Since the Supreme Court of the United States shook up the bankruptcy litigation world with its decision in Stern v. Marshall, bankruptcy practitioners have been finding “Stern problems” everywhere they look. A straightforward decision in Carney v. CitiMortgage, Inc., however, reminds us that, as broad as Stern may be, bankruptcy courts retain full authority to hear and consider “non-core” matters and to issue “proposed findings of fact and conclusions of law” for review by a district court.
Core vs. Non-Core
Bankruptcy courts are generally entitled to hear any action that “arises under” the Bankruptcy Code, “arises in” a bankruptcy case or is otherwise “related to” a bankruptcy case. When a dispute arises under the Bankruptcy Code or arises in a bankruptcy case, that dispute is generally said to fall within the bankruptcy court’s “core” jurisdiction. By statute, bankruptcy courts are authorized to issue a “final order” resolving any dispute that falls within their core jurisdiction. In contrast, if a dispute is only “related to” a bankruptcy case, it is generally said to fall within the bankruptcy court’s “non-core” jurisdiction. Bankruptcy courts are generally not permitted to enter final orders with respect to “non-core” disputes. Instead, they must issue “proposed findings of fact and conclusions of law” for consideration by a district court, which will then decide whether to issue a final order.
Stern v. Marshall
In Stern v. Marshall, the Supreme Court complicated this picture by holding that bankruptcy courts lack constitutional authority to enter final orders in certain matters that Congress specifically designated as “core.” As a result, disputes have proliferated over the scope of bankruptcy court decision-making power (the Supreme Court is expected to provide some additional clarity on that front soon). In fact, the scope of bankruptcy court power has become so murky that some bankruptcy litigators are starting to see potential Stern challenges where none exist. Thankfully, a well-reasoned and concise decision from the Bankruptcy Court for the Southern District of Georgia has provided a welcome reminder of Stern’s limits.
Carney v. Citimortgage, Inc.
In 2012, William and Janice Carney filed a chapter 13 personal bankruptcy petition and, thereafter, commenced a lawsuit in the bankruptcy court seeking to set aside a foreclosure on their home, as well as actual and punitive damages against a group of defendants. One of the defendants in the lawsuit, a law firm that the plaintiffs had retained to provide foreclosure-prevention services, moved to dismiss the action on Stern v. Marshall grounds. Additionally, the defendant argued that the action was “non-core” and that the bankruptcy court therefore lacked jurisdiction over the dispute.
In rejecting the motion to dismiss, the bankruptcy court highlighted the contradictions between the defendant’s two arguments. While the Supreme Court in Stern ruled that a bankruptcy court may not enter a final order on certain matters designated as core, it did not limit a bankruptcy court’s authority to issue proposed findings of fact and conclusions of law on “non-core” matters. Thus, according to the bankruptcy, the defendant’s assertion that the dispute was “non-core” (which the plaintiffs did not dispute) rendered Stern irrelevant.
The bankruptcy court’s conclusion is unquestionably correct. The premise of Stern is that only “Article III” courts—which include district courts—are entitled to issue final orders on certain matters. Allowing bankruptcy courts to review non-core matters, but limiting their decision–making power to issuing proposed findings of fact and conclusions of law for de novo consideration by a district court, does not violate that premise.
The lesson is simple: while Stern may prevent a bankruptcy court from entering a final order (or potentially doing anything at all) with respect to certain core disputes, bankruptcy court power over non-core matters remains unchanged.