The Southern District of New York and the District of Delaware Restore Order to a Chaotic Post-Stern Landscape
Recently, the Southern District of New York and the District of Delaware have issued Amended Standing Orders resolving some of the uncertainty arising from the Supreme Court’s ruling in Stern v. Marshall last term by expressly permitting bankruptcy courts to hear and issue proposed findings of fact and conclusions of law in those matters where they lack the constitutional authority to issue final judgments.
Pursuant to 28 U.S.C. § 1334, district courts have jurisdiction over all civil litigation arising under the Bankruptcy Code or arising in or related to bankruptcy cases. To facilitate the efficient resolution of these proceedings, district courts almost universally refer them to their bankruptcy courts pursuant to 28 U.S.C. § 157(a), which authorizes the district court to enter a “standing order of reference” referring such matters to the district’s bankruptcy judges. The United States District Courts for the Southern District of New York, and the District of Delaware have had such orders in place since 1984.
28 U.S.C. § 157 also classifies the matters that may be referred to bankruptcy courts into two types — “core” and “non-core” — and provides different procedures for resolving them. Bankruptcy courts may hear and finally determine core matters, and the district courts’ review over such determinations is subject to traditional appellate standards of review, which are generally deferential to the bankruptcy court’s factual findings. For non-core matters, absent consent of the parties, bankruptcy courts must submit proposed findings of fact and conclusions of law to the district courts, which enter final judgments after giving a de novo review of the bankruptcy courts’ factual findings and legal conclusions. For decades, this procedure went unquestioned.
However, last summer the United States Supreme Court issued its decision in Stern v. Marshall, which called into question the constitutionality of certain matters designated as core under a particular subsection of 28 U.S.C. § 157(b) being adjudicated by the bankruptcy court. Since then, bankruptcy court defendants around the country have deluged district courts with motions to withdraw the district court’s reference in a variety of statutory core matters, arguing that the bankruptcy court lacks the constitutional authority to hear the matter. In making this argument, defendants have also routinely argued that 28 U.S.C. § 157(c), which allows a bankruptcy judge to issue proposed findings of fact and conclusions of law with respect to non-core matters, cannot be extended to core matters because Congress failed to expressly create such a mechanism for core matters in section 157.
The Southern District of New York and the District of Delaware have now addressed the issue directly. On January 31, 2012, Chief Judge Loretta A. Preska of the Southern District of New York issued an Amended Standing Order of Reference. The Amended Order provides that bankruptcy judges may submit proposed findings of fact and conclusions of law with respect to core matters over which bankruptcy courts do not have constitutional authority to enter final judgments. The Amended Order also provides that the district court may treat any order of the bankruptcy court as a set of proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order or judgment in a manner that would be consistent with Article III of the United States Constitution. One month later, on February 29, 2012, the District of Delaware followed suit, with Chief Judge Gregory M. Sleet issuing an identical Amended Standing Order of Reference.
While the Amended Orders do not specifically mention the Stern decision, they are clearly designed to put an end to the routine filing of motions to withdraw the reference and continue the practice in both districts of referring to the bankruptcy courts those matters that they traditionally resolve. Frequent litigants in the bankruptcy courts across the United States should pay attention to other districts, which may soon follow with amended orders of their own.