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Bankruptcy – jurisdiction — constitutionality

United States Court of Appeals For the Seventh Circuit


Bankruptcy – jurisdiction — constitutionality

Bankruptcy courts have no jurisdiction to hear claims under a Wisconsin statute that allows individuals to sue if their health care records are disclosed without permission in violation of sec. 146.84.

“Just as Pierce’s filing of a proof of claim in Vickie’s bankruptcy did not give the bankruptcy judge authority to adjudicate her counterclaim, Aurora’s act of filing proofs of claim in the debtors’ bankruptcies did not give the bankruptcy judge authority to adjudicate the debtors’ state-law claims. The debtors’ claims seek “to augment the bankruptcy estate—the very type of claim that . . . must be decided by an Article III court.” Id. at 2616 (citing N. Pipeline and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)). Non-Article III judges may hear cases when the claim arises ‘as part of the process of allowance and disallowance of claims,’ id. (quoting Katchen, 382 U.S. at 336), or when the claim becomes ‘integral to the restructuring of the debtor-creditor relationship,’ id. at 2617 (quoting Langenkamp, 498 U.S. at 44). Although there is some factual overlap between the debtors’ claims and Aurora’s proofs of claim, the bankruptcy judge ‘was required to and did make several factual and legal determinations that were not “disposed of in passing on objections” to’ Aurora’s proofs of claim. Id. (quoting Katchen, 382 U.S. at 332 n.9). In granting Aurora’s summary judgment motion, the bankruptcy judge interpreted a Wisconsin state law to require proof of actual damages as an essential element of the debtors’ claims and found that there was no genuine issue of material fact as to the lack of actual damages. Nothing about these decisions involved an adjudication of Aurora’s proofs of claim and there is no ‘reason to believe that the process of adjudicating [Aurora’s] proof[s] of claim would necessarily resolve’ the debtors’ claims. Id. Stern reaffirmed that ‘Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.’ Id. at 2618. The debtors’ action owes its existence to Wisconsin state law and will not necessarily resolve in the claims allowance process. That the circumstances giving rise to the claims involved procedures in the debtors’ bankruptcies is insufficient to bypass Article III’s requirements. Stern v. Marshall makes plain that the bankruptcy judge in our cases ‘exercised the “judicial Power of the United States” in purporting to resolve and enter final judgment on’ the debtors’ Wisconsin state-law claims. Id. at 2611. We thus hold that the bankruptcy judge lacked authority under Article III to enter final judgments on the disclosure claims.”

Dismissed and Remanded.

10-3465 & 10-3466 In re Ortiz

Appeals from the United States Bankruptcy Court for the Eastern District of Wisconsin, Kelley, Bankr. J., Tinder, J.

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