November 9, 2015
by Eddie R. Jimenez
Aldridge Pite, LLP
USFN Member (California, Georgia, Nevada)
In Wellness International Network, Limited v. Sharif, 575 U.S. __ (May 26, 2015), the U.S. Supreme Court issued its much-anticipated decision, addressing two issues regarding the bankruptcy court’s power to enter final judgments. Specifically, the Supreme Court decided: (1) whether an Article I bankruptcy judge has constitutional authority to enter a final judgment to determine whether an asset is property of the debtor’s bankruptcy estate when the decision requires reference to state alter-ego law; and (2) whether a party may expressly or impliedly consent to a final decision by a bankruptcy court when the court would otherwise lack authority to render such a ruling.
In 2009, Richard Sharif filed a chapter 7 bankruptcy petition in the Northern District of Illinois. Wellness International Network, Ltd. subsequently filed an adversary complaint against Sharif, objecting to his discharge and requesting a declaration that the trust which owned certain assets was Sharif’s “alter ego” and, therefore, the assets belonged to Sharif’s bankruptcy estate. Ultimately, the bankruptcy court entered judgment against Sharif, denying his discharge and declaring that the assets held in the trust were property of the bankruptcy estate.
Sharif appealed the bankruptcy court’s decision to the U.S. District Court and asserted, for the first time and after all briefing was completed, that the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 2; 131 S. Ct. 2594 (2011), rendered the bankruptcy court’s judgment unconstitutional because it lacked authority to enter a final judgment on the Stern (alter-ego) claim. The district court affirmed the bankruptcy court’s judgment, but the Seventh Circuit Court of Appeals reversed the district court, holding that the bankruptcy court lacked constitutional authority to enter judgment on Wellness’s state law alter-ego claim and that the bankruptcy court’s lack of constitutional authority cannot be waived.
The Supreme Court reversed the Seventh Circuit decision and held that the entitlement to an Article III adjudicator is a personal right that can be waived, and waiver of this right need not be express, and may be implied so long as the consent is knowing and voluntary. Based upon its holding, the Supreme Court remanded the case back to the Seventh Circuit to decide whether Sharif’s actions constituted knowing and voluntary consent, and whether Sharif forfeited his Stern argument on appeal.
In light of the Wellness decision, litigants need to make an early determination regarding whether to consent to the bankruptcy court adjudicating their dispute or, alternatively, to request a final judgment from the U.S. District Court and/or state court. As a party’s consent may be implied, if knowing and voluntary, it is advisable for parties to specifically indicate in the complaint or response to the complaint whether the party consents or objects to the bankruptcy court entering a final judgment regarding any Stern claims and/or file a “Motion to Withdraw the Reference to U.S. District Court.” Many bankruptcy courts have already attempted to remove the guesswork regarding the consent issue by adopting local bankruptcy rules, which provide procedures for parties to indicate whether they consent to the bankruptcy court issuing a final judgment on Stern claims.
Accordingly, after Wellness, parties must be mindful of not only the constitutional issues involved in their case but also of any local bankruptcy rules and/or procedures related to consent and Stern claims in bankruptcy litigation. Additionally, if a party chooses to have a final judgment issued by the U.S. District Court and/or state court, they must timely and repeatedly pursue an objection to a bankruptcy court issuing a final decision on any Stern claims in their case.
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