Michigan Bankruptcy Blog

Interpretations of Stern in the Western District of Michigan

This blog entry includes material originally prepared by the author for the 2012 FBA Bankruptcy Seminar. 

The U.S. Supreme Court’s decision in Stern v. Marshall, 131 S. Ct. 2594 (2011), immediately cast a shadow of uncertainty on bankruptcy courts’ constitutional authority to enter final orders.  But Stern leaves many questions unanswered, and the bankruptcy judges within the Western District of Michigan have differed as to whether the case should be interpreted narrowly or broadly.  As a result, depending on the presiding judge in a particular case, Stern may be critically important or unworthy of mentioning.  The following is a brief review of cases in this district that address the scope of Stern.

1. District Court: The impact of Stern is not well-settled. The United States District Court for the Western District of Michigan has observed that “[t]here is considerable disagreement and uncertainty as to the extent to which Stern will impact the bankruptcy court's authority to enter final judgments in other core proceedings.”  Boyd v. King Par, LLC, 2011 WL 5509873 (W.D. Mich., Nov. 10, 2011) (Hon. Robert Holmes Bell) (commenting in the context of a motion to withdraw reference).
2. Judge Hughes & Teleservices. Bankruptcy Court Judge Hughes wrote extensively about Stern in Meoli v The Huntington Nat'l Bank (In re Teleservices Group, Inc.), 456 B.R. 318 (Bankr. W.D. Mich. 2011) (Hon. Jeffrey R. Hughes).  In Teleservices, Judge Hughes – writing in the first person – concluded that he lacked constitutional authority to enter a final order in the Chapter 7 trustee's fraudulent transfer action under §§ 548 and 544 of the Bankruptcy Code.
   
   Among other things, Judge Hughes emphasized that according to Stern, the exercise of "judicial power" – which includes "traditional actions of common law" – is limited to Article III judges.  Judge Hughes reasoned that allowing non-Article III judges, such as bankruptcy judges, to exercise judicial power may result in the deprivation of due process rights guaranteed by the Fifth Amendment.  Consequently, Judge Hughes held that any money judgment against the defendant must be entered by an Article III judge and that the bankruptcy court's prior opinion and order would be submitted to the district court as a non-core matter on report and recommendation.
3. Judge Hughes & Default Judgments. Judge Hughes has more recently held that the Bankruptcy Court does not have constitutional authority to enter a default money judgment in favor of a Chapter 7 trustee in a cause of action to recover on a debtor’s open accounts.  Moyer v. Koloseik (In re Sutton), 470 B.R. 462 (Bankr. W.D. Mich. 2012).
4. Judge Gregg. Bankruptcy Court Chief Judge Gregg has concluded that the Bankruptcy Court has constitutional authority to enter a final order in a mortgage avoidance action and in a nondischargeability action against the debtor.  Tibble v. Wells Fargo Bank, N.A. (In re Hudson), 455 B.R. 648 (Bankr. W.D. Mich. 2011) (“[e]xcept for the types of counterclaims addressed in Stern v. Marshall, a bankruptcy judge remains empowered to enter final orders in all core proceedings.  . . .  This judge cannot envision a core proceeding that is more ‘core’ than lien avoidance”); First Horizon Home Loan Corp. v Apostle (In re Apostle), 467 B.R. 433 (Bankr. W.D. Mich. 2012) (“the Stern decision is extremely narrow”).
5. Judge Dales. Bankruptcy Court Judge Dales has held that the Bankruptcy Court has constitutional authority to enter a default judgment in an avoidance action brought by a Chapter 7 trustee.  Hagan v. Classic Products Corp. (In re Wilderness Crossings, LLC), 2011 WL 5417098 (Bankr. W.D. Mich. 2011) (“the court is unwilling to automatically extend the dicta in Stern to default judgment motions under Chapter 5, particularly where the amount at issue is relatively small compared to transaction costs”).

Practice pointer. At some point during pretrial proceedings (e.g., during the pretrial conference or in an order for written pretrial statements), the bankruptcy judges in the Western District of Michigan likely will ask whether the parties consent to entry of a final order in the proceeding, notwithstanding Stern.

Categories: Chapter 7, U.S. Supreme Court, Western District of Michigan