Restructuring

Contributed by Kyle J. Ortiz
In Ortiz v. Aurora Health Care, Inc. (In re Ortiz), No. 10-3465 (7^th Cir. Dec. 30, 2011), the United States Court of Appeals for the Seventh Circuit dismissed an appeal from a final order of the bankruptcy court decided prior to the Supreme Court’s decision in Stern v. Marshall.  The Seventh Circuit held that it did not have appellate jurisdiction over the appeal because, following Stern, the bankruptcy court lacked the constitutional authority to enter the final order it had issued.  Perhaps the most interesting aspect of the decision, however, was that the Seventh Circuit, in deciding that the bankruptcy court’s final order was invalid, took a broader view of Stern than most courts have.  It held that, even though the matter was a core proceeding “arising in” a title 11 case, because the matter involved a state law claim between private parties that did not implicate the “claims allowance process,” the bankruptcy court lacked authority to enter a final order.
Background:
The action stemmed from lawsuits brought by two groups of chapter 13 debtors against a medical provider that had filed proofs of claims in the debtors’ bankruptcy cases.  The proofs of claim contained confidential medical information regarding the debtors.  The debtors sued the claimants under a Wisconsin statute that prohibits medical providers from disclosing patient records without their permission.  The United States Bankruptcy Court for the Eastern District of Wisconsin granted summary judgment in favor of the medical provider, and the Seventh Circuit granted direct appeal.  Arguments were heard in the case prior to the Stern ruling, but following Stern, the Seventh Circuit sua sponte ordered supplemental briefing on the bankruptcy court’s authority to enter final judgments dismissing the debtors’ complaints, and depending on the answer, whether the Seventh Circuit had authority to hear an appeal of the bankruptcy court’s decision.
Seventh Circuit’s Analysis:
The Seventh Circuit began its analysis by examining whether the underlying claims were “core.”  Like many courts following Stern, the Seventh Circuit came to the conclusion that core proceedings are limited to proceedings that “arise in a Title 11 case or arise under Title 11.”  Applying this standard, the Seventh Circuit found that the debtors’ claims were core because they would have no existence outside of bankruptcy and thus arose in the debtors’ bankruptcy cases.  However, unlike the numerous courts that have held, post-Stern, that bankruptcy courts retain final authority over core matters arising in a title 11 case or under title 11, the Seventh Circuit asserted that further analysis was needed to decide whether the bankruptcy court had constitutional authority to enter its judgment.  The Seventh Circuit stated that even though “the factual circumstances of the debtors’ claims arise from bankruptcy procedures[, that] does not alter the fact that bankruptcy judges are not Article III judges,” and that the question remained “whether the nature of the debtors’ claims allowed Congress to [constitutionally] withdraw them from ‘the bounds of [Article III] jurisdiction.’”
The Seventh Circuit stated that Stern held that the responsibility for deciding suits made “of the stuff of the traditional actions at common law . . . rest[s] with Article III judges in Article III courts,” and, unless a claim involves a “public right,” Article III “prohibit[s] Congress from giving bankruptcy courts authority to adjudicate claims that [go] beyond the claims allowance process.”  Although this interpretation of the Stern decision is largely consistent with that of many other courts, the Seventh Circuit diverged in its application of this interpretation.  Many courts have held that final adjudication of claims that arise in a title 11 case or under title 11 are part of a public bankruptcy scheme and, thus, fall under the “public rights” exception enunciated in Stern.  The Seventh Circuit, however, declined to follow this line of cases and, instead, held that because the debtors’ counterclaims involved private rights between private parties disputing interests defined by state law and did not involve governmental parties, the claims did not involve public rights.  The Seventh Circuit explicitly rejected that view that the Bankruptcy Code is part of a federal statutory scheme, stating that the debtors’ claims did not involve “so-called ‘public rights’ and did not flow from a federal statutory scheme or involve a particularized area of the law.”
In light of this conclusion, the Seventh Circuit reasoned that because the debtors’ actions “owe [their] existence to Wisconsin state law and will not necessarily resolve in the claims allowance process,” the bankruptcy judge lacked authority to enter a final judgment.  Accordingly, the Seventh Circuit held that, without a final judgment to review, it lacked any statutory basis for appellate jurisdiction and dismissed the appeal stating that “[u]nless and until an Article III judge enters a final judgment we have no jurisdiction to review these matters.”
Consequence:
The Seventh Circuit’s decision in Ortiz was a win for the debtors in these cases, but may be a loss for debtors, as a whole, thanks to the Seventh Circuit’s broad reading of Stern.  Ortiz, however, stands out as a bit of an anomaly, in the universe of decisions rendered in the wake of Stern, for its rejection of bankruptcy as a federal statutory scheme.  It will be interesting to see if other courts will follow the Seventh Circuit or if courts deciding matters in this “particularized area of the law” will continue to apply the “public rights” exception to claims that arise in a bankruptcy case or under the Bankruptcy Code.