Stern Amendments to Bankruptcy Rules

Bryan Cave Leighton Paisner

While it has taken five years of committee and court efforts, the “Stern Amendments” to the Federal Rules of Bankruptcy Procedure will become effective December 1, 2016.  These amendments will streamline litigant and court procedures in resolving subject matter jurisdiction matters as between district courts and bankruptcy courts.

The Bankruptcy Cave has followed many procedural issues since Stern v. Marshall.[1]/Stern held certain claims designated by statute for final adjudication in bankruptcy court, are nonetheless required by the Constitution to proceed in an Article III district court (Stern post). Various Stern progeny has explored the role of parties’ consent to final adjudication in the bankruptcy court, the ability of the bankruptcy court to make findings of fact and conclusions of law for final determination by the district court, emerging local rule accommodations of jurisdictional uncertainty, and a special practitioner’s peril where a trial in district court is (oddly) governed by bankruptcy rules.  See our posts from the Bankruptcy Cave’s “Stern Series” on In re Fisher Island Invs., Inc., 778 F.3d 1172 (11th Cir. 2015), the sequence of Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) and Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015), and Rosenberg v. DVI Receivables XIV, LLC, 818 F.3d 1283 (11th Cir. 2016).

The delay in rule amendments responsive to Stern was in no way due to inaction by the courts or rule committees involved.  In fact, the prime cause of the extended timeline was that the Supreme Court continued to attend to developing Stern issues through Executive Benefits and Wellness, cited above.  It was deemed inappropriate for the Supreme Court to consider rule changes involving the same subject matter as cases before the Court.

To understand the Stern Amendments, a brief background:  Constitutionally, there is a limit on the scope of rights that Congress can direct to resolution in an Article I court instead of an Article III court.  A part of this constitutional division is provided by statute at 28 U.S.C. § 157(b) and (c).  Section 157(b) lists core proceedings as to which bankruptcy courts can determine and issue final judgments and orders.  Section 157(c) provides that for non-core matters, a bankruptcy court may hold hearings and submit proposed findings of fact and conclusions of law to its district court, unless the parties consent to bankruptcy court final adjudication.  These statutory core versus non-core provisions were further reflected in bankruptcy rules.

However, in 2011 Stern identified a third kind of proceeding that was “core” but also beyond the constitutional authority of the bankruptcy court—a constitutionally non-core proceeding.  Through Executive Benefits and Wellness, along with responsive changes to Local Rules in the bankruptcy courts (See, Wellness post), it became increasingly apparent that litigant consent to final determination by the bankruptcy court could solve a lot of problems that would otherwise engender uncertainty (by both courts and litigants) as a case moved forward.

The Stern Amendments change Bankruptcy Rules 7008, 7012, 7016, 9027, and 9033.  Collectively, they eliminate the requirement that a litigant state whether a proceeding is core or non-core, and rather go straight to a requirement that the pleader state whether it consents to final adjudication in bankruptcy court.  If all parties to the dispute consent, then it does not matter if a matter is core or non-core.  However, if any party does not consent, then the bankruptcy court must act under Rule 7016(b) and decide whether the proceeding is within its core jurisdiction and constitutional authority, and also determine whether to issue final judgments and orders, to submit proposed findings of fact and conclusions of law to the district court, or to take some other approach.  The Stern Amendment changes include:

  • BR 7008 – General Rules of Pleading – Changes eliminate the requirement for the pleader to state whether the proceeding is core versus non-core in favor of stating whether the pleader does or does not consent to final determination by the bankruptcy court.
  • BR 7012 – Defenses and Objections – Changes to subdivision (b) regarding responsive pleading again eliminate distinctions of core versus non-core in favor whether the pleader does or does not consent to final determination by the bankruptcy court.
  • BR 7016 – Pretrial Procedures – Changes with new subdivision (b) provide three options for the bankruptcy court on consent or non-consent of parties: (1) to hear and determine the dispute, (2) to hear it and issues proposed findings of fact and conclusions of law for the district court, or (3) to take some other action. Option (3) will allow some measure of responsiveness to the many variations of scenarios the bankruptcy court might face in the operation of these amendments.
  • BR 9027 – Removal – Changes to subdivision (a)(1) and (e)(3) regarding removal again eliminate distinctions of core versus non-core in favor whether the pleader does or does not consent to final determination by the bankruptcy court.
  • BR 9033 – Proposed Findings of Fact and Conclusions of Law – Changes to subdivision (a) make the service of proposed findings of fact and conclusions of law applicable to both core and non-core proceedings.

After the Stern Amendments take effect, the complicated and sometimes esoteric constitutional issues involved in the identification of a statutorily core but constitutionally non-core Stern proceeding will remain.  However, all those substantive issues should now find their procedural expression under the Rules cited above.  The changes should “weed out” casual or uncommitted expressions of non-consent, yet give real jurisdictional disputes a dedicated and explicitly flexible means for adjudication.

[1]/ 131 S. Ct. 2594 (2011).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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