James M. Lawniczak on Whether Parties Can Consent to a Bankruptcy Judge Entering a Final Order

This Emerging Issues Analysis examines whether, post-Stern v. Marshall, parties can consent to a bankruptcy court's entry of final judgment in a related matter. The circuits are split on the issue, with the Sixth Circuit denying the bankruptcy court such power, but the Ninth Circuit recently holding that bankruptcy judges can constitutionally enter final orders in related matters with consent. The Sixth Circuit is alone in its position.

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The U.S. Supreme Court's decision in Stern v. Marshall, 2011 U.S. LEXIS 4791, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (June 23, 2011), has generated significant comment in both cases and commentary. Stern v. Marshall held there are certain circumstances under which bankruptcy judges cannot constitutionally issue final orders, even though Congress has statutorily provided otherwise. The question that this commentary addresses is whether the parties to a dispute can consent to a bankruptcy judge entering a final order in those cases where the judge cannot constitutionally do so under the Stern v. Marshall holding. The circuits are already split on the issue, with the Sixth Circuit holding that consent does not suffice to allow a bankruptcy judge to enter a final order in a related matter and the Ninth Circuit holding that it does.

The Stern v. Marshall Holding

The Stern v. Marshall case involved years-long disputes between parties and estates. "Stern" was executor of the estate of Vicki Marshall, a/k/a Anna Nicole Smith ("Ms. Smith") estate. "Marshall" was executrix of the estate of E. Pierce Marshall, son of Ms. Smith's husband. While alive, Ms. Smith had filed a bankruptcy case in California. Pierce Marshall had filed a proof of claim in Ms. Smith's bankruptcy case. She filed a counterclaim. The bankruptcy court entered a judgment for Ms. Smith on the counterclaim. Subsequently, a Texas probate court entered a contrary judgment against Ms. Smith on the same facts. It became critical for res judicata purposes to know whether the bankruptcy court's judgment was an effective final judgment, because if it was, then as the first judgment it was binding. However, after the judgment was entered, Marshall challenged the bankruptcy court's constitutional authority to enter the judgment, and the Court of Appeals for the Ninth Circuit agreed with him on appeal.

The Supreme Court held that the counterclaim filed by Ms. Smith was not a dispute as to which an Article I judge could constitutionally enter a final order, even though 28 U.S.C. § 157(b)(2)(C) so provided. This was because bankruptcy courts cannot issue final orders on a "state common law claim" that is "independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor's proof of claim in bankruptcy." 131 S. Ct. at 2611, 180 L. Ed. 2d at 496.

Lexis.com subscribers can access enhanced versions of the opinions and annotated versions of the statutes cited in this article:

Stern v. Marshall, 2011 U.S. LEXIS 4791, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (June 23, 2011)

28 U.S.C. § 157

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