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Isn't Consent for Suckers?

posted by Jason Kilborn

As I wrestle with the EBIA v. Arkison case and the great paper pointed out by Melissa last week, I can't get past a nagging feeling that the argument about party consent to bankruptcy courts' issuing final orders on "core but unconstitutional" matters is more theoretical than practical. Why would any well-represented defendant in a fraudulent conveyance case consent to making the case against them smoother and more efficient for the trustee?! It seems to me (and this was the case in my practice days long ago) that defendants who know what they're doing will throw up any possible roadblock in the way of such a case in the hopes of wearing down the trustee and making settlement more likely and/or cheaper. For example, as EBIA did, fraudulent conveyance defendants for years now, since Granfinanciera, have been demanding jury trials and insisting that such trials proceed before the district court. What makes anyone think defendants will consent to bankruptcy courts' entering final (e.g., summary judgment) orders, even if this is allowed?

In other words, why all the fuss? What am I missing? Even if the Supreme Court holds that individual defendants can waive the Article III concerns at issue in Arkison, will this really change anything meaningfully? It seems to me that the much more important issue in Arkison is the second, about allowing bankruptcy courts to make proposed rulings in such "core but unconstitutional" cases despite the supposed "gap" in 28 USC § 157(b)(1)--a "no" answer on that question would bring the system to a screeching halt. But isn't consent for suckers--and how many suckers do we expect are out there in such cases?

Comments

You're wrong and you're right; I think your practice experience is leading you astray here. In the vast majority of fraudulent conveyance cases in America, or counterclaims, or the miscellany of other proceedings Stern covers or has been held to cover, you don't have a particularly well-represented defendant - or you have a defendant who actually prefers to more cheaply litigate in bankruptcy court. Stern's raised in a tiny fraction of the cases it applies or arguably applies to. So if the Ninth Circuit is reversed on the consent issue, bankruptcy courts would theoretically be required to issue recommendations in thousands of proceedings they could otherwise decide.

That said, you're absolutely right that whether bankruptcy courts can even make a recommendation in "core but unconstitutional" cases is a much bigger deal than whether or not they can decide them. For a couple reasons - first, recommendations aren't, in practice, reviewed much less deferentially than decisions, and if no one objects to the recommendation there's either no review or almost no review, so in essence, whether a recommendation is reviewed by a district court is virtually just as much a choice of the parties as whether a bankruptcy court order is reviewed by a district court. Second, given that currently the remedy for a bankruptcy court's failing to raise Stern sua sponte, or getting Stern wrong, is merely a recharacterization of an order as a recommendation, bankruptcy courts don't have much incentive to raise Stern sua sponte, even if they're told to do so. And if you look in the Sixth Circuit, where Stern's been unwaivable for a year now, you don't see many, or really any, bankruptcy court opinions raising Stern sua sponte. But if bankruptcy courts can't make a recommendation in "core but unconstitutional" cases, and Stern's held to be unwaivable, you would see an enormous shift of fraudulent conveyance claims, counterclaims, etc. from bankruptcy to district court.

If courts are going to impose implied consent when none is solicited by statute then why do we even need a Constitution or bankruptcy attorney?
What a dangerous precedent imposing implied consent is in the absence of notice.

What is OK in bankruptcy must be OK for jurisprudence in general and I shudder at the thought that everything I do not object to in a court of law is consented to otherwise.

It is one thing to allow expressed consent when none is solicited, but to imply consent absent a warning consent is required tramples on the Constitution.

The mindset that we have to explicitly reinvent and invoke the Constitution at every stage of litigation is stultifying.

Why does bankruptcy breed these ideas?

Anon--thanks so much! My own practice experience may well be unrepresentative.

Robert--your comments about consent on Melissa's post focused my attention on those issues in Arkison, and you may well know this, but EBIA's conduct was "sandbagging" if ever I've seen it. I also am troubled by "gotcha" implied consent, but when Rule 7012 requires you to admit or deny that an issue is core, and then express your consent (or not) to bankruptcy court judgment if you deny that an issue is core--one ignores this rule at one's peril, as Paleveda did for EBIA. Pierce Marshall objected strenuously to bankruptcy court adjudication of Vickie's counterclaim, and he was in the same Ninth Circuit with the same adverse precedent about the bankruptcy courts' ability to adjudicate pre-trial matters. The S. Ct. has held that LOTS of rights that are WAY more important than this one have been waived by silence, especially when a rule explicitly calls for objection.

Bankruptcy judges are smart folks. If expressed consent is acceptable but implied consent is not, I think we'll see judges seeking express consent from parties on the record.

Jason,

Didn’t EBIA object to the Bankruptcy Court’s authority to decide the trustee’s complaint at the earliest possible moment in its answer by demanding a jury trial to be conducted outside bankruptcy?

Why is this not an explicit objection to waiver of Article III rights as required by Rule 7012?

And how can you invoke the Rule when the Statute itself is recognized to be unconstitutional by both the Ninth Circuit and Supreme Court?


Point well taken, Robert, but Rule 7012 requires something fairly simple and straightforward, which Paleveda stubbornly ignored. His gamesmanship may well come back to bite him in this case. I'm actually more concerned that the Supremes granted cert. to establish that NO consent (express or implied) could overcome the Article III problem ... which would explain why the messy facts of this case didn't dissuade the Justices. I have my fingers crossed that they're poised to reconfirm their "narrow" assurances from Stern, though at the very least I hope and expect they will interpret section 157(b) in a reasonably capacious way to avoid the meltdown we saw after Northern Pipeline.

I've posted this theory before but maybe the 4 dissenting minority in Stern granted certiorari in Executive Benefits to expand the "public right" exception to an Article III trial.

My theory anticipates at least one member of the Stern majority will join the minority to establish that the alter-ego of the debtor is the debtor and waived its Article III rights once the debtor chose to seek bankruptcy protection.

Even Scalia ought to agree that when the US Trustee's Office (through its chapter 7 trustee agent)files a complaint in bankruptcy court against the alter-ego of the debtor the proceedings represent a public right issue.

This outcome would be a classic Supreme Court redefinition of the issues presented, much like occurred in Travelers v Bailey.

On the question of why well-represented defendants would consent, I can think of a lot of reasons why consent could be advisable in given cases. (Although I agree that most of the time I probably wouldn't consent.)

A couple of thoughts:

What if a defendant thought it could win before the bankruptcy court--and was more likely to do so there than before the district court? For whatever reason, including knowledge of particular district or bankruptcy judges, or the involvement of some sort of specialized issue where bankruptcy judges might be more likely to get the desired result. After all, specialist bankruptcy lawyers will often be hired to represent parties in these things, and they may be more comfortable with the "devil they know." (Or more venally, they may prefer to gain practice experience and face time before bankruptcy judges.) I don't think this is particularly implausible; debtors/trustees frequently are aggressive (as well they should be) in pursuing these things--and faced with such aggression, a bankruptcy judge may in some ways be a more reliable decision maker for a defendant, more familiar with what is and isn't properly recoverable.

What if a defendant wants to get it over with? District court trial dates can often be harder to come by than bankruptcy court trial dates. Sometimes these things aren't particularly high dollar, and the creditor might well be a small business that doesn't want this hanging over its head one way or the other. Or it might simply be the case that a rapidly approaching trial date will force a DIP/trustee to have more serious settlement talks than is otherwise possible--sometimes it can be quite difficult for creditors' counsel to get the ear of debtors' counsel.

Even accepting your premise--that defendants should always want to draw things out--who's to say that it's not a bonus to fight it once before the bankruptcy court, fight it again before the district court, and fight it yet again before the appellate court? Particularly if you've got some issue of law where you'll get something approaching de novo review at both appellate levels, you might see that as a nice long diversion to force the estate to go down.

Great points, Chris. Thanks so much! I'd really like to have solid empirical info on this, but alas ...

"The S. Ct. has held that LOTS of rights that are WAY more important than this one have been waived by silence, especially when a rule explicitly calls for objection."

No. Article III's requirement that judges who exercise the judicial power of the United States is not a right to have one's case adjudicated by a judge with life tenure (I know Schor suggests it partially is, but bear with me), any more than the requirements in Article I that a bill pass both houses of Congress and that congressmen be 25 and Senators be 30 add up to a "right" to be governed by bicamerally enacted laws enacted by persons above the ages of 25 in one house and 30 in the other. These are structural provisions of the Constitution, not individual rights, that, whether we think they make a lot of sense, were put there to guarantee benefits that inure to the whole polity. Judges don't just decide disputes between parties. Judges make law just as congressmen and Senators make law. The framers believed life-tenured judges would make better law, as they believed Senators over a certain age would make better law. To take the most extreme case, the fact that we have a life-tenured, presidentially nominated, Senate-confirmed Supreme Court rather than an elected Supreme Court serves the nation as a whole, not just the hundred or so people, businesses and governments who are parties in their cases each year; their interests in the Court's impartiality is dwarfed by ours. A bankruptcy judge is a much smaller fish, but not so small that the only people who care about his impartiality are the people in front of him; a bankruptcy judge's decisions can have enormous persuasive effect on a national scale.

Now, simply showing that life tenure isn't a right doesn't necessarily make it unwaivable; a litigant can waive any constitutional argument from Article I he can make. If I'm convicted under a statute and I want to argue it didn't pass both houses of Congress, I have to argue that in district court. But once you see that life tenure is a structural provision, not just an individual right to a neutral adjudicator, you have to ask why you'd treat this structural provision of Article III differently as to waiver than the case and controversy requirement (i.e., standing) or federal jurisdiction. For reasons I won't expand on here because this comment is already long enough, the power of the judicial branch to act over a certain case or type of case (rather than over a certain litigant) generally isn't and shouldn't be waivable, while the power of the other two branches to act in a given area or to make a given law can be waived by litigants, and properly so.

Great observations, Anon, though I'm not sure "No" is the right answer here. Your analysis seems rather more doctrinaire than the Schor opinion would warrant: "the Court has declined to adopt formalistic and unbending rules." I would have liked to have seen more analysis of this second, non-consent aspect of Schor's analysis in both of the Arkison briefs, and I suspect this is where the Court will focus when the decision comes down, but IF the Court concludes that the bankruptcy jurisdiction scheme does not seriously impinge on separation of powers (as many smart commentators have concluded, including the smart commentator who wrote Arkison's brief), then EBIA's implied consent looks very much like Schor's implied consent. Seems to me it very well could go either way here.

Petitioner’s Reply Brief in Executive Benefits drops another bomb at footnote #7 - successor liability actions raise “Stern” type issues.

And, in conjunction with its argument that judicial rewriting of the statutes to close the “Gap” in 28 USC 157 also threatens 1334(c)(2) then the stage is eventually set for the High Court to reverse the practice of extinguishing unsecured claims via 363(f) through an anti-successor liability injunction.

It was Justice Stevens in his dissent in Celotex v Edwards that said: "If a bankruptcy judge lacks jurisdiction to “determine” a question, the judge also lacks jurisdiction to issue an injunction that prevents an Article III court, which concededly does have jurisdiction, from determining that question."

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