On May 26, 2015, the Supreme Court in Wellness Int'l Network, LTD v. Sharif1 answered one of the principal questions left open by the Supreme Court's prior decision in Stern v. Marshall – can litigants in a bankruptcy court consent to a final adjudication of "Stern Claims." A Stern Claim "is a claim that is 'core' under the statute but yet prohibited from proceeding in that way as a constitutional matter." The Supreme Court in Stern ruled that a bankruptcy court lacks constitutional authority to adjudicate such claims because bankruptcy judges are not "Article III" judges appointed for life and protected from diminution in salary.
In the wake of Stern, many courts and practitioners questioned whether parties could consent to entry of final orders and judgments by a bankruptcy court. Four years later, after avoiding the question in the case of Executive Benefits Ins. Agency v. Arkison, the Supreme Court finally addressed the issue head-on in Wellness. The majority in Wellness ruled not only that parties can consent to the bankruptcy court entering a final order on a Stern Claim, but also that express consent is not required. Rather, parties can give implied consent by their actions so long as consent is "knowing and voluntary."
In Wellness, Sharif was an individual debtor in chapter 7. One of his creditors 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, arguing that the trust was the alter ego of Sharif. The bankruptcy court eventually entered default judgment against Sharif for failing to comply with discovery obligations, which Sharif appealed. While on appeal, the Supreme Court issued the Stern opinion. Sharif then argued that the alter ego claim was a Stern Claim, making the default judgment on that claim unconstitutional. The district court held that Sharif had waived his Stern argument and affirmed the bankruptcy court's ruling. The Seventh Circuit, however, found that a Stern-based jurisdictional defense cannot be waived, and that the bankruptcy court did not have constitutional authority to enter final judgment on the Stern Claim.
The Supreme Court reversed the Seventh Circuit, finding that the Constitution is not violated when parties knowingly and voluntarily consent to adjudication by a bankruptcy judge. The Wellness majority ruled that the right to have Stern Claims adjudicated by an impartial and independent Article III judge is a personal right subject to waiver. Even though bankruptcy judges are not Article III judges, parties can nevertheless consent to have their disputes decided by a non-Article III judge.
The Wellness majority distinguished the Stern decision based solely on the consent of the parties, holding that Stern and earlier cases finding constitutional bars to adjudication involved non-consenting litigants forced into having their claims decided by a non-Article III judge. The majority opinion also rejected an expansive reading of Stern that would apply to consenting parties as being inconsistent with the Stern opinion's own statements that it was to be a narrow ruling that "did not change all that much about the division of labor between district courts and bankruptcy courts."
The Wellness majority also rejected the argument that express consent is required to effectuate a waiver of the right to Article III adjudication, adopting an implied consent standard when applying § 157. Thus, waiver may be based on "actions rather than words." The Supreme Court emphasized that a waiver must be "knowing and voluntary," and the inquiry is "whether 'the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case' before the non-Article III judge." Though it rejected the need for express consent, the Supreme Court noted in a footnote that it is good practice for courts to seek express consent and that statutes and judicial rules may require express consent.
The Wellness majority declined to rule upon whether the parties consented to adjudication by the bankruptcy court, noting that such a determination would require a "deeply factbound analysis of the procedural history unique to this protracted litigation." Thus, the case was remanded to determine whether Sharif consented. The decision therefore leaves undecided whether Sharif's acknowledgement in his pleadings that the claims were core constituted a knowing and voluntary waiver of his right to Article III adjudication.
Chief Justice Roberts issued a dissent joined by Scalia and Thomas (in part). Justice Roberts argued that the case could have been resolved on the narrower issue that the claim in question (that the trust was the alter ego of Sharif) was not a Stern Claim at all, and that the bankruptcy court had constitutional authority to enter the judgment without the need for consent. Justice Roberts further argued that allowing final adjudication of Stern Claims by a bankruptcy court impermissibly threatens the institutional integrity of the Judicial Branch, and that consent of the parties cannot cure such a violation of Article III.
While issues remain in the wake of Stern, Wellness is a significant decision in the evolving landscape of bankruptcy jurisdiction. It has returned to bankruptcy courts some of the jurisdictional authority taken by Stern. It has given courts and practitioners a significant tool to address Stern issues at the beginning of a case instead of litigating the bankruptcy court's jurisdiction after an adverse result. For litigants in bankruptcy, Wellness puts parties on notice that remaining silent regarding consent to Stern Claims may not provide any protection from adjudication by a bankruptcy judge. Parties must be prepared early in a proceeding to take a position regarding consent to a final adjudication.
Footnote
1. No. 13-935 (U.S. May 26, 2015)
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