District of Delaware Bankruptcy Judge Peter J. Walsh denies the motions of defendants (the “Defendants”) in 8 adversary proceedings that sought dismissal of avoidance and recovery claims based on Stern v. Marshall, — U.S. –-, 131 S.Ct. 2594 (2011).  In his opinion, Zazzali v. New West Paving et al, Adv. Proc. No. 10-54995 Dkt No. 47 (Bankr.D. April 12, 2012), Judge Walsh concludes that, after Stern, he still “can enter a final judgment on the core preference, post petition transfer, fraudulent transfer, and unjust enrichment claims and issue proposed findings of fact and conclusions of law on the non-core causes of action.”  Judge Walsh also addresses in dicta the “even if” scenario and erases any notion that, based on Stern, a dismissal is obtainable in a Chapter 5 avoidance proceeding in Delaware Bankruptcy Court.

Background

The Defendants’ 8 adversary proceedings are among the more than 850 avoidance actions brought in the DBSI Inc. bankruptcy (Case No. 08-12687) by the trustee for the Jointly-Administered Chapter 11 Estates and/or for the DBSI Estate Litigation Trust. The DBSI trustee instituted a shotgun approach in these adversary proceedings and brought claims based on multiple avoidance grounds. The complaints against the Defendants seeking dismissal of their adversary proceedings included avoidance and recovery claims under Bankruptcy Code §§ 544, 547, 548, 550, and 551, as well as unjust enrichment premised on the avoidance actions.

All of Defendants maintained that they had not consented to the Bankruptcy Courts adjudication of the adversary actions. All of the Defendants also had advised the Court that they intended to demand a jury trial. Judge Walsh also noted that certain of the Defendants had not filed proofs of claim. Importantly, Judge Walsh did not find it necessary to distinguish, or even identify, those Defendants for purposes of his opinion.

The Court’s Decision

As have numerous other courts, Judge Walsh adopts the Alexandrian solution to the Gordian Knot that is the reasoning in Stern.  He restricts the Stern holding to its facts – i.e. a “state-law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” 131 S.Ct. at 2620.  As the DBSI trustee’s avoidance actions against the Defendants do not involve any state law counterclaims, Judge Walsh holds that Stern is inapplicable and the Defendants’ motions to dismiss are without basis.    

Even if, Stern no Ticket Out of Bankruptcy Court

Having concluded that Stern is inapplicable, Judge Walsh could have stopped writing.  He does not.  The message in the last half of his opinion is clear: even interpreted broadly,  Stern is no ticket out of Delaware Bankruptcy Court for avoidance action defendants.

Movants also argue that in the event that this Court determines that it does not have the authority to finally adjudicate the actions, it must dismiss the actions because there is no statutory authority for a bankruptcy court to submit proposed findings of fact and conclusions of law to the district court where the proceeding is “core but precluded by Article III,” as it were. Movants base their argument on the text of 28 U.S.C. § 157(c), which provides

A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected. 28 U.S.C. § 157(c)(1) (emphasis added). According to Movants, this provision means that the bankruptcy court has no authority to make recommendations to the district court where the matter is “core” under the statute but cannot be finally adjudicated by the bankruptcy court because of Article III considerations as expounded in Stern.  (Doc. # 147, at 16-17.)

Aside from the fact that I conclude that I do have authority to finally adjudicate the core matters in these actions, I reject this argument, as it implies that Stern has eviscerated the grant of subject matter jurisdiction to the bankruptcy courts under 28 U.S.C. §§ 1334 and 157(a) – a reading that the Stern majority expressly disavowed. 131 S.Ct. at 2607 (“Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. That allocation does not implicate questions of subject matter jurisdiction.”) (citation omitted). As the court noted in Refco, there is language in the Stern majority opinion that strongly suggests that any such “core but precluded” proceedings are to be treated as matters “related to” the bankruptcy case, i.e. that the bankruptcy court should make recommendations to the district court:

The current bankruptcy system also requires the district court to review de novo and enter final judgment on any matters that are “related to” the bankruptcy proceedings, § 157(c)(1), and permits the district court to withdraw from the bankruptcy court any referred case, proceeding, or part thereof, § 157(d). Pierce has not argued that the bankruptcy courts “are barred from ‘hearing’ all counterclaims” or proposing findings of fact and conclusions of law on those matters, but rather that it must be the district court that “finally decides” them.   We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a “narrow” one.

131 S.Ct. at 2620 (cited in Refco, 461 B.R. at 193) (citations omitted). If Movants’ reading of Stern were correct, it would both implicate the bankruptcy court’s subject matter jurisdiction to hear certain matters and dramatically change the respective roles of the district and bankruptcy courts – two things the Stern court repeatedly insisted it did not do with its decision. Further, as the Refco court points out, “when addressing the consequences of holding a statute unconstitutional, courts must impose a remedy that best corresponds to what Congress would have intended if it had known about such holding.” 461 B.R. at 193 (citing United States v. Booker, 543 U.S. 220, 246 (2005)).     Applying that principle to § 157, I agree that “it would be absurd to conclude that the bankruptcy courts are deprived of jurisdiction over matters designated by Congress as core when, for Article III reasons, Congress gave jurisdiction to bankruptcy courts to issue proposed findings of fact and conclusions of law in non-core matters.”   Id.    Stern has not changed the bankruptcy court’s subject matter jurisdiction, and consequently, this Court can hear any claims – including those at issue here – over which it has at least “related to” jurisdiction. Where there is such a “related to” matter, this Court can issue proposed findings of fact and conclusions of law to the district court.

Lastly, Movants argue that since this Court cannot conduct a jury trial (which Movants state they intend to demand), it would be a waste of resources for this Court to issue proposed findings of fact and conclusions of law to the district court for de novo review. Movants insist that this would somehow result in “two trials, the first leading to a bankruptcy court recommendation; the second to a district court final order.” (Doc. # 147, at 17.) Going further, Movants argue that the hearing in this Court would “be a mere ‘rehearsal’ because its outcome will be non-binding on objecting parties and on the court that will conduct the second hearing. It is difficult to conceive of a greater or more unnecessary waste of judicial resources and of the time, money, and other resources of the litigants.” (Id. at 18.)

The recommendation system that Movants are disparaging is the exact mechanism that 28 U.S.C. § 157(c)(1) – and the court in Stern – contemplates and that has long been used by bankruptcy and district courts across the country. These concerns about judicial economy were undoubtedly considered when § 157 was enacted. Moreover, Movants misconstrue what is meant by “de novo review.” De novo review does not mean a de novo hearing; rather, it means that “district judge may accept, reject, or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions.” Fed. R. Bankr. P. 9033(d). See also In re Hipp, Inc., 895 F.2d 1503, 1519 (5th Cir. 1990) (contrasting review that is “truly de  novo – i.e., a further trial proceeding at which the determination will be based solely on the evidence freshly presented in open court at that further proceeding” to “review under Rule 9033(d) which may be solely on the record and without any additional hearing or evidence”). Thus, there will not be “two trials.”

With regard to Movants’ argument that they will demand a jury trial, which I cannot conduct, this issue is not before me as there has been no demand made. Further, once the jury demand is made, it is customary in this district for the bankruptcy court to preside over the action until the case is ready for trial. See,  e.g., Residual Trustee v. The Upper Deck Co., LLC (In re KB Toys,  Inc.), No. Civ.A. 06-363-KAJ, 2006 WL 1995585, at *1 (D. Del. July 17, 2006); Wakefern Food Corp. v. C & S Wholesale Grocers, Inc. (In re Big V Holding Corp.), Civ.A. 01-233(GMS), 2002 WL 1482392, at *5 (D. Del. July 11, 2002); Liquidating Trustee of the MPC Liquidating Trust v. Granite Fin. Solutions, –- B.R. –-, Adv. Proc. No. 10- 54299 (PJW), 2012 WL 386268, at *8 (Bankr. D. Del. Feb. 7, 2012). Thus, a right to a jury trial, even when invoked, is not grounds to dismiss the action from this Court.

Lastly, I note that the determination of whether this Court can enter a final judgment in this matter has been rendered academic by the recently issued Amended Standing Order of Reference by the U.S. District Court for the District of Delaware.   The existing standing order was amended to add:

If a bankruptcy judge or district judge determines that entry of a final order or judgment by a bankruptcy judge would not be consistent with Article III of the United States Constitution in a particular proceeding referred under this order and determined to be a core matter, the bankruptcy judge shall, unless otherwise ordered by the district court, hear the proceeding and submit proposed findings of fact and conclusions of law to the district court. The district court may treat any order of the bankruptcy court as proposed findings of fact and conclusions of law in the event the district concludes that the bankruptcy judge could not have entered a final order or judgment consistent with Article III of the United States Constitution. Amended Standing Order of Reference, dated Feb. 29, 2012. In other words, the District Court can treat any order issued by this Court as a recommendation if it later determines that Article III precluded me from entering a final judgment.