Technical Automation Services Corp. v Liberty Surplus Insurance Corp.

In Technical Automation Serv’s Corp. v Liberty Surplus Ins. Corp., No. 10-20640, slip copy (5th Cir. March 5, 2012), the Fifth Circuit discussed the power of magistrate judges when it raised, sua sponte, the question of whether magistrate judges have the jurisdictional authority to enter judgment on claims. In Stern v. Marshall, 131 S.Ct. 2594 (2011) (more famously known as the Anna Nicole Smith case), the Supreme Court ruled that a bankruptcy judge is not an Article III judge and therefore cannot adjudicate ancillary claims in a bankruptcy proceeding, unless the ancillary claims stem from the bankruptcy itself. It came to the attention of civil procedure nerds (and this Fifth Circuit panel) that magistrate judges are also not Article III judges, so magistrate judges may be similarly limited and they should not be able to invade the province of a true Article III judge.

In Puryear v. Ede’s Ltd., 731 F.2d 1153 (5th Cir. 1984), the Court held that the Magistrates Act, 28 U.S.C. §636(c)(1), which permits a United States magistrate judge to conduct “any or all proceedings in a jury or nonjury civil matter and order entry of judgment in the case,” was constitutional because it also requires the consent of both parties.

The 5th Circuit held that, under current precedent, there is nothing wrong with a magistrate making final determinations. However, the Court hinted that this issue might be ripe for Supreme Court adjudication if the right case comes along.

The Court reasoned as follows:

Although the similarities between bankruptcy judges and magistrate judges suggest that the Court’s analysis in Stern could be extended to this case, the plain fact is that our precedent in Puryear is there, and the authority upon which it was based has not been overruled. Moreover, we are unwilling to say that Stern does that job sub silentio, especially when the Supreme Court repeatedly emphasized that Stern had very limited application.

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Notwithstanding that this constitutional question may be seen in a different light post Stern, we will follow our precedent and continue to hold, until such time as the Supreme Court or our court en banc overrules our precedent, that federal magistrate judges have the constitutional authority to enter final judgments on state-law counterclaims.

After concluding the magistrate had the power to adjudicate the dispute, the Fifth Circuit wasted little time concluding the magistrate came to the wrong answer. The magistrate found the insured, Technical Automation, was owed a defense under the E&O endorsement in the Liberty Mutual policy. Liberty Mutual argued that the policy should be reformed because of mutual mistake. The magistrate, using the eight corners doctrine, held mutual mistake did not affect the duty to defend because she could not go beyond the eight corners of the pleadings and policy to look at whether there was mutual mistake. The Fifth Circuit clarified, finding that the real first question was not “what is in the eight corners,” it is “whether there was an agreement in the first place.” Because mutual mistake questions the very formation of the policy, it can affect the duty to defend regardless of the terms of the policy.

Author: Harry Morse, Charles E. Rothermel