Even without implied consent, the bankruptcy court has power to enter final judgment liquidating a state law claim that is excepted from discharge, according to Bankruptcy Judge Marvin Isgur of Houston.
Judge Isgur’s Dec. 19 opinion appears at odds with the Seventh Circuit’s Collazo decision from April, where Circuit Judge Richard A. Posner held that the bankruptcy court must enter proposed findings for a nondischargeable money judgment unless the parties impliedly consented to a final adjudication.
Last year, Judge Isgur entered judgment liquidating a $412,500 claim that he had excepted from discharge under Section 523(a)(2)(A). On appeal, the district court remanded the case for Judge Isgur to decide whether he had power to enter a final judgment liquidating the amount of the claim.
On remand, Judge Isgur decided that he could finally adjudicate the amount of the nondischarged claim. Even without inherent power, he concluded that the parties impliedly consented.
Judge Isgur first analyzed his inherent power to enter final judgment absent actual or implied consent.
In 2009, before Stern v. Marshall, the Fifth Circuit held in In re Morrison that bankruptcy courts have both subject matter jurisdiction and constitutional authority to liquidate state law claims in dischargeability actions. Although Stern came later, Judge Isgur said that Morrison remains good law in the Fifth Circuit because it was not “wholly inconsistent with” the Supreme Court’s decision.
Judge Isgur cited the Ninth, Sixth and Eighth Circuits for holding, after Stern, that bankruptcy courts have power to enter final judgments determining both the dischargeability and amount of state law claims.
Theoretically speaking, Judge Isgur said there is final adjudicatory power because the validity and amount of a nondischargeable claim are “directly intertwined.” Further, he said, liquidating the amount “arises in” title 11 because the dischargeability claim would have no existence outside of bankruptcy.
Apart from the inherent power to enter final judgment, Judge Isgur held there was implied consent, in part because the defendant never questioned the bankruptcy court’s power until the first appeal in district court. Moreover, the defendant participated in the adversary proceeding through trial without ever raising the question of consent, and even signed a pre-trial statement not mentioning the issue.
Collazo came to the Seventh Circuit in a different procedural context. There, the bankruptcy court ruled that a debt was nondischargeable but declined to enter judgment liquidating the amount of the debt, doubting whether there was constitutional power.
In almost a footnote to Collazo, Judge Posner said there was jurisdiction to enter judgment for a nondischargeable debt because the proceeding was “related to” the bankruptcy case. On the question of power to enter final judgment liquidating the claim, Judge Posner remanded the case for the bankruptcy court to decide whether the parties impliedly consented to final adjudicatory power.
If they had not, Judge Posner said the bankruptcy judge could make proposed findings of fact and conclusions of law for review in district court.
Judge Posner’s decision raises conceptual problems, because there would be different standards of review in district court from a final order on nondischargeability compared with proposed findings about the amount of the debt. If the district court were to decide that the nondischargeability ruling was well reasoned and based on non-reversible findings of fact, would the decision of the bankruptcy court at that point limit the ability of the district judge to disagree with the bankruptcy court’s proposed findings as a result of issue or claim preclusion?
To read ABI’s discussion of the Seventh Circuit’s Collazo decision, click here.