08/18/2011 – Order, Report and Recommendation filed in the AFY, INC. Adversary Proceedings by Sears Cattle Co. et al before Chief, U.S. Bankruptcy Judge Thomas L. Saladino in the United States Bankruptcy Court for the District of Nebraska. Judge Saladino grants defendant’s motion to set aside a judgment entered on July 6, 2011, granting the trustee’s claim for collection of an account receivable in the amount of $291,937. Judge Saladino acknowledges that the claim falls within the scope of § 542(b). However, he characterizes the claim as a “collection action”. Applying, the Supreme Court’s decision of Stern v. Marshall, Judge Saldino holds that “[b]ecause this action does not arise under Title 11 or arise in the bankruptcy case itself, nor would it be resolved in the claims allowance process, it is not a core proceeding within the constitutional authority of the bankruptcy court to enter judgment.” The key portions of Judge Saladino’s decision follow.
The Stern decision circumscribes the ability of non-Article III judges to enter final judgments on certain types of claims, limiting the bankruptcy court’s constitutional authority to do so to core proceedings stemming from the bankruptcy itself and actions that “would necessarily be resolved in the claims allowance process.” 131 S. Ct. at 2618. The cause of action at issue here fits into neither category.
The defendant did file a proof of claim in the debtor’s bankruptcy case, characterizing it as a contingent claim for an unknown amount of at least $323,208.23. The proof of claim is premised on the allocation of proceeds of the sale of certain real property co-owned by the debtor and the defendant. It is unlikely the defendant could invoke the right of setoff under 11 U.S.C. § 553 because these are not mutual debts, so the trustee’s cause of action would not be resolved in the claims allowance process.
In his complaint, the trustee asserted, without reference to specific authority, that this action is a core proceeding. The defendant argues it is non-core. The trustee characterizes this cause of action as one to force the turnover of property belonging to the bankruptcy estate under 11 U.S.C. § 542(b).4 Section 542(b) refers to the collection of debts that are “matured, payable on demand, or payable on order.” The debt the trustee is attempting to collect is undisputed and presumably is matured and payable on demand. While it falls within the scope of § 542(b), it nevertheless is simply a collection action. It is a claim that would not be before the bankruptcy court but for the fact that the debtor filed a bankruptcy petition. As a collection action, it could, and normally would, be adjudicated outside of bankruptcy.
Because this action does not arise under Title 11 or arise in the bankruptcy case itself, nor would it be resolved in the claims allowance process, it is not a core proceeding within the constitutional authority of the bankruptcy court to enter judgment. Instead, the case should be transferred to the United States District Court for the District of Nebraska for entry of final judgment.
Accordingly, I will grant the defendant’s motion for relief from the judgment, vacate the portion of the judgment concerning the trustee’s first cause of action, and recommend to the district court that it withdraw the reference of the case to treat this court’s order of July 6, 2011 (Fil. No. 50) as proposed findings of fact and conclusions of law on which the district court may enter final judgment.