In Stern v. Marshall, 131 S. Ct. 2594 (2011), the Supreme Court established that a bankruptcy court lacks constitutional authority to enter a final judgment on a debtor’s state law counterclaim despite Congress’s grant of statutory authority to do so. In Wellness Int’l Network v. Sharif, No 12-1349 (7th Cir. Aug 21, 2013), the seventh circuit held that a constitutional objection based on Stern is not waivable. [Read more…] about Constitutional Authority Objection Not Waivable
Petition for Certiorari on Stern Issues Addresses “Gap” in Bankruptcy Jurisdiction
Two issues growing out of the Supreme Court’s controversial jurisdictional decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), have found their way back to that Court in a petition for certiorari. Executive Benefits Insurance Agency (EBIA) v. Arkinson (In re Bellingham Insurance Agency), No. 12A831 (S.Ct. Apr. 3, 2013). The case involves an alleged fraudulent conveyance by a non-creditor and is squarely within the holding of Stern under which the Court found that Congress violated Article III when it vested in bankruptcy courts the authority to enter final judgments on certain state-law counterclaims designated as “core” bankruptcy proceedings under Section 157(b)(2) of Title 28.
The issues raised in the petition are: 1) whether the bankruptcy court had the power under 28 U.S.C. 157(b) to issue findings of fact and conclusions of law to the district court for final adjudication, and 2) whether, the bankruptcy court could finally adjudicate a motion for summary judgment on the fraudulent conveyance claim upon consent of the parties.
While the case was on appeal to the Ninth Circuit, the Supreme Court decided Stern v. Marshall, 131 S. Ct. 2594 (2011). Based on that case, the circuit court found that although the Constitution precluded a bankruptcy court from finally deciding the core issue of fraudulent conveyance involving a non-creditor, 28 U.S.C. 157(b)(1) should be interpreted to permit bankruptcy courts all the power that “the constitution will bear” and that the “more modest power” to issue proposed findings of fact and conclusions of law is within those confines. Additionally, citing Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 850-51 (1986), the court distinguished between personal and structural protections under Article III finding that the issue of fraudulent conveyance implicated personal protections that could be waived by the parties. Where section 157(c) permits the parties to consent to final adjudication in non-core proceedings, the court found that it followed that they could likewise consent to such adjudication in core proceedings. Exec. Ben. Ins. Agency v. Arkinson, 702 F.3d 553 (9th Cir. 2012)
The petition identifies a split in the circuit courts with respect to both of these issues. In Waldman v. Stone, 698 F.3d 910, 917–918 (6th Cir. 2012), cert. denied, 2013 U.S. LEXIS 2333 (Mar. 18, 2013), the Sixth Circuit held that parties cannot consent to a bankruptcy court’s jurisdiction to adjudicate core issues on a private right of action subject to Article III, and in Ortiz v. Aurora Health Care (In re Ortiz), 665 F.3d 906 (7th Cir. 2011), the Seventh Circuit held that proposed findings of fact and conclusions of law were limited to non-core proceedings.
The case, if accepted by the Supreme Court, could guide the courts in dealing with the “gap” left by the decision in Stern.
Eighth Circuit Puts Off Lien-Stripping in Chapter 13 Issue for Another Day
In a cranky opinion chastising “judicially careless attorneys” and remanding the case to the bankruptcy court on procedural grounds, the Eighth Circuit sidestepped the issues of whether a wholly unsecured mortgage can be stripped in Chapter 13, and whether, if such stripping is allowed, the availability of discharge is a necessary prerequisite to it. In re Fisette, No. 11-3119 (8th Cir. Sept. 12, 2012). [Read more…] about Eighth Circuit Puts Off Lien-Stripping in Chapter 13 Issue for Another Day
Stern v. Marshall Construed
Interpreting the Supreme Court decision in Stern v. Marshall, 131 U.S. 2594 (2011), the Bankruptcy Court for the Eastern District of Kentucky found that it had subject matter jurisdiction over debtor’s state common law counterclaims but did not have jurisdiction over the counterclaims based on Kentucky’s usury and consumer protection statutes. In re Tolliver, No. 09-2076 (Bankr. E.D. Ky. February 2, 2012). The issue arose in an adversary proceeding in which the debtor objected to a proof of claim filed by Ocwen Federal Bank, as servicer to Bank of America. Debtor filed counterclaims advancing state statutory and common law claims based on Ocwen’s alleged charging of unauthorized and duplicative fees and costs, and improperly inflating debtor’s balance, causing her to default. [Read more…] about Stern v. Marshall Construed
Seventh Circuit on Jurisdiction Post-Stern
The fallout from Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) is really picking up. The Seventh Circuit Court of Appeals became the first circuit court to weigh in, ruling, in a case with facts similar to those of Stern, that the bankruptcy court lacked jurisdiction to issue a final judgment on a claim, asserted by debtors in two proposed class actions, that a medical services creditor violated a Wisconsin state statute by filing proofs of claim revealing the debtors’ medical information. In re Ortiz, — F.3d —-, 2011 WL 6880651 (7th Cir., Dec 30, 2011). Courts disagree over whether a bankruptcy court may issue a final judgment in a proceeding to avoid an allegedly fraudulent transfer. Compare In re Citron, 2011 WL 4711942 (Bankr. E.D. N.Y., Oct. 6, 2011) (court may issue final judgment), with In re Heller Ehrman LLP, — F.Supp.2d —-, 2011 WL 6179149 (N.D. Cal., Dec. 13, 2011) (court may not issue final judgment). A question several courts have asked is what a bankruptcy court should do when a matter designated as “core” in 28 U.S.C. § 157(b)(2) must be decided by an Article III court. The two possibilities are that “unconstitutional core” matters default to the procedure used for non-core matters (i.e., proposed findings and recommendations under 28 U.S.C. § 157(c)) or that such matters should be entirely removed from the bankruptcy courts. Most courts considering the issue hold that bankruptcy courts retain the power to enter proposed findings and recommendations in this class of cases. See, e.g., In re Byce, 2011 WL 6210938 (D. Idaho, Dec. 14, 2011); In re Mortgage Store, Inc., 2011 WL 5056990 (D. Hawai’i, Oct. 5, 2011); In re Heller Ehrman LLP, above.
Denial of Motion to Dismiss for Abuse Final Appealable Order
In McDow v. Dudley, No. 10-1732 (4th Cir. Nov. 30, 2011) the fourth circuit found that an order denying a trustee’s motion to dismiss a debtor’s chapter 7 case as abusive under section 707(b) is a final, appealable order under section 158(a). In the bankruptcy court, the trustee sought dismissal based on a means test calculation that the debtors had $2,000/month available to pay creditors. The bankruptcy court granted debtors’ motion for summary judgment finding that section 707(b) applies only to cases filed originally under chapter 7 and does not encompass cases converted from chapter 13, as debtors’ case was. The district court dismissed the trustee’s appeal as interlocutory.
The circuit court vacated and remanded. The court reasoned that when Congress enacted BAPCPA and added the means test it created a presumption of abuse when debtor’s income exceeded a statutory threshold. Because BAPCPA imposed a strict deadline for the trustee to raise the issue of bad faith the court found that resolution of that issue was essential to the continuation of the case and therefore constituted a conclusion of a discrete dispute which was an appealable order. The court further noted that pragmatic considerations, including the possible liquidation of assets and depletion of resources if the case goes forward, militated in favor of treating the denial of dismissal for abuse as a final appealable order.
California Appellate Court on Option ARMs
Yesterday in the case of Boschma, et al v. Home Loan Center, Inc., No. G043716, a California Appellate Court held that homeowners sufficiently stated a claim for a state UDAP violation based on the lender’s disclosure that suggested only the possibility of negative amortization and interest rate increases when both were certain. The interest rate was going to rise from the introductory teaser rate, and if the borrowers paid according to the payment schedule in the TIL disclosure negative amortization was also a certainty.