Not all Bankruptcy “Core” Proceedings are Created Equal: A Limitation on State Law Lender Liability Claims in Bankruptcy Court After Stern v. Marshall

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The scenario has become all too familiar in recent years: a borrower defaults on a loan and, when the lender pursues the loan collateral through foreclosure or other proceedings, the borrower files for bankruptcy protection. More often than not, when the lender appears in bankruptcy court to pursue its interest in the collateral, the borrower counterattacks with a host of state law lender liability claims.

The recent opinion of the United States Supreme Court (the “Court”) in Stern v. Marshall (“Stern”), Case No. 10-179, 2011 WL 2472792 (U.S. June 23, 2011), may temper a borrower’s enthusiasm to pursue such claims. In Stern, the Court restricted a bankruptcy court’s jurisdiction to enter final judgments regarding claims arising under state law rather than the Bankruptcy Code. The Court held that a bankruptcy court, as a non-Article III court, lacks the constitutional authority to decide a state law claim brought by a debtor against a creditor, even if the matter is part of the “core” statutory jurisdiction of the bankruptcy court. This decision limits the reach of bankruptcy court jurisdiction and may require state law claims to be decided in a non-bankruptcy forum, even if they are central to a debtor’s bankruptcy case.

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