By Donald L. Swanson

I’m reading a U.S. circuit court’s recent bankruptcy opinion that cites Stern v. Marshall, 564 U.S. 462 (2011).  I’m startled by that and blurt out (to myself), “Who cites Stern anymore?!” and “Is Stern still a thing?!” and “I thought Stern has been narrowed to nearly nothing?!”

And then I see the Ninth Circuit BAP’s In re Richards opinion (decided 12/11/2023), which diminishes Stern‘s effect even more.

Some History

Back in the early twenty-teens, when Stern v. Marshal is still a newly-decided case, I’m giving a seminar presentation and argue that the impact of Stern v. Marshall is limited. It applies, I argue, only to counterclaims in bankruptcy court that seek damages from third persons based on a particular type of claims.  Such type of claims is described by the U.S. Supreme Court as:

• “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.”
  • [Note: 1789 is the year the U.S. Constitution went into effect.]

I base my confidence, back then, on these limiting words in Stern v. Marshall‘s majority opinion (emphasis is added):

• “We do not think [our holding] meaningfully changes the division of labor in the current statute; . . . the question presented here is a ‘narrow’ one”; and
• “We conclude today that Congress, in one isolated respect,” erred: “the Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.”

Yet, I receive push-back in the seminar, including this: “The impact of Stern v. Marshall is much more significant than Mr. Swanson seems to believe.” [Not that I’d remember such a thing all these years later.]

And based on developments in intervening years, I’m doubling down on my earlier seminar position to this: the impact of Stern v. Marshall is even narrower and less significant, today, than I previously believed.

I’ll try to explain.

The Essence of Stern v. Marshall

The essence of Stern v. Marshall is this:

• 28 U.S.C. § 157(b)(2) contains a list of “core” proceedings over which bankruptcy courts can exercise jurisdiction and enter final orders, which list includes “counterclaims by the estate against persons filing claims against the estate”;
• The unqualified inclusion of “counterclaims” in the § 157(b)(2) list is constitutionally proper in many situations but is unconstitutional when applied to the Stern v. Marshall facts: i.e., (i) creditor files a claim in bankruptcy for defamation, and (ii) the bankruptcy estate counterclaims for tortious interference with an expected gift;
• The tortious interference counterclaim is one of those “stuff of the traditional actions at common law tried by the courts at Westminster in 1789,” and
• So, treating the tortious interference counterclaim as a “core proceeding” under § 157(b)(2) is unconstitutional.

Further Narrowing of Stern v. Marshall

In a few years following its 2011 Stern v. Marshall opinion, the U.S. Supreme Court narrows Stern even further.

• In Executive Benefits Insurance Agency v. Arkison, 573 U.S. 25 (2014), the U.S. Supreme Court declares that: (i) a bankruptcy court can hear a Stern claim and present proposed findings of fact and conclusions of law thereon to the district court for issuing a final order, as authorized by 28 U.S.C. § 157(c), and (ii) a de novo review and affirmance by an Article III court on appeal from a bankruptcy court’s ruling on a Stern claim legitimizes the bankruptcy court’s ruling; and
• In Wellness International Network, Ltd. v. Sharif, 575 U.S. 665 (2015), the U.S. Supreme Court declares that a bankruptcy court can hear and decide a Stern claim upon the express or implied consent of the parties.

Supreme Court Citations

Moreover, the U.S. Supreme Court has never cited Stern v. Marshall in a bankruptcy case, since its 2015 Wellness opinion: not in a majority opinion, not in a concurring opinion, not in a dissenting opinion and not in a plurality opinion.  Not once.

The U.S. Supreme Court has cited Stern v. Marshall in 17 non-bankruptcy opinions, but these 17 opinions involve separation of powers issues and Article III standing issues in administrative law contexts.  And the citations to Stern in such cases are mostly in concurring opinions (6 of them) or in dissenting opinions (8 of them)–only 3 of them are citations in majority opinions.

So . . . the U.S. Supreme Court seems to have relegated Stern v. Marshall to something of a bankruptcy law trash heap in the last two decades.

In re Richards

And then comes a further narrowing of Stern by the Ninth Circuit Bankruptcy Appellate Panel.  On December 11, 2023, the Ninth Circuit BAP issues its In re Richards opinion.

In the In re Richards appeal, Appellant argues that the Bankruptcy Court exceeded its jurisdiction by making a final ruling on a Stern issue.  The Ninth Circuit BAP rejects that argument and declares that Appellant waived any Stern argument by filing the appeal with the BAP instead of the District Court.

Here’s the BAP’s analysis on the Stern waiver point (at 13):

• a district court effectively cures any constitutional infirmity by reviewing a bankruptcy appeal under the de novo standard;
• Debtor could have had an Article III review simply by electing to have this appeal heard in the district court—but Debtor opted to proceed before the Bankruptcy Appellate Panel, instead;
• Debtor’s foremost argument is that the bankruptcy court deprived her of Article III review by the district court, “yet she knowingly and voluntarily elected review by this Panel instead of the district court”; and
• so, Debtor “waived her right to district court review by electing to have the appeal heard by the BAP.”

The upshot of In re Richards is this:

• the remedy, for concerns about a bankruptcy court’s ruling on an Article III Stern issue, is an appeal to the U.S. District Court with a request for de novo review; and
• the sandbagging strategy of appealing to the non-Article III BAP, alleging concerns about an Article III Stern issue, shouldn’t work.

Conclusion

To repeat and emphasize my position from years ago: Stern v. Marshall has always had only a narrow and limited application and effect.

And that application and effect is narrowed even further by:

• the U.S. Supreme Court’s subsequent Arkison and Wellness opinions;
• the U.S. Supreme Court ignoring Stern in all bankruptcy cases thereafter; and
• the Ninth Circuit BAP’s In re Richards opinion.

In sum, Stern v Marshall, as an embodiment of bankruptcy law, is not only narrow . . . it’s a mere sliver.

* Thanks for research efforts on the above by Kaci Jumps, a third-year law student at Nebraska Law College and recent winner of a regional moot court competition sponsored by the New York City Bar Association.

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