Creating a circuit split, the Third Circuit held that “a magistrate judge may enter final judgment in a bankruptcy appeal” if there is “consent of the parties and referral by a district court.” The Seventh and Tenth Circuits had ruled to the contrary in 1987 and 1990, holding that magistrate judges may not enter final orders in bankruptcy appeals.

The Third Circuit remanded its case to the bankruptcy court for further, substantial proceedings. There may be no petition for certiorari or rehearing en banc, because both parties were in favor of a final order by the magistrate judge. The Third Circuit had appointed an amicus to argue against the appellate power of magistrate judges, but the amicus lacks standing to pursue the issue further.

The bankruptcy judge in Delaware was presiding over an adversary proceeding between the holder of a royalty interest in an oil and gas property and the operator of the site. The bankruptcy judge granted summary judgment in favor of the operator.

On the ensuing appeal, Judge Freeman said in her May 7 opinion said that “the parties consented to proceed before a Magistrate Judge for all proceedings, including final judgment.” She went on to say that the magistrate judge raised the question of her own jurisdiction sua sponte.

On the merits, the magistrate judge affirmed the bankruptcy court, with a proviso that her decision should be taken as a report and recommendation if there were no power to enter a final order.

Pivotal Statutory Amendments

Judge Freeman said that the circuit’s “jurisdiction to hear this appeal turns on whether the Magistrate Judge had jurisdiction to enter a final judgment in the bankruptcy appeal.” She noted how the circuit had “appointed David R. Kuney, Esq. as Amicus Curiae to argue the position that a magistrate judge lacks jurisdiction to issue a final judgment in a bankruptcy appeal.” She thanked the “Amicus for his service to the Court.” Prof. Kuney is an Adjunct Professor at the Georgetown University Law School.

The outcome turned on 28 U.S.C. § 636(c), which provides:

Notwithstanding any provision of law to the contrary — (1) Upon the consent of the parties, a full-time United States magistrate judge . . . may conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or courts he serves. 

Immediately, Judge Freeman noted how the Third Circuit had ruled in 1983, soon after adoption of the Bankruptcy Code, that “a magistrate judge lacked jurisdiction under section 636(c)(1) to issue a final order in a bankruptcy appeal, notwithstanding the consent of the parties. In re Morrissey, 717 F.2d 100, 101 (3d Cir. 1983).” However, the statutes then were different.

Judge Freeman said that the appeals court ruled as it did in Morrissey because, at the time, 28 U.S.C. § 1334(c) was written to mean that a “district court may not refer an appeal under that section to a magistrate or to a special master.” She referred to the preclusion of appeals to magistrate judges as the “Express Prohibition.”

In response to the Supreme Court’s Northern Pipeline decision in 1982 finding the bankruptcy court’s jurisdiction to be unconstitutional, Judge Freeman said that Congress “completely rewrote” the bankruptcy court’s jurisdiction in 1984 with a new Section 1334. She said that “[t]he Express Prohibition on the referral of bankruptcy appeals to magistrate judges ‘was repealed by simple omission,’” quoting the Fifth Circuit in Minerex Erdoel, Inc. v. Sina, Inc., 838 F.2d 781, 785 (5th Cir. 1988).

Judge Freeman said that the new jurisdictional statute presented the appeals court with “a question of first impression in this Circuit under the current statutory regime.” Since 1984, she held that “there has been no barrier to magistrate judges’ authority to enter final judgments in bankruptcy appeals pursuant to section 636(c) with the consent of the parties.”

Citing a Third Circuit opinion in a criminal case, Judge Freeman said that a magistrate judge’s jurisdiction is coextensive with the district court’s jurisdiction when the parties consent.

Judge Freeman buttressed her reading of the statute “with the reality that magistrate judges function as part of a district court” and with the Third Circuit’s holding “that entry of final judgment by a magistrate judge upon consent of the parties, as a general matter, does not violate Article III of the United States Constitution.” Furthermore, she said, “The right to an Article III adjudicator is a personal right that is subject to waiver,” according to Supreme Court precedent.

Judge Freeman said she “cannot agree” with the Seventh and Tenth Circuits, which held that magistrate judges are not permitted to enter final orders on bankruptcy appeals. See In re Elcona Homes Corp., 810 F.2d 136, 139 (7th Cir. 1987); and Virginia Beach Fed. Sav. & Loan Ass’n v. Wood, 901 F.2d 849 (10th Cir. 1990).

Having found jurisdiction, Judge Freeman affirmed in part and remanded in part for further proceedings on issues other than jurisdiction.