Fifth Circuit: District Court Improperly Referred Bankruptcy Appeal to Magistrate Judge for Final Determination

Federal district courts, with the consent of the parties, are authorized by statute to refer "civil matter[s]" to magistrate judges for the purpose of conducting all proceedings and entering a judgment in the litigation. In the case of an appeal to a district court from a bankruptcy court, however, this statutory authority arguably conflicts with another statutory provision dictating that appeals from a bankruptcy court order or judgment be heard by a "district court" or a "bankruptcy appellate panel." This apparent conflict was recently addressed by the U.S. Court of the Appeals for the Fifth Circuit in In re South Central Houston Action Council, 38 F.4th 471 (5th Cir. 2022). The Fifth Circuit vacated a magistrate judge's ruling on appeal from a bankruptcy court judgment, ruling that the district court improperly referred the appeal to the magistrate judge for a final disposition, rather than a recommendation subject to review and adoption by the district court.

Bankruptcy Court Jurisdiction

Article III, Section 1 of the U.S. Constitution provides that "[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish." It further states that such judges "shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office." 

The exercise of the "judicial Power of the United States" is vested in judges appointed pursuant to Article III of the Constitution, i.e., Article III judges. Bankruptcy judges, however, are not Article III judges. They do not have life tenure—bankruptcy judges are appointed for a 14-year term (subject to reappointment) by the circuit courts of appeals under 28 U.S.C. § 152—and their salaries are subject to diminution. Bankruptcy judges are technically authorized under Article I, which governs the legislative branch and authorizes the establishment of a uniform system of federal bankruptcy laws. U.S. Const. Art. I § 8 cl. 4. Under principles of separation of powers, bankruptcy judges cannot exercise the judicial power reserved for Article III judges.

In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the U.S. Supreme Court struck down the Bankruptcy Act of 1978 because it conferred Article III judicial power upon bankruptcy judges who lacked life tenure and protection against salary diminution. Two years later, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 to fix the Marathon issue. The 1984 jurisdictional scheme for bankruptcy courts continues in force today.

That scheme vests bankruptcy jurisdiction in the first instance in the U.S. federal district courts.

Federal district courts have "original and exclusive jurisdiction" of all "cases" under the Bankruptcy Code. 28 U.S.C. § 1334(a). District courts also have "original but not exclusive jurisdiction of all civil proceedings arising under" the Bankruptcy Code, "or arising in or related to cases under" the Bankruptcy Code. 28 U.S.C. § 1334(b).

District courts may and routinely do, however, refer these cases and proceedings by standing orders of reference to the bankruptcy courts in their districts, which are constituted as "units" of the district courts. 28 U.S.C. §§ 151 and 157(a). That reference may be withdrawn by the district court "for cause shown," and must be withdrawn "if the [district] court determines that resolution of the proceeding requires consideration of both [the Bankruptcy Code] and other laws of the United States regulating organizations or activities effecting interstate commerce." 28 U.S.C. § 157(d).

Under 28 U.S.C. § 152(a)(1), "Bankruptcy judges shall serve as judicial officers of the United States district court established under Article III of the Constitution." 

A bankruptcy court may enter a "final" judgment in "all core proceedings arising under the [Bankruptcy Code] or arising in a case under [the Bankruptcy Code]." 28 U.S.C. § 157(b)(1). Core proceedings include, but are not limited to, among other things, matters concerning the administration of the estate; the allowance or disallowance of claims; orders authorizing postpetition financing; proceedings to avoid and recover preferential or fraudulent transfers; determinations as to the dischargeability of debts; motions to modify the automatic stay; the recognition of foreign bankruptcy proceedings under chapter 15 of the Bankruptcy Code; and "other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims." 28 U.S.C. § 157(b)(2). 

The bankruptcy court may also hear non-core "related" matters, but may not decide them without the consent of the parties. 28 U.S.C. §§ 157(c). Unless the parties consent to a bankruptcy court's final adjudication of a non-core related matter, the court must "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." 28 U.S.C. § 157(c)(1). A bankruptcy court may not try personal injury or wrongful death claims, which must be tried in the district court. 28 U.S.C. § 157(b)(5). If a party in a proceeding that may be heard by a bankruptcy court has a right to a jury trial, the bankruptcy court may conduct the jury trial if the parties expressly consent and the court is "specially designated to exercise such jurisdiction by the district court." 28 U.S.C. § 157(e).

In addition to statutory authority, a bankruptcy judge must have constitutional authority to hear and determine a matter. See Stern v. Marshall, 564 U.S. 462 (2011). Constitutional authority exists when a matter originates under the Bankruptcy Code or, in non-core matters, where the matter is either one that falls within the "public rights exception," (i.e., cases involving "public rights" that Congress could constitutionally assign to "legislative" courts for resolution) or where the parties have consented, either expressly or impliedly, to the bankruptcy court hearing and determining the matter. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) (parties may consent to a bankruptcy court's jurisdiction); Richer v. Morehead, 798 F.3d 487, 490 (7th Cir. 2015) (noting that "implied consent is good enough").

Appeals of Bankruptcy Court Orders

Sections 158, 1291, and 1292 of title 28 of the U.S. Code determine whether federal appellate courts other than the U.S. Supreme Court have jurisdiction to hear appeals of orders or judgments issued by lower courts. That determination ordinarily hinges on whether the order or judgment is "final" or merely "interlocutory."

In ordinary civil litigation, a final order or judgment "ends litigation on the merits and leaves nothing for the … court to do but execute the judgment." Hooker v. Cont'l Life Ins. Co., 965 F.2d 903, 904 (10th Cir. 1992). Therefore, an interlocutory order is an order that does not constitute a final judgment on the merits. See Black's Law Dictionary (11th ed. 2019) (defining "interlocutory" as "interim or temporary; not constituting a final resolution of the whole controversy").

A bankruptcy case differs from ordinary civil litigation because it is a framework within which the court resolves a wide variety of disputes that precede the closure of the bankruptcy case after confirmation of a plan, discharge of the debtor following administration of its nonexempt assets, or dismissal.

Thus, the rules governing appeals of orders or judgments in bankruptcy cases are somewhat different than those in other civil litigation. See Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582, 586 (2020) ("The ordinary understanding of 'final decision' is not attuned to the distinctive character of bankruptcy litigation."); Matter of Forty-Eight Insulations, Inc., 115 F.3d 1294, 1299 (7th Cir. 1997) (finality is applied with a "relaxed eye" in the bankruptcy context); In re Dow Corning Corp., 86 F.3d 482, 488 (6th Cir. 1996) (the finality requirement in bankruptcy "is considered in a more pragmatic and less technical way in bankruptcy cases than in other situations").

Twenty-eight U.S.C. § 158(a) reflects this by providing that "[t]he district courts of the United States shall have jurisdiction to hear appeals": (i) from final bankruptcy court judgments, orders, and decrees; (ii) from interlocutory orders and decrees increasing or reducing a debtor's exclusive right to propose and seek acceptances for a chapter 11 plan; and (iii) "with leave of the court, from other interlocutory orders or decrees."

Appeals from the same types of bankruptcy court orders may instead be heard with the consent of the litigants by three-judge "bankruptcy appellate panels" under the circumstances specified in section 158(b).

Twenty-eight U.S.C. § 158(d)(1) provides that federal circuit courts of appeals shall have jurisdiction over appeals from "all final decisions, judgments, orders, and decrees entered [by district courts or bankruptcy appellate panels] under subsections (a) and (b)."

Twenty-eight U.S.C. § 1291 similarly provides that, with certain exceptions, the federal circuit courts of appeals "shall have jurisdiction of appeals from all final decisions of the district courts of the United States." Section 1292 gives the courts of appeals jurisdiction over certain interlocutory appeals.

Finally, section 158(d)(2) provides that a circuit court of appeals, in its discretion, shall have jurisdiction to hear an appeal from a final judgment, order, or decree if the bankruptcy court, district court, or bankruptcy appellate panel involved certifies, or the litigants jointly certify, that the judgment, order, or decree: (i) involves a question of law as to which there is no controlling circuit court or U.S. Supreme Court precedent or "involves a matter of public importance"; (ii) involves a question of law requiring the resolution of conflicting rulings; or (iii) if immediately appealed, "may materially advance the progress of the case or proceeding in which the appeal is taken."

Magistrate Judges

Magistrate judges are judicial officers of the U.S. district courts appointed by the district judges for a renewable term of eight years (four years for part-time magistrates) to handle a variety of judicial proceedings. The U.S. magistrates system was established by the Federal Magistrates Act of 1968. Pub. L. No. 90-578, 82 Stat. 1107 (1968) (codified as amended at 28 U.S.C. §§ 604, 631-639 and 18 U.S.C. §§ 3060, 3401-3402). Thus, like bankruptcy judges, magistrate judges are Article I, rather than Article III, judges. 

The jurisdiction and powers of magistrate judges are set forth in 28 U.S.C. § 636. Those powers include, among other things, "all powers and duties conferred or imposed upon United States commissioners" by law or by the Federal Rules of Criminal Procedure, the authority to issue warrants, conduct preliminary proceedings in criminal cases, and hear cases involving petty offenses committed on federal lands.

Pursuant to 28 U.S.C. § 636(c), with the consent of the parties, a magistrate judge "may conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or courts he serves."

Houston Action Counsel

A church that owned a large commercial building in Houston (the "landlord") leased space to a health care services company (the "debtor") for a low-cost medical clinic. Due to a rent dispute, the landlord terminated the lease and obtained a judgment entitling it to possession of the premises. However, before it was evicted, the debtor filed for chapter 11 protection in the Southern District of Texas in January 2019.

In April 2019, the debtor sued the landlord in a Texas state court for breach of contract and unjust enrichment. In November of that year, the landlord removed the state court action to the bankruptcy court as an adversary proceeding. In June 2020, the bankruptcy court entered summary judgment in favor of the landlord in the litigation and later denied the debtor's motion for reconsideration.

The debtor appealed to the district court, which with the consent of the parties reassigned the appeal to a magistrate judge pursuant to 28 U.S.C. § 636(c). The magistrate judge affirmed the bankruptcy court's rulings and dismissed the appeal. The debtor then appealed to the Fifth Circuit.

The Fifth Circuit's Ruling

A three-judge panel of the Fifth Circuit vacated the magistrate judge's ruling and remanded the case below, but not on the merits of the appeal.

Writing for the Fifth Circuit panel, U.S. Circuit Court Judge Edith H. Jones emphasized that the court of appeals has an obligation to examine the district court's jurisdiction before addressing the merits of a dispute. She concluded that the district court's judgment must be vacated "because the district court improperly authorized referral of the appeal from a bankruptcy court decision to a magistrate judge," and that was inconsistent with the Fifth Circuit's previous ruling in Minerex Erdoel, Inc. v. Sina, Inc., 838 F.2d 781 (5th Cir. 1988).

In Minerex, Judge Jones explained, a previous Fifth Circuit panel held that, despite the "broad latitude" for referring matters to magistrate judges under 28 U.S.C. § 636(c), the statute governing appeals from bankruptcy court decisions—28 U.S.C. § 158—"plainly and solely" permits appeals to be taken either to a district court or a bankruptcy appellate panel. Houston Action Counsel, 38 F.4th at 472 (citing Minerex, 838 F.2d at 786). The Minerex court also stated that "[i]t is reasonable to conclude that had Congress meant for its appeals scheme to include the potential for reference to a magistrate, Congress would have expressly so provided … [yet] did not do so." Minerex, 838 F.2d at 786. Judge Jones noted that a district court may refer bankruptcy appeals to a magistrate judge for a report and recommendation, but the district court can adopt the magistrate's findings and conclusions only after engaging in independent consideration of the issues. Houston Action Counsel, 38 F.4th at 472 n.1.

The Fifth Circuit accordingly vacated the magistrate judge's judgment and remanded the case to the district court for further proceedings.

Outlook

The Fifth Circuit's ruling in Houston Action Counsel resolves the conflict between the two statutes at issue—28 U.S.C. §§ 158 and 636(c)—in keeping with a well-recognized principle of statutory construction. In particular, specific statutory provisions targeting a particular issue apply instead of provisions more generally covering the issue. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012). Thus, because section 158 expressly states that district courts or bankruptcy appellate panels "shall" have jurisdiction to hear appeals from bankruptcy court orders and judgments, that provision trumps the more general (and permissive) jurisdictional reference of "civil matters" to magistrate judges in section 636(c).