Following last year’s Stern v. Marshall bombshell, cases are slowly trickling up to the Court of Appeals level. After I wrote about a recent Fifth Circuit opinion which held that the jurisdiction of U.S. Magistrate Judges was not invalidated, a commenter pointed out a recent Seventh Circuit decision. In this post, I will look at that case, In re Ortiz, 665 F.3d 906 (7th Cir. 2011), in which the Seventh Circuit granted a direct appeal and then concluded that it did not have a final decision to review, as well as an even more recent First Circuit case which appears to reach the opposite conclusion. The Seventh Circuit Undoes a Direct Appeal Ortiz involved a health care provider that filed proofs of claim in an estimated 3,200 bankruptcy cases in the Eastern District of Wisconsin over a five year period which disclosed the debtors’ confidential medical information. Two sets of debtors filed class action proceedings under a Wisconsin non-disclosure statute.* Bankruptcy Judge Susan Kelley** granted summary judgment for the health care provider, finding that the debtors had not shown actual damages as required by the Wisconsin statute. Both parties requested a direct appeal to the Seventh Circuit, which was approved. However, in light of Stern v. Marshall, the Seventh Circuit concluded that it was not permitted to allow the direct appeal because there was not a “final” order. Direct appeals to the Court of Appeals are authorized under 28 U.S.C. §158(d) in three instances: *Final orders; *Interlocutory orders increasing or decreasing the debtor’s exclusive period to file a plan; and *With leave of court over interlocutory orders and decrees. Even though no party had raised the jurisdictional issue, the Court concluded that it had “an independent duty to determine whether we have jurisdiction.” The Court noted the schizophrenic nature of the Stern decision which, on the one hand, claims to be a narrow decision, but on the other hand, appears to prohibit the bankruptcy courts from going beyond the power to adjudicate claims. The Court wrote:The first question (whether the bankruptcy court had authority to enter a final order) requires a close reading of Stern v. Marshall. Although the Court noted that the question presented was "narrow," it was quite significant as Congress "may no more lawfully chip away at the authority of the Judicial Branch than it may eliminate it entirely." (citation omitted). The Court held that Article III prohibited Congress from giving bankruptcy courts authority to adjudicate claims that went beyond the claims allowance process. (citation omitted). The decision rebuffed an intrusion into the Judicial Branch that would "compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush." (citation omitted). 665 F.3d at 911. Prior to Stern, the bankruptcy court’s authority would have appeared clear for this was a matter “arising in” a title 11 case. Because proofs of claim only exist in title 11 proceedings, claims arising from proofs of claim could only arise in the bankruptcy context. However, the Court found that the Wisconsin non-disclosure claims were similar to the counterclaim filed by Vicki Lynn Marshall in the Stern case: Just as Pierce's filing of a proof of claim in Vickie's bankruptcy did not give the bankruptcy judge authority to adjudicate her counterclaim, Aurora's act of filing proofs of claim in the debtors' bankruptcies did not give the bankruptcy judge authority to adjudicate the debtors' state-law claims. The debtors' claims seek "to augment the bankruptcy estate--the very type of claim that . . . must be decided by an Article III court." (citation omitted). Non-Article III judges may hear cases when the claim arises "as part of the process of allowance and disallowance of claims," (citation omitted), or when the claim becomes "integral to the restructuring of the debtor-creditor relationship," (citation omitted). Although there is some factual overlap between the debtors' claims and Aurora's proofs of claim, the bankruptcy judge "was required to and did make several factual and legal determinations that were not 'disposed of in passing on objections' to" Aurora's proofs of claim. (citation omitted). In granting Aurora's summary judgment motion, the bankruptcy judge interpreted a Wisconsin state law to require proof of actual damages as an essential element of the debtors' claims and found that there was no genuine issue of material fact as to the lack of actual damages. Nothing about these decisions involved an adjudication of Aurora's proofs of claim and there is no "reason to believe that the process of adjudicating [Aurora's] proof[s] of claim would necessarily resolve" the debtors' claims. (citation omitted). Stern reaffirmed that "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 stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." (citation omitted). The debtors' action owes its existence to Wisconsin state law and will not necessarily resolve in the claims allowance process. That the circumstances giving rise to the claims involved procedures in the debtors' bankruptcies is insufficient to bypass Article III's requirements. Stern v. Marshall makes plain that the bankruptcy judge in our cases "exercised the 'judicial Power of the United States' in purporting to resolve and enter final judgment on" the debtors' Wisconsin state-law claims. (citation omitted). We thus hold that the bankruptcy judge lacked authority under Article III to enter final judgments on the disclosure claims. 665 F.3d at 914. The Court of Appeals concluded that because the bankruptcy court lacked authority to enter a final order, that it lacked authority to grant a direct appeal. If the court had stopped there, its decision would have been clear. However, it added a cryptic comment suggesting that the bankruptcy court lacked any authority in the matter: For the bankruptcy judge's orders to function as proposed findings of fact or conclusions of law under 28 U.S.C. § 157(c)(1), we would have to hold that the debtors' complaints were "not a core proceeding" but are "otherwise related to a case under title 11." (citation omitted). As we just concluded, the debtors' claims qualify as core proceedings and therefore do not fit under § 157(c)(1). The direct appeal provision in 28 U.S.C. § 158(d)(2)(A) also does not authorize us to review on direct appeal a bankruptcy judge's proposed findings of fact and conclusions of law. 665 F.3d at 915. Many commentators have concluded that the Stern decision created a third category of claims to the core/non-core taxonomy: core claims in which the bankruptcy court could not enter a final judgment. The prevailing sentiment, indeed one fostered indirectly by the Stern decision itself, is that the bankruptcy courts may enter proposed findings of fact and conclusions of law in all matters in which they lack authority to enter a final judgment. The Ortiz opinion suggests that this may not be the case, but finds it unnecessary to decide the issue. The First Circuit Shrugs Off Stern in a Footnote The Ortiz opinion can be contrasted with a brief discussion contained in a First Circuit opinion. In re Divittorio, 2012 U.S. App. LEXIS 248 (1st Cir. 1/6/12). In re Divittorio is another chapter in the home mortgage wars being fought in the courts. In that case, the debtor consented to an order conditioning the automatic stay and modifying the underlying loan. After the debtor defaulted, the creditor obtained relief from the automatic stay. The debtor then sought to “rescind” the loan. He filed an adversary proceeding for rescission under the Massachusetts Consumer Credit Cost Disclosure Act and sought to vacate the order lifting the automatic stay. The bankruptcy court declined to vacate the prior order, but stayed the foreclosure for 90 days to determine the rescission claim. The bankruptcy court concluded that the creditor had not violated the MCCCDA and the debtor appealed. In a footnote, the court noted its belief that its jurisdiction was unimpaired.We do not believe that the Supreme Court's recent decision in Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), affects the jurisdiction of the bankruptcy court to render a decision in this matter. Stern held:Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984. The Bankruptcy 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.(citation omitted). Here, however, it first was necessary to resolve the validity of Mr. DiVittorio's claim under the MCCCDA to determine whether HSBC was entitled to relief from the automatic stay. 2012 U.S. App. LEXIS at *18, n. 4. The Court ultimately decided the appeal in favor of the creditor. The First Circuit’s discussion is rather unsatisfying because it assumes that determination of the counterclaim was necessary to determine the motion to lift stay. However, how is this distinguishable from the argument that the Wisconsin non-disclosure claims were necessary to determine proofs of claim filed by the health provider? If anything, the automatic stay context is less compelling than determination of a proof of claim, since a motion to lift stay is a summary proceeding. Grella v. Salem Five Cent Savings Bank, 42 F.3d 26 (1st Cir. 1994). While the Court’s stated rationale may be unsound, it can probably be vindicated based on consent, since both parties litigated the matter through the bankruptcy court, district court and court of appeals without objection. The Ortiz court rejected consent. However, that case was factually distinguishable because BOTH parties objected to determination by the bankruptcy court. The debtors asked the bankruptcy court to abstain or remand, while the creditor sought to withdraw the reference. What It Means The two decisions may or may not signal a split between the circuits. The First Circuit’s decision is so perfunctory that it may be possible for the court to distinguish it away. However, the larger lesson for creditors is that Stern v. Marshall cuts both ways. If a creditor litigates and wins in bankruptcy court, an appellate court may decide that jurisdiction to enter a final judgment was lacking and send the creditor back to relitigate. Thus, the legacy of Stern may be unending litigation. *--While Federal Rule of Bankruptcy Procedure 9037 imposes privacy restrictions with respect to bankruptcy court filings, including proofs of claim, courts are split over whether it creates a private right of action. Cases allowing a claim for sanctions, include Matthys v. Green Tree Servicing, LLC (In re Matthys), 2010 Bankr. LEXIS S.D. Ind. 2010); French v. American General Financial Services (In re French), 401 B.R. 295 (Bankr. E.D. Tenn. 2009), while cases rejecting such a right include Carter v. Flagler Hospital, Inc., 411 B.R. 730 (Bankr. S.D. Fl. 2009); Lentz v. Bureau of Medical Economics (In re Lentz), 405 B.R. 893 (Bankr. N.D. Ohio 2009); Cordier v. Plains Commerce Bank (In re Cordier), 2009 Bankr. LEXIS 2009). **--Judge Kelley’s current claim to fame is that she is the judge presiding over the case of the Archdiocese of Milwaukee. As a woman and a practicing Catholic, she is in the unusual position of exercising at least some temporal authority over the male hierarchy of her own church.

    Some mistakes the Chapter 13 trustee will call you on;  others go unremarked.   So let’s discuss some simplistic thinking that has your Chapter 13 client paying too much into the plan. I’ve reviewed any number of newbie plans that use the non exempt equity in the debtor’s possessions as the liquidation premium. Subtract the exemptions from the value of the assets and you have, they think, the measure of the “best interests of creditors” test for confirmation. Nope.  Let’s look at the Code to see why that’s too much. Confirmation test The Code requires for confirmation that a plan give each unsecured claim no less than the amount that would be paid on the claim in a Chapter 7 liquidation.  § 1325(a)(4). The difference between the newbie world view and the Code encompasses the trustee’s costs of administration. In a Chapter 7, tangible assets don’t become distributable dollars at the wave of the trustee’s wand.  The trustee generally incurs expenses, payable from the estate, in turning assets into cash. The trustee also gets paid from the estate for his work.  The formula for paying trustees is found in §326(a).  So the trustee’s commission comes off the gross total of dollars distributed to creditors. (The trustee does not get a commission on any money paid to the debtor on account of exemptions, or any money paid to co owners of assets he sells). Asset by asset In calculating the plan pot, debtor’s counsel needs to analyze how much it will cost the trustee to administer the estate up to the point where he is ready to cut checks to creditors. If the asset is cash in the bank, there are no “costs of sale”.  Trustee writes a letter and the money is turned over. If the asset is real estate, the estate will be paying a realtor and closing costs.  A sale of land will usually require the estate to file a tax return, so subtract something for an accountant. Suppose the real estate is depreciated real property:  there may be capital gains taxes which the estate must pay before paying out money to creditors.  Take that off the sum of non exempt equity. And if the asset is a preference action, some allowance has to be made for the costs of collection.  Or an analysis of whether a preference of small size would actually be recovered.  You must make deductions here for either the costs of suit, including professional fees, and for any discount offered to reach settlement. You get the picture.  Imagine what it takes to turn the debtor’s non exempt assets into cash and quantify the costs of doing so. It is the net, non exempt equity that measures what unsecured creditors, priority and general unsecureds, must get to have a confirmable plan. Go forth, readers, and calculate. If you are local to the San Francisco Bay Area, I’m presenting a two hour live class on crafting Chapter 13 plans.  A more detailed look at the liquidation test is just a part of that exploration of how to get to the right numbers for a Chapter 13 plan.  The date is April 14th.  There are more details at Law-full.com. Image courtesy of Sharon Drummond.

Bankruptcy and divorce often coincide with one another. The divorcing couple will have to decide if they want to file bankruptcy together or apart. There are pros and cons to either decision. Generally a married couple can file bankruptcy together; however the courts do not care if they are living separately. However both people’s income and assets will be used to determine if either a chapter 7 or chapter 13 bankruptcy can be filed. In addition if the couple files together they will only need to pay one court filing fee and can be represented by the same attorney for one fee. If instead the couple divorces and then files, they each must file their own bankruptcy case with their own attorney. This increases the cost of actually filing for bankruptcy for each individual.   If however you decide to divorce before filing for bankruptcy, the bankruptcy may not be able to be filed for a long time. Divorce proceeding can take time to finish because of division of marital property, such as houses, businesses, or bank accounts. If the divorcing couple has dependent children the issue of child support must be dealt with before the divorce is finalized. Some states allow spousal support or alimony and that legal issue has to be arranged before the divorce is final. Each person will have to file their own bankruptcy case with the court and have separate attorneys to represent them during the bankruptcy proceedings.   Bankruptcy will not discharge certain types of debt. Spousal support, child support, or alimony payments will not be discharged during bankruptcy. Property settlements from the divorce may or may not be dischargeable depending which chapter the bankruptcy case is filed under. Besides of support obligations, other debts incurred by the debtor in the course of a divorce or settlement proceeding might be dischargeable in a chapter 13 bankruptcy case. Even though the divorce decree titles something as support it might not be support in the bankruptcy proceeding and even though the divorce decree does not specify an obligation as support it might be nonetheless non-dischargeable in either chapter. If a non-filing spouse has a claim against the filing ex-spouse, it might be necessary in a chapter 13 bankruptcy case to file a claim with the court if the support payment is being paid by the trustee.   If one person files bankruptcy and includes joint debt, the other ex-spouse is still liable for the debt. This is also true even if the divorce decree or settlement agreement states that the filing spouse is responsible for paying the debt. The responsibility for the filing spouse to the ex-spouse and the creditor might be eliminated in a chapter 13 bankruptcy case. The non-filing spouse would be left with paying the joint debt. However, the non-filing spouse might be able to modify the divorce decree or settlement agreement. For example if both individuals names were on credit cards, mortgage documents, lease agreements, or other types of debts; then creditors can legally demand payment. In some cases during divorce proceedings debts are listed and the person responsible for paying is clarified as part of the divorce decree. 

When considering filing for bankruptcy there are a number of things to consider.  One common question is how bankruptcy will affect finding new employment or government employment or security clearances.  The answer depends on a number of circumstances.  Some employers may be interested in whether you have filed for bankruptcy as a measure of financial responsibility.  With respect to applications you, many applications state that if there is any fraud or intentional misrepresentation on the application you can be terminated.  In this case it would be better to be honest about your bankruptcy and perhaps explain the situation than to face potential termination at a later date.  In some instances, government employers may actually encourage an individual with a lot of debt to file for bankruptcy to decrease their debt to income ratio.  This can be true especially where the individual debtor deals with money.  An individual with a considerable amount of debt may be more likely to be tempted to divert funds or sell secrets of a company or government for sums of money.  The bankruptcy code does state than an individual cannot be passed up for a security clearance or a promotion simply because he/she has filed for bankruptcy.  The military has addressed this issue explaining that such decisions are based on a number of considerations, but bankruptcy can play a role in the decision.  Not filing may make you more of a risk, as explained above; however, some may look at filing as a way out of paying for obligations.  In this case, you may be able to explain the circumstances surrounding your filing, whether it was largely medical issues or if there was on trigger.  At the end of the day, it can affect security clearances, but filing for bankruptcy is not an automatic bar to a security clearance or a promotion in a government or military position.  According to the military, your relationships with your chain of command and your reputation in your field are equally, if not more important in making such decisions. Private employers may be able to exercise much more discretion pursuant to the laws of your state.  If you are concerned about finding new employment, or how bankruptcy may affect your current career you should speak with a St. Louis Bankruptcy Attorney today!

Is a Debtor Required to Forfeit Property in a Bankruptcy? When someone is considering filing bankruptcy, there are a lot of questions and concerns they may have.  They may be worried about having to forfeit property and may think they will have to surrender their property, such as vehicles, houses, pension, household goods, etc. There are certain occasions where debtors may have to turn over to the Trustee some of their property.  However, this does not often happen and only happens if the property cannot be exempted and/or if there is a large amount of equity.  Property exemptions will vary state to state.  In Missouri, there is a $15,000 homestead exemption to protect equity a debtor has in their real property.  Equity is the difference between what a piece of property is worth and how much is owed against the property.  Therefore, if a person owns a house worth $150,000.00 and $135,000.00 is owed against the property, they have $15,000.00 equity in the property.  Since there is a $15,000.00 homestead exemption, that equity would be protected, and the Trustee would not be able to sell the property.  As long as the debtor is current on the house and continues making their payments, they will be able to keep the real property.  The exemption for a mobile home is $5,000.00. There are other exemptions to protect personal property in Missouri.  There is a $3,000.00 exemption for household goods, furnishings, and clothing.  It is $6,000.00 for a joint filing.  Those values can be determined by estimating garage sale prices for the personal property.  There is also a $1,500.00 wedding ring exemption per person filing and a $500.00 exemption for other jewelry per person filing.  There is a $3,000.00 tools of the trade exemption that covers work-related tools and supplies.  There is also an exemption for qualified retirement plans. The Missouri vehicle exemption is $3,000.00.  If a debtor has $3,000.00 or less equity in a vehicle, they will be able to keep their vehicle as long as they continue making their payments on the vehicle and are current on the vehicle.  Debtors can only exempt one vehicle per person filing.  There is a wildcard exemption of $600.00 per person, which can exempt anything not covered by any other specific exemption.  The wildcard can be used to cover any money a debtor has in the bank at the time of filing, cash on hand, additional equity in houses or cars, collectibles, etc.  There is also a head of household exemption which can be used in certain circumstances and would also cover any property not covered by other specific exemptions.  If you have any questions regarding this issue, please contact a St. Louis or St. Charles bankruptcy attorney.

Should a Debtor Reaffirm a Vehicle When Filing a Chapter 7 Bankruptcy? A Chapter 7 bankruptcy makes a debtor no longer liable under their contracts.  That is why a debtor can surrender a house or vehicle through the bankruptcy with no penalty.  The deficiency will be discharged through the bankruptcy, and the debtor will no longer be responsible for that debt.  The deficiency is the difference between what a debtor owes on a secured debt, such as a vehicle, and what the secured debt is sold for by the creditor after surrendering the property. Reaffirmation essentially puts a debtor back into a contract with the car creditor.  Some creditors do not require a debtor to sign a reaffirmation agreement and will allow the debtor to continue to pay on the vehicle without such an agreement.  However, many car creditors do require debtors to sign a reaffirmation agreement if they intend to keep the car.  In that case, if debtors do not agree to sign the reaffirmation agreement, they can repossess the vehicle.  In that case, a debtor would need to decide whether they want to surrender the car or reaffirm the vehicle and continue to pay for it. Once a reaffirmation agreement has been signed, the debtor will once again be liable under the contract.  If the debtor does not make payments on the vehicle, the creditor can repossess the vehicle, and the debtor will be responsible for the deficiency on the car, and it will not be discharged through the bankruptcy.  When considering whether it is advantageous to reaffirm a vehicle, there are a few pros and cons a debtor can consider.  One benefit of signing a reaffirmation agreement is that some creditors will report those on-time payments to the credit bureaus;  however, not all creditors will do this.  Another benefit is that some car creditors will send statements to the debtor if a debtor reaffirms.  Otherwise, they may not do this.  A benefit of not signing a reaffirmation agreement is that if a debtor does not sign the reaffirmation, the debtor can walk away from the vehicle with no penalty if they cannot afford the payments and will not be responsible for the deficiency.  A debtor may not want to reaffirm when they owe much more on the vehicle than what it is worth or if the debtor questions whether they will be able to maintain the payment on the vehicle.  A debtor may want to reaffirm if there is a low loan balance and if the payments are manageable and can be easily maintained.  If you have any questions, please contact a St. Louis or St. Charles bankruptcy attorney.

You are required to list all of your creditors in your bankruptcy petition.  You will want to run a credit report, whether you do that yourself or have your attorney run the report for you.  Everything listed on your credit report should be listed on your petition if there is an amount owed.  However, your credit report is only a starting point.  Not all companies and organizations report to credit bureaus.  Some common examples of places that may not report to credit agencies are some doctors, small businesses, and friends or family members.  You want to make every effort possible to ensure that you have listed all creditors.  In listing your creditors on the petition they receive notice of the filing. However, if a creditor was missed, there are different options depending on how far your case has progressed.  If you are in a Chapter 7 and your case is still open you can add creditors to your petition.  If this comes late in the process it may hold your case open a bit longer to provide those creditors with notice.  There may be additional fees for adding creditors at this stage.  If you are in Chapter 13 a creditor may file a proof of claim, however, there is a deadline to file claims.  The deadline is set by the court.  If you case has already been dismissed you cannot add creditors to the petition.  However, as long as the debt was incurred prior to your petition date the debt is still discharged.  In this case you should contact your attorney.  Either you or your attorney can provide a copy of your discharge to the creditor.  It is certainly preferred that all creditors are provided notice through your filing.  In a Chapter 13, if there are creditors that were not initially disclosed to your attorney you monthly plan payment may have to be increased to account for the additional debt.  Notably, you cannot add creditors to your bankruptcy filing where the debt was incurred after the date of your petition in either a Chapter 7 or a Chapter 13 bankruptcy filing.  If you want to list debts incurred after your filing you would have to have your case dismissed and re-file your case.  If you have any questions, or would like to discuss your case, contact a St. Louis Bankruptcy Attorney today!

Many people fear that they will never again have good credit if they have to file for bankruptcy. While having a bankruptcy in your past has a very negative impact on your credit score, the overall results of discharging your other debts may actually increase your credit score despite the bankruptcy and position you toward good credit in the long-term. This article will address how bankruptcy may actually improve your credit score.  By the time most people have made the decision to file for bankruptcy, their credit scores are likely already very low. The fact is that people who are paying their bills on time and who have the money to pay them in full simply do not need to file bankruptcy. Depending on how many delinquent accounts a debtor has and how high the balance is on those accounts, their credit scores will reflect exactly how bad their position is financially. Thus, individuals considering bankruptcy already have low credit. Unless the debtor is expecting a financial windfall, bankruptcy may be the only way out of the debt cycle keeping their credit low.Bankruptcy and Credit ReportsFiling for bankruptcy appears on credit reports and has a dramatic impact on overall credit scores. Depending on the reporting institution, it can lower credit scores anywhere from 100-200 points. Chapter 7 bankruptcies stay on credit reports for ten years from the date of discharge. Chapter 13 bankruptcies are reported for seven years after the date of filing. One common credit scoring service, Fair Isaac, which publishes the FICO score, divides consumers into ten groups to compare them to consumers in similar financial situations. That means that if you file bankruptcy, your FICO score will partially base your score on how you are doing compared to other bankruptcy filers. You won't be compared to those who have never filed bankruptcy and have perfect credit. This scoring system works to your advantage, despite the bankruptcy lingering on your credit report.Credit After BankruptcyIf you have filed for Chapter 7 bankruptcy, once the bankruptcy court grants a discharge, all of the debts that were included in the bankruptcy will reflect that fact on your credit report. That means that your debt to income ratio will improve, improving your score in that regard. Your late payment history on those accounts will diminish over time. Perhaps most beneficially, you will no longer have to try to make payments on the discharged debts, meaning that you can pay your remaining bills on time and in full to start establishing a positive payment history on your remaining accounts. If you have filed for Chapter 13, the debts that are included in your bankruptcy plan will reflect that fact on your credit reports. After completion of your plan, any debts remaining will also be discharged similar to a Chapter 7 bankruptcy. Before discharge, Chapter 13 plans are based on budgeting appropriately. With a manageable plan payment, you will be able to start paying your remaining debts on time and in full prior to discharge, putting you in a very positive position even before your debts are completely discharged.If you are struggling with your bills, do not rule out filing bankruptcy solely because it will affect your credit. After all, the overall effect of filing bankruptcy may actually positively influence your credit long term. Bankruptcy is not appropriate or available for everyone, so it is important to speak with a qualified bankruptcy attorney to determine if bankruptcy is right for your situation.

      This seems to have been my season for issues driven by testamentary, or pseudo testamentary transfers. I’ve encountered the post petition trust beneficiary; the client with an unanticipated prepetition interest in a probate estate; and the residual beneficiary of a spend thrift trust irrevocable before filing. But I saw a new one that I need to add to my list of things to discuss with clients. My clients were the beneficiaries of a couple of small insurance policies owned by one debtor’s parent.  The policies were intended to provide for funeral expenses of the parent. When the parent passed away within 180 days of the bankruptcy filing, those insurance policies dumped their bounty into the lap of the bankruptcy trustee. So thanks to § 541(a)(5), money flowing from the efforts of a non debtor and intended for one purpose either pays my clients’ creditors or displaces the exemption protecting some asset of the debtors. Twenty questions I currently ask new clients if they have an interest in the estate of someone who has already died and if there is any likelihood that someone may pass away in the next six months.  If possible we try to determine whether the testamentary instrument is a will or a trust. If it’s a will, we consider whether the testator might be open to making any provision for my clients in a spend thrift trust as an alternative. But I need now to look for life insurance issues where the purpose was not to benefit the beneficiaries but to enable payment of the deceased’s last expenses. Complexities never cease. Image courtesy of jarrodstone.

In a ruling that could shed some light (but not very much) on the authority of bankruptcy judges, the Fifth Circuit has ruled that a magistrate's ruling in an insurance coverage dispute did not run afoul of the Supreme Court ruling in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594 (2011). Technical Automation Services Corp. v. Liberty Surplus Insurance Corporation, No. 10-20640 (5th Cir. 3/5/12), which you can find here.The IssueTechnical Automation Services Corp. involved whether an insurance company had a duty to defend an insured in an underlying lawsuit. The parties consented to trial before a U.S. Magistrate. The magistrate granted summary judgment in favor of the insured. On appeal, the Fifth Circuit requested briefing on the application of Stern v. Marshall to a magistrate. See "Fifth Circuit to Consider Impact of Stern v. Marshall on U.S. Magistrates" here. In response to the question "whether Article III of the Constitution permits a federal magistrate judge, with the consent of the parties, to enter final judgment on a party's state law counterclaim," (opinion, p. 7), the Court answered "yes."The DecisionBy way of prelude, the Court noted that a prior panel of the Fifth Circuit had ruled in favor of the ability of a magistrate to proceed with consent. Puryear v. Ede's Ltd., 731 F.2d 1153, 1154 (5th Cir. 1984). Thus, the court was bound to follow the prior precedent "absent an intervening change in the law, such as by a statutory amendment, or the Supreme Court or by our en banc court." Opinion, p. 9. This framed the question of whether Stern v. Marshall overruled prior decisions about the power of magistrates.While noting the many similarities between bankruptcy judges and magistrates, the Court chose to base its ruling on the Supreme Court's insistence that Stern was a narrow decision. Accordingly, the Court reaffirmed that Congress may not withdraw “from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” (citation omitted). The Supreme Court emphasized that even the slightest “chipping” away of Article III can lead to “illegitimate and unconstitutional practices,” and accordingly held that the jurisdiction of the bankruptcy courts did not extend to most counterclaims based on common law. (citation omitted).This holding can be translated to the many similarities of the statutory powers of federal magistrate judges. Whereas Article III judges “hold their offices during good behavior, without diminution of salary,” bankruptcy judges and federal magistrate judges are Article I judges who lack tenure and salary protection. (citation omitted). Moreover, the text of 18 U.S.C. § 157(b) (the statute addressed in Stern) and the text of the Magistrates Act, 28 U.S.C. § 636(c), allow Article I judges to enter final judgments, allow for judges’ final judgment to be binding without further action from an Article III judge, entitle the decisions to deference on appeal, and permit the courts to exercise “substantive jurisdiction reaching any area of the corpus juris.” (citation omitted).Although the similarities between bankruptcy judges and magistrate judges suggest that the Court’s analysis in Stern could be extended to this case, the plain fact is that our precedent in Puryear is there, and the authority upon which it was based has not been overruled. Moreover, we are unwilling to say that Stern does that job sub silentio, especially when the Supreme Court repeatedly emphasized that Stern had very limited application. Id. at 2620. (emphasizing the limited scope of the decision, saying that the issue addressed was a “narrow one” that related only to “certain counterclaims in bankruptcy”) (internal quotation omitted) see also id. (“Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protection set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984.”) (emphasis added). Article III jurisprudence is complex, requiring the court to do an examination of every delegation of judicial authority. (citation omitted). Notwithstanding that this constitutional question may be seen in a different light post Stern, we will follow our precedent and continue to hold, until such time as the Supreme Court or our court en banc overrules our precedent, that federal magistrate judges have the constitutional authority to enter final judgments on state-law counterclaims. (emphasis added).Opinion, pp. 11-12.What It MeansOn the most basic level, Technical Automation Services says very little about the authority of bankruptcy judges. It simply holds that Stern does not upset prior Fifth Circuit precedent governing the authority of magistrate judges. However, it provides advocates of bankruptcy court authority with two valuable arguments:1. The Fifth Circuit is willing to take Chief Justice Roberts at his word when he says that Stern is a narrow decision. While many were concerned that Stern could be another Marathon Pipeline and could signal a return to the old summary/plenary distinction under the Bankruptcy Act, the Fifth Circuit is willing to take it slow. If the other circuits slow play the decision and the Supreme Court strategically declines to grant cert, it could be decades before the issue reaches the Supreme Court again. 2. Since a central feature of magistrate jurisdiction is consent, Technical Automation provides a powerful rebuttal to parties who want to consent to bankruptcy court decision making and then cry "Stern" when they don't like the result.If nothing else, Technical Automation is significant because it didn't change anything significant.Post-Script: Although I edited it from the quote above for purposes of brevity, the opinion contains a wonderful quote from Chief Justice Rehnquist's concurrence in Northern Pipeline where he referred to Article III cases as "but landmarks on a judicial 'darkling plain' where ignorant armies have clashed by night." Northern Pipeline Construction Company v. Marathon Pipe Line Company, 458 U.S. 50, 91 (1982)(Rehnquist, J. concurring). I know that I will be looking for ways to include this language in future Stern briefs.