Restructuring

Contributed by Doron P. Kenter.

“Will you, won’t you, will you, won’t you, won’t you join the dance?” – The Mock Turtle’s Song, Lewis Carroll’s Alice’s Adventures in Wonderland

Vinny Gambini: Are you suuuuure? Mona Lisa Vito: I’m positive. – My Cousin Vinny

By now, readers of the Weil Bankruptcy Blog should be familiar with the myriad issues raised in the wake of Stern v. Marshall and Executive Benefits Insurance Agency v. Arkison. Among these issues is a hot button question regarding whether bankruptcy courts may enter a final judgment in Stern-type claims (i.e., core matters as to which the bankruptcy court otherwise lacks constitutional authority to enter a final judgment), which the Supreme Court will – hopefully – resolve in its upcoming decision in Wellness Int’l Network v. Sharif. In short, though, in the Ninth Circuit, parties may consent to entry of a final order on Stern claims if they have provided their express or implied consent to same.
In Wright v. Bayview Loan Services, the debtor’s son (and others) brought an action against Bayview in 2009, asserting a laundry list of claims arising from the alleged breach of a stipulation in the debtor’s bankruptcy case among Bayview, the debtor, and a number of other interested parties. The stipulation had granted Bayview limited conditional relief from the automatic stay to foreclose on certain of the debtor’s properties. In the complaint, the plaintiffs alleged that the bankruptcy court had “jurisdiction over the subject matter and the parties of this lawsuit based upon the [s]tipulation,” and that the matter was “a core proceeding.” After three years of litigation, certain of the defendants prevailed in their motions for summary judgment. The bankruptcy court granted Bayview’s motion for summary judgment in November 2011 (several months after the Supreme Court decided Stern). Dissatisfied with the result, the debtor’s son appealed, arguing (among other things) that the bankruptcy court had not had authority to enter a final judgment in the action because the case involved state law claims that were outside the bankruptcy court’s constitutional adjudicatory authority in light of Stern.
On appeal, the district court rejected the appellant’s contentions. The court pointed to the fact that in the Ninth Circuit, consent can cure any constitutional deficiencies in a bankruptcy court’s power to enter a final judgment on otherwise core claims. As an initial matter, the court concluded that the appellant had expressly consented to entry of a final judgment in the bankruptcy court, insofar as he had pled that the bankruptcy court had “jurisdiction” over the subject matter and that the matter was “core.” Notwithstanding the district court’s reasoning, however, neither of these statements should have been sufficient to constitute consent to entry of a final order on Stern claims. First, the complaint stated that the bankruptcy court had jurisdiction over the “subject matter.” As we’ve noted before, Stern is not about subject matter jurisdiction. Indeed, pursuant to 28 USC § 157, bankruptcy courts enjoy concurrent subject matter jurisdiction with the district courts. Stern, however, is about whether the bankruptcy court has constitutional authority to enter a final judgment. Second, the complaint admitted the claims being asserted were “core,” which the district court took to mean that the plaintiff had consented to the bankruptcy court’s ability to enter a final judgment. However, Stern is entirely based on the fact that there are certain core matters as to which the bankruptcy court cannot enter a final judgment – notwithstanding their “core-ness.” Accordingly, the facts cited for the proposition that the plaintiff had expressly consented to entry of a final judgment do not necessarily fit the bill for express consent. On the other hand, the Ninth Circuit has held that consent to entry of a final judgment on Stern claims may be implied from parties’ conduct. Indeed, the district could have concluded that plaintiff’s consent was implied in any case. Among other things, the plaintiff’s decision to commence his action in the bankruptcy court – followed by a failure to assert any challenges to the bankruptcy court’s authority until after he lost – is about as clear as a consent to adjudication as any action shy of express consent. Moreover, it is likely that the bankruptcy court had final adjudicatory authority in any event (regardless of consent), insofar as the causes of action stemmed from a stipulation in the bankruptcy case and approved by the bankruptcy court, and bankruptcy courts generally retain the ability to interpret their own orders (a fact that was acknowledged in the stipulation at issue in Wright, in which the plaintiff-appellant had agreed that the bankruptcy court would retain jurisdiction over any disputes emanating from the stipulation).
The course of conduct in Wright suggests the tension inherent in the current circuit split and the pending issued in Sharif. If, as the Ninth Circuit has held, consent can cure constitutional deficiencies in a bankruptcy court’s authority to adjudicate core claims, litigants bear the burden of identifying any constitutional deficiencies and of raising constitutional challenges at the outset (or near the outset) of affected proceedings. If, on the other hand, Stern’s constitutional issues are “structural” and cannot be cured by consent, then bankruptcy courts will bear the burden of determining whether they may enter a final judgment. If bankruptcy courts did not conduct an independent analysis at the outset of every proceeding, litigants like Wright could pursue litigation even to the point of judgment, and then upset the entire process by demanding de novo review by the district court. Of course, the Supreme Court will have the final word (unless and until Congress gets involved), but we can only hope that any decision is made with the full knowledge of the potentially far-reaching ramifications of the Court’s decision.