Fifth Circuit Weighs in on Stern’s Effects on Magistrate Judges’ Authority to Enter Final Judgments on State Law Counterclaims

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Co-authored by Kyle J. Ortiz and Doron P. Kenter.

On March 5, the United States Court of Appeals for the Fifth Circuit handed down its decision in the much-watched case of Technical Automation Servs. Co. v. Liberty Surplus Ins. Corp. Though the underlying issue was one of contract interpretation, Technical Automation received increased attention due to the court’s request for briefing regarding whether Stern v. Marshall had any effect on the powers of magistrate judges to hear and determine state law counterclaims with parties’ consent.

In Technical Automation, the parties to an insurance contract had consented, under the Federal Magistrates Act, to a federal magistrate judge handling all further proceedings regarding the parties’ state law claims and counterclaims (which were being heard in federal court due to the parties’ diversity of citizenship and the amounts at stake in the proceeding).  The Act provides, in pertinent part, that “[u]pon the consent of the parties, . . . [a] United States magistrate judge . . . may conduct any or all proceedings in a jury or nonjury civil matter and order entry of judgment in the case.”  28 U.S.C. § 636(c).

After the magistrate judge issued summary judgment in favor of Technical Automation, Liberty Surplus appealed, arguing that the magistrate judge had not properly considered whether a “mutual mistake” had existed with respect to the contract between the parties.  While the appeal was pending, the Supreme Court decided Stern v. Marshall, and the Fifth Circuit, sua sponte, requested that the parties address whether entry of a final order by a magistrate judge is subject to challenge in light of Stern.

In its decision, the Fifth Circuit first considered whether the magistrate judge had authority to enter a final judgment with respect to the parties’ state law counterclaims.  Though framed as a “jurisdictional issue,” the Fifth Circuit’s inquiry focused on whether the magistrate judge acted within her authority to enter a final judgment in this case.  (Indeed, most cases interpreting Stern have concluded that Stern is not about jurisdiction – which can never be waived by consent – but rather, about bankruptcy judges’ authority and the constitutional limits thereon.)  The Fifth Circuit observed that the Federal Magistrates Act expressly permits magistrate judges to hear and decide matters before the district court, so long as the parties consent.  It noted that the Fifth Circuit had previously held in Puryear v. Ede’s Ltd. that this grant of authority to magistrate judges is constitutional because (i) all parties must have consented to this treatment and (ii) the district court retains the power to vacate this reference to the magistrate upon its own motion.

The Fifth Circuit recognized that under Stern, bankruptcy judges are, under certain circumstances, constitutionally barred from entering a final judgment on state law counterclaims and asked whether magistrate judges, as Article I judges, were similarly barred from entering final judgments on such claims, regardless of consent.  Despite the parallels between magistrate judges and bankruptcy judges (as Article I judges without life tenure, who can exercise only such authority as has been granted to them by the district court, and who can enter binding final judgments without further action by an Article III court), the Fifth Circuit declined to conclude that Stern should be construed to apply to magistrate judges.  It noted that, by Stern’s own terms, that decision should be read narrowly and relates only to “certain counterclaims in bankruptcy.”  The court noted that existing precedent in the Fifth Circuit dictated that magistrate judges were authorized to issue final judgments in state law counterclaims with the consent of the parties, and that for a Supreme Court decision to change existing precedent in the circuit, such decision must “unequivocally” overrule that precedent.  Accordingly, the Fifth Circuit refused to read Stern to apply in any other context, declined to hold that Stern impliedly overruled Puryear, and concluded that, until the Supreme Court explicitly says so, Stern will not affect magistrate judges’ authority in the Fifth Circuit.  Accordingly, after vacating the original judgment, the Fifth Circuit remanded the case to the magistrate judge for further proceedings and a final disposition regarding the underlying issues.

Though the Fifth Circuit’s decision does not directly affect bankruptcy proceedings, it suggests that more courts will continue to hold that Stern’s application is limited to the narrow fact pattern that was before the Supreme Court in that case.  Technical Automation might suggest that, like magistrate judges, bankruptcy judges may also issue final orders with respect to state law counterclaims, so long as they have all parties’ consent to do so.  It may also suggest that magistrate judges and bankruptcy judges are not inextricably intertwined with respect to Stern’s repercussions (which remain to be seen).  Lastly, Technical Automation appears to be a direct invitation to the Supreme Court to provide further guidance regarding its intent in Stern and exactly how broadly litigants should construe the implications of that decision.  As always, we’ll continue to keep you apprised of all key Stern-related developments.