• In re Sundale, Ltd.: Bankruptcy Court May Have Final Say in Certain State-law Counterclaims
  • March 22, 2013 | Authors: Scott St. Amand; J. Ellsworth Summers
  • Law Firm: Rogers Towers, P.A. - Jacksonville Office
  • As we have discussed in previous posts, the Supreme Court has held that not all counterclaims which arise within the context of a bankruptcy case are “core” proceedings, such that the bankruptcy court may make a final and binding determination on the claim. This is troublesome to creditors because further litigation of the claim has the potential to be expensive, and thus the return on the claim may be diminished.

    It is an unpleasant prospect, therefore, that a bankruptcy court may lack the jurisdiction to resolve an adversary proceeding involving a debtor’s state law counterclaim. Nevertheless, in Stern v. Marshall, the Supreme Court specifically ruled that bankruptcy courts “lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim.”

    After Stern bankruptcy practitioners were left wondering which counterclaims, if any, remained the province of bankruptcy courts. Although the Supreme Court noted that its holding was limited, the Eleventh Circuit had been reticent to weigh in on this particular jurisdictional question. Finally, in November of 2012, the appellate court released its opinion in In re Sundale, which held that state law counterclaims that are necessarily resolved by resolution of the proof of claim are distinguishable from those non-core counterclaims in Stern. Because of their “core” nature, the bankruptcy court had jurisdiction to enter a binding final judgment on the counterclaim.

    As in the previously discussed case of In re Celotex, the holding in Sundale is narrow, but ultimately beneficial to creditors. Both cases limit debtors from unreasonably prolonging bankruptcy proceedings through litigation. It is too early to tell whether these two bankruptcy cases signal a trend of deference to the bankruptcy court by the Eleventh Circuit, but as it stands now, creditors may take some solace that Stern did not shut the door on the finality of all bankruptcy court counterclaim decisions.