On May 26, 2015, continuing a springtime ritual for bankruptcy lawyers, the Supreme Court issued its latest “progeny of Stern” ruling on the adjudicative authority of the bankruptcy courts. In a 6-3 decision the Court held that “Our precedents make clear that litigants may validly consent to adjudication by the bankruptcy courts.” Wellness Int’l Network, Ltd. v. Sharif __ U.S. __ (May 26, 2015).
This springtime ritual began four years ago when the Supreme Court issued its blockbuster opinion on the constitutional authority of bankruptcy courts to adjudicate disputes before them in Stern v. Marshall, 564 U.S. __, 131 S.CT 2594 (2011). Stripped (excuse the pun) of is infamous association with Anna Nicole Smith, a 5-4 court determined that despite the statutory authority of the bankruptcy court to make a final decision in a “core” matter, a bankruptcy judge could not enter judgment on a tort claim asserted by debtor against a putative creditor because Article III of the Constitution prohibited congress from conferring such authority on non-Article III decision makers.
For those readers who have forgotten their Constitutional Articles, in brief, Article III requires Congress, when creating lower courts, to provide that judges for such courts have, among other protections, a life time term (subject to removal by impeachment) and protection from reduction in compensation during such terms. In Stern, the Court found the provisions essential to the separation of powers between the judicial and legislative branches of government.
While Judge Roberts stated the Stern opinion was a narrow one, the case has spun off a mini-industry in litigating the effect of the decision through the lower courts. Here in KRCL’s “home” circuit, the Fifth Circuit noted: “Although the[Supreme] Court stated that its decision was “narrow,” [citation omitted]., its reasoning was sweeping.” Frazin v. Haynes & Boone, LLP et al., 732 F.3d 313 (5th Cir. 2013), cert. denied, 134 S.Ct. 1770, (Mar 31, 2014).
Last spring, the Supreme Court issued its decision in Executive Benefits Ins. v. Arkinson, 573 U.S. __ (2014) wherein the Supreme Court held under the reasoning of Stern, if the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, a bankruptcy court can issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court. In so deciding, the Supreme Court avoided deciding whether under the reasoning of Stern, litigants can consent to a bankruptcy court entering judgment either expressly or by implication. And so litigation over the authority of the bankruptcy court to finally decide matters continued.
This Spring, the Supreme Court did not avoid the issue of consent to final adjudication by bankruptcy courts, implicated or express. Multiple circuit courts, including the Fifth, Sixth and Seventh Circuit Courts of Appeal, had held to that the right to adjudication by an Article III court could be waived, while the Ninth Circuit had found the opposite. In writing for the six member majority, Justice Sotomayor, not only held that litigants can waive the right to adjudication by an Article III court, and thereby be subject to the entry of a final judgment by the bankruptcy court, but that such consent can arise by implication, i.e. the actions or inactions of the party before the court as oppose an express statement of consent.
Nonetheless, the Supreme Court, by remanding the case to the lower courts to determine if the waiver in the underlying case was “knowing and voluntary,” an inquiry it stated was a “deeply factbound analysis,” suggests that bankruptcy parties have not seen the end of Stern litigation.
In addition, while the 6 to 3 decision shows that the Court was solidly in favor of the holding, a dissent by Chief Justice Roberts bears mentioning. In his dissent, Justice Roberts uses colorful language to warn of the potential consequences of the Court’s decision, including that allowing parties to consent to a bankruptcy court’s adjudication of a Stern claim “may assign our hard-won constitutional birthright” and that the decision may be used to allow for the concentration of power into the “impetuous vortex” of the legislative branch. Justice Sotomayor, writing for the majority, batted away these warnings, noting sardonically that to “hear [Chief Justice Roberts’s] dissent tell it, the world will end not in fire, or ice, but in a bankruptcy court.” It seems that, at least as far as six Justices are concerned, allowing bankruptcy courts to enter final judgments on Stern claims with consent of the parties does not portend the end of our constitutional system.