“Bad news comes in threes.” “Third time’s the charm.” “Three strikes and you’re out.”
One of these three adages may come to characterize the outcome of a case of significant import argued before the US Supreme Court this week. The Supreme Court heard arguments on Wellness Int’l Network, Ltd. v. Sharif. The case is the third in a trilogy including Stern v. Marshall and Executive Benefits Ins. Agency v. Arkison, which examine the scope of the constitutional exercise of judicial power by bankruptcy courts.
In 2011, the Court held in Stern that certain actions expressly designated by the Bankruptcy Code as “core,” and thus presumptively subject to the entry of final judgment by bankruptcy courts, were instead an unconstitutional exercise of Article III judicial power by an Article I tribunal.
In Arkison, decided last June, the Supreme Court dodged the opportunity to construe the breadth of “core but unconstitutional” claims (so-called “Stern Claims”) or to decide whether a party could agree, either by express or implied consent, to a bankruptcy court’s rendering a final judgment that would otherwise be unconstitutional. Instead, a unanimous Court ruled that the procedural history of the case mooted the dispute by effectively providing a final judgment by an Article III court.
In Wellness, the Court was again confronted with questions on the scope on the constitutional power of a bankruptcy court and the impact of consent on the breadth of that authority. The Court was asked to determine whether one of the most fundamental matters that bankruptcy courts have traditionally resolved – what constitutes “property of the estate” of a debtor – is within a bankruptcy court’s constitutional judicial power.
The debtor in Wellness commenced his bankruptcy case after losing a lawsuit with a creditor in a non-bankruptcy litigation.The dispute at issue concerned whether particular assets were “property of the estate” under Section 541 of the Bankruptcy Code as maintained by the Trustee or whether the Trustee had only “bare legal title” to property held in trust by the debtor for other family members.
The questions before the Supreme Court were whether the bankruptcy court had constitutional judicial power to render final judgment on the “property of the estate” question and, if not, whether that authority had been legally conferred by the express or implied consent of the parties.
The arguments on Wednesday were, in many respects, a reprise of the earlier oral arguments in Arkison. The petitioner argued that the decision was within the constitutional scope of judicial power of the bankruptcy court, sought to differentiate the dispute from the fraudulent transfer claim at issue in Stern, and argued that the defendant debtor had consented to the authority of the bankruptcy court both expressly and by implication. The respondent argued that Stern was controlling, that there was no legitimate distinction for constitutional purposes between a fraudulent transfer claim and a dispute over the scope of “property of the estate,” that the debtor could not legitimately consent to the exercise of unconstitutional judicial power by the bankruptcy court and that, in this instance no such consent was even present.
Again as in Arkison, Justices Breyer, Ginsberg, Kagan and Sotomayor seemed sympathetic with authority for bankruptcy courts to resolve property of the estate issues and with consensual authority over “Stern claims.” Chief Justice Roberts was again concerned with exercise of judicial power by non-Article III judges, and whether it would take something out of what he referred to as “our constitutional birthright to decide cases and controversies under Article III.” Justice Scalia appeared to view the issues as similar to Stern and its narrower view of constitutional authority of bankruptcy courts. And Justices Alito, Kennedy and Thomas did not participate actively enough to give much indication of their views.
The Office of the Solicitor General argued in support of the petitioner. Among the arguments made was that these two issues (scope of constitutional judicial power and effectiveness of express or implied consent) needed to be resolved by the Court in order to provide guidance and certainty to the bankruptcy bench and bar. In an interesting colloquy, the OSG representative was asked whether, if deciding one of the two questions was dispositive, the Court could nonetheless decide both issues to provide greater guidance and clarity. He was also asked which of the two issues he viewed as more important for resolution. The OSG representative declined to make the choice presented or to advise the Justices their ability to decide both questions.
Between now and the end of the Supreme Court’s term in June, the bankruptcy community will be anxiously awaiting the Supreme Court’s decision in order to know the permissible extent of bankruptcy court judicial power and to know whether a consent process might be used to facilitate rendering final judgments by the bankruptcy courts.