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Litigation: A Stern gift that keeps on giving

Supreme Court case continues to wreak havoc on the jurisdiction of federal bankruptcy courts.

In Stern v. Marshall, the Supreme Court held that a non-Article III court, such as a bankruptcy court, may only constitutionally determine “public rights,” such as the resolution of a proof of claim filed in a bankruptcy, and not private rights, such as those to augment the estate.

Stern clarifies that private rights may be adjudicated only to the extent that they are “necessarily resolvable” in the context of determining the public rights. Supplementing prior case law, Stern held that a federal bankruptcy court cannot enter final findings of fact with respect to a debtor’s state law counterclaim against a creditor despite the creditor having filed a proof of claim in the bankruptcy estate.

2. In re Fairfield Sentry Limited In contrast, defendants in this case moved to remand avoidance actions arising under state and foreign laws from the bankruptcy court to state court, or have the bankruptcy court abstain from hearing the matters due to its lack of subject matter jurisdiction. The underlying bankruptcy was an ancillary proceeding under Chapter 15 of the Bankruptcy Code arising from a foreign liquidation proceeding pending in the British Virgin Islands. The debtor plaintiffs were funds that had invested with Bernard Madoff who became insolvent as a result of Madoff’s fraud.

Prior to the commencement of the foreign liquidation proceeding, the funds brought an action in state court for money had and received, unjust enrichment, constructive trust and other related claims. Once the ancillary proceeding was commenced, the state court actions were removed, additional actions were filed and the state court claims were amended to add various avoidance claims.

The trust appealed to the district court. During briefing, Stern was decided. Applying Stern, the trust moved to dismiss the appeal and remand the matter to state court. The district court held that the trust’s claims involved private rights and so could not be finally determined by the bankruptcy court.

The district court went on to analyze whether the bankruptcy court possessed final adjudicative authority through implied consent of the parties. The district noted that although Stern confirmed that consent can be a sufficient basis for Article I final adjudication, it also created confusion regarding the consent analysis and opined that while a creditor consents to all actions necessarily resolved in ruling on a proof of claim, the creditor’s consent does not extend to claims not resolved by the proof of claim.


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Randye Soref

Randye B. Soref is a shareholder and administrative chair of Buchalter Nemer’s Insolvency and Financial Solutions  practice group. She focuses her practice on bankruptcy and...

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