In re Inc.

456 B.R. 318

55 Bankr.Ct.Dec. 98

In re TELESERVICES GROUP, INC., Debtor.Marcia R. Meoli, Trustee, Plaintiff,

v.The Huntington National Bank, Defendant.

Bankruptcy No. HG 05–00690.

Adversary No. 07–80037.

United States Bankruptcy Court, W.D. Michigan.

Aug. 17, 2011.

Douglas A. Donnell, Mark A. Kehoe, Mika Meyers Beckett & Jones PLC, John E. Anding, Drew, Cooper & Anding, Grand Rapids, MI, Marcia R. Meoli, Hann Persinger PC, Holland, MI, Peter A. Teholiz, The Hubbard Law Firm, PC, Lansing, MI, for Plaintiff.James Moskal, Jeffrey O. Birkhold, Kevin M. Kileen, Matthew T. Nelson, Warner Norcross & Judd LLP, Grand Rapids, MI, for Defendant.

OPINION RE: HUNTINGTON'S JULY 13, 2011 MOTION—AMENDMENT TO APRIL 28, 2009 PRETRIAL ORDER—CONSTITUTIONAL AUTHORITY

JEFFREY R. HUGHES, Bankruptcy Judge.

The Huntington National Bank (“Huntington”) has filed a motion to amend my ¹ April 28, 2009 pretrial order. The requested amendment would eliminate the order's designation of this adversary proceeding as a matter in which I can enter a final determination subject only to ordinary appellate review. Huntington contends that I lack the constitutional authority to enter what in this instance could be a multi-million dollar judgment against it arising from fraudulent transfers. For the reasons stated in this opinion, I agree that I do not have that authority.²

Stern v. Marshall and its Fallout

For over twenty-five years, my colleagues and I have operated with the understanding that we were properly constituted judges capable of rendering final judgments in many, but not all, matters arising in connection with a bankruptcy proceeding. That understanding derives from 28 U.S.C. § 157 (hereinafter “Authority Section 157”) ³ and its identification of so-called “core proceedings.” Under this paradigm, bankruptcy judges are enabled to enter final orders or judgments concerning matters that are typically associated with the administration of a bankruptcy proceeding. However, we do not have that ability when the matter arises outside of this core. For example, a trustee's effort to collect an account receivable from a debtor's customer is considered non-core.⁴ Authority Section 157 itself establishes this distinction by providing a long list of matters that would fall within the parameters of a core proceeding. Some seem obvious—e.g., objections to discharge,⁵ confirmations of plans,⁶ and orders to turnover property of the estate.⁷ Others are intentionally vague but still seem to fit. For instance, any matter “concerning the administration of the estate” is a core proceeding. 28 U.S.C. § 157(b)(2)(A).⁸ Moreover, the list provided is not exclusive. “Core proceedings include, but are not limited to....” 28 U.S.C. § 157(b)(2).

This system has worked well for the most part. Although it is the district court that actually has the jurisdiction to hear bankruptcy matters,⁹ I am one of the three bankruptcy judges who actually oversee the thousands of cases filed in this district each year.¹⁰ Moreover, in exercising my delegated authority, I have entered countless orders as final without a second thought about the legitimacy of what I was doing.

However, Stern v. Marshall¹¹ reveals how misplaced my confidence has been. As the Court itself observed, the underlying proceedings in Stern rivaled Dickens' infamous Jarndyce and Jarndyce in both complexity and endurance.¹² Nonetheless, Stern can be summarized as a dispute over a considerable inheritance and a stepmother's effort to employ the bankruptcy court to recover what that court finally determined was a multi-million dollar tort claim against the deceased husband's son. At issue was the bankruptcy judge's ability to enter a final judgment on account of that claim. Had the estate simply sued the stepson, it is unlikely that the case would have reached the Court a second time.¹³Northern Pipeline had already answered that question.¹⁴ However, the estate's action had been brought as a counterclaim to the stepson's own tort claim against the bankruptcy estate and Authority Section 157(b)(2)(C) identified such counterclaims as being “core.” ¹⁵ Indeed, when the stepson challenged the judgment that the bankruptcy court had entered against him, the Court determined not only that the bankruptcy judge had the statutory authority to make that award but also that the stepson had long ago waived any right to contest it.¹⁶ However, the Court then dropped a bombshell by declaring that the judgment was nonetheless invalid because it violated the Constitution.

In fairness, bombshell is an exaggeration if surprise alone is to be the measure. After all, the Court had already expressed its constitutional concerns in Northern Pipeline. Stern merely repeats the Court's prior declarations that the separation of powers requires a judiciary that is independent of the legislative and executive branches. Stern also reminds us that bankruptcy judges lack that independence because they do not have the life tenure or the salary security that Article III demands of anyone who is charged with exercising the “judicial power of the United States.” ¹⁷ Consequently, it made no difference to the Court in Stern how the estate's tort claim against the stepson came to the bankruptcy judge's attention. As Chief Justice Roberts observed:

[I]t is hard to see why Pierce's [the stepson's] decision to file a claim should make any difference with respect to the characterization of Vickie's [the stepmother's] counterclaim. “ ‘[P]roperty interests are created and defined by state law,’ and ‘[u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.’ ” Pierce's claim for defamation in no way affects the nature of Vickie's counterclaim for tortious interference as one at common law that simply attempts to augment the bankruptcy estate—the very type of claim that we held in Northern Pipeline and Granfinanciera must be decided by an Article III court.Stern, 131 S.Ct. at 2616 (citation omitted).

For what it is worth, I believe that Stern's reasoning is sound. I may take umbrage at the suggestion that my independence as a decision-maker would ever be compromised by the threat of not being reappointed or having my compensation reduced. But there remains the appearance that I could be so influenced and that alone is enough. Moreover, the historical argument that the Court makes is compelling, as is its argument that constitutional principles cannot be overlooked simply because the issue raised is mundane or the potential infringement is innocuous. Id. at 2609, 2620.

However, bombshell does fairly describe Stern's impact upon the more practical issue of how bankruptcy judges are to perform what the Code still calls us to do. Stern is careful to limit its holding to only the specific issue that was before the Court. Unfortunately, this is not a situation where those who labor in the fields can wait until the next fistfight between an expectant heir and his stepmom finds its way to the Court. Everyday I am presented with numerous orders that Congress expects me to either sign as final or forward on with a report and recommendation. However, prior to Stern, I did have a standard—28 U.S.C. § 157(b)(2)—to serve as my guide. But now I am told that that standard is unreliable when tested against the Constitution itself.

My frustration with Stern is that it offers virtually no insight as to how to recalibrate the core/non-core dichotomy so that I can again proceed with at least some assurance that I will not be making the same constitutional blunder with respect to some other aspect of Authority Section 157(b)(2). Stern certainly reaffirms that only an Article III judge can enter a judgment associated with the estate's recovery of contract and tort claims designed to augment the estate. Stern also emphasizes that the guaranty of such oversight cannot be avoided by making the recovery part of the claims allowance process.

But Stern is silent as to how much further this constitutional protection extends into the bankruptcy process. For example, Authority Section 157(b)(2) also gives me the statutory authority to enter final orders regarding objections to claims,¹⁸ the estate's procurement of credit,¹⁹ and the turnover of the estate's property.²⁰ I would assume that a few of these activities remain within the authority that I am able to exercise independent of an Article III judge. However, Stern's reticence leaves me wondering whether my assumption is a good one. At most, I am told that a judicially recognized “public rights” exception might permit a non-Article III judge to act on his own with respect to some aspects of the bankruptcy process.²¹ However, as Stern itself concedes,²² the Court has yet to give clear definition to this exception as a general proposition, let alone as to how it might apply in the bankruptcy arena.²³

Moreover, the problem presented by Stern goes beyond my own frustration. For instance, Congress, through Section 363(b) of the Bankruptcy Code,²⁴ has directed that the estate's property cannot be disposed of by the bankruptcy trustee outside of the ordinary course without “notice and a hearing.” Likewise, Sections 1129, 1225, and 1325 all contemplate a court confirming plans submitted in cases filed under Chapters 11, 12, and 13. If I continue to order sales as I did prior to Stern, is not the purchaser of that property left with the risk that the sale will be later declared null because it was not authorized by the right court? Cf. 11 U.S.C. § 549(a)(2)(B). And is not the debtor of a Chapter 13 plan confirmed by me post- Stern left to wonder whether the discharge he is to receive as a consequence of the ordered plan will really protect him from a creditor's subsequent efforts to collect?

One alternative would be to play it safe and simply refer without reflection every future...