In a case involving a plaintiff proceeding in forma pauperis, or IFP, the Seventh Circuit created doubt about the ability of a bankruptcy judge, in a non-core suit involving numerous named defendants, to enter a final order on consent of the plaintiff and a defendant who was served when there are named but unserved defendants.
The Case Before the Magistrate
Intending to proceed IFP without paying the filing fee under 28 U.S.C. § 1915, an individual filed suit in federal district court naming the Wisconsin labor department as defendant. The plaintiff consented to proceeding before a U.S. magistrate judge for all purposes.
Employing screening procedures invoked in IFP proceedings, the magistrate judge examined the complaint and dismissed the suit under 28 U.S.C. § 1915(e) for failure to state a claim, before the defendant had even been served.
The plaintiff appealed. Sua sponte, the appeals court identified “significant questions of appellate jurisdiction” and appointed Travis Crum from the Washington, D.C., office of Mayer Brown LLP to represent the plaintiff-appellant. Crum had been a clerk for Supreme Court Justices M. Anthony Kennedy and John Paul Stevens.
The Seventh Circuit was tasked with deciding whether the magistrate judge had power to enter a final order of dismissal when the unserved defendant had not consented. After briefs were filed and oral argument was held in early November 2016, the decision came down on June 16, and it was a humdinger, with Seventh Circuit judges all over the map.
Disagreements Among Seventh Circuit Judges
On the three-judge panel, Chief Circuit Judge Diane P. Wood wrote the majority opinion, joined by Circuit Judge Ann Claire Williams. They concluded that the IPF statute, the Magistrate Judges Act and constitutional considerations in the wake of Stern v. Marshall require waiver from at least one unserved defendant before an Article I judge can enter a final order.
Circuit Judge Richard A. Posner dissented, believing no consent is required from non-served parties.
The panel distributed the opinion to determine whether sufficient circuit judges favored rehearing en banc. Circuit Judges Frank H. Easterbrook and Diane S. Sykes dissented from the denial of rehearing en banc, agreeing with the result advocated by Judge Posner but disagreeing with how he got there.
There is another curious feature to the opinion. On the issue before the appeals court, there were two prior Seventh Circuit opinions 12 years apart that seemingly reached differing results, with the more recent case not citing the former. Perhaps because the facts and the procedural contexts were not precisely the same, the more recent panel may not have felt bound by the first, which had issued a per curiam opinion where the issue was mentioned in a footnote. Consequently, the majority opinion by the three-judge panel says it overrules the more recent of the two prior decisions in the circuit without rehearing en banc, although the judges did vote on rehearing. Possibly also, the majority believed that the more recent three-judge panel had no authority to overrule the decision made 12 years earlier.
The Three Opinions
Before we explain how the opinions may affect bankruptcy practice, let’s explain the majority holding and the views of the dissenters.
The Magistrate Judges Act, in 28 U.S.C. § 636(c)(1), allows a magistrate judge to enter final judgment “upon the consent of the parties.” The appeals court was called on to decide whether “parties” means all the named parties or only the parties before the court that have been served.
The circuits are already split. The Fifth Circuit and one of the Seventh Circuit opinions hold that “parties” does not include unserved defendants. The Eighth Circuit and the other Seventh Circuit opinion concluded that “parties” includes named defendants, whether or not they have been served.
After lengthy study of the statute, the majority concluded that an unserved defendant is a party whose consent is required. The majority appeared to say that consent from one defendant is sufficient if there are multiple defendants.
Significant for bankruptcy cases, the majority said that any doubt about the interpretation of the statute “would be laid to rest by the constitutional problem that would arise if we were to hold that the consent of one party alone was enough to permit an Article I judge to resolve the case on the merits.” Citing Wellness International, Marathon Pipeline and Stern, the majority said that “institutional concerns” give “final decision making authority only to Article III judges, unless all parties consent to an alternative.”
The majority held that consent by an unserved defendant is “more consistent” with the statute and better respects the “constitutional line” between Article III judges and “other adjudicators.”
Further linking the decision about magistrate judges to bankruptcy judges, the majority said that “the role of the magistrate judge must parallel that of the bankruptcy judges after Stern.”
Dissenting, Judge Posner believed that express consent is not required from unserved defendants. Citing Wellness International, which held that implied consent is sufficient in the bankruptcy context, he said that an unserved defendant’s consent “can be taken for granted because the defendant has no interest in having the case continue.”
Dissenting from the denial of hearing en banc, Judges Easterbrook and Sykes would not require consent from unserved parties under Section 636(c).
Important for bankruptcy practice, Judges Easterbrook and Sykes disagreed with Judge Posner’s view that an unserved defendant consents “implicitly, constructively, or in any other way.”
More significant for bankruptcy, the two judges said that the majority’s opinion would require a district judge in “every suit with an un-served or unknown defendant.” They disagreed with the majority’s view that consent from one defendant is enough when there are multiple defendants.
Since res judicata would not bind an unserved defendant, the two judges would require consent under Section 636(c) only from the parties who would be bound by the judgment.
Implications for Bankruptcy
The implications are ominous for bankruptcy cases. For example, assume a plaintiff files a non-core suit against several defendants, but serves only one. Also assume that the plaintiff and the served defendant consent to final adjudication in bankruptcy court.
The Seventh Circuit case means that the bankruptcy court must decide whether there is constitutional authority to issue a final judgment even though other named defendants have not been served.
Now that the cat is out of the bag on yet another obtuse issue raised by Stern, let’s hope that Wisconsin latches onto the conflict of circuits and files a petition for certiorari, allowing the Supreme Court to decide whether consent is required from non-served defendants.