United States: U.S. Supreme Court Addresses Authority Of Federal Bankruptcy Courts To Enter Final Orders And Judgments

The Wellness majority opinion is noteworthy for a number of reasons. As a practical matter, it permits this aspect of bankruptcy court practice—proceeding to final judgment in non-core matters on consent as being valid and constitutionally permissible—to continue.

The world may end in fire and ice but, at least for now, it will not end in the bankruptcy court.[1]

In Wellness International Network, Ltd. v. Sharif, Case No. 13-935, 575 U.S. ___ (2015) ("Wellness"), the Supreme Court of the United States was presented with yet another question regarding the authority of federal bankruptcy courts to enter final orders and judgments in certain proceedings. Challenges of this sort have become increasingly common in the wake of the Court's 2011 decision in Stern v. Marshall, 564 U.S. ___ (2011) (challenge to authority of a bankruptcy court to enter final orders), and include cases such as Executive Benefits Insurance Agency v. Arkison, 573 U.S. ___ (2014) (same), decided by the Court last year. On May 26, 2015, the Court handed down its opinions in Wellness, with the majority finding that litigant consent was sufficient to overcome the constitutional challenge Richard Sharif had raised regarding the extent of the bankruptcy court's authority.[2]

By way of background, prior opinions of the Court clarify that federal bankruptcy courts are "Article I" courts because bankruptcy judges do not enjoy life tenure and their salaries are not protected from diminution by Congress (protections that are the hallmarks of the courts established pursuant to Article III of the Constitution). The distinction makes a difference in that, as prior opinions have found, only "Article III" judges can enter final judgments in actions that are "the stuff of the traditional actions at common law tried by the courts at Westminster in 1789."[3] Because of this distinction, bankruptcy courts may enter final orders in some matters ("core" bankruptcy matters),[4] but for others ("non-core" bankruptcy matters), they may only enter proposed findings of fact and conclusions of law that are subject to de novo review and entry of final judgment by the district court for the district in which the bankruptcy court sits.

In Wellness, Sharif was a debtor in bankruptcy. One of his creditors (Wellness International) commenced an adversary proceeding against Sharif, seeking a determination that Sharif was not entitled to a discharge in bankruptcy for what might be characterized as "bad acts" or violations of bankruptcy law and policy. One of the bad acts was Sharif's alleged hiding of an asset from his bankruptcy estate. The hidden asset was a trust, which Wellness contended was Sharif's alter ego in a separate count in the adversary complaint. As part of the adversary proceeding, Wellness sought a declaratory judgment regarding Sharif's alter ego status.

Two issues made their way to the Supreme Court. The first was whether the alter ego claim was one which could be decided by the bankruptcy court by entry of a final order—i.e., whether the claim was a "core" bankruptcy matter. The second was whether, if the alter ego claim was not a "core" bankruptcy matter, the bankruptcy court could nonetheless decide the matter by entry of a final order because Sharif had consented to the bankruptcy court doing so.

The majority opinion, authored by Justice Sotomayor, resolved the case by focusing on the second issue—whether litigant consent permits a bankruptcy court to enter a final judgment in a matter which, absent consent, the Article I bankruptcy court could resolve only by entry of proposed findings of fact and conclusions of law (i.e., entry of a non-final order as a "non-core" matter) subject to de novo review by the district court. In resolving this issue, the Court held that "allowing Article I adjudicators to decide claims submitted to them by consent does not offend the separation of powers so long as the Article III courts retain supervisory authority over the process."[5] Such oversight exists in our present-day bankruptcy system. Thus, the Court found that bankruptcy court entry of final judgment on consent did not "impermissibly threaten the institutional integrity of the Judicial Branch" based on its analysis and consideration of the "practical effect" of the statutory framework and bankruptcy practice on separation of powers principles, rather than adherence to "formalistic and unbending rules."[6] The Court concluded:

Adjudication based on litigant consent has been a consistent feature of the federal court system since its inception. Reaffirming that unremarkable fact, we are confident, poses no great threat to anyone's birthrights, constitutional or otherwise.[7]

The Wellness majority opinion is noteworthy for a number of reasons. As a practical matter, it permits this aspect of bankruptcy court practice—proceeding to final judgment in non-core matters on consent as being valid and constitutionally permissible—to continue. If this practice had been upended, bankruptcy litigation likely would have become even more costly, and delay would have increased. Increased costs and delay are, obviously, detrimental to any possible reorganization case and are a principal complaint of many bankruptcy law critics.

Second, the opinion is noteworthy because it discusses the "Article I" similarity between the bankruptcy court and federal magistrate systems and the practical impact that would result had the Court ruled that litigant consent could not overcome the constitutional challenge. The potential impact of a decision in Wellness upon non-bankruptcy court federal practice before federal magistrates was apparent to the majority in Wellness, and was discussed a number of times in the majority opinion. The contributions of Article I federal bankruptcy judges and magistrates were also noted, the Court stating "[I]t is no exaggeration to say that without the distinguished service of these judicial colleagues, the work of the federal court system would grind nearly to a halt."[8]

Conclusion

Constitutional challenges to the authority of Article I courts, including federal bankruptcy courts, to enter final judgments in certain matters, are likely to remain a topic of discussion and decision in bankruptcy practice. The constitutional concerns at issue are significant, but so are the practical implications of rulings that upend or cause substantial disruption in a system that has been in place for decades. In Wellness, the Court set an outside boundary for the kinds of matters that can be resolved by bankruptcy courts through the entry of final orders, as compared with most of the recent opinions from the Court that talked about things bankruptcy courts could not do. In this one respect, present-day bankruptcy practice has been left alone, and while we still have to watch out for fire and ice, bankruptcy courts cannot be held responsible for the end of the world (at least for now).

[Duane Morris represented the National Association of Bankruptcy Trustees as amicus curiae in Wellness.]

For Further Information

If you have any questions about this Alert, please contact William C. Heuer, any of the attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.

Notes

  1. Wellness, 575 U.S. ___, Slip Op. at 17 ("The principal dissent warns darkly of the consequences of today's decision. ... To hear the principal dissent tell it, the world will end not in fire, or ice, but in a bankruptcy court.").
  2. See id. at 2. Justice Sotomayor authored the majority opinion, which was joined by Justices Breyer, Ginsburg, Kennedy and Kagan. Justice Alito authored a separate opinion concurring in the judgment. Chief Justice Roberts authored a dissenting opinion, which was joined by Justices Scalia and Thomas.
  3. See id. (Roberts, C.J., dissenting).
  4. See 28 U.S.C. §§ 157, 1334.
  5. See Wellness, 575 U.S. ___, Slip Op. at 12 (majority opinion).
  6. See id. (quotations altered).
  7. See id. at 17 (note that C.J. Roberts has often referred to the entry of final judgments in common law matters as being the "birthright" of the Article III judiciary).
  8. See id.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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