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Did The Supreme Court Finally Explain Stern? Examining the Wellness of Bankruptcy Court Jurisdiction

The Supreme Court has spoken once again on the limited jurisdiction of the bankruptcy courts, adding to the understanding derived from previous cases. Wellness International Network, Ltd., et al. v. Sharif is the Supreme Court’s sixth significant case exploring bankruptcy court jurisdiction under the Bankruptcy Code. For a brief and simplified history of bankruptcy jurisdiction jurisprudence shaped by these prior decisions, please jump to our prior advisory on this issue here.

In its previous decision in Executive Benefits Insurance Agency v. Arkinson, the Supreme Court left open two major issues: first, whether a creditor could impliedly consent to bankruptcy court jurisdiction to enter a final order by participating in the case without objection; and second, whether consent (express or implied) to jurisdiction to enter final orders is even valid under the Constitution. On the second issue, 28 U.S.C. §157 specifically provides the opportunity for all parties to consent and for the bankruptcy court to finally decide the matter. As we saw in Stern, however, that language does not make such a grant of jurisdiction constitutional.

The Court in Wellness went a long way toward answering these two questions. Wellness determined that Article III of the Constitution is not violated when the parties knowingly and voluntarily consent to adjudication of “gap” claims under Stern. “Gap” claims are those claims that are designated by statute as “core” issues but that cannot be treated as “core” because of the constitutional limits of bankruptcy court jurisdiction. After Wellness, there every reason to think that parties can consent on non-core” and related to” matters as well.

In Wellness, the debtor, Sharif, had engaged in protracted litigation with Wellness International Network, Ltd. Eventually Sharif filed a chapter 7 bankruptcy. Wellness objected to Sharif’s discharge on the grounds that certain assets, which Sharif claimed he held in trust for relatives, were actually his assets and therefore property of the bankruptcy estate. That issue raised the constitutional question of whether the bankruptcy court could finally decide a “gap” claim with the consent of the parties.

The Supreme Court decided that the parties’ consent to the bankruptcy court entering a final judgment was sufficient to confer that power upon the bankruptcy court. Consent, reasoned the Court, constitutes a waiver of a personal right of the parties to have such action determined by an Article III judge. The majority was not concerned that the holding would violate a structural constitutional separation of powers, which could not be waived by parties. Article III courts, e.g., federal district courts, retain broad supervisory powers over bankruptcy courts: bankruptcy judges are appointed and may be removed by Article III judges; bankruptcy courts are structurally a part of the district court; bankruptcy judges may only hear cases delegated to them by the district court; and the district court may withdraw the reference and hear the matter itself. In summary, the Supreme Court found that

…allowing Article I adjudicators to decide claims submitted to them by consent does not offend the separation of powers so long as Article III courts retain supervisory authority over the process.

The Supreme Court went on to say that either express or implied consent would be sufficient to allow bankruptcy judges to finally decide Stern claims. However, the consent must be “knowing and voluntary”. To consent, a party or its counsel, must have been aware of the need for consent and the right to refuse consent and still proceeded in the bankruptcy court. In fact, in a footnote, the Supreme Court recommended procedures by which parties would be required to explicitly consent or not. It is interesting to note that the Supreme Court did not explicitly deal with the issue of whether the beneficial ownership of the trust assets were part of Sharifs’ bankruptcy estate or whether Sharifs’ activities in the litigation constituted sufficient implied consent.

In conclusion, prior to the passage of the Bankruptcy Code, bankruptcy court jurisdiction under the Bankruptcy Act divided cases between summary and plenary jurisdiction. This distinction is very similar to the concepts used today when distinguishing between “core” and “non-core” proceedings or, alternatively, when distinguishing between matters which “arise under” or “arise in,” from those that “relate to” a bankruptcy case. Under the Act, consent was sufficient to allow the bankruptcy court to hear and finally determine plenary actions. Since the Supreme Court decided that consent may confer the ability of the bankruptcy court to issue final judgments in “gap” claims, and that consent may be implied, the jurisdictional landscape looks remarkably similar to how it was under the Act. To the extent that a difference may arise, it may be in deciding what constitutes implied consent. For example, under the Act, consent could be conferred by the failure to object in an answer. The particulars of what presently constitutes implied consent will be decided in future cases. However there is already precedent under the Act on that question and that precedent ought to be, at least, influential on the issue today under the Code.


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