Opinion
1:02-cv-01270-JDT
October 31, 2002.
ENTRY ESTABLISHING MATTER AS REVIEW OF PROPOSED FINDINGS AND CONCLUSIONS IN NON-CORE PROCEEDING AND ALLOWING REPLY BRIEF ONLY
This Entry is a matter of public record and is being made available to the public on the court's web site, but it is not intended for commercial publication either electronically or in paper form. Although the ruling or rulings in this Entry will govern the case presently before this court, this court does not consider the discussion in this Entry to be sufficiently novel or instructive to justify commercial publication or the subsequent citation of it in other proceedings.
This case involves a bit of a procedural conundrum. The underlying dispute concerns the Bankruptcy Court's denial of Defendant Ernst and Young LLP ("EY")'s motion to stay proceedings pending arbitration of negligence and breach of contract claims instituted by Gregory S. Fehribach, the Chapter 7 Trustee of Taurus Foods, Inc., against EY in connection with its audit of Taurus Food's 1995 financial statements. This matter comes to the court either on referral or appeal-the parties disagree as to which. EY claims the Bankruptcy Court only had authority to issue proposed findings of fact and conclusions of law with respect to the denial of stay due to its status as a non-core proceeding. In that event, the task of this court is to review those proposed findings and conclusions and enter a final decision. The Trustee, on the contrary, maintains the Bankruptcy Court rendered a final order that is now the subject of appeal to this court. This entry seeks to clarify whether the court is dealing with an appealable final order or proposed findings and conclusions.
As non-Article III courts, bankruptcy courts have the power to make final determinations only in core proceedings arising in a case under title 11, an illustrative list of which is provided in 18 U.S.C. § 157(b)(2). See also Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (broad grant of jurisdiction to bankruptcy courts unconstitutional). In non-core proceedings "related to" a case under title 11, a bankruptcy court may hear the case, but must submit proposed findings of fact and conclusions of law to the district court for review and entry of a final order. See 18 U.S.C. § 157(c)(1). The district court may refer a non-core proceeding to the bankruptcy court for a final order or judgment, however, provided all parties to the proceeding consent. See 18 U.S.C. § 157(c)(2). In the present case, EY cannot be considered to have consented to this procedure.
EY did, in fact, file a timely notice of appeal in which it restated its position that the Bankruptcy Judge lacked authority to enter a final order. The purpose of the notice, it claimed, was to preserve its appellate rights in case this court should decide sua sponte to treat the lower court's ruling as a final decision.
The court confronts this problem because of the parties' failure to comply with the Federal Rules of Bankruptcy Procedure. Rule 7008(a) mandates that in an adversary proceeding before a bankruptcy judge, "the complaint. . . . shall contain a statement that the proceeding is core or non-core[.]" The Trustee failed to include such statement in his First Amended Complaint. He did invoke the jurisdiction of the Bankruptcy Court under 18 U.S.C. § 157, however, that provision also gives the court power to hear and issue proposed findings and conclusions with respect to non-core proceedings "related to" title 11. It can be inferred the Trustee meant to invoke the full jurisdiction of the Bankruptcy Court to render final judgments in core proceedings, nonetheless, he failed to expressly designate the proceeding as such. The Trustee's sole mention of this issue involves his objection to EY's characterization of the Bankruptcy Court's Order as "proposed," where he correctly points out that the caption of the Bankruptcy Judge's Order lacks that qualifier. But he does not openly state that denial of a stay pending arbitration is a core bankruptcy proceeding.
Likewise, Rule 7012(b) stipulates that "a responsive pleading shall admit or deny an allegation that the proceeding is core or non-core." Accordingly, in its first response to the complaint-its Motion to Stay Proceedings Pending Arbitration-EY contends that the Trustee's Complaint asserts non-core state law claims. However, this responsive pleading lacks a further statement, required by the rule, giving or withholding EY's consent to the entry of a final order by the Bankruptcy Court in the event the respondent contends the proceeding is non-core.
The Bankruptcy Court itself did not directly address this issue. Its failure to caption its findings of fact and conclusions of law as "proposed" may indicate that it took itself to be issuing an appealable final order, but the court cannot be certain of that court's intent.
In any event, the decision to treat the matter one way rather than the other has no significant consequences. For in either case, the cause will come before this court for decision. And the standard of review will be unaffected by a determination as to the status of the Bankruptcy Court's denial of stay. In the first instance, the standard of review for proposed findings and conclusions is de novo with respect to those matters to which a party has timely and specifically objected. 18 U.S.C. § 157(c)(1). In the second, a final order is reviewed for clear error as to findings of facts and de novo as to conclusions of law. In re Smith, 286 F.3d 461, 464-465 (7th Cir. 2002) (citations omitted). The sole difference in the standards, then, pertains to factual findings. In the present case, EY has not objected to any of the Bankruptcy Court's findings of fact; instead, its objections relate wholly to that court's legal analysis. Thus neither party will be disadvantaged by the adoption of one or the other option; for whether the denial of stay is considered a submission of proposed findings and conclusions or an appealable final order, the conclusions of law supporting it will be subjected by this court to de novo review.
That still leaves the question of how, precisely, to treat the lower court's order. This court will hereinafter consider it a submission of proposed findings of fact and conclusions of law in a non-core proceeding. EY took this position in its first responsive pleading, see supra at 3, and thereby preserved its right to raise the argument before this court. It is correct as a matter of law. The underlying breach of contract and negligence claims brought by the Trustee do not fit into any of the items in the list of core proceedings in § 157(b)(2), which are not to be interpreted expansively. See Barnett v. Stern, 909 F.2d 973, 980 (7th Cir. 1990). In Barnett, moreover, the Seventh Circuit adopted the following test for distinguishing between core and non-core proceedings, used by many other circuit courts as well: "If the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy it is not a core proceeding; it may be related to the bankruptcy because of its potential effect, but under section 157(c)(1) it is an `otherwise related' or non-core proceeding." Id. at 981 (quoting In re Wood, 825 F.2d 90 (5th Cir. 1987)). Its application to this case is clear. The Trustee's claims against EY are ordinary state law claims arising out of a pre-petition audit EY performed for Taurus Foods, in Bankruptcy Court solely because of the Chapter 7 liquidation of Taurus. They do not invoke substantive rights created by bankruptcy law nor does their existence depend on the bankruptcy proceeding. A motion to stay the adversary proceedings in Bankruptcy Court pending the arbitration of these claims is, therefore, a non-core proceeding. See Griffin Trading Co. v. Checkers, Simon, Rosner, LLP, 250 B.R. 667, 671 (N.D.Ill. 2000) (motion to stay proceedings pending arbitration of negligence and contract claims relating to accounting malpractice is non-core proceeding). Consequently, the Bankruptcy Court's Order will be treated as a submission of proposed findings of fact and conclusions of law for review and entry of a final order by this court.
The court already has before it both EY's objections to the Bankruptcy Judge's Order and the Trustee's response to those objections. EY moves to strike the Trustee's response to its objections as untimely. EY is correct that the response was filed well after the ten days from receipt allowed under Bankruptcy Rule 9033(b). However, it appears from the Bankruptcy Court docket that the objections were set for a hearing, and that various continuances and enlargements of time related to the objections were granted by the Bankruptcy Judge. Unfortunately, if the Bankruptcy Court transmitted the motions and rulings to this court, the undersigned cannot find copies of them in order to determine whether the Trustee could have relied on the Orders to believe that he had until August 26, 2002, to file his response to the objections. The procedural nightmare that this matter has become might be enough reason to give the Trustee an extended period of time to respond to the objections. Besides, the response is helpful, so the court will consider it. Therefore, EY's Motion to Strike the Plaintiff's Response and Motion for Ruling on Objections are DENIED. A reply to a response of objections in non-core proceedings is not anticipated by Bankruptcy Rule 9033(b) but in this case a reply by EY would be helpful, so its alternative request to file a reply is GRANTED, and it will be allowed to file that reply within fifteen days of this date. That will complete the briefing allowed on EY's objections. Also, the Trustee's objection to EY's Notice of Appeal is SUSTAINED.
Finally, the stay of the adversary proceeding previously issued by this court remains in effect until further notice.
ALL OF WHICH IS ORDERED this 31st day of October, 2002.