Stern has produced.