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The Aftermath of Stern v. Marshall: Sixth Circuit Ruling Addresses Bankruptcy Court’s Jurisdiction

One of the most interesting, and at times vexing, issues that arises in bankruptcy proceedings involves the jurisdiction of the bankruptcy courts. In 2011, the U.S. Supreme Court weighed in with its noteworthy decision in Stern v. Marshall, in which it held that bankruptcy courts lack the constitutional authority to enter a final judgment on a state law counterclaim that is not related to the bankruptcy proceeding. Since Stern, a number of cases have been published - at both the bankruptcy court and court of appeals level - where Stern jurisdictional issues have been raised and adjudicated.

A recent opinion by the United States Court of Appeals for the Sixth Circuit, Hart v. Southern Heritage Bank, analyzed whether Stern deprives a bankruptcy court of constitutional authority to enter a final money judgment in a non-dischargeability action under 11 U.S.C. § 523(a)(2)(B).

The Sixth Circuit began its analysis by reviewing the scope and impact of the Stern decision. In Stern, the Supreme Court held that bankruptcy judges, as non-Article III judges, lack constitutional authority to enter final judgments on counterclaims asserted by a debtor where the counterclaims involve issues not essential to the allowance or disallowance of the underlying claims or are otherwise not subject to the "public rights" exception.

In the Hart case, Southern Heritage Bank brought an adversary proceeding under section 523 of the Bankruptcy Code against debtor Hart. The bankruptcy court found four loans extended by the bank to Hart non-dischargeable and determined the amounts of the non-dischargeable debts. The court did not, however, enter a final monetary judgment on those amounts. The court then considered, and granted, a motion filed by Southern Heritage Bank to amend the order to include an entry of judgment on the amount of each non-dischargeable loan. In opposing the bank’s motion, Hart argued that, based on Stern, the court lacked constitutional authority to enter a final monetary judgment in the dischargeability action at issue. On appeal, the Sixth Circuit rejected Hart's argument, concluding that Hart's argument is both "factually and legally distinguishable" from Stern.

The Sixth Circuit held that the case was factually distinguishable from Stern because Hart did not assert a counterclaim based on state law against Southern Heritage Bank in the adversary proceeding at issue.

The Sixth Circuit also explained that the Hart case was legally distinguishable from Stern because, unlike in Stern where the counterclaim at issue derived from state law, the bank's claim in Hart "arises specifically in bankruptcy." The court noted that "determinations as to the dischargeability of particular debts" and "objections to discharge" are core proceedings of the bankruptcy court under 28 U.S.C. § 157(b). Second, the court explained that the Hart case was legally distinguishable from Stern because the bank's non-dischargeability claim was capable of resolution through the claims-allowance process in bankruptcy and, therefore, "Stern does not strip the bankruptcy court of its constitutional authority to enter a final monetary judgment in this dischargeability action under section 523(a)(2)(B)."

Hart's final argument that the bankruptcy court exceeded its constitutional authority under Stern was that a final monetary judgment could not be entered when litigation related to the bankruptcy proceedings was pending in state court. The Sixth Circuit rejected this argument primarily on factual grounds - Hart never filed a state court counterclaim. The court also noted that even if Hart had filed state court counterclaims, "those claims would have been precluded by the final federal monetary judgment, a decision the bankruptcy court had authority to make."

Ultimately, the Sixth Circuit affirmed the bankruptcy court’s entry of judgment and noted that Hart should not be permitted to "escape the collateral effects of the bankruptcy court’s decision made under proper authority."

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Stern v. Marshall , 131 S. Ct. 2594 (2011).
Hart v. Southern Heritage Bank, (In re Hart), Appeal No. 13-6188 (6th Cir., April 28, 2014).

Categories: 6th Circuit Court of Appeals

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 concentrates her practice in the areas of Bankruptcy, Finance, Collections, Real Estate, and Commercial Litigation. In the bankruptcy area she represents creditors and Chapter 7 Trustees in all aspects of bankruptcy. Patricia also represents small and mid-sized businesses to large corporations in multi-faceted litigation matters in state and federal court. Her work with financial institutions includes collections, loan workouts, foreclosures, receiverships and various complex banking and finance issues. 

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