Southern District of New York Takes a Stand on Stern

and on February 2, 2012 ·

Posted in Jurisdiction and Appeals,Stern Files

As we have chronicled, the Supreme Court’s decision in Stern v. Marshall has created quite a stir among restructuring professionals.  The United States District Court for the Southern District of New York, in issuing its Amended Standing Order of Reference on January 31, 2012, however, has put all on notice that it has had enough of the ruckus and that it would prefer if everyone calmed down.

The Order states that, to the extent a bankruptcy judge or district judge determines that the bankruptcy judge did not have constitutional authority to enter a final order in a given proceeding, “unless otherwise ordered by the district court,” the bankruptcy judge shall, nonetheless, hear the proceeding and submit proposed findings of fact and conclusions of law to the district court.  Thus, the Southern District has made clear that it agrees with many commentators that Stern is not jurisdictional, but, instead, speaks to the bankruptcy courts’ final authority.

The Southern District, in a further effort to have its reference respected, stated that the district court “may treat any order of the bankruptcy court as proposed findings of facts and conclusions of law in the event the district court concludes” that the bankruptcy judge lacked constitutional authority to enter a final order.  Essentially, the district court is discouraging parties from moving to withdraw the reference on Stern related grounds, implying that it would prefer to address questions of final authority on appeal, after the matter has been sufficiently litigated before the bankruptcy court.

The Order also gives bankruptcy judges comfort that they can enter final orders without worrying about the matter being remanded on constitutional grounds and eliminates the need to issue reports and recommendations in lieu of final orders as a precautionary measure.  Bankruptcy courts in the Southern District will also have greater certainty that their orders will not be subject to collateral attack – though they may be subject to a heightened form of review on appeal if matters determined by these bankruptcy court orders are deemed to be outside the bankruptcy courts’ authority to enter a final judgment.

It remains to be seen what effect the Southern District’s Order will have on parties seeking to challenge the bankruptcy courts’ final authority or whether other district courts will follow suit.  We will keep you posted.

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