Co-authored by Kyle J. Ortiz and Doron P. Kenter.
We can hardly believe that it has only been a year since the Supreme Court decided Stern v. Marshall. In just one year, well over 350 decisions have referenced Stern for many different propositions. To assist you in the strenuous task of sifting through the slew of cases interpreting Stern, we are pleased to announce the launch of our new search tool, which will allow you to quickly narrow cases citing Stern by jurisdiction and by issues discussed in each decision. We hope that this tool will help to identify the key issues affected by Stern, and the different ways in which courts in various jurisdictions have been weighing in on these issues. The search tool is still in “beta” mode, so we welcome your comments and feedback while we work out any remaining bugs.
As we had anticipated, there has been a considerable amount of “ping-pong” in the courts regarding Stern’s effects on a host of issues in bankruptcy cases. Although this debate has not necessarily been jurisdictional in nature (as the dissent in Stern suggested), it continues to rear its head in countless bankruptcy cases.
Much of the debate is centered on Stern’s effects on fraudulent transfer and/or preference actions. Many courts have examined Stern’s own admonition that the case is to be read narrowly, and was not intended to upset the balance of power between the bankruptcy courts and the district courts. Indeed, the majority of cases have remarked that Stern is only applicable to compulsory state law counterclaims where the matter before the court is a “core” matter that would not necessarily be resolved in ruling on the allowance or disallowance of the creditor’s proof of claim (or, perhaps, where the counterparty has not filed a proof of claim). In that vein, a number of courts have held that bankruptcy courts still have the power to issue final judgments in most (if not all) fraudulent transfer actions. Some decisions, however, including a recent one from Judge Rakoff in Kirschner v. Agoglia, reject this rationale. Relying on Granfinanciera and Marathon, these courts have suggested that the Supreme Court’s own characterization of its holding as a “narrow” one is simply “cautionary dicta,” and concluded that fraudulent transfer actions are “quintessentially suits at common law,” and outside bankruptcy courts’ authority to enter a final judgment.
Stern has most frequently been invoked in the context of motions to withdraw the reference. Many courts have suggested that their underlying approach to Stern is largely irrelevant in the context of withdrawal motions because Stern concerned the bankruptcy courts’ authority to enter a final judgment and not their subject matter jurisdiction. Indeed, in many of the cases holding that bankruptcy courts do not have constitutional authority to enter a final judgment, the court has still declined to withdraw the reference (at least at the time that such withdrawal is initially requested). In those cases, courts have frequently concluded that withdrawal of the reference may be appropriate prior to a trial on the merits of the underlying action, but that the matter should remain with the bankruptcy court through the resolution of all pretrial matters (including, perhaps, dispositive motions).
Some courts have suggested that consent (whether explicit or implied) can confer authority on bankruptcy courts to enter final judgments in such actions. Thus, many courts have sought parties’ express consent to entry of a final order (indeed, some jurisdictions have gone so far as to incorporate that requirement into their local rules).
Other bankruptcy judges (and, some district courts) have attempted to reconcile this tension by suggesting that, to the extent that a final order is later deemed to be outside the court’s authority, the court’s decision should instead be construed as proposed findings of fact and conclusions of law. Stern’s only effect then would be on the standard of review to be applied in such circumstances (i.e., by subjecting factual findings to a de novo review, if the bankruptcy court lacked authority to enter a final judgment). At least one court, however, has recognized the inherent problems with this approach, as it would subject the same factual findings to both deferential review (insofar as the facts affect claims as to which the bankruptcy court had final authority) and to de novo review (insofar as the same facts affect claims as to which the court did not have such authority). Other courts have noted that de novo review is (at least to some extent) subject to the district court’s discretion, and that district courts may exercise some degree of flexibility even where they are obligated to apply that standard.
The full implications of the Stern decision remain to be seen, and we are now beginning to see these issues reach the circuit courts. Because there is no apparent final resolution regarding how Stern should affect bankruptcy proceedings, it is always possible that the circuits will reach differing conclusions and the issue could end up back in the Supreme Court. In the meantime, we’ll continue to keep you updated of developments in the Stern saga.
Note: As with all posts on the Bankruptcy Blog, this tool is intended to be a research aid, but is not necessarily exhaustive or conclusive. Please do not rely exclusively on this database for legal research purposes.