Stern v. Marshall Updates – DC Bankruptcy Court Has Jurisdiction to Hear State Law Counterclaims

by Cadwalader, Wickersham & Taft LLP
Contact

In GB Herndon, the District of Columbia Bankruptcy Court determined that it had constitutional authority to determine state common law counterclaims and state law claims against nondebtor codefendants. Adams Nat’l Bank v. GB Herndon & Assocs., Inc. (In re GB Herndon & Assocs., Inc.), 459 B.R. 148 (Bankr. D.D.C. 2011).   The case involved a routine contract dispute.  Adams National Bank lent money to the debtor to finance the construction of a housing complex.  The debtor and its guarantors failed to meet their obligations, first under the original loan agreement, then under a forbearance agreement, and the bank sued in state court for breach of contract.

The debtor and its codefendants asserted counterclaims for breach of contract, tortious interference with contract, and breach of the duty of good faith and fair dealing. The bank also initiated an extra-judicial foreclosure, which led the debtor to file for chapter 11 relief, thus staying both the foreclosure sale and the state court breach of contract proceedings. The debtor subsequently removed the state court action to the bankruptcy court, and after a hearing on the bank’s summary judgment motion, the bankruptcy court dismissed the counterclaims asserted by the debtor and its nondebtor codefendants.

On June 23, 2011, the date on which Stern v. Marshall was decided by the Supreme Court, the bankruptcy court entered judgment in favor of the bank and against the defendants. Thereafter, the debtor and the nondebtor co-defendants moved for relief from the judgment under Rule 59(e) or 60(b) and argued that under Stern v. Marshall the bankruptcy court lacked the constitutional authority to determine the state law counterclaims.

Similar to Stern, the central issue in GB Herndon was whether the bankruptcy court had the constitutional authority to determine the counterclaims or whether Article III required that the counterclaims be adjudicated by an Article III judge. The court distinguished between two distinct interests that Article III protects. The first of these interests is a litigant’s individual right to have claims decided by an Article III judge.  The court concluded that this interest did not provide an adequate basis for denying the bankruptcy court authority over the counterclaims because the individual right is waivable.

The court analogized the facts to those in Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833 (1986), a case in which the respondent first demanded that his state law counterclaims be heard in front of an administrative agency, but then challenged the agency’s jurisdiction once the agency had ruled against him. Relying on Schor’s holding that the respondent there had waived his right to an Article III adjudication by choosing to litigate in a non-Article III forum, the bankruptcy court ruled that the defendants similarly had waived this right. In its notice of removal, the debtor characterized the state court action as a “core proceeding,” and none of the defendants challenged either that characterization or the bankruptcy court’s authority to adjudicate the counterclaims.

Notably, the court stated that Stern v. Marshall did not represent a “wholesale change in the law” that would warrant relief from the judgment because Stern affirmed a 2010 Ninth Circuit decision and therefore, during the proceedings before the bankruptcy court, there had been precedent to support an argument that the court lacked core jurisdiction over the state law counterclaims, which the debtor’s experienced bankruptcy counsel had failed to raise.

The bankruptcy court next addressed the second interest that Article III protects, a separation-of-powers, or structural, interest. Although the court observed that Stern did not decide the issue of whether this interest bars bankruptcy courts from entering final judgments on state common law counterclaims when consent is given, it expressed concern that the lengthy discussion of structural issues in Stern might lead some to conclude incorrectly that, in the eyes of the Supreme Court, “even bankruptcy judge adjudications with the consent of the parties would run afoul of Article III.” GB Herndon, 459 B.R. at 158-59.

The bankruptcy court rebutted such a reading of Stern in several ways. First, it reflected that if structural interests barred bankruptcy court adjudications of state common law counterclaims even with the parties’ consent, then the Supreme Court could simply have decided Stern on this more categorical basis, and would not have needed to wrestle with the individual parties’ rights to an Article III adjudication. Second, the court noted cases in which the Supreme Court and various courts of appeals have upheld the exercise of the Article III judicial power by other types of non-Article III judges, such as magistrate judges, with the consent of the parties. Third, the court emphasized that any separation-of-powers concerns should be mitigated by the fact that, as with decisions of magistrate judges, decisions of bankruptcy judges are reviewable by Article III courts.

The bankruptcy court went on to conclude that even without consent, it would have jurisdiction to determine the counterclaims. Because a ruling on the bank’s claims would require a determination of the enforceability of the forbearance agreement and a ruling on the counterclaims, the action was within the exception to the Article III requirement that common law claims be heard by an Article III court. Moreover, even if they had not waived their right to be heard by an Article III court, the nondebtor codefendants, who raised no counterclaims beyond those asserted by the debtor, would be bound by the ruling against the debtor as a matter of issue preclusion.

 

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP
Contact
more
less

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.