Following last year's Stern v. Marshall bombshell, cases are slowly trickling
up to the Court of Appeals level. After I wrote about a recent Fifth
Circuit opinion which held that the jurisdiction of U.S. Magistrate Judges
was not invalidated, a commenter pointed out a recent Seventh Circuit decision.
In this post, I will look at that case, In re Ortiz, 665 F.3d 906 (7th
Cir. 2011) [an enhanced version of this opinion is available to lexis.com subscribers
/ unenhanced version available from lexisONE Free Case Law],
in which the Seventh Circuit granted a direct appeal and then concluded that it
did not have a final decision to review, as well as an even more recent First
Circuit case which appears to reach the opposite conclusion.
The Seventh Circuit Undoes a Direct Appeal
Ortiz involved a health care provider that filed proofs
of claim in an estimated 3,200 bankruptcy cases in the Eastern District of
Wisconsin over a five year period which disclosed the debtors' confidential
medical information. Two sets of debtors filed class action proceedings under a
Wisconsin non-disclosure statute.* Bankruptcy Judge Susan Kelley** granted
summary judgment for the health care provider, finding that the debtors had not
shown actual damages as required by the Wisconsin statute. Both parties
requested a direct appeal to the Seventh Circuit, which was approved. However,
in light of Stern v. Marshall, the Seventh Circuit concluded that it was
not permitted to allow the direct appeal because there was not a "final" order.
Direct appeals to the Court of Appeals are authorized
under 28 U.S.C. §158(d) [an annotated version of this statute is available to lexis.com
subscribers] in three instances:
*Interlocutory orders increasing or decreasing the
debtor's exclusive period to file a plan; and
*With leave of court over interlocutory orders and
Even though no party had raised the jurisdictional issue,
the Court concluded that it had "an independent duty to determine whether we
The Court noted the schizophrenic nature of the Stern
decision which, on the one hand, claims to be a narrow decision, but on the
other hand, appears to prohibit the bankruptcy courts from going beyond the
power to adjudicate claims. The Court wrote:
The first question (whether the bankruptcy court had
authority to enter a final order) requires a close reading of Stern v.
Marshall. Although the Court noted that the question presented was
"narrow," it was quite significant as Congress "may no more
lawfully chip away at the authority of the Judicial Branch than it may
eliminate it entirely." (citation omitted). The Court held that Article
III prohibited Congress from giving bankruptcy courts authority to adjudicate
claims that went beyond the claims allowance process. (citation omitted). The
decision rebuffed an intrusion into the Judicial Branch that would
"compromise the integrity of the system of separated powers and the role
of the Judiciary in that system, even with respect to challenges that may seem
innocuous at first blush." (citation omitted).
665 F.3d at 911.
Prior to Stern, the bankruptcy court's authority
would have appeared clear for this was a matter "arising in" a title 11 case.
Because proofs of claim only exist in title 11 proceedings, claims arising from
proofs of claim could only arise in the bankruptcy context. However, the Court
found that the Wisconsin non-disclosure claims were similar to the counterclaim
filed by Vicki Lynn Marshall in the Stern case:
Just as Pierce's filing of a proof of claim in Vickie's
bankruptcy did not give the bankruptcy judge authority to adjudicate her
counterclaim, Aurora's act of filing proofs of claim in the debtors'
bankruptcies did not give the bankruptcy judge authority to adjudicate the
debtors' state-law claims. The debtors' claims seek "to augment the
bankruptcy estate--the very type of claim that . . . must be decided by an
Article III court." (citation omitted). Non-Article III judges may hear
cases when the claim arises "as part of the process of allowance and
disallowance of claims," (citation omitted), or when the claim becomes
"integral to the restructuring of the debtor-creditor relationship,"
(citation omitted). Although there is some factual overlap between the
debtors' claims and Aurora's proofs of claim, the bankruptcy judge "was
required to and did make several factual and legal determinations that were not
'disposed of in passing on objections' to" Aurora's proofs of claim.
(citation omitted). In granting Aurora's summary judgment motion, the
bankruptcy judge interpreted a Wisconsin state law to require proof of actual
damages as an essential element of the debtors' claims and found that there was
no genuine issue of material fact as to the lack of actual damages. Nothing
about these decisions involved an adjudication of Aurora's proofs of claim and
there is no "reason to believe that the process of adjudicating [Aurora's]
proof[s] of claim would necessarily resolve" the debtors' claims.
(citation omitted). Stern reaffirmed that "Congress may not bypass
Article III simply because a proceeding may have some bearing on a
bankruptcy case; the question is whether the action at issue stems from the
bankruptcy itself or would necessarily be resolved in the claims allowance
process." (citation omitted). The debtors' action owes its existence to
Wisconsin state law and will not necessarily resolve in the claims allowance
process. That the circumstances giving rise to the claims involved procedures
in the debtors' bankruptcies is insufficient to bypass Article III's
requirements. Stern v. Marshall makes plain that the bankruptcy judge in
our cases "exercised the 'judicial Power of the United States' in
purporting to resolve and enter final judgment on" the debtors' Wisconsin
state-law claims. (citation omitted). We thus hold that the bankruptcy judge
lacked authority under Article III to enter final judgments on the disclosure
665 F.3d at 914.
The Court of Appeals concluded that because the
bankruptcy court lacked authority to enter a final order, that it lacked
authority to grant a direct appeal. If the court had stopped there, its
decision would have been clear. However, it added a cryptic comment suggesting
that the bankruptcy court lacked any authority in the matter:
For the bankruptcy judge's orders to function as proposed
findings of fact or conclusions of law under 28 U.S.C. § 157(c)(1), we
would have to hold that the debtors' complaints were "not a core
proceeding" but are "otherwise related to a case under title
11." (citation omitted). As we just concluded, the debtors' claims qualify
as core proceedings and therefore do not fit under § 157(c)(1). The
direct appeal provision in 28 U.S.C. § 158(d)(2)(A) also does not authorize
us to review on direct appeal a bankruptcy judge's proposed findings of fact
and conclusions of law.
665 F.3d at 915.
Many commentators have concluded that the Stern
decision created a third category of claims to the core/non-core taxonomy: core
claims in which the bankruptcy court could not enter a final judgment. The
prevailing sentiment, indeed one fostered indirectly by the Stern decision
itself, is that the bankruptcy courts may enter proposed findings of fact and
conclusions of law in all matters in which they lack authority to enter a final
judgment. The Ortiz opinion suggests that this may not be the case, but
finds it unnecessary to decide the issue.
The First Circuit Shrugs Off Stern in a
The Ortiz opinion can be contrasted with a brief
discussion contained in a First Circuit opinion. In re Divittorio, 2012
U.S. App. LEXIS 248 (1st Cir. 1/6/12) [enhanced version / unenhanced version]. In re Divittorio is
another chapter in the home mortgage wars being fought in the courts. In that
case, the debtor consented to an order conditioning the automatic stay and
modifying the underlying loan. After the debtor defaulted, the creditor
obtained relief from the automatic stay. The debtor then sought to "rescind"
the loan. He filed an adversary proceeding for rescission under the Massachusetts
Consumer Credit Cost Disclosure Act and sought to vacate the order lifting the
automatic stay. The bankruptcy court declined to vacate the prior order, but
stayed the foreclosure for 90 days to determine the rescission claim. The
bankruptcy court concluded that the creditor had not violated the MCCCDA and
the debtor appealed.
In a footnote, the court noted its belief that its
jurisdiction was unimpaired.
We do not believe that the Supreme Court's recent
decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011),
affects the jurisdiction of the bankruptcy court to render a decision in this
matter. Stern held:
Article III of the Constitution provides that the
judicial power of the United States may be vested only in courts whose judges
enjoy the protections set forth in that Article. We conclude today that
Congress, in one isolated respect, exceeded that limitation in the Bankruptcy
Act of 1984. The Bankruptcy Court below lacked the constitutional authority to
enter a final judgment on a state law counterclaim that is not resolved in the
process of ruling on a creditor's proof of claim (citation omitted).
Here, however, it first was necessary
to resolve the validity of Mr. DiVittorio's claim under the MCCCDA to determine
whether HSBC was entitled to relief from the automatic stay.
2012 U.S. App. LEXIS at *18, n. 4. The Court ultimately
decided the appeal in favor of the creditor.
The First Circuit's discussion is rather unsatisfying
because it assumes that determination of the counterclaim was necessary to
determine the motion to lift stay. However, how is this distinguishable from
the argument that the Wisconsin non-disclosure claims were necessary to
determine proofs of claim filed by the health provider? If anything, the
automatic stay context is less compelling than determination of a proof of
claim, since a motion to lift stay is a summary proceeding. Grella v. Salem
Five Cent Savings Bank, 42 F.3d 26 (1st Cir. 1994).
While the Court's stated rationale may be unsound, it can
probably be vindicated based on consent, since both parties litigated the
matter through the bankruptcy court, district court and court of appeals
without objection. The Ortiz court rejected consent. However, that case
was factually distinguishable because BOTH parties objected to determination by
the bankruptcy court. The debtors asked the bankruptcy court to abstain or
remand, while the creditor sought to withdraw the reference.
What It Means
The two decisions may or may not signal a split between
the circuits. The First Circuit's decision is so perfunctory that it may be
possible for the court to distinguish it away. However, the larger lesson for
creditors is that Stern v. Marshall cuts both ways. If a creditor
litigates and wins in bankruptcy court, an appellate court may decide that
jurisdiction to enter a final judgment was lacking and send the creditor back
to relitigate. Thus, the legacy of Stern may be unending litigation.
*--While Federal Rule of Bankruptcy Procedure 9037
imposes privacy restrictions with respect to bankruptcy court filings,
including proofs of claim, courts are split over whether it creates a private
right of action. Cases allowing a claim for sanctions, include Matthys v.
Green Tree Servicing, LLC (In re Matthys), 2010 Bankr. LEXIS S.D. Ind.
2010); French v. American General Financial Services (In re French), 401
B.R. 295 (Bankr. E.D. Tenn. 2009), while cases rejecting such a right include Carter
v. Flagler Hospital, Inc., 411 B.R. 730 (Bankr. S.D. Fl. 2009); Lentz v.
Bureau of Medical Economics (In re Lentz), 405 B.R. 893 (Bankr. N.D. Ohio
2009); Cordier v. Plains Commerce Bank (In re Cordier), 2009 Bankr.
**--Judge Kelley's current claim to fame is that she is
the judge presiding over the case of the Archdiocese of Milwaukee. As a woman
and a practicing Catholic, she is in the unusual position of exercising at
least some temporal authority over the male hierarchy of her own church.
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