The well-publicized and convoluted legal disputes between the decedent’s estates of former Playboy Playmate Vickie Lynn Marshall, a/k/a/ Anna Nicole Smith, the surviving spouse of J. Howard Marshall, a previously deceased but very wealthy individual, and his son E. Pierce Marshall, effectively fighting over Howard’s estate, has been well explained elsewhere as have been the constitutional implications of the majority, minority, and concurring opinions of the divided Supreme Court. See, e.g. Brubaker, Article III’s Bleak House: The Statutory Limits of Bankruptcy Judges’ Core Jurisdiction, West’s Bankruptcy Law Letter, Vol. 31, No. 8 (August 2011); Brubaker, Article III’s Bleak House: The Constitutional Limits of Bankruptcy Judges’ Core Jurisdiction, West’s Bankruptcy Law Letter, Vol. 31, No. 9 (September 2011).
Bankruptcy judges lack jurisdiction. To recap, in mid-2011 the Supreme Court issued its decision in Stern v. Marshall which contained an extensive analysis of Article III of the U.S. Constitution. In a 5-4 decision, the majority opinion held that a final judgment issued by a bankruptcy judge on a state law counterclaim, not resolved in the process of ruling on a creditor’s proof of claim, notwithstanding its inclusion as a “core proceeding” under 28 U.S.C. §157(b)(2)(C), violated the separation-of-powers principles of Article III. Stern v. Marshall.
Stern raises questions. Among the many unanswered questions arising from Stern is what other parts of 28 U.S.C. §157(b) (2) may grant too much authority to bankruptcy judges, resulting in violation of Article III (because they lack the life tenure and salary protections afforded to the Article III members of the federal judiciary)? Which other subsections of the statute besides (C) may run afoul of Article III and thereby necessitate entry of a final judgment or appealable order by the District Court? While the majority holding is narrow, the ramifications of the dicta are broad, breathtaking, and only beginning to be felt.
As Stern noted, 28 U.S.C. §157 itself is not jurisdictional. It does not implicate questions of subject matter jurisdiction. It is rather sub-sections 157(b)(1) and (c)(1) that allocate authority to enter final judgments between the bankruptcy court and the district court. See also, Matrix IV, Inc. v. Am. Nat’l Bank & Trust Co. In particular, Section 157(c) (2) provides that parties may consent to entry of final judgment by the bankruptcy judge in a non-core matter. See In re: Olde Prairie Block Owner, LLC, Will this be the saving grace of final order entry by bankruptcy judges, in lieu of submission of proposed findings and conclusions by the bankruptcy judges, attendant review and final order entry by the district judges, with commensurate time delays and additional costs and fees? Only time will tell, but express consent under the statute may not override Article III violations by other parts of section 157 in the courts.
Ortiz interprets Stern. The latest Seventh Circuit opinion applying Stern is the December 30, 2011, opinion In re Ortiz. Ortiz involved two groups of debtors who filed separate class action lawsuits against a Wisconsin medical provider creditor, which had filed an estimated 3200 proofs of claim in bankruptcy cases in the Eastern District of Wisconsin from 2003-2008. These proofs of claim listed the debtors’ medical treatment information without permission of the respective debtors. The bankruptcy judge granted summary judgment in favor of the defendant creditor in both cases.
The Seventh Circuit granted direct appeal, but after Stern, the Circuit panel concluded that the direct appeal was improvidently granted because the bankruptcy judge lacked authority to enter final judgments on the debtors’ claims. Therefore the Trial Court had not properly entered final judgments upon which to exercise appellate jurisdiction. Accordingly, it dismissed the appeals and remanded the matters to the bankruptcy court, stating that until an Article III judge enters a final judgment on the disputed claims the appeals had to be dismissed. In addition to citing Stern, Ortiz cited the still viable and controlling opinion in N. Pipeline Constr. Co. v. Marathon Pipe Line Co., for the proposition that final judgments on claims based on state law that are independent of the federal bankruptcy law, and which are not necessarily resolvable by ruling on a creditor’s proof of claim in bankruptcy, rest with Article III judges in Article III courts. Stern.
The detailed background and litigation history of the related cases in Ortiz ironically noted that both sides sought to avoid litigating in the bankruptcy court, but also opposed the other side’s proposed forum with both abstention motions and remand motions, and motions to withdraw the reference, all of which were denied by the bankruptcy and district court courts, respectively. Ultimately the bankruptcy judge dismissed both of the adversary proceedings after finding that the Wisconsin statute required proof of actual damages (which the debtors had failed to provide) and certified the matters for direct appeal (which was granted) and both matters were consolidated for appeal directly to the Seventh Circuit.
Arguments were held in February, 2011, before Stern was issued but thereafter the Seventh Circuit ordered supplemental briefing on three issues. The first issue was dispositive and concerned whether the bankruptcy judge had constitutional authority to issue the final judgments dismissing the debtors’ complaints against the creditor. The ultimate determination was no. Under the majority view of the limits of Article III in Stern, Ortiz concluded that the debtors’ claims against the creditor fit within the “arising in” jurisdictional grant of 28 U.S.C. §1334 as administrative matters arising only in bankruptcy cases. The creditor had filed proofs of claims in various bankruptcy cases, and thus Ortiz concluded that the matters were ‘core matters’ under section 157. This point in Ortiz seems to place the emphasis on the act of filing the proofs of claim rather than the proscribed medical treatment content disclosed in the proofs of claim, which seems to be the focus of the subject Wisconsin statute. See Wis. Stat. § 146.84. Had the proscribed disclosures been made to some third parties, not in connection with the bankruptcy cases, for example to credit bureau reporting agencies or collection agents, the debtors’ claims against the creditor would arguably be ‘non-core related’ for purposes of 28 USC §1334.
Ortiz extensively reviewed Stern and concluded that the instant claims by the debtors involved private parties disputing interests defined by state law. No governmental parties were involved, and the claims did not flow from any federal right or statute, but were ordinary state law claims that the bankruptcy judge in these matters had no authority to adjudicate any more than the ones in Stern. Moreover, Ortiz noted that despite some factual overlap between the debtors’ claims and the creditor’s proofs of claim, the bankruptcy judge made factual and legal determinations on the debtors’ claims against the creditor. Ortiz also noted that these determinations were not disposed of on objections to the creditor’s proofs of claim, and that the latter would not necessarily resolve the former.
The consent of the parties for the bankruptcy judge to try the matters was not found to be present, given the debtors’ motions for abstention and remand, and the creditor’s motions to withdraw the reference. Thus, Ortiz concluded that there was no express or implied consent of the parties under section 157(c) (2) to agree to a final disposition of judgment by the bankruptcy judge.
Ominous implications. The implications of Ortiz are substantial, because most claims in bankruptcy that arise pre-petition, whether asserted by creditors or debtors, are based upon some alleged breach of contract, tort or statutory duty. In addition, many, if not most, arise under some state law or common law basis. See, e.g. Dragisic v. Boricich (In re: Boricich). There are far fewer claims that arise post-petition under the Bankruptcy Code itself, than those originating at some pre-petition time. While creditors’ proofs of claim in proper form and with requisite supporting documentation are deemed allowed under 11 U.S.C. §502(a), objections to same after Ortiz may now have to be finally adjudicated by the district court, with the bankruptcy judge limited to entering proposed findings and conclusions. The additional delay, cost and expenses created will only serve to make the bankruptcy system less efficient.
The Article III concerns and limits articulated in Stern and Ortiz apply to much more than claims however, as many orders and judgments are entered on a daily basis in the millions of bankruptcy cases and related adversary proceedings currently pending. It is impossible to know whether consent of the parties will solve the practical problems attendant to the massive pending dockets of the bankruptcy courts in this and other circuits. Virtually all District courts have an automatic reference rule or operating procedure that refers all bankruptcy cases and adversary proceedings to the bankruptcy judge. See, e.g., District Court Operating Procedure 15(a) of the United States District Court of Northern Illinois. There is no real likelihood of these rules and/or procedures being vacated or withdrawn, as the district courts have enough work to occupy them and likely have no desire to add thousands of bankruptcy cases and adversary proceedings to their dockets.
Caution to practitioners. Practitioners should pay closer attention to the requirements of Federal Rule of Bankruptcy Procedure 7008(a), and would be well advised to apply it to all motions and applications under Rule 9014, as well as adversary proceedings. The pleader should allege whether the matter at hand is ‘core’ or ‘non-core’, and if ‘non-core,’ whether the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge. In this way, the issue of consent of the parties to entry of final judgment by the bankruptcy judge can be resolved early on in contested matters, along with the always present jurisdictional concerns which are best addressed sooner than later.
 564 U.S. ____, 131 S. Ct. 2594, 180 L. Ed.2d 475 (2011)
 131 S. Ct. 2594 at 2608
 131 S. Ct. 2594 at 2607
 649 F.3d 539, 551 (7th Cir. 2011).
 457 B.R. 692 (Bankr. N.D. Ill 2011).
 665 F. 3d 906 (7thCir. Dec. 30, 2011)
 458 U.S. 50, 102 S.Ct. 2858 (1982)
 131 S. Ct. at 2609, 2611
 2011 Bankr. Lexis 4356, *3 (Bankr. N.D. Ill. Nov. 15, 2011
Hon. John H. Squires was appointed to the U. S. Bankruptcy court in 1988, recently retired from the bench, is currently of Counsel with the Wheaton firm of Springer Brown Covey Gaertner and Davis. He received his law degree from University of Illinois College of Law, Champaign, Illinois, J.D., 1971. Received his bachelor degree from the University of Illinois, Political Science, A.B. cum laude, 1968.