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“Wellness” Has Made Us Better

On Thursday I published a blog article entitled Will “Wellness Make Us Better?, in which I posed the question of whether or not the U.S. Supreme Court would finally rule on whether or not bankruptcy courts can, in Stern type cases, enter a final judgment with the consent of the parties.

Yesterday the Supreme Court, in a 6-3 decision authored by Justice Sotomayor, answered the question in the affirmative and provided us all a good measure of relief.  In the case of Wellness International Network, Ltd., et al. v. Shariff (“Wellness”), Richard Shariff tried to discharge a debt he owed to Wellness International Network, Ltd.  After a series of procedural rulings on discovery, the bankruptcy court eventually entered a default judgment against Shariff.  While Shariff’s appeal was pending in the District Court, the U.S. Supreme Court held in Stern v. Marshall, 131 S. Ct. 2594 (2011) that Article III forbids bankruptcy courts from entering final judgments on claims that seek only to “augment” the bankruptcy estate and would otherwise “exist without regard to any bankruptcy proceeding.”  Thereafter in Wellness, the 7th Circuit Court of Appeals held that the judgment entered by the bankruptcy court against Shariff could not stand because the bankruptcy court lacked the constitutional authority to enter a final judgment on the claim.

The Supreme Court disagreed with the 7th Circuit and, consistent with the 9th Circuit holding in Bellingham, 702 F.3d 553 (9th Cir. 2012), held that Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent.

The Supreme Court held that this practice does not usurp the constitutional prerogative of Article III Courts.  The Court noted that bankruptcy judges are appointed and may be removed by Article III judges; that bankruptcy judges constitute a unit of the district court; that bankruptcy courts hear matters solely on a district court’s reference and that they possess “no free-floating authority to decide claims traditionally heard by Article III courts.”

The Court went on to state that Stern did not compel a different result.  Stern, the Court stated, turned on the fact that the litigants in that case “did not truly consent to resolution of the claim against it in a non-Article III forum,” and therefore the Court held that Stern does not govern the question of whether litigants may validly consent to adjudication by a bankruptcy court.

In coming to its conclusion, the Court looked at the practical application of its decision, saying “It is no exaggeration to say that without the distinguished service of these [bankruptcy] judicial colleagues, the work of the federal court system would grind nearly to a halt.  The Court went on to state that interpreting Stern to a bar consensual adjudications by the bankruptcy courts would “meaningfully change the division of labor in our judicial system,” when the Stern decision was a narrow one.

The Court also traced legal history to show that adjudication by consent in a non-Article III forum was nothing new.  The Court began with an 1813 decision affirming an award of damages to a court of arbitrators, and then traced the history of permitting adjudication by consent to the “modern era” in the case of Commodity Futures Trading Comm’n v. Schore, 478 U.S. 833 (1986) in which the Court approved the grant of authority for the Commodity Futures Trading Commission (“CFTC”) to hear customer complaints against commodities brokers with the appropriate consent of the parties.  Following this line, the Court then quoted a later decision of Peretz v. United States, (501 U.S. 923 (1991)) which concerned whether magistrate judges could preside over jury selection in a felony trial.  Relying on the history of these cases, the Court ruled that the entitlement to Article III adjudication is a “personal right” and is therefore subject to waiver.

Finally, the Court went on to reject Shariff’s contention that consent had to be express.  The Court stated that a litigant’s consent, whether express or implied, must however still be knowing and voluntary.  The Court did not delve into whether or not Shariff’s consent was in fact knowing and voluntary and to that extent remanded the matter back to the 7th Circuit for appropriate adjudication.

The Supreme Court has put a narrow interpretation on Stern and for the most part, has reinstated the constitutional role of the bankruptcy courts.

Categories: Supreme Court