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December 1, 2016 Revisions to the FRBPs: Taking the Bite Out of the Core-Noncore Distinction

On December 1, 2016, something extraordinary happened. No, it was not president-elect Trump visiting another Carrier air conditioning factory in Indianapolis. It was an event that made no headlines and caused no stir.  The Federal Rules of Bankruptcy Procedure were silently amended to remove all references to “core” and “noncore” proceedings.

So what’s the big deal?

Besides eliminating one of the last tools I possessed to sound smarter than my non-bankruptcy colleagues, the change reflects the final chapter in a 34-year saga regarding bankruptcy court jurisdiction and the constitutional authority of bankruptcy judges.

Marathon Cases

Prior to the late 1970s, the last major bankruptcy law was passed in 1898. Under the 1898 Bankruptcy Act, a bankruptcy judge was a quasi-judicial officer referred to as a “referee” and possessed very little actual authority.  The Bankruptcy Act of 1978 changed all of that: creating the modern (and oft-amended) Bankruptcy Code (title 11 of the United States Code); and creating an entirely separate bankruptcy court system, complete with judges appointed by the president and confirmed by the senate.[1]  Along with the fancy new rules and court system, the 1978 Act provided the bankruptcy court with expanded jurisdiction and authority.  This is where it got tricky.

Under the 1978 Act, the foundation of modern day bankruptcy court jurisdiction was established. A bankruptcy court had jurisdiction over any matter arising under title 11, arising in a case under title 11, or related to a case under title 11.  Congress’ intention behind the rule was to provide “”broad and complete jurisdiction over all matters … that arise in connection with bankruptcy cases.”[2]  In other words, if the issue came up during the pendency of a bankruptcy case, the bankruptcy court had jurisdiction over it.  Now what could be the problem with that?Bankruptcy-245x300

Within a couple years, cases challenging that jurisdiction began making their way up the pipeline through the circuit courts and actually led to the U.S. Supreme Court decision of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).  Essentially, in Marathon, the court focused on the separation of powers and took issue with the fact that bankruptcy courts, which were created by Congress (Article I branch), were making decisions that should only be made by the judicial branch created under Article III.  Before the varnish on the bankruptcy judge’s new chambers had time to dry, the court ruled that the provision granting bankruptcy courts such broad jurisdiction (28 U.S.C. § 1471) was unconstitutional.   A legislative scramble ensued.

[1] This appointment process changed by Congress in 1984 (Pub. Law 98-353) to provide for appointment of bankruptcy judges by the U.S. Court of Appeals in the corresponding judicial circuit.

[2] H.R. REP. No. 95-595, 95th Cong., 2d Sess. 4, reprinted in [1978] U.S. CODE CONG. & AD. NEWS 5963.

In my opinion, the biggest mistake of Northern Pipeline was not the holding, which made logical sense, but rather the loaded word choice.  In its reasoning, the Supreme Court made multiple references to the “core” of judicial power: stating that debtor-creditor relations are at the “core” of federal bankruptcy power, and conversely, private rights disputes, lie at the “core” of Article III judicial power Marathon Pipe Line Co., 458 U.S. at 70-71.

1984 Bankruptcy Amendments

Shortly after Marathon was decided, the Judicial Conference of the United States issued an emergency interim rule which narrowed the definition of “related” proceedings and allowed the bankruptcy court only to submit findings and conclusions to the district court when the parties do not consent to jurisdiction for “related to” proceedings (take note of the last point).

Then, in 1984 Congress intervened. Jurisdiction was still based upon whether matters were “arising under,” “arising in,” or “related to” but such jurisdiction was granted to the district court, rather than the bankruptcy court.  Instead of stopping there, and allowing bankruptcy courts to determine these matters under a general referral system, Congress took the words of Marathon a bit too literally—permitting bankruptcy judges the authority to decide “core” proceedings (“arising under” or “arising in”), but restricting a bankruptcy judge’s power to decide proceedings that are not core, in which case the bankruptcy judge, absent consent of the parties, must submit findings to the district court for review. 28 U.S.C. § 157.  In an apparent attempt to clarify what a “core” matter is, Congress included a potentially troublesome, non-exhaustive list of 16 matters.

Stern Cases

So what happens when the bankruptcy judge faces a matter that is “core” to bankruptcy by definition, but also falls within the private right dispute which is also “core” to Article III district court? The issue was bound to come up.

Stern v. Marshall involved that precise issue. Stern involved a counterclaim by the bankruptcy estate, defined as core under 28 U.S.C. §157(b)(1)(C); but, the counterclaim was a common law tort claim, which is the epitome of the “core” private rights dispute which may only be decided by an Article III judge.  The Supreme Court, without addressing consent, held that the bankruptcy court did not have the constitutional power to decide this matter, despite being a statutory “core” proceeding.  Panic ensued.

Stern turned the “core” “noncore” distinction on its head, ultimately creating a third category of so-called Stern claims—which seemed to fit everywhere and nowhere at the same time.  Nevertheless, rather than attempt to further define Stern claims—which was the ultimate tragedy of the 1984 Act—the line of cases following focused on the bankruptcy court’s saving grace already present in the statute—consent.  The Supreme Court settled the question in Wellness International, determining that consent, even implied, is sufficient to grant a bankruptcy court the power to issue a ruling now in “noncore” proceedings.  If not, findings are to be submitted to the district court.

Consent is King

So what does this really mean? For those that do not regularly practice in the bankruptcy court, making the distinction between jurisdiction vs. judicial power to enter a judgment, can be a daunting task.  In fact, prior to the December 1, 2016 revisions to the Federal Rules of Bankruptcy Procedure, a party appearing in a bankruptcy adversary proceeding had to state whether the matter was, in fact, “core”—which often sends litigants and practitioners running to their closest bankruptcy colleague. Now, these subtle revisions have provided clarity to the matter—you consent to the bankruptcy court’s authority to rule on the matter, or you do not, in which case the matter will be referred to the district court after the bankruptcy court makes its findings.  This relatively clear-cut procedure can provide an unwilling party appearing in bankruptcy court a substantial amount of leverage in dealing with opposing counsel, in light of an entirely new hurdle to overcome before a judgment may even be entered.  Ultimately, consent has now become the “core” power of the litigants.