On May 26, 2015, the U.S. Supreme Court ruled in favor of the firm’s client Wellness International Network, reversing a Seventh Circuit decision that held that Article III of the Constitution was violated when litigants consented to the entry of judgments by bankruptcy courts on what have come to be known as “Stern” claims. In siding with arguments made by Partner Catherine L. Steege and her team, the Court has clarified a considerable constitutional question over the authority of the nation’s nearly 1,000 federal bankruptcy judges and federal magistrate judges.
The Court ruled that Article III of the U.S. Constitution is not violated when parties knowingly and voluntarily consent to adjudication by the bankruptcy court of “Stern” claims. The majority ruled that express or implied consent suffices. Justice Alito concurred, but concluded that it was unnecessary to determine whether implied consent was sufficient because the debtor Sharif had forfeited hisStern arguments on appeal. Today’s decision is the Court’s third case in four years addressing the issues raised by the Court’s 2011 decision inStern v. Marshall. In Stern, the Court held that bankruptcy courts could not enter judgment except when the dispute at issue “stemmed from the bankruptcy itself” or was a dispute that would necessarily be resolved in the process of allowing claims against the bankruptcy estate. In all other types of disputes, bankruptcy courts must now submit proposed findings of fact and conclusions of law to the district court for entry of judgment. Following Stern, the courts divided over whether a litigant could consent to the entry of a judgment by the bankruptcy court. The Fifth, Sixth and Seventh Circuits held that litigants could not consent because the issue involved structural separation of powers concerns that were beyond the rights of an individual litigant to waive. The Ninth Circuit upheld the right of litigants to consent.
The Supreme Court’s decision reverses the Seventh Circuit and remands the case for a determination of whether Mr. Sharif’s actions constituted knowing and voluntary consent.
The three dissenters, Justices Roberts, Scalia and Thomas, would have reversed on the basis that the dispute before the bankruptcy court was not a “Stern” claim.