In an 18 page decision signed April 12, 2012, Judge Walsh of the Delaware Bankruptcy Court provided a fairly thorough analysis of the effect of the Stern v. Marshall opinion issued by the Supreme Court, in his opinion denying a motion to dismiss. Judge Walsh’s opinion is available here (the “Opinion”). A blog post discussing the Stern v. Marshall opinion is available here: Stern v. Marshall: Effects on Delaware.
The DBSI bankruptcy and ensuing preference actions brought by the DBSI Trustee are discussed in the following posts:
A Closer Look at the DBSI Bankruptcy
Trustee In DBSI Bankruptcy Files Adversary Actions
Decision in DBSI Inc., Reminds Us that District Courts have Personal Jurisdiction Throughout the United States
The Opinion was written in response to several “Motions to Dismiss in the Absence of Article III Authority to Adjudicate” filed by defendants to avoidance and recovery of fraudulent transfer complaints. Opinion at *2.
Judge Walsh’s Opinion
As provided by Judge Walsh, there are 2 interpretations of the Stern decision, a broad and a narrow reading. “The broad interpretation holds that bankruptcy judges cannot enter final adjudications on avoidance actions because such actions are quintessentially suits at common law and thus must be decided by an Article III judge.” The narrow view “restricts Stern’s holding to its facts in that the decision only specifically removed a debtor’s state law counterclaims under § 157(b)(2)(C) . . . from final adjudicatory authority of the bankruptcy court.” Opinion at *9.
Judge Walsh continues by agreeing “with [his] colleagues that Stern’s holding should be read narrowly and thus restricted to the case of a state-law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.” Opinion at *10. Judge Walsh then further supports Delaware’s use of a narrow interpretation of the Stern opinion by citing several SDNY opinions that also interpret Stern narrowly.
Judge Walsh then held that Stern does not apply to the cases addressed by the Opinion. Opinion at *11. Adding the final word on the subject, Judge Walsh cited the Amended Standing Order of Reference issued by the U.S. District Court for the District of Delaware, which provides:
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.
Opinion at *17. Judge Walsh concludes “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.” Opinion at *17.
While Stern v. Marshall created significant confusion immediately after it was issued, bankruptcy and district courts have heard substantial argument regarding its impact. In Delaware, the impact has been determined through a comprehensive series of opinions, including this Opinion issued by Judge Walsh. For any cases in Delaware that you are involved in that may be impacted by the Stern decision, make sure to contact an attorney familiar with the post-Stern decisions.