The Fifth Circuit’s ruling on Nov. 11, 2013, in BP RE L.P. vs. RML Waxahachie Dodge L.L.C. et al..[1] extended what it had previously acknowledged was a “narrow ruling” by the U.S. Supreme Court in Stern vs. Marshall.[2] The panel essentially held that the authority granted to the bankruptcy court to enter final orders and judgments under 28 U.S.C. §157(c)(2) is unconstitutional, despite express consent.
The debtor, BP RE, had a business dispute with the defendants, one of which was a prospective lessee of buildings owned by the debtor where two automobile dealerships had been located. The debtor asserted breaches of two leases, as well as state law claims for tortious interference, conspiracy, trespassing and quantum meruit.
The debtor brought its lawsuit in bankruptcy court, and in two joint pre-trial orders expressly consented to the bankruptcy court entering a final judgment. The defendants won partial summary judgment as to certain facts and claims, and thereafter won on all remaining counts at trial. On appeal, the district court affirmed the bankruptcy court judgments.
The Fifth Circuit ruled that the bankruptcy court properly had statutory authority due to the consent given to enter orders and judgments in this non-core proceeding under 28 U.S.C. § 157(c)(2), but that it lacked constitutional authority to enter final judgments as the underlying claims were state-law causes of action.[3]
The Ninth Circuit case of In re Bellingham Insurance Agency, Inc.,[4] also commonly known as the Executive Benefits case, upheld a summary judgment entered by a bankruptcy court on state law claims, finding that there was implied consent to their adjudication by the bankruptcy court. That case has now been argued before the U.S. Supreme Court, and a decision is expected within the next few months. If the U.S. Supreme Court in Executive Benefits follows the Fifth Circuit BP RE case and the Seventh Circuit in Wellness International Network Limited v. Sharif,[5] non-core adversaries can still be tried in the bankruptcy court by consent, but the findings of fact and conclusions of law will then have to be submitted to the district court as recommendations, seeking entry of a final judgment at the district court level.
In representing a debtor-in-possession or trustee in their pursuit of damages arising from state court causes of action (presumably not as part of claims litigation), these rulings raise two critical decisions from the outset: (1) Do you file the suit in the bankruptcy court?, and (2) if adversary proceedings are filed, how will you timely address the issues of consent to adjudication and submission to the district court if you are seeking either to obtain an order to dismiss claims or a ruling on them by summary judgment?
Choosing the court is always a preliminary question in litigation. Look at which courts could hear the case, and if there is more than one, consider the forum that appears to be the best for achieving the goals of the client. So, if the client is a DIP or trustee, they are already in the bankruptcy forum and have bankruptcy counsel. Furthermore, they have a judge who understands their fiduciary obligations to pursue claims, as well as the limitations on resources. Consequently, the bankruptcy court has usually been the favored forum for such clients.
Litigation in bankruptcy court, however, involves additional time and expense. Even if you are successful in front of the bankruptcy judge, there may be further proceedings before the district court when it considers the findings of fact and conclusions of law as “recommendations.” More court time means more expense. Additionally, despite the heavy caseloads bankruptcy judges have, they tend to move lawsuits along so that the administration can be completed (i.e., a plan confirmation or final report approval). The caseload and procedures of the district court can result in a much longer period before your suit can be heard, and even more time if you are awaiting a final ruling. So, knowing that the district court, as a second step, will build in more time and perhaps more expense, it may be a wiser choice to go directly to the district court. Alternatively, even if you have grounds for federal court jurisdiction, going straight to a state court may be the best option in some instances.
The next issue, consent to adjudication in non-core matters, needs to be evaluated and addressed earlier. Some judges have been using the first hearing or status conference in an adversary proceeding to ask both counsel if they consent to adjudication by the bankruptcy court. With that approach, at least consent is in the record. However, this express consent, even if put in writing, is not enough to permit the bankruptcy judge to enter final orders or judgments in non-core matters, according to the ruling in BP RE. As a result, it appears that litigators will need to now be clearer as to the scope of consent and the mechanisms as to when and how matters will be sent to the district court for entry of final orders or judgments.
For instance, the standard scheduling order sets forth the last date upon which dispositive motions may be heard (typically no later than 45 days before the trial docket call). Should the parties agree to the bankruptcy court hearing dispositive motions, or should they go straight to the district court? If a summary judgment has been granted in the bankruptcy court as to certain claims and/or parties, shouldn’t that immediately be sent up to the district court to find out whether it is final before trying the rest of the issues? If not, aren’t parties possibly setting themselves up for potential re-litigation of issues they believed were already decided? Although a district court judge may give great deference to the recommended findings of fact and conclusions of law from a bankruptcy court, he or she may rule differently.
Litigants have been able to treat these orders as final under 28 U.S.C. § 157(c)(2) because they had consent, absent a timely appeal. Now that such orders are not final, the appeal clock does not start ticking based on such rulings of the bankruptcy judge. If parties want an order or judgment to be final, they will need to put it before the district court judge.
Going forward, those seeking to litigate non-core matters for a bankruptcy estate will need to decide early whether they should seek to litigate first before a bankruptcy judge (assuming the other side consents), and how they will navigate motions to dismiss claims or for summary judgment. Furthermore, the additional time and expense that will come from the two-step process to finality needs to be factored into the costs of the litigation.
[1] BP RE L.P. v. RML Waxahachie Dodge L.L.C., et al. (In re BP RE L.P.), 735 F.3d 279 (5th Cir. 2013).
[2] Stern v. Marshall, 131 S. Ct. 2594 (2011).
[3] BP RE L.P., 735 F. 3d at 286-87.
[4] Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency Inc.), 702 F. 3d 553 (9th Cir. 2012), cert. granted, 133 S. Ct. 288 (2013).
[5] Wellness Int'l Network Ltd. v. Sharif, 727 F. 3d 751 (7th Cir. 2013).