Direct Appeal from Bankruptcy Proceeding Transferred for Lack of Jurisdiction

Federal courts have struggled with the implications of Stern v. Marshall, 564 U.S. 462 (2011), and Wellness International Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015)—in which the Supreme Court held that the Constitution requires the parties’ consent before bankruptcy courts can finally adjudicate claims that neither “stem[] from the bankruptcy itself [n]or would necessarily be resolved in the claims allowance process.” Stern, 564 U.S. at 499. The Eleventh Circuit dodged one of the many questions raised by these decisions before transferring an appeal for lack of jurisdiction in Wortley v. Bakst, Nos. 15-11923 & 15-90007, 2017 WL 57769 (11th Cir. Jan. 5, 2017).

Wortley involved state-law claims against a bankruptcy trustee’s counsel for allegedly conspiring to influence the outcome of separate adversary proceedings against the plaintiffs. The defendants had removed the case from state court to the bankruptcy court, which granted their motion to dismiss. The Eleventh Circuit then accepted a certified direct appeal from the bankruptcy court’s dismissal order under 28 U.S.C. § 158(d)(2).

On appeal, the plaintiffs argued that the bankruptcy court had no jurisdiction to dismiss state-law claims seeking damages from individuals instead of from the bankruptcy estate. The defendants responded that the claims would not have existed at all without the underlying adversary proceedings and that the plaintiffs’ action was therefore a “core proceeding” subject to bankruptcy jurisdiction under 28 U.S.C. § 157(b).

These jurisdictional arguments raised a thorny question: Even if the plaintiffs had asserted “core” claims “as a statutory matter,” was the bankruptcy court “prohibited from proceeding . . . as a constitutional matter” without the parties’ consent under Stern and Wellness, 135 S. Ct. at 1941–42?

In an opinion by Judge Jordan, the Eleventh Circuit acknowledged this question but avoided it by holding that the plaintiffs’ action was not a core bankruptcy proceeding. Although the action “stem[med] from a bankruptcy in a literal sense,” the court reasoned that it was “not the sort of case that would arise only in bankruptcy[,] because the corruption or improper conduct of a judge can occur in any type of legal proceeding.” Wortley, 2017 WL 57769, at *5.

But the court also rejected the plaintiffs’ argument that the bankruptcy court lacked jurisdiction altogether. Because it was “conceivable” that the plaintiffs’ state-law claims might “affect the handling and administration” of the bankruptcy estate in the adversary proceedings, the Eleventh Circuit concluded that the claims were part of a “non-core proceeding related to the [underlying] bankruptcy”—and thus subject to the bankruptcy court’s more limited jurisdiction under 28 U.S.C. § 157(c)(1). Wortley, 2017 WL 57769, at *5.

The upshot was that “the bankruptcy court lacked authority to enter the final order of dismissal [under § 157(b)] and instead should have submitted proposed conclusions of law to the district court under § 157(c)(1).” Wortley, 2017 WL 57769, at *5. Following this requirement for non-core proceedings would have allowed the district court to consider the bankruptcy court’s recommendations de novo before issuing a judgment subject to an ordinary, non-direct appeal.

The final question for the Eleventh Circuit, with respect to its own jurisdiction, was “so what?” Having concluded that the bankruptcy court exceeded its authority instead of allowing the district court to rule on the defendants’ motion to dismiss, the court of appeals still had to decide whether to review the bankruptcy court’s order on appeal.

After identifying the question as one of first impression in the Eleventh Circuit, the court held that it lacks jurisdiction to review a bankruptcy court’s unauthorized orders in non-core proceedings. The court explained that its jurisdiction over direct appeals from a bankruptcy court is limited to “judgment[s], order[s], or decree[s]” with “adjudicative consequence[s]”—and “[a]bsent consent, in [non-core] proceedings only the district court is vested with adjudicatory authority.” Wortley, 2017 WL 57769, at *6. Because a bankruptcy court’s recommendations “do not, in and of themselves, constitute a judicial decision with legal effect,” id., the court of appeals transferred the case sua sponte to the district court to review the bankruptcy court’s order as a report with proposed conclusions of law.

Posted by Lee Peifer.

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