Federal Rules of Bankruptcy Procedure to be Amended Effective December 1, 2016 | Practical Law

Federal Rules of Bankruptcy Procedure to be Amended Effective December 1, 2016 | Practical Law

Amendments to the Federal Rules of Bankruptcy Procedure based on the 2011 Stern v. Marshall ruling will take effect on December 1, 2016. These amendments resolve subject matter jurisdiction issues between bankruptcy courts and district courts.

Federal Rules of Bankruptcy Procedure to be Amended Effective December 1, 2016

Practical Law Legal Update w-003-9779 (Approx. 6 pages)

Federal Rules of Bankruptcy Procedure to be Amended Effective December 1, 2016

by Practical Law Bankruptcy & Restructuring
Published on 31 Oct 2016 • USA (National/Federal)
Amendments to the Federal Rules of Bankruptcy Procedure based on the 2011 Stern v. Marshall ruling will take effect on December 1, 2016. These amendments resolve subject matter jurisdiction issues between bankruptcy courts and district courts.
Amendments to the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules) based on the 2011 Stern v. Marshall ruling will take effect on December 1, 2016. These "Stern Amendments" resolve subject matter jurisdiction issues between bankruptcy courts and district courts. The Stern Amendments generally eliminate the requirement for litigants to state whether a matter is core or non-core under 28 U.S.C. Section 157. Rather, the pleadings specified in the Stern Amendments must state whether or not the pleading litigant consents to final adjudication in bankruptcy court.

Background

The Stern Amendments revise the Bankruptcy Rules to require a litigant to consent or not to final adjudication by a bankruptcy court. Before the Stern Amendments, the Bankruptcy Rules:
  • First required a litigant to state whether a proceeding was a core or non-core bankruptcy proceeding.
  • If non-core, the litigant was then required to give consent to final adjudication by a bankruptcy court.
The Stern Amendments do not require a determination of a core issue unless a party does not consent to final adjudication by the bankruptcy court. If a party does not consent, then the bankruptcy court, under amended Federal Rule of Bankruptcy Procedure 7016(b), will decide whether:
  • To hear and determine the proceeding.
  • To hear the proceeding and submit proposed findings of fact and conclusions of law to a district court.
  • To take some other action.

Stern v. Marshall

The 2011 ruling in Stern v. Marshall found that an Article I bankruptcy judge lacked the constitutional authority to enter final judgment on a debtor's common law counterclaim against a creditor (564 U.S. 462 (2011); and see Legal Update, Stern v. Marshall – Supreme Court Limits Bankruptcy Court's Powers to Adjudicate Debtors' Counterclaims). The Stern decision determined that the bankruptcy court lacked this authority even though the claim was deemed to be related to a core bankruptcy proceeding and, therefore, the bankruptcy court had the authority to rule under 28 U.S.C. Section 157.
Section 157 of the US Code:
  • Lists core proceedings for which a bankruptcy court may enter a final order or judgment (28 U.S.C. § 157(b)).
  • States that for non-core issues that are otherwise related to a case that deals with core issues, a bankruptcy court may hear a proceeding and submit proposed findings of fact and conclusions of law to a district court for a final order and judgment (28 U.S.C. § 157(c)).
In Stern v. Marshall, a third type of proceeding was identified, one that involved a core issue, but was also beyond the constitutional authority of the bankruptcy court to enter final judgment. The Stern decision was handed down in 2011, but not codified by amendment to the Bankruptcy Rules until the Court had given its opinion in cases on similar issues (see Executive Benefits Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014) and see Legal Update, Supreme Court Clarifies Bankruptcy Court Procedure When Facing a Non-Bankruptcy Claim; see Wellness International Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) and see Legal Update, Bankruptcy Judges May Adjudicate Stern Claims with Parties' Consent: Supreme Court).

Stern Amendments

The proposed Stern Amendments are designed to frame the question of judicial authority and allow the bankruptcy judge to determine the appropriate course of action. The court must decide whether to hear and finally adjudicate the proceeding, whether to hear it and issue proposed findings and conclusions, or whether to take some other action.
The effect of the Stern Amendments requiring a party's consent before determining whether the issue is a core proceeding allows bankruptcy courts to avoid the issue raised in Stern by determining a bankruptcy court's authority up front. The Stern Amendments make changes to the following rules:
Bankruptcy Rule
Original Rule
Change to Rule
Fed. R. Bankr. P 7008: General Rules of Pleading
Applying Federal Rule of Civil Procedure 8 to adversary proceedings, this rule requires that pleadings contain:
  • A statement that the proceeding is core or non-core.
  • If the proceeding is non-core, a statement that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy court.
Eliminates the requirement to state whether a proceeding is core or non-core. Instead, the pleader must state whether they consent to a final determination by the bankruptcy court.
Fed. R. Bankr. P 7012(b): Defenses and Objections 
Applying Federal Rule of Civil Procedure 12(b)(i) to adversary proceedings, this rule requires that  a responsive pleading: 
  • Admit or deny if a proceeding is core or non-core.
  • If the proceeding is non-core, include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy court.
Eliminates the requirement for the pleader to state whether the proceeding is core or non-core.
Fed. R. Bankr. P 7016(b): Pretrial Procedures
Applying Federal Rule of Civil Procedure 16 in adversary proceedings, which governs general pretrial planning and scheduling issues.
Changes provide the bankruptcy court with three options on the consent or non-consent of parties:
  • To hear and determine the proceeding.
  • To hear the proceeding and submit proposed findings of fact and conclusions of law.
  • Take some other action.
Fed. R. Bankr. P 9027(a)(1), (e)(3): Removal
Notice of removal: The notice of removal should contain a statement that:
  • The proceeding is core or non-core. 
  • If non-core, that the party does or does not consent to entry of final orders or judgment by the bankruptcy court.
Procedure after removal: Pleadings filed in connection with the removal (other than the party filing the initial notice) should contain a statement that:
  • The proceeding is core or non-core.
  • If non-core, that the party does or does not consent to entry of final orders or judgment by the bankruptcy court.
For more information on removal, see Practice Note, Notice of Removal, Remand, and Abstention in Bankruptcy.
Changes eliminate the requirement to state whether the proceeding is core or non-core within the subject matter jurisdiction of the bankruptcy court.
Fed. R. Bankr. P 9033(a): Proposed Findings of Fact and Conclusions of Law
In a non-core proceeding, the bankruptcy court is required to file proposed findings of fact and conclusions of law.
Changes make a bankruptcy court's proposed findings of fact and conclusions of law applicable to both core and non-core proceedings.

Conclusion

The Stern Amendments provide bankruptcy courts with clear authority to adjudicate non-core proceedings if parties consent, and a framework to determine how to proceed before a trial when not all parties consent to bankruptcy court adjudication of core or non-core proceedings. These amendments will streamline bankruptcy court procedures by requiring a definitive framework for both pleading parties and the bankruptcy courts when such a jurisdictional question arises.