Fifth Circuit Holds That Stern Eliminates Bankruptcy Court's Power to Decide Non-Core Actions by Consent
In a decision that demonstrates the potentially broad impact of the forthcoming Supreme Court decision in Bellingham, the Fifth Circuit held that bankruptcy judges may not “determine” non-core matters even where the parties consent. BP RE, L.P. v. RML Waxahachie Dodge, L.L.C. (In re BP RE, L.P.), No. 12-51270 (5th Cir. Nov. 11, 2013), see Executive Benefits Ins. Agency v. Arkinson (In re Bellingham Ins. Agency), 702 F.3d 553 (9th Cir. 2012), cert. granted 133 S.Ct. 2880 (2013) (set for oral argument January 14, 2014).
While three earlier Court of Appeals decisions had reached a similar conclusion with respect to “core” proceedings, this is the first appellate decision extending that reasoning to non-core matters. Compare Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012), cert. denied 133 S.Ct. 1604 (2013); Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. Aug. 21, 2013), reh’g and reh’g en banc denied (Oct. 7, 2013); Frazin v. Haynes and Boone, L.L.P., (In re Frazin), 732 F.3d 313 (5th Cir. Oct. 1, 2013). Taken together, the two lines of decisions suggest that bankruptcy judges will be unable to issue final judgments in a large range of matters if the Supreme Court holds that consent does not cure the Stern v. Marshall, 131 S.Ct. 2594 (2011), Article III problem. Interestingly, the Fifth Circuit attempts to distinguish the very similar consent-based jurisdiction of magistrate judges in a footnote by arguing that Stern was limited to bankruptcy judges.
Perhaps more interesting than the decision or its reasoning is the fact that so many Court of Appeals judges are eager to weigh in on an issue that will be argued at the Supreme Court in two months and decided by next June. Judge Easterbrook recently weighed in on the other side of the consent debate in Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. Sept. 6, 2013). Although Judge Easterbrook was forced to distinguish the earlier Seventh Circuit panel decision in Wellness since he lacked the power to reject it, there is little doubt that the Peterson andWellness decisions create a split on the issue within the Seventh Circuit.
The Article III limitations serve two different interests. They serve “structural” separation of powers interests by preventing the legislative and executive branches of government from encroaching on the powers reserved to the judicial branch. The life tenure and salary protections for judges also protect the “personal” liberty right of litigants to adjudication by a judge free from potential political pressure. The split among the circuit courts, and one question before the Supreme Court in Bellingham, is whether Stern limited the power of bankruptcy courts based on structural or personal concerns. The BP RE decision goes out of its way to praise the Sixth Circuit’s decision in Waldman that the constitutional limits on the power of non-Article III bankruptcy judges are “structural” and therefore not subject to waiver by the parties, describing its “thorough reasoning” as “compelling.” The structural argument adopted by cases like BP RE is not that the bankruptcy scheme is an attempt to usurp judicial power, but rather that the Article III judiciary is diluted and diminished by allowing non-Article III judges to enter final orders.