One of the best innovations in the U.S. bankruptcy system is creation of bankruptcy appellate panels (“BAPs”), as a division of the U.S. circuit courts of appeals. BAPs hear appeals of bankruptcy court decisions. Currently, there are five BAPs, one in each of the following circuits: First, Sixth, Eighth, Ninth and Tenth.
The BAP panel for each appeal consists of three judges. These are sitting bankruptcy judges from various bankruptcy courts.
Ordinarily, an appeal from a bankruptcy court decision goes to the U.S. district court and from there to the U.S. circuit court of appeals. As an alternative to the district court, Congress established the BAPs “to hear and determine” appeals from bankruptcy courts “with the consent of all the parties.” 28 U.S.C. § 158(c)(1). Appeals from BAP decisions also go to the circuit courts of appeals.
The idea behind the BAPs is this: bankruptcy is a highly specialized area of law and practice, and bankruptcy judges bring a level of experience and expertise to the bankruptcy appellate process that district judges can’t provide.
Jurisdiction Issues
A primary shortcoming of the BAPs is this: bankruptcy judges who serve on these panels are Article I judges under the U.S. Constitution, not Article III judges. This reality creates jurisdiction issues, as revealed in the U.S. Supreme Court’s Stern v. Marshall, 564 U.S. 462 (2011), opinion.
Stern v. Marshall says that issues “related to” a bankruptcy case must be resolved by an Article III judge, not by an Article I bankruptcy judge. A bankruptcy judge may still handle a trial of such issues but may not make a final ruling. Instead, the bankruptcy judge must provide “proposed findings of fact and conclusions of law to the district court” for “de novo” review and a final decision. See 28 U.S.C. § 157(c).
So, all Stern v. Marshall jurisdiction issues plaguing bankruptcy courts also apply to the BAPs.
The Appeal Choice
Any party wanting to appeal from a bankruptcy court decision can appeal to either the U.S. district court or to the BAP (in circuits where one exists). Sometimes, the choice is mostly a coin flip. Other times, parties want the higher levels of bankruptcy expertise the BAP provides. Other reasons vary widely. Some reasons are good. Others aren’t.
“Sandbagging”
One not-so-good reason is “sandbagging the court.” Sandbagging is defined as a litigant “remaining silent about his objection and belatedly raising the error only if the case does not conclude in his favor.” In re Pringle, 459 B.R. 447, 458 (9th Cir. BAP 2013).
One form of sandbagging is for a litigant to go through trial of a dispute in bankruptcy court; then if the ruling is unfavorable, assert on appeal that the bankruptcy court did not have jurisdiction to make the adverse ruling. Much of the opportunity for sandbagging is eliminated by the U.S. Supreme Court in Wellness International v. Sharif, 135 S.Ct. 1932 (2015), where it ruled that Stern v. Marshall issues and other authority-to-rule issues can be waived by express or implied consent.
Yet, Wellness International v. Sharif does not completely close sandbagging opportunities, because it holds that, (i) implied consent must be knowingly made (not inadvertently forfeited), and (ii) a dispute over implied consent requires a “deeply factual analysis of the procedural history” of a case.
So the opportunity for sandbagging still remains. Here’s how a sandbagging strategy might go:
1) a party prosecutes a bankruptcy dispute but periodically drops into pleadings and motions a cryptic reference to non-core proceedings or lack-of-jurisdiction under Stern v. Marshall;
2) upon receipt of an adverse ruling, the party appeals to the BAP and argues that the bankruptcy court lacked authority to issue anything other than proposed findings of fact and conclusions of law;
3) the appeal is not made to the district court, because the district court could solve Stern v. Marshall problems by treating the bankruptcy court ruling as “proposed findings of fact and conclusions of law” and applying the de novo standard of review—the BAP can’t similarly solve the problem because it’s judges aren’t Article III; and
4) the same lack-of-jurisdiction issues might then be appealed from the BAP to the circuit court of appeals—and if the Stern v. Marshall arguments prevail, the case will start over, again, back in bankruptcy court.
Proposed Remedy
The sandbagging approach described above is inappropriate and should not be allowed or countenanced. Accordingly, an appropriate remedy would be this:
If a party wishes to assert Stern v. Marshall issues on appeal, the party can do so only by appealing to the district court and its Article III judges; and
If the appeal is taken to the BAP (and its Article I judges), instead, all Stern v. Marshall arguments are automatically waived.
This remedy is particularly appropriate, since an appeal to the bankruptcy appellate panel can be taken (under 28 U.S.C. § 158(c)(1)) only by “consent of all the parties.”
Precedent
Strong precedent exists for this proposed remedy. The U.S. Supreme Court case is Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986) (cited as authoritative by Justice Breyer in his four-Justice Stern v. Marshall dissent).
Justice Breyer’s Stern v. Marshall dissent highlights Schor points on consent of the parties, such as:
Congress gave the Commodity Futures Trading Commission authority to adjudicate counterclaims, “but the decision to invoke this forum is left entirely to the parties”;
It is “self-evident” that Congress may make a “mechanism” available through which “willing parties may, at their option, elect to resolve their differences,” citing mediation and arbitration as examples; and
Since the Commodity Futures Trading Commission is “relatively immune from political pressures” and has “obvious expertise” in the area it regulates, the authority granted it by Congress to resolve counterclaims by consent of the parties “is of unquestioned constitutional validity.”
These points provide full support for the proposed remedy.
Conclusion
It’s time for the proposition to be declared law that appeal to a bankruptcy appellate panel accomplishes a waiver of all Stern v. Marshall issues and concerns.
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