In Waldman v. Stone, the Sixth Circuit explored the contours of bankruptcy court jurisdiction arising from an action in which the debtor obtained a $3 million judgment against one of his main creditors. The case involved an individual debtor who claimed that his principal creditor’s fraud ultimately drove him into bankruptcy. As result, he commenced an adversary proceeding both to avoid the alleged debt as well as to recover on affirmative-based claims. After a trial, the bankruptcy court both disallowed the creditor’s claim and awarded the debtor $3 million in compensatory and punitive damages.
The Sixth Circuit, in an opinion by Judge Kethledge, explored the parameters of bankruptcy court jurisdiction to consider affirmative claims by the debtor. This included a survey of some of the recent U.S. Supreme Court authority in this area. The Court ultimately concluded that the claims for monetary damages were sufficiently distinct from the disallowance claim that they were beyond the power of the bankruptcy court to adjudicate in a final order. These state law claims required the debtor to prove facts beyond those necessary for the disallowance claim: “the bankruptcy court’s judgment with respect to those claims, therefore, was entered in violation of Article III.” The Court then turned to what to do about the constitutional violation. After considering a variety of options, the Court elected to remand the case to the bankruptcy court in order to permit it to recast its judgment as proposed findings of fact and conclusions of law, which the district court should then review de novo.
This case is of obvious interest to both bankruptcy practitioners as well as those representing creditors in non-bankruptcy proceedings. As more and more claims are sought to be adjudicated in bankruptcy court, it is a reminder that there are limits to the bankruptcy court’s jurisdiction. The Court also presents an interesting way to address those concerns by having the bankruptcy court issue proposed findings of fact and conclusions of law rather than a final adjudication.