Sunday, May 20, 2012

Stern v. Marshall: The Texas Cases

This is a paper that I did for the Austin Bar Association summarizing the Texas cases applying Stern v. Marshall to date.   Please note that where the holding is indented, I am directly quoting the opinion.   I also used the following key for highlighting certain decisions:

*--If you only read a few cases, read these ones.
#--Cases where the Court found that Bankruptcy Judge lacked authority to enter a final order. 

Fifth Circuit Court of Appeals:

Technical Automation Services Corp. v. Liberty Surplus Insurance Corporation, 673 F.3d 399 (5th Cir. 3/5/12)(E. Grady Jolly)

Facts:              Magistrate Judge granted summary judgment on an insurance coverage dispute.   Fifth Circuit sua sponte requested briefing on whether Stern v. Marshall affected the Magistrate Judge’s ability to enter a final judgment.

Holding:          Stern v. Marshall did not overrule prior precedent on constitutionality of U.S. Magistrate’s authority to enter a final judgment.

U.S. District Courts:

Feuerbacher v. Moser, 2012 U.S. Dist. LEXIS 44396 (E.D. Tex. 3/29/12)(Marcia A. Crone)

Facts:  Trustee sued debtor’s husband under TUFTA to recover fraudulent transfers.    Bankruptcy Court ruled in favor of Trustee.   On appeal, husband raised a Stern issue.

Application of the aforementioned rationales to the case at bar reveals that Stern does not preclude the bankruptcy court from issuing a final judgment on claims where, as here, the Trustee seeks to recover fraudulent transfers.  

Mahanna v. Bynum, 465 B.R. 436 (W.D. Tex. 11/28/11)(Sam Sparks)
Facts:  Debtors filed chapter 13 bankruptcy.   Court directed debtors to convert to chapter 7 or chapter 11.   Debtors converted to chapter 11.   After debtors failed to comply with obligations of debtors-in-possession, U.S. Trustee filed Motion to Dismiss or Convert.    Debtors requested conversion.   Court dismissed the case over debtors’ objection.   Debtors appealed.
Holding:   Court rejected argument that Bankruptcy Court lacked authority to enter a final order on motion to dismiss or convert.
Stern did not destroy all finality in bankruptcy courts, it simply held § 157(b)(2)(C) was unconstitutional to the extent it swept counterclaims not arising in or under Title 11 into the category of "core" proceedings.

Bushman v. Moore, 2011 U.S. Dist. LEXIS 154776 (S.D. Tex. 9/14/11)(Vanessa D. Gilmore)
Facts:  Bankruptcy Court entered judgment finding debt to be non-dischargeable and finding that property was not homestead.
Holding:  Debtors argued that Stern v. Marshall prevented Bankruptcy Court from entering final judgment.  

Here, in contrast to Stern v. Marshall, the Bankruptcy Court was not ruling on a state law counterclaim, but on a determination as to the dischargeability of particular debts under 28 U.S.C. § 157(b)(2)(I). These types of claims remain under the bankruptcy judge's core proceedings jurisdiction following Stern v. Marshall.
#In re AIH Acquisitions, LLC, 2011 U.S. Dist. LEXIS 101190 (N.D. Tex. 9/7/11)(John McBryde)

Facts:  Individuals filed plea in intervention in adversary proceeding involving Textron.   Bankruptcy Court dismissed claims with prejudice for failure to plead with specificity under Rule 9(b)).

Holding:          Bankruptcy Court lacked authority to enter a final order on claims.    Claims asserted in plea in intervention were state law claims similar to the counterclaim in Stern v. Marshall.   The District Court reversed the dismissal order and withdrew the reference.

Bankruptcy Courts:

Burchik v. Butler, Adv. No. 11-1220 (Bankr. W.D. Tex. 5/10/12)(Craig A. Gargotta)(oral ruling)

            Facts:  Chapter 7 Debtor brought suit against former counsel for malpractice.

            Holding:          In announcing oral ruling, Court noted that absent consent, it would not have had authority to enter a final ruling under Stern.   Because parties expressly consented, Court could enter a final order.

In re Ruth, 2012 Bankr. LEXIS 1857 (Bankr. S.D. Tex. 4/26/12)(Jeff Bohm)
Facts:  Debtors filed adversary proceeding against creditor seeking to deny claim and recover sanctions for abuse of the proof of claim process and for vexatious litigation.
Holding:  Court had authority to enter a final order on counterclaim to proof of claim because counterclaim arose out of Bankruptcy Code and Bankruptcy Rules.  Additionally, it was necessary to resolve the dispute to determine the claim.

In re Bechuck, 2012 Bankr. LEXIS 1459 (Bankr. S.D. Tex. 4/4/12)(Jeff Bohm)
Facts:  Trustee filed an application to employ special counsel.
Holding:   Because Court denied application to employ special counsel, authority to enter a final order was not implicated.    However, Bankruptcy Court would nevertheless have authority because employment of counsel is governed by Bankruptcy Code and Bankruptcy Rules.

In re Laughlin, 2012 Bankr. LEXIS 1268 (Bankr. S.D. Tex. 3/23/12)(Jeff Bohm)
Facts:  Creditor filed complaint to determine dischargeability of debt.

This suit is therefore based on an express bankruptcy statute; indeed, the requested relief is unique to the Code and could never be obtained under state law. For these reasons alone, this Court concludes that Stern is inapposite, and therefore it has constitutional authority to enter a final judgment in this dispute.

In re Thalmann, 2012 Bankr. LEXIS 1066 (Bankr. S.D. Tex. 3/13/12)(Jeff Bohm)
Facts:  Creditor moved to dismiss case as having been filed in bad faith and Debtor objected to proof of claim filed by State Court Receiver.

State law has no equivalent to (sections 1307(c) and 1325(a)(3) and (a)(7)); they are purely a creature of the Bankruptcy Code. Accordingly, because the resolution of this dispute is based on express bankruptcy statutes, not state law, Stern is inapplicable, and this Court has the constitutional authority to enter a final judgment on the Motion pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Carlew, 2012 Bankr. LEXIS 1006 (Bankr. S.D. Tex. 3/9/12)(Jeff Bohm)
Facts:  Chapter 7 trustee objected to debtor’s exemptions.

In the dispute at bar, the Chapter 7 Trustee has objected to the Debtor's exemption of the Insurance Proceeds pursuant to Section 522(l) and Fed. Bankr. R. 4003(b). State law has no equivalent to this statute and rule; therefore, the facts in this case  are distinguishable from those in Stern, which involved solely state law. Granted, the resolution of the dispute at bar does hinge on Texas state law regarding homestead exemption. But, unlike Stern, where the resolution of the debtor's counterclaim did not necessarily adjudicate the creditor's claim, here, the resolution will certainly determine whether the Debtor has a claim to the Insurance Proceeds. If he does--i.e. if these proceeds are exempt--there will necessarily be less funds available for distribution for creditors. If the Debtor does not have a claim to the Insurance Proceeds--i.e. the proceeds are not exempt--then the Trustee will have more funds to distribute the proceeds to pay creditors. For these reasons, the dispute at bar is sufficiently distinguishable from the dispute in Stern for this Court to sign a final order.

In re Frazer, 466 B.R. 107 (Bankr. S.D. Tex. 107 (Bankr. S.D. Tex. 3/5/12)(Jeff Bohm)

            Facts:  Debtors filed adversary proceeding to strip lien of homeowners association from their homestead.

            Holding:  While validity of lien depends on state law, determination of dispute is necessary to resolve claim and therefore Court has authority to enter a final order.

In re Crescent Resources, LLC, 2012 Bankr. LEXIS 843 (Bankr. W.D. Tex. 3/2/12)(Craig A. Gargotta)

            Facts:  Plan Trustee filed a Complaint to Avoid and  Recover Improper “Bonus” Payments.    Defendants filed a Motion to Dismiss.    Court granted motion in part and denied in part.    Specifically, Court ruled that plan of reorganization did not adequately preserve causes of action under 11 U.S.C. §544 under state fraudulent conveyance law.  Trustee requested that Court certify a direct appeal to the Fifth Circuit Court of Appeals.   One issue that the Trust requested the Court to certify was whether the Court had authority to enter a final order dismissing the claims with prejudice.

            Holding:          Court disagreed that case was “squarely within the category of state law proceedings” implicated by Stern.    Although case involved a fraudulent transfer action brought under state law by virtue of strong arm powers under section 544, Court’s ruling was based upon interpretation of the Plan.    Furthermore, order was interlocutory and therefore was not a “final” order governed by Stern.

*In re American Housing Foundation, 2012 Bankr. LEXIS 449 (Bankr. N.D. Tex. 2/10/12)(Robert Jones)

            Facts:  Trustee brought actions under 11 U.S.C. §§544, 547 and 548.   96 defendants in 20 adversary proceedings filed motions to dismiss based on Stern v. Marshall.   Motions were filed under Rule 7012(b)(1) based on lack of subject matter jurisdiction.

            Holding:          Court assumed that it did not have authority to enter final orders in proceedings because defendants did not file claims and causes of action did not fit within public rights doctrine.    Court considered whether it could hear cases and issue proposed findings of fact and conclusions of law to the U.S. District Court.  “(I)t makes little sense to suggest that a bankruptcy judge has authority to hear a matter and issue proposed findings of fact and conclusions of law on "related to" matters but does not have authority to do the same with respect to "core" matters.”   Court concluded that it could enter non-binding findings of fact and conclusions of law.    Case contains a very thoughtful and extensive discussion of Stern.  

In re Franceschini, 2012 Bankr. LEXIS 156 (Bankr. S.D. Tex. 1/12/12)(Marvin Isgur)

           Facts:  Creditor brought action to determine dischargeability under 11 U.S.C. §523(a)(6).


The right to a discharge is established by the Bankruptcy Code and is central to the public bankruptcy scheme.   (citations omitted).   Determinations of whether a debtor meets the conditions for a discharge are integral to the bankruptcy scheme, and bankruptcy courts have the authority to make such determinations pursuant to its in rem jurisdiction. (citation omitted).”   Court had authority to enter final order on determination of dischargeability.

In re Hereford Biofuels, LP, 2012 Bankr. LEXIS 22 (Bankr. N.D. Tex. 1/3/12)(Stacey C.G. Jernigan)

            Facts:  Non-debtor brought action against another non-debtor over interpretation of section 363 order.

While the Adversary Proceeding has arisen in a post-confirmation context, and is between two non-debtor parties, the disputes herein ultimately concern: (a) the interpretation and enforcement of a prior sale order of the bankruptcy court, under section 363 of the Bankruptcy Code (and the asset purchase agreement that the bankruptcy court approved); and (b) the definition of what was or was not property of the bankruptcy estate in the underlying bankruptcy case, pursuant to section 541 of the Bankruptcy Code. In fact, the asset purchase agreement, the bankruptcy court sale order, and what was "property of the estate," are undoubtedly at the crux of the parties' disputes. The only place that one would find a bankruptcy court sale order and these post-sale issues is in the context of a bankruptcy case. Thus, the court determines that this is a core "arising  in" proceeding, pursuant to 28 U.S.C. §§ 157(b)(2)(A), (O) & 1334(b). It is a proceeding in which the bankruptcy court may enter final orders.

In re Hill, 2011 Bankr. LEXIS 5186 (Bankr. S.D. Tex. 12/30/11)(Jeff Bohm)

            Facts:  Chapter 13 trustee filed objection to exemptions and motion to modify confirmed plan.

            Holding:          Because proceeding arose under Bankruptcy Code and Rules, Court could enter a final order.   Public rights doctrine applied as well.
*In re Apex Long Term Acute Care-Katy, LP, 465 B.R. 452 (Bankr. S.D. Tex. 12/28/11)(Marvin Isgur)

            Facts:  Trustee brought four preference suits.   Trustee compromised three of the cases and sought to dismiss them with prejudice.  Trustee sought a default judgment on the fourth case. 

            Holding:  Court raised issue of its ability to enter the orders sua sponte.   Because dismissal with prejudice and default judgment constitute final orders, Court had to examine its authority.   After extensive analysis, Court concluded that it could enter final orders in cases where defendants filed claims because preference action was part of the claims adjudication process.    As to defendants who did not file claims, Court could enter final orders based on the public rights doctrine.”   Thia is a very scholarly opinion and should be the "go to" opinion for defending the ability of the bankruptcy court to enter final orders in a preference case.
In re Carroll, 464 B.R. 293 (Bankr. N.D. Tex. 12/13/11)(Barbara J. Houser)

            Facts:  Debtor filed for chapter 13 relief.   Creditor sought to liquidate claims and have them declared to be nondischargeable.    Debtor argued that court did not have jurisdiction.

            Holding:          Court had authority to enter final orders.   Stern clarifies “bankruptcy courts’ constitutional power, not their subject matter jurisdiction.”   “(T)here can be little doubt that this Court, as an Article I tribunal, has the Constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case. Determining the scope of the debtor's discharge is a fundamental part of the bankruptcy process.”   Because Stern left intact Court’s ability to adjudicate a creditor’s claim, Court may liquidate amount of non-dischargeable debt.

*#In re Soporex, Inc., 463 B.R. 344 (Bankr. N.D. Tex. 11/28/11)(Barbara J. Houser)

            Facts:  Trustee filed complaint against officers and directors for breach of fiduciary duty and objections to claim.   Defendants filed motion to dismiss which did not raise a Stern issue.

            Holding:          Court raised Stern issue sua sponte.   Court concluded that it could not enter a final order on trustee’s counterclaims against insiders filing claims.    Court ruled that it could issue proposed findings and conclusions to the district court on statutory core proceedings where it lacked constitutional authority to enter a final order.   In dicta, Court noted whether parties could “remove the constitutional impediment identified by Stern by consent is unclear.”

Many are debating the breadth of the Supreme Court's decision in Stern. The arguments are interesting and, in some instances, mind-numbing. For today, I leave those arguments to others because I believe that the issue before me can be more simply, and practically, decided. It would be incredibly ironic for this Court to lack constitutional authority to finally determine the Trustee's breach of fiduciary duty and corporate waste claims against Smith and Sabolik (when they actually inserted themselves into Inc.'s bankruptcy case by filing a proof of claim) as the Supreme Court has clearly held in Stern, but to have constitutional authority to finally determine the Trustee's breach of fiduciary duty claims (arising from substantially the same acts or failures to act) against Linehan, the Outside Directors, and Letson, who chose not to involve themselves in the Debtors' bankruptcy cases at all until they were forced to do so by the Trustee's decision to sue them here. As a practical matter, this Court concludes that such a result is irreconcilable with the Supreme Court's analysis in Stern. If this Court lacks constitutional authority to finally determine  one set of breach of fiduciary duty claims against two former officers of certain of the Debtors, surely it lacks constitutional authority to finally determine substantially identical sets of breach of fiduciary duty claims against other former officers and/or directors of certain of the Debtors.

            As a result, the Court submitted proposed findings of fact and conclusions of law with regard to the motions to dismiss.

In re Whitley, 2011 Bankr. LEXIS 4545 (Bankr. S.D. Tex. 11/21/11)(Jeff Bohm)

            Facts:  Court issued order to show cause regarding compensation of attorney in chapter 13 proceedings.


The dispute at bar is not a counterclaim of the Debtor, nor does it arise out of state law; therefore, Stern does not apply. This suit arises out of alleged violations of the disclosure requirements imposed by an express Bankruptcy Code provision--i.e. § 329. Moreover, the Trustee also seeks relief based upon another express Bankruptcy Code provision--i.e. § 330, which allows the Court to award or deny compensation to attorneys that represent the debtor and the debtor's estate. State law has no equivalent to these statutes; they are purely creatures of the Bankruptcy Code. Accordingly, the resolution of this dispute is not based on state common law, Stern does not apply, and this Court has the constitutional authority to enter a final judgment in this dispute pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Chao, 2011 Bankr. LEXIS 4543 (Bankr. S.D. Tex. 11/21/11)(Jeff Bohm)

            Facts:  Court issued Memorandum Opinion Regarding Sua Sponte Conversion of Case from Chapter 11 to Chapter 7.

            Holding:          Court found that it had authority to enter a final order converting the case from chapter 11 to chapter 7.

#In re Special Value Continuation Partners, LP,  2011 Bankr. LEXIS 4475 (Bankr. S.D. Tex. 11/15/11)(Marvin Isgur)

            Facts:  Lenders filed a state court action against officers and directors alleging that they provided misleading financial projections and made misrepresentations to obtain financing for company which filed bankruptcy.   Defendants removed case and requested that venue be transferred to Delaware.   Plaintiffs moved to abstain and remand.

            Holding:          One factor that court considered in denying motion to transfer venue and granting motions to abstain and remand was that court could not enter a final order under Stern.   “These are state law causes of action by nondebtors against nondebtors. The causes of action neither derive from nor depend upon any agency regulatory scheme.”

In re Noram Resources, Inc., 2011 Bankr. LEXIS 4268 (Bankr. S.D. Tex. 11/7/11)(Marvin Isgur)

            Facts:  Chapter 7 trustee brought suit against officers and directors asserting that they had breached their fiduciary duties under Canadian law.    Directors moved to dismiss.


“After Stern, the Court's authority over state-law matters (or, in this case, foreign-law matters) is particularly questionable.”   However, Court still had authority to enter interlocutory orders, such as ruling on a motion to dismiss.

#In re Yazoo Pipeline Co., LP, 459 B.R. 636 (Bankr. S.D. Tex. 10/14/11)(Marvin Isgur)

            Facts:  Trustee filed suit to recover damages for misconduct occurring while debtor was in chapter 11.   Trustee filed motion for leave to file second amended complaint.


Although the claims in this proceeding involve  conduct that took place within the context of a bankruptcy case, bankruptcy law does not alter the state-law character of the claims. The claims would not necessarily be resolved through the claims adjudication process or through the resolution of any other essential bankruptcy matter. This Court does not have authority to enter a final judgment in this matter. On this Court's Recommendation, the District Court has ordered that the reference will be withdrawn after all pretrial matters are concluded.

In re The Heritage Organization, LLC, 459 B.R. 911 (Bankr. N.D. Tex. 10/3/11)(Barbara J. Houser)

            Facts:  Several years after an adverse judgment, defendants moved to vacate the judgment under Rule 60(b)(4) based on the Stern decision.

            Holding:          Judgment is not void for want of jurisdiction unless nor arguable basis for jurisdiction existed in the first place.   Court had statutory jurisdiction.   Because Stern case was not decided for two years after judgment, court “declines to conclude that it lacked any arguable basis for jurisdiction.”

#In re Heights Melrose Group, LLC, 2011 Bankr. LEXIS 153073 (Bankr. S.D. Tex. 9/29/11)(Marvin Isgur)

            Facts:  Debtor filed suit to determine that defendants did not have a claim to certain condominiums.    Defendants claimed that foreclosure sale at which debtor purchased properties was invalid.   Both parties moved for summary judgment.

            Holding:          Court could not enter final orders on parties’ state law claims.   As a result, Court submitted proposed findings and conclusions to the District Court.

*In re Bigler, LP, 458 B.R. 345 (Bankr. S.D. Tex. 8/19/11)(Jeff Bohm)

            Facts:  Bank brought declaratory judgment complaint against other creditors to determine extent, priority and validity of liens.


The broader applicability of the Supreme Court's decision  remains unclear. Other types of disputes frequently decided by bankruptcy courts may now also require final adjudication by Article III courts. A bankruptcy court's authority over matters involving state law causes of action is particularly questionable. Indeed, just as the debtor's counterclaim in Stern was based entirely upon state law, the law governing the dispute in this adversary proceeding is based entirely upon state law. Accordingly, at first blush, it would appear that the undersigned Article I judge does not have the constitutional authority to enter a final judgment in this adversary proceeding. However, for the reasons set forth below, this Court concludes that it does have such authority.

This Court may exercise authority over matters integral to the bankruptcy scheme under the "public rights" exception articulated in Stern. Under Thomas v. Union Carbide Agric. Prods. Co., a right closely integrated into a public regulatory scheme may be resolved by a non-Article III judge.  (citation omitted). The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including "the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a 'fresh start' by releasing him, her, or it from further liability for old debts." (citation omitted).

Here, this suit concerns a dispute that must be resolved in order to determine the appropriate distribution among the Debtors' creditors. The determination of lien priority on assets that were once property of the bankruptcy estate are part of the "public rights" exception, as it involves the exercise of the Bankruptcy Court's in rem jurisdiction over the estate. (citation omitted).

Hence, resolution of the lawsuit pending in this Court arises from an express provision of the Plan, the very purpose of which is to distribute cash to the prevailing party or parties--thereby accomplishing the very objective of the public right known as the bankruptcy process  (i.e. paying claims of creditors). (citation omitted). Therefore, not only does this lawsuit involve a right integral to the bankruptcy scheme--the determination of lien priority--but it also involves a right created by the Bankruptcy Code--distribution of property of the estate to creditors pursuant to the Plan. Accordingly, this dispute falls within the undersigned judge's constitutional authority to enter a final judgment.

In re Ritz, 459 B.R. 623 (Bankr. S.D. Tex. 8/4/11)(Jeff Bohm)

            Facts:  Creditor of a corporation asserted that debtor drained corporation of funds.   Creditor asserted claim against the debtor and sought determination of nondischargeability.

            Holding:          Court could enter a final order under the public rights doctrine.

In re Okwonna-Felix, 2011 Bankr. LEXIS 3028 (Bankr. S.D. Tex. 8/3/11)(Jeff Bohm)

            Facts:  Debtor sought approval of compromise of claims against insurance companies.


Accordingly, because the resolution of the Motion is not based on state common law, but entirely on federal bankruptcy law (both the Rule and the case law instructing how to apply the Rule), the holding in Stern is inapplicable, and this Court has the constitutional authority to enter a final order in this contested matter pursuant to 28 U.S.C. §§ 157(a) and (b)(1).

In re Muhs, 2011 Bankr. LEXIS 3032 (Bankr. S.D. Tex. 8/2/11)(Marvin Isgur)

              Facts:  Creditor filed complaint to determine dischargeability.


When a bankruptcy court determines the extent of a creditor's nondischargeable claim, the court simply decides that a particular creditor is entitled to something more than the creditor would otherwise get out of the bankruptcy bargain.  Such determinations are inextricably tied to the bankruptcy scheme and involve the adjudication of rights created by the Bankruptcy Code. This case therefore falls within the Bankruptcy Court's authority, and the Bankruptcy Court's judgment is final.

*In re Turner, 462 B.R. 214 (Bankr. S.D. Tex. 7/11/11)(Jeff Bohm)

            Facts:  Chapter 13 debtors filed Complaint for Turnover and Damages against Bank that froze account.

            Holding:          Complaint for turnover was based on automatic stay and not upon state law.
The automatic stay is one of the most important--if not the most important--features of the Bankruptcy Code, and it is integral to the public bankruptcy scheme. Its purpose is to enjoin all creditors from taking action against the debtor and the estate so that the debtor may have some breathing room to propose and obtain confirmation of a plan of reorganization which will pay creditors.  (citation omitted). A debtor has a fiduciary duty to his creditors to take the action necessary to pay their claims. (citation omitted). Given the central role of the automatic stay in the bankruptcy scheme, the broad effect of the automatic stay, and the fiduciary duty imposed upon debtors, this Court concludes that enforcement of the automatic stay fits within the "public rights" exception. The automatic stay protects not just one person or entity, but rather protects all of those persons and entities affected by the filing of a bankruptcy petition. (citation omitted). The debtor and the estate benefit because the stay is an injunction that enjoins creditors from unilaterally attempting to collect their respective claims against the estate. (citation omitted). Each of the creditors benefits because no other creditor may unilaterally take action against the estate--which means that the debtor has time to deliberately and carefully file a plan and then obtain confirmation so that all claims can be paid. (citation omitted). Stated differently, the existence of, and the benefits provided by, the automatic stay do not constitute a private right  of any one specific person or entity, but rather comprise a public right that inures to the benefit of all those persons involved in a bankruptcy. Without the enforcement of the automatic stay, reorganization of consumer debtors and business debtors throughout the country would be impossible and would undermine the public policy of allowing honest debtors to obtain a fresh start. Accordingly, because the undersigned judge concludes that the dispute at bar involves a "public right," the undersigned judge concludes that he has the constitutional authority to sign a final judgment in this adversary proceeding.

This is the first Texas opinion that I could find applying Stern v. Marshall.   Since this opinion, Judge Bohm has included a discussion of Stern v. Marshall in virtually every opinion he has written.