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Stern II, now time for Stern III

posted by John Pottow

Thanks to Stephen for posting the Bellingham/Arkison/Executive Benefits opinion, which I will for simplicity think of as Stern II, as it's the second installment of what will necessarily be a trilogy of Supreme Court cases on the question.  True, the bankruptcy courts live to breathe another day, but the consent question remains unanswered.  (Actually, that's not really true: the consent question was answered already in the magistrate context; the question is really whether "narrow" Stern has changed the answer.)

When will that next case come?  Could be as early as Monday when the orders from this Thursday's conference are announced, inlcuding the Wellness petition pending from CA7.  It could be a GVR "in light of" Stern II, in which case the split remains, or it could be Stern III.  Watch this space!


I think the excitement is over. Executive Benefits proves that the Court has no desire to address the consent issue. And, in the bankruptcy context at least, I cannot see any reason they would have to. So long as Bankruptcy Courts can issue proposed findings of facts and conclusions of law on Stern claims, and be summarily affirmed in nearly every case (as they undoubtedly will be in SDNY and DE), the consent issue is largely irrelevant.

I suppose a District Court judge somewhere might think otherwise, or perhaps someone concerned with judicial economy might try to test the waters. I get that Professors around the country are excited by the possibility that these undesirable circumstances might give rise to a "Stern III." But a trilogy seems no more necessary here than it was for the Godfather (which is to say, not at all).

^^ Wrong in several respects. First, Executive Benefits doesn't "prove" that the Court doesn't want to decide the consent issue. They granted cert to address the consent issue, after all, immediately after a circuit split developed on consent, but before there was *any* split, on the circuit or district level, on the statutory issue they ultimately decided. (After cert was granted, the Seventh Circuit, alone in the nation, held that bankruptcy courts could not make recommendations on Stern claims.) It would seem that, at least when cert was granted, four members of the Court wanted to address consent. At argument, maybe two thirds of the discussion regarded consent, and only a few Justices (Alito, Sotomayor, Ginsburg) suggested that the consent issue might be moot given the posture of the case, while the rest of the Court enthusiastically sparred over consent with counsel and each other. What really probably happened is that a couple of Justices, or maybe just one, felt strongly that the consent issue was moot, and there was no majority to be formed on either side of the issue. Once it became clear that there weren't five votes to hold anything one way or another, they all agreed to sign an opinion holding the one thing they all could agree on, the statutory question in the case.

As for why the consent issue isn't going to be irrelevant, a clear error standard of review is very different from a de novo standard of review on factual findings, especially where, in a closely litigated high-dollar case, the district court may choose to hear testimony from the witnesses the bankruptcy court heard in making its proposed findings. As often as district courts may rubberstamp bankruptcy court recommendations, there will surely be cases where district courts don't, and where they reach a different result than the bankruptcy court because of their de novo review. Further, an abuse of discretion standard of review in default judgments is quite different from a de novo standard of review over a proposed default judgment - and that difference is what's at stake in the pending cert petition from the Seventh Circuit raising the same question of consent the Court declined to decide Monday. Finally, although this last type of case could never reach the Supreme Court, the Stern hawks on the Court have to be troubled by all the unappealed judgments in Stern claims that bankruptcy courts are entering with the consent of the parties; unappealed judgments are probably entered in the vast majority of Stern claims bankruptcy courts hear. The Court can never stop that if it doesn't take a case on consent.

That said, the Seventh Circuit case seems like a dodgy vehicle in a few respects. First, the Seventh Circuit's holding that Stern applied to the claim at issue there in the first place is extremely dubious, and the petitioner's seeking cert on that too. If they grant cert on that question, they probably never reach consent. If they don't, while granting consent, they leave a pretty atrocious error uncorrected, and awkwardly must assume without deciding that Stern applies to requests for declaratory judgments that certain assets are, under state law, the debtor's property and therefore part of the bankruptcy estate - which is absurd, as of course bankruptcy courts retain authority after Stern to demarcate the bounds of the estate. Vehicle problem #2 is that the Seventh Circuit, it turns out, erred in holding that the bankruptcy court's judgment could not be treated as a recommendation, and that the bankruptcy court even lacked authority to conduct discovery on the 541 claim - which last item is a huge deal because the bankruptcy court entered a default judgment as a discovery sanction. Hence, they ordered the district court to withdraw the reference and hear the 541 claim from scratch, thereby purging the discovery violations that were the basis for the default judgment in the first place. If the Seventh Circuit's right about consent, what they should have ordered, given Monday's holding, is merely that the district court treat the bankruptcy court's judgment as a recommendation, and decide whether a default judgment was a proper sanction for the violations of discovery which the bankruptcy court did have the power to conduct. If, on the other hand, the Seventh Circuit's wrong, the district court's original affirmance of the bankruptcy court's default judgment, on an abuse of discretion standard, stands. The question then is, is the Court really going to grant cert just to decide whether or not the district court's going to review the default judgment again de novo, when it may well be the case that the district court will once again agree with the bankruptcy court? Right now, there's every reason to think the petitioner would win in district court if the Court merely GVR'd, allowing the Seventh Circuit to tell the district court to decide de novo whether to enter default judgment as a sanction for the discovery violations that took place below.

Bankruptcy Clerk, I think you capture a number of the practical reasons the Court might have come out the way it did. I'll admit my second sentence is misleading. What I meant was that the Court (i.e. any potential plurality of its members) did not want to reach the consent issue.

Take a step back, look at the letter the Chief Justice wrote to Congress this year. The Court is unhappy about how the judiciary is being treated. It has always been the most underfunded (yet efficient) branch of government, and, rather than reward them, Congress has cut back even more. At the same time, the work of non-Article III judges seems to be growing. In the Court's view, Stern was a great chance for them to remind Congress that judges cannot simply delegate their powers (even if Congress tells them they can). The same Constitution that Congress seems hell bent on protecting with their budget cuts is the one that guarantees the importance (and salaries) of Article III judges. Perhaps that is reading too much into Stern, but that's how I see it.

Now, let's come to Executive Benefits. The Court knows that upending the entire bankruptcy system is not going to help anyone. Judges already suffering from budget cuts will find exponentially more work on their plate. But they also cannot agree on the consent issue (or they just don't want to give the people a power that even Congress cannot wield). And, the consent issue also threatens to pull in the magistrate system, which would also mean more work for judges. That brings us to the unanimous opinion we have.

There are two ways of responding to the opinion: (1) noting that there are still holes, and that the Court might upend the entire system (2) looking at the decision as evidence that the Court (or a plurality of it) agree that the system should not be upended (even if they cannot truly agree how to prevent that from happening). I think four members of the Court—even if there are four “Stern hawks”—will think twice before granting cert on consent (though I am still not entirely clear what case will squarely present that issue to the Court at this point) since they know it will not have the support of a majority.

I take your point about the distinctions between the various standards of review. My point, however, is that the District Courts will rarely step in and, when they do, the case seems unlikely to make it all the way to the Supreme Court. For the sake of certainty and predictability (something we both agree is of paramount concern), it seems more beneficial to downplay the likelihood of a sequel than to see it as an inevitability. Nothing is impossible. The Godfather did, eventually, become a trilogy, but no one even remembers the third installment.

Here's the deal: we now have a circuit split on whether 157(c)(2) is unconstitutional. CA5 says yes, CA9 says no. CA7 tries (implausibly) to have it both ways. As said, I think most likely outcome is to GVR CA7 this week. And the parties in CA5 -- perhaps mistakenly thinking SCOTUS would resolve the issue in EBIA -- declined to seek cert. So there is no "certable" case pending yet to raise the issue of the circuit-splitting question on the constitutionality of 157(c)(2). It'll come soon enough, as long as someone with enough money in another circuit loses and wants to get a third kick at the can, they'll seek cert and latch onto the split. To be clear, CA5 has held 157(c)(2) goes down not just for Stern claims but for all non-core claims, period (amusingly, as I recall, based on the "highly persuasive" reasoning of a case from CCA6 that didn't even cite 157(c)(2)!). Good times.

John, why would a district court rely exclusively and explicitly on 157(c)(2) if it can just summarily affirm? Are you suggesting a district court wants to dare the Court to give it more work?

Bankruptcy, I don't think I get the question. Perhaps try to reframe, but don't get distracted by Stern claims. Just think of a straight-up non-core, aka "related-to," cause of action. If the parties try it before bankruptcy court on consent, it is under 157(c)(2). The district court has no choice in the standard of review; it doesn't get to "summarily affirm." E.g., it has to review findings of fact under a substantial evidence standard.

(1) A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

(2) Notwithstanding the provisions of paragraph (1) of this subsection, the district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments, subject to review under section 158 of this title.

For "related to" proceedings, the bankruptcy court has the power to hear the matter under both (1) AND (2). It only has the power to issue judgments under (2). So longs as the BK court issues both a final judgment AND, in the alternative, proposed findings of facts and conclusions of law (as they have done), explain to me how we need (c)(2)--or, more precisely, why the district court would say, even though the bankruptcy court has jurisdiction under (1) to issue proposed findings off facts and conclusions of law, I am going to view this as a final judgment since they had consent.

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