Do bankruptcy courts need a Stern rule?

March 7, 2014

empty pockets image: bankruptcy or debt settlement?In Stern v. Marshall — the landmark bankruptcy case pitting the probate estate of Playboy Playmate Anna Nicole Smith against E Pierce Marshall — the U.S. Supreme Court said bankruptcy courts lack constitutional authority to enter final judgments on state law matters that are not resolved during the claim allowance process.

In Stern the parties battled over who gets $88 million from the probate estate of J. Howard Marshall II, who died a little more than one year after marrying Smith.

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Now, Chief Judge Randolph J. Haines of the U.S. Bankruptcy Court in Arizona says bankruptcy courts need a rule on how long parties have to object to the court’s authority to issue a final judgment.

Without such a rule, the judge says, litigants can seek a substantive ruling, then object to the court’s authority if they don’t like the court’s decision.

Judge Haines just faced that situation.

In Haley, Trustee, v. Barclays Bank Delaware (In re Carter), Barclays — the defendant in a preferential transfer action — moved for summary judgment and raised a Stern objection to the trustee’s identical motion.

On March 3, Judge Haines ruled that Barclays waived any Stern objection by seeking summary judgment.  “Barclays cannot have it both ways, and it is difficult to understand how both the objection to final judgment and the request for entry of final judgment could have been filed in compliance with Rule 9011(b),” he said.

Judge Haines suggested that courts may want to adopt a local rule to avoid facing similar litigation strategies in the future.  Such a rule would provide that a Stern objection is waived or forfeited unless the objecting party quickly moves for withdrawal of the reference, and prosecutes that motion to conclusion in the District Court.