On August 21, 2013, in Wellness International Network v. Sharif, No. 12-1349 (7th Cir. August 21, 2013), the Seventh Circuit issued its latest opinion on the thorny issues emanating from the Supreme Court’s “narrow” decision in Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011).  Unfortunately, even within the Seventh Circuit, Wellness may not settle litigants’ continuing disputes over the appropriate division of labor between bankruptcy and district courts and bankruptcy courts’ authority to enter final judgments, because the Seventh Circuit’s analysis of Article III principles arguably may be mere dicta that lower courts elect not to follow.

Wellness International Network (“WIN”) filed in bankruptcy court an adversary complaint against Richard Sharif seeking to prevent discharge of Sharif’s debts and a declaration that a trust of which Sharif was a trustee was Sharif’s alter ego.  In the midst of Sharif’s appeal from the bankruptcy court’s default judgment in favor of WIN, the Supreme Court issued its decision in Stern, and the parties eventually began litigating on appeal whether the bankruptcy court had statutory and constitutional authority to enter the default judgment as a final judgment.

The Seventh Circuit began its analysis by examining “whether the bankruptcy court had statutory authority to enter final judgment on WIN’s claims.”  Wellness, slip op. at 17 (citations omitted).  The Court concluded easily that WIN’s first four counts, which consisted of WIN’s objection to Sharif’s discharge, were core matters in which the bankruptcy court could enter final judgment pursuant to statute.  Wellness, slip op. at 18 (citing 28 U.S.C. § 157(b)(2)(J)).  The Seventh Circuit explained later in its opinion that the bankruptcy court also had constitutional authority to enter final judgment on the first four counts of WIN’s complaint.  Wellness, slip op. at 41.

As to WIN’s fifth and final count, an alter-ego claim, the Seventh Circuit noted that “[c]ourts have reached differing conclusions as to whether alter-ego claims are core matters,” but the Court passed on “determin[ing] whether the alter-ego claim is core or noncore because Sharif has waived the issue.”  Wellness, slip op. at 18 (citations omitted).  This finding of waiver is at odds with the Seventh Circuit’s ultimate decision to remand with instructions that “the district court shall first determine whether the alter-ego claim is a core or a noncore proceeding.”  Wellness, slip op. at 49.  In any event, with its conclusion of waiver in hand, the Seventh Circuit “proceed[ed] on the assumption that the alter-ego claim was a core proceeding over which the bankruptcy court had authority under § 157(b)(1) to enter final judgment[.]”  Wellness, slip op. at 19 (emphasis added).

It is not at all clear why the Seventh Circuit decided that Sharif’s waiver supported an assumption that the alter-ego claim is core rather than noncore.  As noted, the Seventh Circuit recognized that other courts have reached different conclusions regarding whether alter-ego claims are core or noncore.  See also Wellness, slip op. at 48 (“The core/noncore status of the alter-ego claim is not apparent.”).  Also unclear is the Seventh Circuit’s labeling as “reasonable” the Sixth Circuit’s explanation in Waldman v. Stone that “the fortuity of Waldman’s waiver of his own rights does nothing to diminish the bankruptcy court’s authority under § 157(c)(1).”  Wellness, slip op. at 47-48 (quoting Waldman, 698 F.3d at 922).  In Waldman, notwithstanding Waldman’s waiver of the statutory authority argument, the Sixth Circuit “concluded that the affirmative claims for fraud were noncore.”  Wellness, slip op. at 48 (emphasis added).

Perhaps the Seventh Circuit assumed the core status of the alter-ego claim out of a desire to reach its prior opinion in Ortiz v. Aurora Health Care, Inc. (In re Ortiz), 665 F.3d 906 (7th Cir. 2011). In Ortiz, the Seventh Circuit “authorized the parties to proceed as a direct appeal” pursuant to 28 U.S.C. § 157(d)(2)(A) from what the Court and the parties believed at the time to be a final judgment of the bankruptcy court.  Id. at 910.  A few months later, the Supreme Court issued its decision in Stern.  Based on Stern, the Seventh Circuit determined in Ortiz that the bankruptcy court lacked the constitutional authority to render a final judgment and, in the absence of a final judgment, that the Seventh Circuit lacked appellate jurisdiction over the appeal.  See id. at 909.

While discussing whether the bankruptcy court’s orders were interlocutory or final, the Seventh Circuit stated that “[f]or the bankruptcy judge’s orders to function as proposed findings of fact or conclusions of law under 28 U.S.C. § 157(c)(1), we would have to hold that the debtors’ complaints were ‘not a core proceeding’ but are ‘otherwise related to a case under title 11.’”  Ortiz, 665 F.3d at 915 (citation omitted).  The Seventh Circuit had concluded, however, that the debtors’ claims were core.  Id.  Read together, the Court’s observations in Ortiz suggested that in core proceedings, bankruptcy courts may not propose findings and conclusions for de novo review by the district court.  Under such reasoning, the bankruptcy court has no constitutional authority to enter final judgment and no statutory authority to propose findings and conclusions.

This conclusion conflicts with that reached by some other courts.  See, e.g., In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 565-66 (9th Cir. 2012).  In fact, the Ninth Circuit described Ortiz as “not ‘thoroughly reasoned,’” id. at 566 n.8, which description the Seventh Circuit expressly noted in Wellness while reaffirming its discussion in OrtizWellness, slip op. at 47.  The Ninth Circuit is not alone in refusing to follow Ortiz.  Numerous courts, including lower courts within the Seventh Circuit, have characterized Ortiz’s “conclusion” as dicta and declined to follow it.2  Given various courts’ disagreement with Ortiz, the Seventh Circuit may have viewed Wellness as a vehicle through which to elaborate on its prior opinion.  As explained below, however, litigants may argue that the Seventh Circuit’s discussion in Wellness of bankruptcy courts’ constitutional authority to enter final judgments, including the Court’s reaffirmation of Ortiz, is itself dicta.

Remember that the Seventh Circuit began its analysis in Wellness by assuming, not deciding, that WIN’s alter-ego claim qualifies as a core proceeding under 28 U.S.C. § 157(b)(2).  In fact, the Seventh Circuit remanded to the district court for the initial core/noncore determination.  Wellness, slip op. at 49.  The Seventh Circuit’s assumption may seem innocuous enough, but the core/noncore determination is a critical threshold issue with respect to whether the bankruptcy court’s default judgment violated Article III.  As the Seventh Circuit explained:

If the [district court] concludes that it is a noncore proceeding, then the court may treat the bankruptcy court’s order purporting to enter final judgment on the alter-ego claim as proposed findings of fact and conclusions of law to be reviewed de novo.  See Fed. R. Bankr. P. 9033(d).

Wellness, slip op. at 49.  In other words, if the district court on remand determines that WIN’s alter-ego claim is noncore (contrary to the Seventh Circuit’s threshold assumption), the bankruptcy court’s default judgment was not a final judgment at all and could not have run afoul of Article III.  If that is the case, then the discussion of Article III principles in Wellness arguably answers a question not actually before the Seventh Circuit.  As a result, the Seventh Circuit’s latest addition to the Stern debate could constitute non-binding dicta that leaves important constitutional issues still technically unresolved.  See, e.g., Wilder v. Apfel, 153 F.3d 799, 803 (7th Cir. 1998) (“Dicta are the parts of an opinion that are not binding on a subsequent court, whether as a matter of stare decisis or as a matter of law of the case.”) (collecting cases).

To avoid any uncertainty, the Seventh Circuit could have remanded to the district court or the bankruptcy court to determine whether the alter-ego claim is a core or noncore proceeding.3  In fact, the Seventh Circuit ultimately did just that, see Wellness, slip op. at 49 (“district court shall first determine whether the alter-ego claim is a core or a noncore proceeding”), but not before addressing issues related to the bankruptcy court’s constitutional authority to enter final judgment in core proceedings.  Consequently, the district court, on remand, may have the rather unique opportunity to issue a ruling that negates a foundational premise of the Seventh Circuit’s opinion.  This procedural posture may create doubt as to the efficacy of what would otherwise be significant analysis in Wellness.

In summary, the Seventh Circuit’s constitutional analysis in Wellness is sure to be heralded by many litigants as important commentary on Stern.  It remains to be seen whether courts will follow Wellness in future cases.