Waivers Must Be Knowing, Voluntary and Intelligent

Ever since Stern v. Marshall, bankruptcy lawyers are frequently asked to consent to entry of final orders by the Bankruptcy Court. I routinely agree to consent because the Bankruptcy Court is a familiar forum and the judges are a known quantity. Occasionally I will say no for strategic reasons. While we deal with these issues on a routine basis, the Fifth Circuit has reminded us that waiving a right to trial before an Article III Judge is a big deal.

A new Fifth Circuit case dealing with consent to trial by a Magistrate Judge might be useful if parties find that they have improvidently consented to entry of final orders by the Bankruptcy Court. In Case No. 24-30552, IFG Port Holdings, LLC v. Lake Charles Harbor & Terminal District, a losing party got a do-ever when it turned out that the Magistrate Judge failed to disclose her close relationship with opposing counsel. While this is not a bankruptcy case, it could be useful to bankruptcy litigants.

What Happened

IFG sued the Lake Charles Harbor & Terminal District ("the Port") in the U.S. District Court for the Western District of Louisiana. The parties consented to a bench trial before the U.S. Magistrate Judge Kathleen Kay. Before the parties consented, Judge Kay disclosed that the daughter of IFG's counsel was her law clerk but would be screened from the case. After trial, Judge Kay ruled against the Port and awarded $125 million. She also made comments that were not complimentary toward the Port's counsel. Among other things, she accused the Port's lawyers of "acting with a 'hubris' that was 'stunning,' and 'flagrant[ly] violat[ing] . . . court rules and procedures.'" 

The Port's lawyers then decided to look into the relationship between the Magistrate and opposing counsel more closely. They learned that opposing counsel had a forty year friendship with the Judge, that opposing counsel was a groomsman at the judge's wedding, that the Judge officiated at the wedding of counsel's daughter (although not the one who was her law clerk), that the daughter threw a surprise birthday party for the Judge and more. The one I liked was that around the time of the consent, Plaintiff's counsel texted the Judge that a music festival they might attend together was more for relaxation than debauchery to which the Judge responded,  “What’s wrong with drunken debauchery??” Any time your judge is discussing drunken debauchery with opposing counsel it suggests that their relationship might be uncomfortably close. 

The Port moved to vacate the order of referral. The District Court denied this motion. On appeal, the Fifth Circuit remanded for further factual development. The District Court then wrote an 59 page opinion and vacated the referral. 

The Plaintiff appealed the order vacating the referral. The Fifth Circuit affirmed. It found that "(t)o waive Article III jurisdiction, a party must knowingly, voluntarily, and intelligently consent" and that the Port was not able to do so because of the Judge's incomplete disclosures.

What Does This Mean for Bankruptcy Lawyers?

Consenting to Bankruptcy Court jurisdiction is different than consenting to trial before a Magistrate Judge for the reason that Stern v. Marshall still leaves a lot of decisions subject to entry of final orders by a Bankruptcy Judge. Anything that involves determining claims, restructuring debts, determining exempt property or discharging debts remains within the ability of the Bankruptcy Court to make a final determination regardless of whether the parties consent. Thus, there is no reason not to consent to the Bankruptcy Court entering final orders on a complaint to determine dischargeabilty. 

You should also consider what you get by objecting. If your client did not file a claim in a case and is sued on an account receivable, you can object to the Bankruptcy Court entering a final order but it doesn't change the fact that the Bankruptcy Court will still conduct the trial and then submit proposed findings of fact and conclusions of law to the U.S. District Court. On the other hand, if the case involves a personal injury or wrongful death tort claim, the Bankruptcy Court lacks the ability to hear the case at all absent consent. See 28 U.S.C.. Sec. 157(b)(5). 

This case also raises an ethical issue about disclosure of relationships. The Bankruptcy Bar has a close relationship with the Bankruptcy Bench. However, if there is a closer relationship, such as if the Bankruptcy Judge officiated at your wedding, it is something that should be disclosed. If, for some reason, the Bankruptcy Judge does not disclose that you just returned from your annual trip to Coachella, you might want to mention it on the record. Also, for goodness sakes, if you are close enough to the judge to send personal emails, don't use the word "debauchery." It's a bad look.