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Will “Wellness” Make Us Better?

The United States Supreme Court will hand down its decision in the next few weeks in the case of Wellness Int’l Network, Ltd. v. Sharif (“Wellness”), 727 F.3d 751 (7th Cir. 2013) regarding bankruptcy courts’ jurisdiction.  The jurisdictional quagmire is a major and growing virus in the bankruptcy courts, increasing exponentially the costs of bankruptcy litigation.  Hopefully, the Wellness decision will eventually provide a belated prescription on bankruptcy courts’ jurisdiction, and make us all feel just peachy.

A little background:

In Stern v. Marshall (“Stern”) 131 S.Ct. 2594 (2011), the Supreme Court granted certiorari to resolve whether a bankruptcy court had the authority to enter a final judgment on a debtor’s counterclaim for tortious interference.  Chief Justice Roberts held that 28 U.S.C. § 157, which gives bankruptcy judges core authority to determine counterclaims that are not necessary to the allowance of claims (so-called “Stern type claims”), unconstitutionally delegated the judicial power of the United States to non-Article III bankruptcy judges.  The Court looked at earlier decisions for its holding that only decisions regarding “public rights” can be delegated to a non-Article III judge, while decisions involving private rights “subject to suit at common law, or in equity or admiralty” require Article III jurisdiction.  The Court held that actions which “augment” the bankruptcy estate may not be within the “public rights” exception and thus a bankruptcy judge does not have the authority to make a final decision, whereas actions to determine a creditor’s right to receive “a pro-rata share in the bankruptcy estate” are matters over which the bankruptcy judge does have the authority to finally decide.

In Stern, the Supreme Court analyzed the constitutionality of 28 U.S.C. § 157, which in relevant part defines certain matters as “core” or “non-core” and authorizes bankruptcy courts to finally adjudicate “core” matters but only to issue findings and conclusions subject to de novo review by Article III district courts in “non-core” matters.  The Court in Stern held that bankruptcy judges did not have the authority to issue final judgments on claims that had been designated as core under 28 U.S.C. § 157 and that Congress actually exceeded its authority in designating such claims to a non-Article III court. The Court, however, did not address how bankruptcy courts should proceed in such cases.

As a result of the Stern decision, different circuit courts have come to different conclusions about bankruptcy courts’ jurisdiction.  In particular, courts have struggled with whether the Article III right identified in Stern is waivable and whether that waiver can occur simply by a party’s failure to object to a bankruptcy court’s jurisdiction.  In the Ninth Circuit, in Exec. Benefits Ins. Agency v. Arkinson (In re Bellingham), 702 F.3d 553 (9th Cir. 2012), the Ninth Circuit Court of Appeals held that fraudulent conveyance claims against parties who have not filed proofs of claim could not be adjudicated by non-Article III judges absent express or implied consent.

The Bellingham decision was appealed to the United States Supreme Court, and on June 9, 2014, the Supreme Court issued its decision, which only partially resolved the procedural uncertainty created by Stern.  Bellingham ostensibly presented the question not only of how bankruptcy courts should deal with Stern type claims but also with whether a bankruptcy court could, with the consent of the parties, enter a final judgment even when doing so without the parties’ consent would be unconstitutional under Stern.  The Supreme Court in Bellingham addressed the “statutory gap” question and held that bankruptcy judges should deal with Stern type claims as they would in “non-core” proceedings, i.e., by issuing findings and conclusions subject to de novo review by the district courts.  The Supreme Court, however, skipped the question of whether a bankruptcy court could enter a final judgment in such a case with the parties’ consent.

In Wellness the Seventh Circuit held, contrary to the Ninth Circuit in Bellingham, that consent could not confer on non-Article III judges the right to enter a final judgment.  The Court stated: “nothing in Stern supports the proposition that a party may waive an Article III objection to the bankruptcy judge’s entry of a final judgment.”

Wellness was appealed to the Supreme Court, and the issues presented for certiorari in Wellness include:

  1. Whether the presence of a subsidiary state law property issue means that the action does not stem from the bankruptcy itself (public right), and therefore that a bankruptcy court does not have the constitutional authority to enter a final judgment; and
  1. Whether a bankruptcy judge can enter a final judgment as a result of the parties’ consent.

Hopefully, the Supreme Court will not duck the consent issue again and will resolve the constitutional ailment that has plagued the bankruptcy courts ever since the Stern decision and thereby make us all feel better.

Categories: Supreme Court