May 26, 2015

Supreme Court Decides Wellness International Network, Ltd. v. Sharif

On May 26, 2015, the U.S. Supreme Court decided Wellness International Network, Ltd. v. Sharif, (No. 13-935), holding that Article III does not prevent bankruptcy judges from entering final judgment on claims that seek only to augment the bankruptcy estate and would exist outside of bankruptcy proceedings (so-called “Stern claims”) if the parties to the proceeding knowingly and voluntarily consent, but that consent need not be express.

Because federal bankruptcy judges are not Article III judges, they do not have the power to enter final judgment in all matters that come before them. They may enter final judgment in “all cases under [the Bankruptcy Code],” and in certain proceedings among those called “core proceedings” (defined in in 28 U.S.C. § 157(b)(2)) that are referred to them by the district court. But in “non-core” proceedings, a bankruptcy judge may enter final judgment only “with the consent of all the parties to the proceeding.” 28 U.S.C. § 157(c)(2). Without that consent, a bankruptcy judge must “submit proposed findings of fact and conclusions of law” that are reviewed by a district court de novo. 28 U.S.C. § 157(c)(1).

Wellness International had claims against Richard Sharif. When Sharif filed bankruptcy, Wellness International filed an adversary complaint in the bankruptcy court objecting to Sharif’s discharge in bankruptcy and seeking a declaration that a trust that owned certain assets was Sharif’s “alter ego” and that the assets therefore belonged to Sharif’s bankruptcy estate. Wellness International asserted that the proceeding was a “core proceeding” in which the bankruptcy court could enter final judgment, and Sharif admitted in his answer to the complaint that the proceeding was “core.” The bankruptcy court eventually ruled in Wellness International’s favor, denying Sharif a discharge and declaring that the assets in the trust were in fact property of Sharif’s bankruptcy estate.

Sharif appealed the bankruptcy court’s decision to the district court, but before briefing in the appeal, the Supreme Court decided Stern v. Marshall, 564 U.S. --- (2011), which held that Article III prevents bankruptcy courts from entering final judgment on claims that seek only to “augment” the bankruptcy estate and would otherwise “exis[t] without regard to any bankruptcy proceeding.” Sharif did not cite Stern in his appeal briefs to the district court, but argued after briefing was completed that Stern required the district court to treat the bankruptcy court’s order only as a report and recommendation, and not a final judgment. The district court refused to consider that argument because Sharif had not raised it in his brief, and proceeded to affirm the bankruptcy court’s judgment.

On appeal, the Seventh Circuit held that while Sharif’s argument based on Stern would normally have been forfeited because he waited too long to raise it, an argument based on Stern concerned the constitutional authority of a bankruptcy court, and therefore could not be waived. The Seventh Circuit concluded that Wellness International’s claim relating to the trust assets was a “Stern claim” that the bankruptcy court lacked jurisdiction to adjudicate, thus requiring the district court to withdraw the reference to the bankruptcy court and set a new schedule for discovery and other proceedings.

The Supreme Court reversed and remanded. The Court first held that the entitlement to an Article III adjudicator is a “personal right” that is ordinarily subject to waiver by a party. While the Court recognized that Article III also serves structural purposes that parties cannot waive, the Court concluded that allowing bankruptcy courts to adjudicate claims submitted to them by consent does not violate any structural purpose as long as Article III courts retain supervisory authority over the process of adjudicating “Stern claims,” which they do through (among other things) their ability to withdraw the reference of “core” proceedings from the bankruptcy court.

The Court then held that waiver of the entitlement to an Article III adjudicator need not be express — and may be implied — as long as the consent was knowing and voluntary. The Court concluded that the waiver issue in this case “would require a deeply factbound analysis of the procedural history unique to this protracted litigation,” and therefore remanded the case to the Seventh Circuit to decide whether Sharif’s actions constituted knowing and voluntary consent, and also whether he forfeited his Stern argument on appeal from the bankruptcy court’s decision.

Justice Sotomayor delivered the opinion of the Court, in which Justices Kennedy, Ginsburg, Breyer, and Kagan joined. Justice Alito filed an opinion concurring in part and concurring in the judgment. Chief Justice Roberts filed a dissenting opinion, in which Justice Scalia joined and Justice Thomas joined in part. Justice Thomas filed a dissenting opinion.

Download Opinion of the Court.

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