Case: 12-51270 Document: 00512436818 Page: 1 Date Filed: 11/11/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 11, 2013
No. 12-51270
Consolidated with No. 12-51279 Lyle W. Cayce
Clerk
In the Matter of: BP RE, L.P.,
Debtor.
---------------------------------------------------------------------
BP RE, L.P.,
Appellant,
versus
RML WAXAHACHIE DODGE, L.L.C.;
RML-MCLARTY-LANDERS AUTOMOTIVE HOLDINGS, L.L.C;
RML WAXAHACHIE FORD, L.L.C; RML WAXAHACHIE GMC, L.L.C.;
RLJ-MCLARTY-LANDERS AUTOMOTIVE GROUP,
Appellees.
Appeals from the United States District Court
for the Western District of Texas
Before SMITH, GARZA, and SOUTHWICK, Circuit Judges.
JERRY E. SMITH, Circuit Judge.
BP RE, L.P. (“BPRE”), filed for Chapter 11 bankruptcy relief and, along
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with BP Automotive, L.P.,1 filed an adversary complaint in the bankruptcy court
alleging various state-law tort and contract claims against multiple RML enti-
ties (“RML”).2 The claims related to negotiations between BPRE and RML over
the sale and lease of a car dealership and the related property. The bankruptcy
court entered a final judgment denying relief, and on appeal the district court,
reviewing the findings of fact for clear error and conclusions of law de novo,
affirmed.
Appealing the judgment of the district court, BPRE argues, on the merits,
that RML breached a lease agreement; that undisputed evidence shows that
defendants committed fraud; and that several findings were against the great
weight of the evidence. Procedurally, BPRE contends that the bankruptcy court
(1) failed to rule on some of BPRE’s claims; (2) relied on evidence not in the
record and failed to apply the proper legal standards; (3) erred in denying a jury
trial; and (4) lacked constitutional authority to enter a final, appealable
judgment.
Because the bankruptcy court lacked Article III authority to enter final
judgment on BPRE’s claims, we vacate the district court’s judgment and remand
to the district court. We thus do not reach the merits of BPRE’s appeal.
I.
The Bankruptcy Code was enacted in 1984 in response to Northern Pipe-
line Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which had
held the 1978 Bankruptcy Act unconstitutional. Under the 1984 Code, district
1
The court eventually granted defendants’ motion to remove BP Automotive, L.P., from
the case.
2
RML Waxahachie Dodge, L.L.C.; RML-McLarty-Landers Automotive Holdings, L.L.C.;
RML Waxahachie Ford, L.L.C.; and RLJ-McLarty-Landers Automotive Group.
2
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courts may refer “cases under title 11 and any or all proceedings arising under
title 11 or arising in or related to a case under title 11” to the bankruptcy court.
28 U.S.C. § 157(a). Bankruptcy judges are appointed by the courts of appeals to
fourteen-year terms, 28 U.S.C. § 152(a)(1), and do not receive the constitutional
tenure and salary protection of Article III judges, N. Pipeline, 458 U.S. at 61. “In
short, there is no doubt that the bankruptcy judges created by the Act are not
Art. III judges.” Id.
Section 157(b)(1) designates certain cases as “core proceedings” and
authorizes a bankruptcy court to “enter appropriate orders and judgments” in
such cases. In a core proceeding, an aggrieved party may appeal the judgment
of the bankruptcy court to the district court, which applies a de novo standard
of review to the conclusions of law and the clearly-erroneous standard to findings
of fact. 28 U.S.C. § 158(a). The Code also gives bankruptcy courts the authority
to hear non-core proceedings that are “otherwise related to a case under title 11.”
§ 157(c)(1). For non-core proceedings, the bankruptcy court submits proposed
findings of fact and conclusions of law to the district court, which then reviews
the submissions de novo. Id. With consent of the parties, however, the bank-
ruptcy court may enter final, appealable judgments in non-core proceedings.
§ 157(c)(2).
II.
BPRE’s adversary complaint stated that the proceedings were “non-core.”
BPRE also requested “judgment, after trial or final hearing,” on the claims
against RML. BPRE filed, on the same day, a “Statement Regarding Consent”
that noted that it sought “monetary damages for breach of contract, tortious
interference, and trespass claims, among others.” BPRE again acknowledged
that “[t]his matter is not a proceeding identified as a core proceeding in
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28 U.S.C. § 157(b)(2). Therefore, this matter is a non-core proceeding but is
related to the bankruptcy in that any recovery on the claims brought by the
debtor will go directly to the estate . . . . Plaintiffs consent to the entry of a final
order by this court.”
BPRE requested a pretrial conference and demanded a jury trial. In the
request, BPRE noted that it had submitted, as required, in its Statement
Regarding Consent, whether it consented to the entry of a final judgment by the
bankruptcy court in a non-core proceeding. The Joint Pretrial Order also
acknowledged that this was a non-core proceeding and that BPRE consented to
the entry of a final judgment.
BPRE’s request for a jury trial was denied as untimely. It then moved to
withdraw the reference to the bankruptcy court, asking the district court instead
to hear the case in the first instance. Not only did BPRE seek to preserve its
jury demand, but it stated that it “does not consent to the Bankruptcy Court
entering a final order or judgment in any non-core proceeding or conducting a
jury trial.”
BPRE maintained that the district court should withdraw the reference
for reasons of judicial economy, given that BPRE had not consented to final judg-
ment and the district court would have to conduct de novo review. The district
court denied the motion, holding that because the matter had already been liti-
gated in the bankruptcy court for over six months, it would not be a waste of
resources to continue there.
BPRE filed a response to defendants’ motions for partial summary judg-
ment. The case was tried without a jury, and the bankruptcy court entered final
judgment denying all of BPRE’s claims. On appeal, the district court affirmed
in part and vacated in part, reviewing the bankruptcy court’s findings of fact for
clear error and conclusions of law de novo. On remand, the bankruptcy court
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again denied BPRE relief and entered judgment. On a second appeal, the dis-
trict court affirmed, applying the same standard of review as before.
III.
A.
In striking down the Bankruptcy Act of 1978 in Northern Pipeline, 458
U.S. at 57–60,3 the plurality took the opportunity to examine and discuss the
Framers’ division of power between the branches and the importance of the Fed-
eral Judiciary’s independence from the Executive and Legislative Branches.
“Art. III both defines the power and protects the independence of the Judicial
Branch.” Id. at 58. Only courts satisfying the requirements of Article III may
exercise the federal judicial power. Id. at 59. “In sum, our Constitution . . . com-
mands that the independence of the Judiciary be jealously guarded, and it pro-
vides clear institutional protections for that independence.” Id. at 60.
In Northern Pipeline, the Court acknowledged that at times the courts
have allowed non-Article III courts to hear cases, although “these precedents
represent no broad departure from the constitutional command that the judicial
power of the United States must be vested in Art. III courts.” Id. at 64. The
plurality characterized three narrow exceptions: territorial courts, military
courts, and the adjudication of “public rights.” Id. at 64–68.4 Rejecting the
notion that the state common-law claims at issue in Northern Pipeline could be
deemed matters of public right, the Court found them to be strictly private
3
Northern Pipeline filed for bankruptcy and then sued Marathon for contract and tort
damages. Marathon sought to dismiss the suit, arguing that the bankruptcy court, a non-
Article III court, did not have the authority to decide the case.
4
In his controling concurrence, Justice Rehnquist declined to categorize the three Arti-
cle III exceptions as the plurality did but concluded that regardless, “[n]one of the cases has
gone so far as to sanction the type of adjudication” at issue. N. Pipeline, 458 U.S. at 91 (Rehn-
quist, J., concurring).
5
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rights, which “lie at the core of the historically recognized judicial power.” Id.
at 70. Although claims that go to the debtor-creditor relationshipSSand thus
affect the federal bankruptcy powerSSmay be a matter of public rights, id. at 71,
state-created rightsSSsuch as contract or tort claimsSSare private rights concern-
ing “the liability of one individual to another under the law,” id. at 71–72.
Concluding that the bankruptcy courts do not fit under any of the narrow
historical exceptions, the Court was unable to “discern any persuasive reason,
in logic, history, or the Constitution, why the bankruptcy courts here established
lie beyond the reach of Art. III.” Id. at 76. Similarly, the Court rejected the sug-
gestion that bankruptcy courts, issuing final judgments and exercising “the
essential attributes” of Article III courts, could be deemed mere adjuncts of the
district courts. Id. at 80–81; see also id. at 85–86.
B.
In Stern v. Marshall, 131 S. Ct. 2594 (2011), the Court was again faced
with whether the bankruptcy court’s statutory authority was authorized by Arti-
cle III. Although Congress had reformed the Bankruptcy Act as a result of Nor-
thern Pipeline,5 the authority available to bankruptcy courts to decide core
claims was not that different from that conferred on them under the 1978 Act.
Id. at 2611. In Stern, the Court determined that the bankruptcy court lacked
the constitutional authority to enter final judgment on the debtor’s state-law
counterclaim even though the statute conferred such authority. Id. at 2620.
In Stern, the publicly prominent Anna Nicole Smith (also known as Vickie
Lynn Marshall) initiated a lengthy parade through federal and state courts in
an attempt to claim some of her deceased husband’s estate. Though she is well
5
See Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. 98-353,
98 Stat. 340 (July 10, 1984).
6
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known in pop culture, bankruptcy law and casebooks will remember her for a
different reason. The case began when J. Howard Marshall, her husband, failed
to include her in his will, causing her to sue Howard’s son, Pierce, in Texas pro-
bate court for fraudulent inducement. See id. at 2601. Vickie Lynn filed for
bankruptcy in California, whereupon Pierce filed a defamation complaint against
her in the bankruptcy court, seeking to recover from her bankruptcy estate.
Vickie Lynn counterclaimed for tortious interference. See id. After she was
awarded about $525 million in damages, Pierce argued that the bankruptcy
court lacked authority to issue a final judgment on the counterclaim. The case
then came before the Supreme Court for the second time. Id.
Determining that the counterclaim was a core proceeding, the Court
acknowledged that the statute allowed the bankruptcy court to issue a final judg-
ment. Id. at 2604. The Court next examined the constitutional problems with
that authority, especially in the wake of Northern Pipeline. The bankruptcy
court had issued a final judgment on a state common-law claim that did “not
flow from a federal statutory scheme,” was not dependent on the adjudication of
a federal right, and was not in the realm of public rights. Id. at 2610–11, 2614.
Again, the Court emphasized the importance of our triparte system and
separation of powers, stressing that the system of checks and balances exists to
serve “two related purposes”: to protect the independence of each branch and to
protect the individual citizen. Id. at 2609. The bankruptcy courts, acting not as
adjuncts but exercising the core judicial power, undermine the independence of
the Judiciary where the Executive and Legislative Branches may confer judicial
power on courts that do not have the tenure and salary protection of Article III,
Section 1. Id. (citing Murray’s Lessee v. Hoboken Land & Improvement Co.,
59 U.S. 272 (1856)).
The Court underlined the significance of guarding Article III powers:
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When a suit is made of “the stuff of the traditional actions at com-
mon law tried by the courts at Westminster in 1789,” Northern Pipe-
line, 458 U.S., at 90 . . . (Rehnquist, J., concurring in judgment), and
is brought within the bounds of federal jurisdiction, the responsibil-
ity for deciding that suit rests with Article III judges in Article III
courts. The Constitution assigns that job—resolution of “the mun-
dane as well as the glamorous, matters of common law and statute
as well as constitutional law, issues of fact as well as issues of law”
—to the Judiciary. Id., at 86-87, n.39 . . . (plurality opinion).
Id. at 2609. The Court concluded that “Congress, in one isolated respect,
exceeded [the Article III] limitation in the Bankruptcy Act of 1984. The Bank-
ruptcy 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.” Id. at 2620.
IV.
A.
In considering whether the bankruptcy court had constitutional authority
to enter final judgment on BPRE’s state common-law claims, we first askSSin the
interest of constitutional avoidance6SSwhether the court had statutory authority.
The parties do not dispute that BPRE’s claims against RML were non-core pro-
ceedings, which usually require the bankruptcy court to enter findings and con-
clusions for the district court to review. § 157(c)(1). But, with the consent of the
parties, the district court may refer a case to the bankruptcy court “to hear and
determine and to enter appropriate orders and judgments.” § 157(c)(2).
6
See Reichle v. Howards, 132 S. Ct. 2088, 2093 (2012) (referring to the “usual reluc-
tance to decide constitutional questions unnecessarily”); Harris v. McRae, 448 U.S. 297,
306–07 (1980) (“[I]f a case may be decided on either statutory or constitutional grounds, this
Court . . . will inquire first into the statutory question.”); St. Joseph Abbey v. Castille, 712 F.3d
215, 220 (5th Cir. 2013) (invoking “constitutional avoidance”), cert. denied, 2013 U.S. LEXIS
7438 (U.S. Oct. 15, 2013).
8
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Assuming the parties consented, the bankruptcy court’s entry of final judg-
ment was appropriate under the statute. Only BPRE maintains that it did not
consent; RML, although it never expressly consented, does not dispute that it
did.7 BPRE expressly consented in its adversary complaint but contends that it
withdrew that consent and never reinstated it.
Whereas BPRE withdrew consent before final judgment—after which
many courts seem to agree is too late—there is no doubt that it chose to file the
claims in the bankruptcy court, expressly consented to the entry of a final judg-
ment there, and sought to revoke the consent only after it was denied a jury.
Considering the judicial concern with gamesmanship, we conclude that BPRE
consented to the bankruptcy court’s authority: “[T]he consequences of a litigant
sandbagging the court—remaining silent about his objection and belatedly rais-
ing the error only if the case does not conclude in his favor—can be particularly
severe.” Stern, 131 S. Ct. at 2608 (internal quotations and alterations omitted).
With the parties’ consent, the bankruptcy court was statutorily authorized under
§ 157(c)(2) to issue a final judgment.
B.
Turning to whether the bankruptcy court had the constitutional authority
to enter final judgment, we are bound to apply Stern, which held that, regardless
of statutory authority, the bankruptcy court did not have the constitutional
7
Ample caselaw addresses what is required to demonstrate consent and whether it can
be implied through behavior or must be express. See, e.g., Abramowitz v. Palmer, 999 F.2d
1274, 1279–80 (8th Cir. 1993); In re G.S.F. Corp., 938 F.2d 1467, 1476–77 (1st Cir. 1991);
Mann v. Alexander Dawson Inc. (In re Mann), 907 F.2d 923, 926 (9th Cir. 1990); Men’s Sports-
wear, Inc. v. Sasson Jeans, Inc. (In re Men’s Sportswear, Inc.), 834 F.2d 1134, 1137–38 (2d Cir.
1987); DuVoisin v. Foster (In re S. Indus. Banking Corp.), 809 F.2d 329, 331 (6th Cir. 1987);
Sheridan v. Michaels (In re Sheridan), 362 F.3d 96 (1st Cir. 2004). Some of these cases how-
ever, were decided before the promulgation of Federal Rule of Bankruptcy Procedure 7008,
which includes an advisory note requiring express consent.
9
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authority to enter a final judgment on claims that are so deeply at the heart of
the federal judiciary’s Article III powers and are not necessary to the resolution
of the bankruptcy estate. “What is plain here is that this case involves the most
prototypical exercise of judicial power: the entry of a final, binding judgment by
a court with broad substantive jurisdiction, on a common law cause of action,
when the action neither derives from nor depends upon any agency regulatory
regime.” Stern, 131 S. Ct. at 2615.
Construing Stern, the Sixth Circuit convincingly reached a similar conclu-
sion involving non-core claims in Waldman v. Stone, 698 F.3d 910, 919 (6th Cir.
2012), cert. denied, 133 S. Ct. 1604 (2013): “[W]hen a debtor pleads an action
arising only under state-law, as in Northern Pipeline; or when the debtor pleads
an action that would augment the bankrupt estate, but not ‘necessarily be
resolved in the claims allowance process[,]’ [Stern,] 131 S.Ct. at 2618; then the
bankruptcy court is constitutionally prohibited from entering final judgment.”
Thus, in Stern the state-law basis of Vickie Lynn’s counterclaim was not
the dispositive factor; instead, the Court focused on whether the claim was cen-
tral to the bankruptcy process.8 Importantly, the fact that the claim, if success-
ful, would “augment the bankruptcy estate,” Stern, 131 S. Ct. at 2618 (quoting
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 (1989)), did not create a suffi-
cient nexus to the resolution of the bankruptcy proceeding. “Vickie’s claim . . .
is in no way derived from or dependent upon bankruptcy law; it is a state tort
action that exists without regard to any bankruptcy proceeding.” Id. Thus,
“Congress may not bypass Article III simply because a proceeding may have
some bearing on a bankruptcy case; the question is whether the action at issue
8
By that logic, the same result would obtain if the claim, instead of being based in state
statutory or common law, were grounded in a right conferred by federal statute or the U.S.
Constitution independent of the federal bankruptcy scheme. But we do not reach that ques-
tion here.
10
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stems from the bankruptcy itself or would necessarily be resolved in the claims
allowance process.” Id.
To the same effect, in the wake of Stern, the Ninth Circuit, in Executive
Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.),
702 F.3d 553, 562 (9th Cir. 2012), cert. granted, 133 S. Ct. 2880 (2013), held that
“the Trustee’s fraudulent conveyance claims are not matters of ‘public right,’ and
ipso facto, cannot be decided outside the Article III courts.” Where the “legal
action need not necessarily have been resolved in the course of allowing or dis-
allowing the claims against the . . . estate . . . . the claim belonged in an Arti-
cle III court.” Id. at 564–65. Despite that stringent limitation on the bankruptcy
court’s powers, however, the court opined that “by failing to object until the case
reached this court,” the appellant “consented to the adjudication of the . . . claim
by a bankruptcy judge.” Id. at 556.
C.
Agreeing with the Sixth and Ninth Circuits that the bankruptcy court
lacked the constitutional authority to enter final judgment on BPRE’s state-law
claims, we must address whether BPRE’s consent to have its claims heard in
bankruptcy court cures the constitutional deficiency. We adopt the compelling
and thorough reasoning of Waldman, which held that parties cannot consent to
such circumvention of Article III that impinges on the structural interests of the
Judicial Branch.9 Waldman was the first post-Stern appellate decision to
9
We are not limited by the dictum in McFarland v. Leyh (In re Texas General Petrol-
eum Corp.), 52 F.3d 1330, 1337 (5th Cir. 1995), which not only was pre-Stern but also offered
only a one-sentence reflection on the ability of an individual to waive his personal constitu-
tional right, which we do not reject. The holding was based on the statutory right to consent
to judgment in bankruptcy court.
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address consent as it relates to the bankruptcy court’s constitutional authority.10
The Sixth Circuit persuasively rejected the notion that the constitutional issue
could be waived.
In Waldman, the court looked both to Stern and to Commodity Futures
Trading Comm’n v. Schor, 478 U.S. 833 (1986), concluding that this issue impli-
cates Article III’s structural interests. Article III, Section 1 not only seeks to
preserve individual litigants’ right to an independent judiciary but also “serves
as an inseparable element of the constitutional system of checks and balances.”
Waldman, 698 F.3d at 917 (quoting Schor, 478 U.S. at 850). The court rejected
the theory that, because the bankruptcy courts are part of the Judicial Branch,
there was no threat of encroachment but only a waivable personal right. Id.
at 917–18.
The Waldman court emphasized that the bankruptcy court’s entry of final
judgment on these types of claims engaged Article III’s structural interests: “The
issue here is not so much the aggrandizement of the Legislative or Executive
Branches, as it is the diminution of the Judicial one.” Id. at 918. “To the extent
that Congress can shift the judicial Power to judges without [the salary and ten-
ure] protections, the Judicial Branch is weaker and less independent than it is
supposed to be.” Id. (citing Schor, 478 U.S. at 850). “Waldman’s objection thus
implicates not only his personal rights, but also the structural principle
advanced by Article III. And that principle is not Waldman’s to waive.” Id.
10
The instant case is similar to Waldman in all critical respects. There, Stone was the
debtor and brought the adversarial action in dispute, although Waldman challenged the
authority on appeal. Waldman, 698 F.3d at 915. In his filings in bankruptcy court, Waldman
accepted that Stone’s claims were core claims. Id. at 917. Although BPRE stated that its
claims were non-core, the cases are similar, because BPRE expressly agreed (at least at first)
for the claims to be treated as core claims with a final order. Waldman however, did not object
to the entry of final judgment, and thus he forfeited his argument, at least as to the statutory
authority. Id. BPRE, on the other hand, raised the point before judgment, even if it had initi-
ally consented to issuance of a final order.
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We acknowledge that the Ninth Circuit’s opinion in Executive Benefits is
in conflict on the issue of consent. We do not dispute that parties may waive
constitutional rights, Schor, 478 U.S. at 848–49, but Executive Benefits disre-
gards the critical structural interests underlying Article III. It does so by rea-
soning that Stern allowed waiverSSthat is, that Pierce Marshall waived the jur-
isdictional argument by filing his defamation claim in the bankruptcy court and
never contesting that court’s authority over the claim. That line of reasoning in
Executive Benefits misses the mark, however, because Stern determined only
that Pierce had waived the issue of statutory authority, see Stern, 131 S. Ct. at
2608, and did not reach the constitutional issue as to waiver.
Although Schor observed that previous decisions had “intimated” that
Article III, Section 1 is “primarily” concerned with individual litigants, the Court
has also acknowledged Article III’s structural interests, especially in this precise
context. See id. at 2609. “In establishing the system of divided power in the
Constitution, the Framers considered it essential that the judiciary remain truly
distinct from both the legislature and the executive.” Id. at 2608 (quoting The
Federalist No. 78, p. 466 C. Rossiter ed. 1961) (A. Hamilton)); see also
N. Pipeline, 458 U.S. at 57–61.
In Schor the Court instructed that in determining whether Article III’s
structural interests are implicated, we consider several non-dispositive factors,
including
the extent to which the ‘essential attributes of judicial power’ are
reserved to Article III courts, and, conversely, the extent to which
the non-Article III forum exercises the range of jurisdiction and
powers normally vested only in Article III courts, the origins and
importance of the right to be adjudicated, and the concerns that
drove Congress to depart from the requirements of Article III.
Schor, 478 U.S. at 851. Allowing bankruptcy courts to enter final judgments on
state-law claims that are not necessary to address the bankruptcy issues confers
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the “essential attributes of judicial power” on non-Article III courts. Nor does
§ 157(c) affect the authority of the bankruptcy court to decide those claims cru-
cial to bankruptcy cases. In addition, no one disputes here the bankruptcy
court’s ability to continue to issue findings of fact and conclusions of law on
related issues. The decision “does not change all that much.” Stern, 131 S. Ct.
at 2620.
Where a structural interest is triggered, “the parties cannot by consent
cure the constitutional difficulty for the same reason that the parties by consent
cannot confer on federal courts subject-matter jurisdiction beyond the limitations
imposed by Article III, § 2.” Schor, 478 U.S. at 851. “When these Article III lim-
itations are at issue, notions of consent and waiver cannot be dispositive because
the limitations serve institutional interests that the parties cannot be expected
to protect.” Id.11
V.
Based therefore on our adoption of the compelling reasoning in Waldman,
we are comfortable in concluding that the bankruptcy court was without consti-
tutional authority to enter a final, appealable judgment on BPRE’s claims. Our
11
Nothing here is not in conflict with Technical Automation Services Corp. v. Liberty
Surplus Insurance Corp., 673 F.3d 399 (5th Cir. 2012), which addressed whether Stern affects
the authority of magistrate judges, under Article III, to enter final judgments where consent
is given under 28 U.S.C. § 636(c). This court relied on Puryear v. Ede’s Ltd., 731 F.2d 1153,
1154 (5th Cir. 1984) (which in turn had relied on Pacemaker Diagnostic Clinic of America, Inc.
v. Instromedix, Inc., 725 F.2d 537 (9th Cir. 1984) (en banc)), which held that the Magistrates
Act is “saved from any constitutional infirmity by its requirement that all parties consent to
such transfer and by the power of the district court to vacate the reference to the magistrate
on its own motion.” Technical Automation, 673 F.3d at 405. In Technical Automation, we
determined that Stern did not unequivocally overrule Puryear or the authorities cited therein,
id. (citing Martin v. Medtronic, Inc., 254 F.3d 573, 577 (5th Cir. 2001)), and that although
there are similarities between the magistrate-judge and bankruptcy statutory schemes, they
are distinct, and Stern’s was a narrow holding not affecting magistrate judges, id. at 407. The
court acknowledged that “this constitutional question may be seen in a different light post
Stern.” Id.
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confidence in that decision is significantly bolstered by a decision of this court
issued after we heard oral argument.
In Frazin v. Haynes & Boone, L.L.P. (In re Frazin), 732 F.3d 313 (5th Cir.
2013), we held that, under Stern, the bankruptcy court lacked constitutional
authority to enter final judgment on certain state-law counterclaims by the
debtor, despite that the debtor had impliedly consented to the bankruptcy court’s
jurisdiction. We reasoned that Stern’s jurisdictional limitation on bankruptcy
courts applied there because “Stern clearly grounded its reasoning in principles
that are broad in scope.” Id. at 319.12
Frazin filed a Chapter 13 bankruptcy petition, then sued in state court
asserting unrelated common-law theories and obtained the bankruptcy court’s
permission to hire a law firm to prosecute that claim. Frazin was discharged
from bankruptcy, but the proceeding was held open because, under the Chap-
ter 13 plan, part of the potential recovery from the state-court suit would be used
to help satisfy unsecured claims. Frazin won a large jury award, and the bank-
ruptcy court gave him permission to hire a different firm for the appeal, with its
fees to be paid on application to the bankruptcy court; the court ordered that any
proceeds from the suit would be held in trust by the appellate firm pending the
court’s direction as to using those sums to satisfy remaining bankruptcy claims.
Frazin won a partial victory on appeal, and the two law firms applied for
fees. In response, Frazin filed state-law counterclaims against the firms as core
proceedings in the bankruptcy court for, inter alia, violations of the Texas Decep-
tive Trade Practices Act (“DTPA”). The bankruptcy court entered a final judg-
ment that denied that claim and awarded fees, and Frazin appealed to the dis-
trict court, which affirmed.
12
Each side was permitted to file two letter briefs addressing the applicability of Frazin
to this proceeding. So although it was not discussed at oral argument, the relevance of Frazin
has been subjected to adversarial testing.
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On appeal to this court, Frazin maintained that under Stern, the bank-
ruptcy court lacked authority to enter final judgment on his counterclaim. This
court agreed. Though recognizing that Stern dealt with different facts and a dif-
ferent statutory section and that the Stern “Court stated that its decision was
‘narrow,’” id. at 318 (quoting Stern, 131 S. Ct. at 2620), the Frazin panel con-
cluded that Stern’s “reasoning was sweeping,” id. at 318–19:
In explaining its holding, the Court discussed the importance of
Article III in maintaining separation of powers among the branches
of government, safeguarding the independence of the judicial
branch, and protecting litigants. The Court stated that “[w]hen a
suit is made of the stuff of the traditional actions at common law
tried by the courts at Westminster in 1789, and is brought within
the bounds of federal jurisdiction, the responsibility for deciding
that suit rests with Article III judges in Article III courts. The
Court concluded with a holding that was notable for its repetition
throughout the opinion: bankruptcy courts “lack[ ] 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.
Id. at 319 (citations omitted).
Comparing the proceedings in Stern to those in Frazin, the Frazin panel
reasoned that
[t]he court’s concern for separation of powers and the independence
of the judiciary is equally as sharp with respect to the state-law
counterclaims brought by Frazin as it was with the counterclaim
brought by Vickie in Stern. Based on the reasoning in the opinion,
we see no basis for treating Frazin’s state-law counterclaims . . . any
differently than the Court treated Vickie’s counterclaim.”
Id. (footnote omitted). The court rejected the contention that Frazin consented
to the bankruptcy court’s jurisdiction and waived objection by filing his claims
there, observing that when
“separation of powers is implicated in a given case, the parties can-
not by consent cure the constitutional difficulty . . . . When these
Article III limitations are at issue, notions of consent and waiver
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cannot be dispositive because the limitations serve institutional
interests that the parties cannot be expected to protect.”
Id. at 320 n.3 (quoting Schor, 478 U.S. at 850-51) (brackets in Frazin). “Thus,
structural concerns cannot be ameliorated by Frazin’s consent or waiver.” Id.
To determine whether the DTPA claim could be finally ruled upon by the
bankruptcy court, Frazin employed “the test from Stern to determine whether
any of these counterclaims would necessarily have been resolved in the claims-
allowance process.” Id. at 320 (footnote omitted). The court answered that
question in the negative “[b]ecause it was not necessary to decide the DTPA
claim to rule on the Attorneys’ fee applications,” id. at 323, such fee applications
being matters that were properly before the bankruptcy court for final judgment
under Stern.
In contending that Stern and Frazin have no applicability to the instant
matter, appellees’ counsel correctly notes that both Stern and Frazin involved
core proceedings, but we are faced with a non-core proceeding. The reasoning
of Stern and Frazin, however, apply equally here. The similarities between a
state-law counterclaim and a state law claimSSboth brought in the bankruptcy
courtSSare striking. In both, the debtor brings claims seeking to enlarge the
bankruptcy estate. Under Stern’s “reasoning in principles that are broad in
scope,” Frazin, id. at 319, if, as BPRE points out in its supplemental letter brief,
a bankruptcy court “lacked the constitutional authority [for] a state law counter-
claim that is not resolved in the process of ruling on a creditor’s proof of claim,”
Stern, 131 S. Ct. at 2620, it also would not have constitutional authority over a
state-law claim merely because it was not a counterclaim. Under Stern’s “rea-
soning [that] was sweeping,” Frazin, 732 F.3d at 318–19, the core/non-core con-
tention urges a distinction without a difference for purposes of Article III.
With regard to consent in light of Frazin, the appellees, in their supple-
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mental letter brief, maintain that the scheme for non-core claims in § 157(c) is
meaningfully different from the scheme for core claims in §157(b) because, as the
appellees urge,
[u]nlike the exclusive jurisdiction provided to the bankruptcy courts
in [§] 157(b) at issue in Stern and Frazin, however, [§] 157(c)
reserves jurisdiction for final judgments for “related claims” to the
Article III district courts, with further authority for the district
courts to refer certain matters to the bankruptcy courts with the
consent of the parties . . . . [T]he authority to retain or refer matters
under [§] 157(c) remains with the district courts.
That argument fails. Although the district court does have the authority to
retain, the bankruptcy court lacks constitutional authority to enter a final judg-
ment if the district court does not retain and the reference is not withdrawn.
And once entered, a purported judgment of the bankruptcy courtSS“the entry of
a final, binding judgment by a court with broad substantive jurisdiction,” Stern,
131 S. Ct. at 2615SSwould be entitled to the usual deference (for example, the
clearly-erroneous standard for factual findings) owed to such an act that is final,
“subject to review only if a party chooses to appeal,” id. at 2619, to a higher, Arti-
cle III tribunal.
In Stern, id. at 2620, the Court noted the efficacy of having bankruptcy
courts submit proposed findings and conclusions but admonished that “such
judges should not be in the business of entering final judgments in the first
place,” id. at 2619. The Court agreed with Pierce Marshall’s argument that, as
to such proceedings that only seek to augment the bankruptcy estate, “it must
be the district court that finally decides them.” Id. at 2620 (internal quotation
omitted, bracket in original).
VI.
In sum, although the strict holding of Stern limits bankruptcy-court
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authority “in one isolated respect” and “the question presented [was] a narrow
one, id., its “sweeping” reasoning, Frazin, 732 F.3d at 319, is broad and logically
must be applied to BPRE’s claims here. Accordingly, we VACATE the judgment
of the district court and REMAND to that court for further appropriate proceed-
ings. Because no party disputes that BPRE’s claims are not core proceedings,
the bankruptcy court has the authority conferred by § 157(c)(1) to issue proposed
findings of fact and conclusions of law as to BPRE’s state-law claims that are
related to the bankruptcy estate in the event the district court elects to refer the
matter to the bankruptcy court for that limited purpose. See Waldman, 698 F.3d
at 922. We impose no limitations on what actions the district court may take on
remand that are consistent with this opinion.
19