Much has been written in the past several years regarding the scope of a bankruptcy court’s jurisdiction in the wake of the Supreme Court’s decisions in Stern v. Marshall, 564 U.S. ___ (2011) and Executive Benefits Ins. Agency v. Arkison, 573 U.S. ___ (2014). Now, the Supreme Court has weighed in again in the case of Wellness Int’l Network, Ltd., et al v. Sharif, 575 U.S. ___ (2015) in an attempt to clarify the confusion created by Stern.
In Wellness, the Supreme Court held that there is no violation of the constitutionally mandated separation of powers by a bankruptcy court, an Article I tribunal, rendering a final judgment on claims that should be decided by Article III courts, so long as the parties to the litigation consent to the resolution by a bankruptcy court. The Supreme Court, however, failed to clarify what is required for a litigant to consent to bankruptcy court jurisdiction despite having the opportunity to do so.
In 2011, the Supreme Court created a wave of confusion when it issued the Stern decision, which found that bankruptcy judges lacked constitutional authority to enter final judgments or orders on matters that Congress designated as “core” for bankruptcy court jurisdictional purposes but for which the Constitution guaranteed adjudication by an Article III tribunal. Meaning, that if a claim or cause of action was designated as “core” but is prohibited from proceeding due to a constitutional bar (i.e., a claim that arose under common law, in equity or admiralty) (a “Stern Claim”), a bankruptcy court did not have jurisdiction to decide those claims notwithstanding the provisions of 28 U.S.C. § 157 and related statutes.
Thereafter, in 2014, the Supreme Court in Bellingham attempted to clarify some confusion created by Stern. In that case, the Supreme Court held that a bankruptcy court could issue proposed findings of fact and conclusions of law for review by a district court when presented with a Stern Claim. Bellingham, however, did not end the discussion regarding the bankruptcy court’s power to adjudicate Stern Claims.
Wellness Case Background
The Wellness case arises out of the attempts by Wellness Internal Network to enforce a judgment against Sharif. After Wellness obtained the judgment, Sharif commenced a chapter 7 bankruptcy case. In the bankruptcy case, Wellness sought to enforce and collect its judgment; however Sharif stymied those efforts by refusing to turn over documents and comply with discovery orders. Eventually Wellness discovered the existence of Soad Wattar Living Trust that held $5 million in assets, which Sharif claimed he administered on behalf of his mother. After discovering the existence of the Trust, Wellness commenced an adversary proceeding in the bankruptcy court objecting to the discharge of Sharif and requesting entry of a declaratory judgment that the Trust is property of the Sharif’s bankruptcy estate because Sharif used the assets of the Trust and the Trust was Sharif’s alter ego. Sharif responded to the complaint and admitted that the adversary proceeding was a “core” matter under 28 U.S.C. § 158.
Due to failure to comply with discovery orders and other factors, the Bankruptcy Court entered a default judgment against Sharif. Pursuant to this default judgment, the Trust was declared to be property of the Sharif’s bankruptcy estate such that its assets were available for administration and distribution to creditors.
Sharif appealed to the district court. After Sharif filed his appeal to the district court, the Sterndecision was issued. Sharif, however, failed to cite or discuss Stern until after briefing had closed. The district court therefore did not consider the Stern issues and affirmed the bankruptcy court.
Sharif again appealed, this time to the Seventh Circuit. The Seventh Circuit affirmed the district court’s decision in part and reversed in part. The Seventh Circuit affirmed that the judgment against Sharif with respect to the claim asserted by Wellness as non-dischargeable; however, the Seventh Circuit reversed the ruling declaring that the Trust was property of the bankruptcy estate. The Seventh Circuit ruled that a litigant, such as Sharif, cannot waive a Stern argument and since the determination of whether the Trust is an alter ego of Sharif was a claim prohibited from proceeding before the bankruptcy court by the Constitution, the bankruptcy court lacked constitutional authority to declare the Trust property of the bankruptcy estate.
The Supreme Court Decision
In a 6-3 decision, the Supreme Court reversed the Seventh Circuit and held that litigants may validly consent to the adjudication of Stern Claims (and other claims) by the bankruptcy court. The majority began the decision discussing the fact that since the founding of the Republic, parties have been permitted to consent to adjudication before non-Article III tribunals and those judgments are binding. The Supreme Court found, relying on precedent, that litigation before an Article III judge is a personal right that can waived so long as the waiver does not implicate a structural challenge to the constitutionally mandated separate of powers. Meaning, parties can consent to trial before a non-Article III court, such as a bankruptcy court, so long as the claims at issues do not result in a challenge to the separation of powers mandated by the Constitution.
The Supreme Court further stated that separation of powers is not challenged so long as Article III courts retain supervisory authority over the process. Indeed, the Supreme Court stated that “[a]djudication based on litigant consent has been a consistent feature of the federal court system since its inception. Reaffirming that unremarkable fact, we are confident, poses no great threat to anyone’s birthrights, constitutional or otherwise.”
The crux of the Wellness decision is the fact that when a party consents to adjudication by a non-Article III tribunal, the party knowingly and voluntarily does so and, therefore, waives that constitutional protection. The Supreme Court distinguished the situation in Wellness from the one in Stern because, in Stern, the litigant had no choice at the time but to litigate in bankruptcy court. The litigant in Stern was “forced” to litigate before a non-Article III court due to existing rules and jurisprudence at the time. Whereas in Wellness, Sharif likely consented to adjudication before the non-Article III bankruptcy court and, therefore, since the bankruptcy court is a division of and under the supervision of the Article III district court, the litigants could consent to trial before the bankruptcy court without offending the separation of powers mandated that doomed the jurisdiction of the bankruptcy court under Stern.
The Wellness decision does not address what is required to determine if a litigant consents to non-Article III adjudication. Sharif argued that such consent must be expressed. The Supreme Court disagreed, stating that consent can be implied but such consent must be knowing and voluntary. The Supreme Court did not, however, go any further and did not decide if Sharif’s consent, by admitting that the adversary proceeding was “core,” was sufficient.
Chief Justice Roberts (the author of Stern) and Justices Scalia and Thomas dissented in the decision.
Thoughts and Conclusion
The Wellness decision goes a long way to restoring bankruptcy court jurisdiction that was eroded or eliminated by Stern and Bellingham. By reaffirming that parties’ consent to final resolution by a bankruptcy court is permissible, the Supreme Court is restoring jurisdiction that was taken by previous decisions. As a result, the Wellness decision should substantially eliminate ancillary litigation over jurisdiction that has developed in the wake of Stern. Nevertheless, the failure of the Supreme Court to clearly delineate the contours of what is “consent” for constitutional purposes will open another avenue of litigation that may complicate the very litigations that Wellness is trying to streamline.