Michigan Bankruptcy Blog

The bankruptcy court entered judgment in favor of Vickie and awarded her over $425 million in damages.  Post-trial, Pierce argued that the bankruptcy court lacked jurisdiction to decide Vickie's counterclaim because it was not a core proceeding.  The district court agreed and held that the bankruptcy court's judgment was merely a recommendation.  On de novo review, the district court found in favor of Vickie but awarded just $44 million in damages.  The Court of Appeals reversed, but on grounds that the U.S. Supreme Court later rejected.  The case then returned to the Court of Appeals, which concluded that Vickie's counterclaim was not a core proceeding.  By that time, the state probate court had ruled in favor of Pierce in Vickie's action, and so the Court of Appeals gave the state court judgment preclusive effect.

On appeal, the U.S. Supreme Court held that Vickie's counterclaim against Pierce, which was based on state tort law, was a core proceeding "under the plain text of § 157(b)(2)(C)" – which lists counterclaims by the estate against claimants as core proceedings.  But the Court then held that although the Bankruptcy Code allowed the bankruptcy court to enter a final judgment, "Article III of the Constitution does not."  Id. at 2608.  That is, although the Bankruptcy Court had statutory authority to decide Vickie's counterclaim, it lacked constitutional authority.

The Court reasoned that final decisions on common law claims must be made by Article III judges, who have life tenure, to protect the integrity of the judicial system.  Bankruptcy judges are not Article III judges and thus cannot decide common law claims unless the claims involve "public rights" that can be assigned to "legislative" courts – i.e., non-Article III courts – for determination.  Cases may fall within the "public rights" exception if they arise between the government and individuals in connection with the government's constitutional functions.

Importantly, in its reasoning, the Court relied on Granfinanciera, SA v. Nordberg, 492 U.S. 33 (1989), in which the Court held that a fraudulent conveyance action in a bankruptcy case did not fall within the "public rights" exception because it more closely resembled a common law contract claim.  Like the fraudulent conveyance action in Granfinanciera, the Court concluded that Vickie's counterclaim did not fall within the "public rights" exception because it was merely a private action between individuals.  Because that exception did not apply, the bankruptcy court lacked constitutional authority to decide the counterclaim.

The impact of this decision is not yet known, but some anticipate an increase of "reports and recommendations" to the district court – rather than final orders – in both state law claims like Vickie's tort claim and perhaps even in fraudulent transfer and preference actions brought under the Bankruptcy Code.  This blog will monitor and report on cases from Michigan's bankruptcy courts that deal with this critical issue.