Wednesday, February 01, 2017

Did Gorsuch Expand Bankruptcy Court Referral Power?

Newly minted Supreme Court nominee Neil Gorsuch sat on the Tenth Circuit for ten years.  During that time, he signed on to eleven opinions regarding bankruptcy, which means that he wrote about bankruptcy around once a year.    None of his opinions are particularly well-known.  (In contrast, fellow finalist Thomas Hardiman authored the opinion in Official Committee of Unsecured Creditors vs. CIT Group/Business Credit, Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3rd Cir. 2015) which is currently before the Supreme Court).    However, these opinions demonstrate his crisp writing style and offer some insights into his judicial thinking.   I am going to look at one of his opinions in depth and follow up with a separate post on his remaining decisions.

A Deep Dive Into Renewable Energy Development

In Loveridge v. Hall (In re Renewable Energy Development Corp.), 792 F.3d 1274 (10th Cir. 2015), Judge Gorsuch lectured a District Judge on the meaning of Stern v. Marshall and its progeny. He wrote:
This case has but little to do with bankruptcy. Neither the debtor nor the creditors, not even the bankruptcy trustee, are parties to it. True, the plaintiffs once enjoyed an attorney-client relationship with a former bankruptcy trustee. True, they now allege the former trustee breached professional duties due them because of conflicting obligations he owed the bankruptcy estate. But the plaintiffs seek recovery only under state law and none of their claims will be necessarily resolved in the bankruptcy claims allowance process. And to know that much is to know this case cannot be resolved in bankruptcy court. The bankruptcy court may offer a report and recommendation. It may even decide the dispute if the parties consent. But the parties are entitled by the Constitution to have an Article III judge make the final call. So the district court's ruling otherwise — its decision to send the dispute to an Article I bankruptcy court for final resolution without their consent — violates the Constitution's commands and must be corrected.
792 F.3d at 1276-77.    In one paragraph, the judge succeeded in summarizing the facts of the case and the legal reasoning supporting the court's decision.    The case involved a bankruptcy trustee (Mr. Hoffman) who consulted one of his clients (Summit Wind Power, LLC) about leases held by the bankruptcy estate.   He initially concluded that the leases were of no value to the estate and encouraged his client to negotiate its own leases with the non-bankrupt counterparties.  The trustee then realized that he had made a mistake.  As Judge Gorsuch explained:
Things got so testy that Mr. Hofmann, yes, brought an adversarial proceeding in bankruptcy court against one client (Summit) on behalf of another (the REDCO estate). Unsurprisingly, Summit responded with state law claims against Mr. Hofmann and his law firm, alleging legal malpractice, breaches of fiduciary duties, and a good many other things besides. Mr. Hofmann, by now irredeemably conflicted, was removed from his post as trustee.
How do these unfortunate but hardly uncommon facts yield a dispute of constitutional magnitude? Summit filed suit in federal court against Mr. Hofmann alleging diversity jurisdiction and the right to have the case resolved in an Article III court. Mr. Hofmann replied that the case belonged in and should be resolved by an Article I bankruptcy court. Ultimately, the district court sided with Mr. Hofmann even as it acknowledged some uncertainty about this much and certified its decision for an immediate appeal.
792 F.3d at 1277-78.    Judge Gorsuch followed with a very conventional (and correct) reading of Stern v. Marshall and demolished the ex-Trustee's argument that proceedings which are "factually intertwined" with a bankruptcy case could be finally resolved by an Article I judge.
In this way, the Court did suggest the source of law generating a claim may inform its categorization as involving a public or private right. But the Court nowhere suggested that any claim "factually intertwined" with bankruptcy may be sent to bankruptcy court for final resolution without consent.
We confess we're glad of this. Asking what source of law generated the claim at issue may well raise some questions around the edges — like what about claims pursuing fraudulent conveyances, which find a home in a federal statute but surely implicate longstanding common law rights? ... Still, questions like these aren't a patch on what would be involved if in each case we had to ask whether the plaintiff's claims are "factually intertwined" with a bankruptcy proceeding. If, as Mr. Hofmann submits, our case is "factually intertwined" enough with bankruptcy to warrant its resolution in bankruptcy court — just because a trustee in the bankruptcy happened to generate a conflict of interest with a client outside the bankruptcy — what wouldn't be? What if a trustee and creditor came to blows in the courthouse parking lot over the terms of a proposed reorganization plan? What if a trustee stole from a third person and gave the money to the bankruptcy estate? Couldn't someone plausibly describe disputes like these as at least as "factually intertwined" with bankruptcy as our own?
792 F.3d at 1280.    However, just as he has ruled against the ex-Trustee, the judge slapped down the appellant as well.
Still, that's not the end of our encounter with this appeal. It isn't because saying (as we do) that a bankruptcy court may not decide this case without the parties' consent under Stern doesn't necessarily mean it cannot hear the case and offer a report and recommendation about its disposition to a district court. Indeed, as the Supreme Court has recently explained, where (as here) we are faced with a "Stern claim"— a claim the bankruptcy court is statutorily but not constitutionally authorized to decide and for which it has not received the parties' consent to proceed — it's still possible under 28 U.S.C. § 157(c)(1) and consistent with Article III for a bankruptcy court to "hear the proceeding and submit proposed findings of fact and conclusions of law to the district court for de novo review and entry of judgment." Arkison, 134 S. Ct. at 2173. In cases like this, the bankruptcy court may act as a sort of magistrate or special master, an adjunct to the decisionmaker, not the decisionmaker itself — and in this way honor both statutory and constitutional commands. Id. So while Summit is right and the district court erred in sending Mr. Hofmann's case to bankruptcy court for final decision, the district court remains free on remand to refer the case to a bankruptcy court for a report and recommendation.
Summit resists this result, fighting even a temporary trip to bankruptcy court for a report and recommendation. For a bankruptcy court to hear a claim as a matter of statutory law, Summit notes, 28 U.S.C. § 157(a) instructs that the claim must "aris[e] under title 11 or aris[e] in or relate[] to a case under title 11," the federal bankruptcy code. And Summit says this requirement isn't met in this case because the parties' fight is so far removed from bankruptcy that it can't be said to "aris[e] under title 11 or aris[e] in or relate[] to a case under title 11." But whatever other problems might attend this line of argument one is by now familiar: it wasn't made before the district court and is therefore another one we may and do decline to resolve in this appeal. See Waldman, 698 F.3d at 917.
Not ready to give up quite so easily on its effort to avoid even a short detour from district court, Summit suggests we cannot ignore and must resolve its argument because it implicates the subject matter jurisdiction of the federal courts. But that much it does not — quite — do. The statute Summit invokes, 28 U.S.C. § 157, involves only the allocation of responsibility between the bankruptcy and district court; it does not "implicate questions of subject matter jurisdiction." Stern, 131 S. Ct. at 2607. We acknowledge that § 157(a) shares similar language with 28 U.S.C. § 1334(b) — and we readily accept that statute is jurisdictional: quite expressly it provides district courts with "jurisdiction" over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." So maybe Summit's § 157(a) argument could be transferred to § 1334(b), and maybe the argument could present a successful jurisdictional challenge there. But if it did, it wouldn't be just the bankruptcy court that would lack jurisdiction to hear and report on this case. The district court itself would have no authority to hear the case either for § 1334(b) expressly governs its jurisdiction too.
Anxious to remain in federal court — just not ever visit bankruptcy court — Summit shirks from acknowledging this, the full consequences of its argument, and nowhere mentions § 1334(b) in its opening brief or how its argument might apply to that statute. And, happily for everyone, we don't have to address the question on our own motion either, even though it does implicate subject matter jurisdiction. We don't because, whether or not the district court has jurisdiction to decide this case under § 1334(b), everyone acknowledges it clearly has jurisdiction to do just that under § 1332(a) given that the complaint alleges complete diversity of citizenship and a sufficient amount in controversy. See, e.g., Penteco Corp. Ltd. P'ship—1985A v. Union Gas Sys., Inc., 929 F.2d 1519, 1521 (10th Cir. 1991).
At the end of the day, then, we are confident that the district court possesses subject matter jurisdiction to hear this case at least under the diversity statute, that Summit is entitled under Stern to have an Article III district court resolve its claims, and that the district court may refer the case to an Article I bankruptcy court for a report and recommendation. Many other questions remain for tomorrow. But resolving this much is enough work for today. The case is remanded to the district court for further proceedings consistent with this opinion.
792 F.3d at 1282-84.  What just happened here?    Judge Gorsuch found that the District Court may refer a Stern claim to the bankruptcy court for a report and recommendation.   That is pretty clear.   However, the Court ducked the question of whether this actually is a Stern claim because the appellant didn't raise that issue before the District Court.   In response to the appellant's claim that subject matter jurisdiction cannot be waived, the Court found that (1) 28 U.S.C. Sec. 157 involves the allocation of authority rather than a grant of jurisdiction and (2) the District Court had diversity jurisdiction.   

What Does the Opinion Mean? 

If I am reading this opinion correctly, the judge undermined his own ruling.   On the one hand, he properly ruled that Stern v. Marshall  does not allow the Bankruptcy Court to enter a final judgment on a claim that is merely "factually intertwined" with the bankruptcy case absent consent.   However, he then found that a "factually intertwined" case could be referred to the Bankruptcy Court for a report and recommendation because the appellant failed to raise the Sec. 157 issue in the District Court.   He very coyly points out that 28 U.S.C. Sec. 157 and 1334 (b) contain similar language but serve different purposes.   However, the very nature of a Stern claim is that Congress has statutorily authorized the Bankruptcy Court to hear the case but the Bankruptcy Court lacks constitutional authority to enter a final judgment absent consent.   28 U.S.C. Sec. 157 is the statutory authority.  In my opinion, it is extremely disingenuous to say that a claim is a Stern claim which may be referred to the Bankruptcy Court under Sec. 157 solely because the other party failed to argue the scope of Sec. 157 in the Court below.   What the Court should have done is to remand the case to the District Court and left open the question of whether the case could be referred to the Bankruptcy Court.   However, by stating that the District Court may refer the case to the Bankruptcy Court, the Court of Appeals has effectively found that the District Court has the authority to refer cases arising under diversity jurisdiction to the Bankruptcy Court regardless of whether Sec. 157 allows that referral.

What Does the Opinion Say About Judge Gorsuch?

What can we learn from this opinion?   Judge Gorsuch is a lively writer.  He authored a 22-page opinion without any headings or subheadings which flowed naturally without these guideposts.  I included long segments from the opinion when I could have summarized them simply because I enjoyed reading his prose.   He has the ability to distill the essence of a case very quickly.   His writing is entertaining to read because he can turn a phrase as well as any jurist.   He takes delight in skewering litigants who take indefensible positions.   In fact, he lectured both parties on their arguments.

However, I am troubled by the fact that when he got to the bottom line, he skipped over an important issue and gave the District Court more authority to refer than was conferred by Congress.   Granted, he did say that the District Court "may" refer the case which implies that the District Court might say no.   However, to say that the Court "may" do something, you must say that it is permissible.   What was he thinking?   Did he get to the end of an opinion and lose focus?   Was he trying to expand the authority of the District Court to unload matters onto the Bankruptcy Court?  Or was he just being too clever?   Given my brief review, I won't try to answer those questions.   However, I wanted to throw them out there for discussion.

This is just one opinion.   I will be back with more later.

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