Third Circuit Upholds Implied Consent to Bankruptcy Court Jurisdiction

Federal bankruptcy judges, who are not appointed under Article III of the Constitution, do not have the power to enter a final judgment in all matters that come before them. Pursuant to 28 U.S.C. § 157(b)(2), they generally may enter a judgment in all cases under the Bankruptcy Code or in certain proceedings defined as “core proceedings.”

In cases like Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) and Stern v. Marshall, 564 U.S. 462 (2011), the Supreme Court further clarified that even certain matters defined as “core proceedings” do not confer upon a bankruptcy court jurisdiction in instances involving purely private rights and state law claims. Indeed, from Stern evolved the notion of Stern claims, which appear to implicate “core” bankruptcy matters but nonetheless do not confer constitutional jurisdiction upon a bankruptcy judge.

The debate amongst courts as to what constitutes a Stern claim thereafter became prevalent, because the line between a private and public right is not always clear. The uncertainty surrounding this issue often allowed litigants to employ gamesmen-like strategies that permitted them to wait until after a bankruptcy court issued an adverse ruling to argue that the court never had jurisdiction to issue such ruling in the first place.

Then, many cases later, things suddenly became better. Along came Wellness Int’l Network, Ltd. v. Sharif, –U.S.–, 135 S.Ct. 1932 (2015), where the Supreme Court chiseled at its seemingly broad holding in Stern (which author, Justice Roberts, later admitted was not intended to be so broad). In Wellness, the Supreme Court not only held that a litigant can “knowingly and voluntarily” consent to a bankruptcy court’s adjudication of a Stern claim, it suggested that a litigant could also forfeit a Stern-based argument by not raising it at the appropriate time.

While Wellness provided much needed guidance, courts and litigants are still grappling with the breadth of Stern. The Third Circuit Court of Appeals’ holding in In re Tribune Media Company, No. 17-2449, 2018 WL 4212086, –F.3d– (3rd Cir. Sept. 5, 2018) provides some additional help. There, the Third Circuit upheld that a litigant can impliedly consent to a bankruptcy court’s jurisdiction by his or her actions, thereby allowing the bankruptcy court to adjudicate a Stern-type claim.

Facts of Tribune Media

An employee of Tribune Media Company’s affiliate filed, prepetition, discrimination claims against the affiliate with state and federal agencies. During the agencies’ investigation of the claims, Tribune and its affiliate filed bankruptcy.

During the bankruptcy, the employee filed a proof of claim, to which the debtors objected. The employee then filed a response and supplemental response to the claim objection. After briefing had concluded, the Bankruptcy Court announced, and the claimant encouraged, that the Court would take the debtors’ claim objection under consideration. The Bankruptcy Court ultimately sustained the debtors’ objection.

The claimant appealed the Bankruptcy Court’s decision and, for the first time, challenged the Bankruptcy Court’s jurisdictional authority to adjudicate his claim.

On appeal, the District Court observed that the employee never raised a jurisdictional challenge during the bankruptcy proceeding. Tribune Media, 2018 WL 4212086, at *3. Instead, the claimant filed two responses to the debtors’ objection, appeared at a contested hearing and acknowledged that the Bankruptcy Court would fully evaluate his claims. Id. In light of the foregoing, the District Court held that the employee waived any objection to the Bankruptcy Court’s jurisdiction and impliedly consented to such jurisdiction. Id.

On further appeal to the Third Circuit, the claimant argued that the Bankruptcy Court lacked both statutory and constitutional authority to adjudicate his discrimination claims.

Statutory Authority

Regarding statutory authority, the claimant argued that his claims constituted personal injury claims that are excepted from bankruptcy court jurisdiction under 28 U.S.C. § 157(b)(5), which provides that “the district court shall order that personal injury tort . . . claims shall be tried in the district in which the bankruptcy case is pending, or in the district court in the district in which the claim arose . . . .”

According to the Supreme Court, however, a claimant can waive an objection under section 157(b)(5) when he “implicate[s] the jurisdiction of th[e] bankruptcy court[,] . . . [chooses] to be a party to the litigation,” and thus “consents to that court’s resolution of his . . . claim[s].” Stern, 564 U.S. at 481.

Relying on Stern, the Third Circuit held that the employee waived his jurisdictional objection when he filed a proof of claim, filed multiple responses to the debtors’ claim objection, appeared at a hearing on the claim objection, and failed to lodge any objection to the Bankruptcy Court’s statutory authority. Tribune Media, 2018 WL 4212086, at *4. The Third Circuit also found it significant that the claimant acknowledged that the Bankruptcy Court would evaluate his claims. Id. Accordingly, the Third Circuit held that the employee consented to the Bankruptcy Court’s jurisdiction and waived any objection under section 157(b)(5).

Constitutional Authority

Regarding constitutional authority, the employee argued that the Bankruptcy Court was required to obtain his express consent to adjudicate his claims.

The Third Circuit disagreed, finding that “[n]o court has stated that a litigant must expressly consent to a bankruptcy court’s jurisdiction.” Tribune Media, 2018 WL 4212086, at *5. In doing so, the Third Circuit relied heavily on the Wellness opinion, where the Supreme Court recognized that constitutional authority simply requires a party’s “knowing and voluntary” consent and such consent may be express or implied by “actions rather than . . . words.” Wellness, 135 S.Ct. at 1939, 1948. This consent provides the constitutional authority to enter a final judgment on claims that ordinarily would require a ruling by an Article III court. Id. at 1939.

In further support of its opinion, the Third Circuit cited to the Fifth Circuit’s holding in Matter of Delta Produce, L.P., 845 F.3d 609, 617 (5th Cir. 2016), where the Fifth Circuit held that a party impliedly consents to jurisdiction when he or she “raise[s] no constitutional objection when joining the case.” The underlying reasoning behind this holding, as well as other district court cases interpreting Wellness, is that implied consent promotes judicial efficiency and discourages gamesmanship by a party who originally agrees to allow a bankruptcy court to adjudicate a dispute. Tribune Media, 2018 WL 4212086, at *6.

Takeaway

While litigants may dread objecting to a bankruptcy court’s jurisdiction early on or may just want to employ a wait-and-see approach, the clear message from the Tribune and Delta Produce cases is that if a litigant does not object early, when given the opportunity, he or she cannot rely on Stern to later complain of the bankruptcy court’s jurisdiction. Litigants must make their Stern objections known early or risk forfeiting them on appeal. Whether the Supreme Court chooses to chisel away at Stern any further, given Justice Robert’s dissent in Wellness, remains to be seen. But, for now, the pendulum towards bankruptcy court jurisdiction has swung closer to the middle.



Categories: Abstention/Removal, Jurisdiction, Recent Case Law

Tags: , , , , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: