Seventh Circuit on Jurisdiction Post-Stern

The fallout from Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) is really picking up. The Seventh Circuit Court of Appeals became the first circuit court to weigh in, ruling, in a case with facts similar to those of Stern, that the bankruptcy court lacked jurisdiction to issue a final judgment on a claim, asserted by debtors in two proposed class actions, that a medical services creditor violated a Wisconsin state statute by filing proofs of claim revealing the debtors’ medical information. In re Ortiz, — F.3d —-, 2011 WL 6880651 (7th Cir., Dec 30, 2011). Courts disagree over whether a bankruptcy court may issue a final judgment in a proceeding to avoid an allegedly fraudulent transfer. Compare In re Citron, 2011 WL 4711942 (Bankr. E.D. N.Y., Oct. 6, 2011) (court may issue final judgment), with In re Heller Ehrman LLP, — F.Supp.2d —-, 2011 WL 6179149 (N.D. Cal., Dec. 13, 2011) (court may not issue final judgment). A question several courts have asked is what a bankruptcy court should do when a matter designated as “core” in 28 U.S.C. § 157(b)(2) is one that must be decided by an Article III court. The two possibilities are that “unconstitutional core” matters default to the procedure used for non-core matters, (i.e., proposed findings and recommendations under 28 U.S.C. § 157(c)) or, alternatively, that such matters should be entirely removed from the bankruptcy courts. Most courts considering the issue hold that bankruptcy courts retain the power to enter proposed findings and recommendations in this class of cases. See, e.g., In re Byce, 2011 WL 6210938 (D. Idaho, Dec. 14, 2011); In re Mortgage Store, Inc., 2011 WL 5056990 (D. Hawai’i, Oct. 5, 2011); In re Heller Ehrman LLP, above.