Waldman v. Stone, decided October 26, 2012, the Court may have significantly expanded the intended reach of a 2011 Supreme Court decision, Stern v. Marshall, 131 S.C.T. 2594 (2011).
In Stern v. Marshall, the Supreme Court held that Bankruptcy Court Judges, as Article I Judges and not Article III Judges under the United States Constitution, could not exercise Article III judicial power to decide state law cause of action even where such state cause of action was arguably a core proceeding under 28 U.S.C. §157. Under 28 U.S.C. §157 bankruptcy judges can enter final judgments in core proceedings but can only make recommendations to the District Court in non-core proceedings unless the parties consent.
Following Stern, most courts and commentators assumed that a party could waive the limitations on the Bankruptcy Court’s jurisdiction imposed by Stern and consent to an adjudication in the Bankruptcy Court. However, in the Waldman decision, the Sixth Circuit held that not only did the Bankruptcy Court lack constitutional authority to enter a judgment against Waldman but that Waldman could raise the issue for the first time on appeal. Further, the Court held that because the objection on appeal advanced the “structural principle” of judicial power articulated in Article III, and was not merely a private right, the objection could not be waived, especially as to affirmative claims that were not merely a defense to a proof of claim.
The Court’s remedy was also interesting. The Court stated, presumably in dicta, that if Stone’s affirmative claims had been statutorily designed as core, although outside the judicial power of an Article I court, there was significant doubt whether 28 U.S.C. §157 would have permitted the Bankruptcy Court to make proposed findings of fact and conclusions of law for review by the District Court, as §157(b)(1) would permit the Court to enter orders, not propose same. However, since the Sixth Circuit concluded that the affirmative claims were not core, as they were based on state law and could have been filed pre-bankruptcy, the Bankruptcy Court could have submitted proposed findings of fact and conclusions of law under 28 U.S.C. §157(c)(1). Therefore, the Court remanded the case to the Bankruptcy Court with directions to recast its judgment as proposed findings of fact and conclusions of law for de novo review by the District Court.
This decision is troublesome in two ways. First, it may undermine the proposed new bankruptcy rules and interim rules adopted in many jurisdictions that permit bankruptcy courts to continue to handle matters based on waiver or consent. However, there is a broader problem because the same waiver and consent issue may be presented in non-bankruptcy civil actions pending in the United States District Courts which are referred to magistrate judges and, therefore, this decision may have significant impact outside the bankruptcy arena.
Karen Lee ("Kitt") Turner
Eckert Seamans Cherin & Mellott, LLC