June 8, 2015
by Christopher J. Panos
Partridge Snow & Hahn LLP – USFN Member (Massachusetts)
The United States Supreme Court in Wellness International Network, Limited v. Sharif, 575 U.S. __ (May 26, 2015), answered one of the foremost questions left open after its decision in Stern v. Marshall, 564 U.S. 2 (2011) — is it permissible for litigants in a bankruptcy court to consent to a final adjudication of claims that are “‘core’ under the statute but yet prohibited from proceeding in that way as a Constitutional matter”? In Stern, the Supreme Court ruled that bankruptcy courts lack authority under the Constitution to adjudicate such claims because bankruptcy judges are not “Article III” judges.
Four years after deciding Stern, the Supreme Court has ruled that parties can consent to the bankruptcy court entering a final order on a “Stern-type claim” and that implied consent may be found as long as consent is “knowing and voluntary.” As the law develops regarding the authority of the bankruptcy courts, it is important for litigants to make an assessment of these issues when litigation is commenced in the bankruptcy court.
Sharif was an individual debtor in a chapter 7 proceeding. A creditor objected to Sharif’s discharge and sought a declaratory judgment that certain assets, held in trust by Sharif, were actually property of the bankruptcy estate. The creditor claimed that the trust was the alter ego of Sharif. After discovery violations by Sharif, the bankruptcy court entered default judgment against him. Sharif appealed. While the appeal was pending, the Supreme Court issued its opinion in Stern. Sharif then argued that the judgment entered by the bankruptcy court was unconstitutional because that court lacked authority over the alter ego claims. The district court upheld the judgment, but the Seventh Circuit Court of Appeals held that the parties could not consent to have the bankruptcy court enter final orders with respect to Stern-type claims. The Supreme Court reversed the Circuit Court, holding that parties can consent to have their disputes decided by a non-Article III judge. The case was remanded for a finding as to whether Sharif had, by his actions, consented to adjudication by the bankruptcy court. The Supreme Court advised in a footnote that the better practice would be for a court to rely on express consent and that may be required in some cases.
The majority opinion appeared to recognize the practicality of permitting bankruptcy courts to determine claims where the parties consent to such adjudication and the judicial efficiency that can be realized by that result. Chief Justice Roberts vigorously dissented, however, arguing that the majority had placed practicality over the separation of powers mandated by Article III of the Constitution.
While issues remain in the wake of Stern, the decision in Wellness International Network, Limited v. Sharif is a significant development in the evolving view of bankruptcy court authority and related practice. Litigants will be forced to make strategic decisions early in any case regarding whether to litigate claims in the bankruptcy court, or to seek final adjudication in the district court.
In practice, even where consent is not given by all parties, many cases involving Stern-like claims will remain with the bankruptcy court to conduct some or all of the litigation, and either report and recommend findings and rulings to the district court or hand-off the case at the time of trial.
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