U.S. Supreme Court Holds Implied Consent Sufficient for Bankruptcy Court Jurisdiction

by Dechert LLP
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On May 26, the U.S. Supreme Court held that, so long as parties knowingly and voluntarily consent, a bankruptcy court can issue final orders on matters that it otherwise would not have the constitutional authority to decide. In Wellness Int’l Network v. Sharif,a highly anticipated decision, the majority of the Supreme Court delivered a pragmatic opinion that quelled fears stemming from the Court’s 2011 decision in Stern v. Marshall,which found that the constitutional authority of bankruptcy courts is not as extensive as the statutory authority granted to them by Congress.

Background

Article III of the United States Constitution vests the judicial power of the United States in a supreme court and such inferior courts as Congress may establish. Article III provides that judges of courts established thereunder shall have life tenure and shall not have their pay diminished. Bankruptcy courts are not Article III courts, and bankruptcy judges do not enjoy the protections of Article III. Rather, bankruptcy judges are “judicial officers of the United States district court,” appointed to 14-year terms by the courts of appeals, and subject to removal for cause. As a result, the scope of a bankruptcy court’s authority is limited, whereas Article III courts have the power to determine “any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.”3

Congress has provided district courts, which are Article III courts, with original jurisdiction over bankruptcy cases and related proceedings but each district court is permitted to refer any and all such proceedings to the district’s bankruptcy judges. Congress permits bankruptcy judges to “hear and determine” and “enter appropriate orders and judgments” in “core” proceedings that arise under the Bankruptcy Code or arise in a case under the Bankruptcy Code, subject to appellate review by the district court. In “non-core” proceedings, i.e. ones that are merely “related to” a bankruptcy case, Congress provided that bankruptcy judges shall submit proposed findings of fact and conclusions of law to the district court, which will review those findings and conclusions de novo. Congress has further provided, however, that “with the consent of all the parties to the proceedings," a bankruptcy judge may hear and determine and enter appropriate orders and judgments in non-core proceedings.

Thus, prior to Stern, the scope of a bankruptcy court’s statutory authority appeared clear: in “core” proceedings, a bankruptcy judge can enter a final order, subject to appellate review, but in “non-core” proceedings, a bankruptcy judge can only submit proposed findings of fact and conclusions of law to the district court, unless all parties consent to the bankruptcy judge’s entry of a final order.

Stern v. Marshall

In 2011, a divided Supreme Court sent the bankruptcy world into upheaval by determining that a bankruptcy court, as a non-Article III court, lacks constitutional authority to enter a final judgment on a state law counterclaim, even though the matter was statutorily designated as a core proceeding. The Supreme Court’s opinion in Stern created substantial uncertainty with respect to so-called “Stern claims” – claims that the bankruptcy court has the statutory authority to finally adjudicate, but not the constitutional authority to do so. Compounding the confusion, these Stern claims, because they are designated core proceedings, were not within the category of matters (non-core) as to which bankruptcy courts were statutorily authorized to submit a report and recommendation to the district court. In short, confusion and uncertainty reigned.

In Exec. Bens. Ins. Agency v. Arkison,the Supreme Court provided some clarity by finding that a bankruptcy court’s entry of a judgment in violation of Stern could be cured by a de novo review by the district court, i.e. the Court approved of treating Stern type, core claims, as non-core. Among the unresolved questions were the scope of “Stern claims” and whether, parties can consent to the entry of a final order by a bankruptcy court.

Wellness Int’l Network v. Sharif

Wellness International Network, Ltd. (“Wellness”) was a creditor of Richard Sharif, an individual chapter 7 debtor. Wellness contended that a trust that Sharif administered was Sharif’s alter-ego and therefore, the trust’s assets were included in his bankruptcy estate. The bankruptcy court entered a default judgment against Sharif. Stern was decided by the Supreme Court while Sharif’s appeal to the district court was pending. While Sharif ultimately sought permission to raise a Stern objection, the district court denied the motion as untimely and the Stern argument, therefore, as waived. The Court of Appeals for the Seventh Circuit reversed, finding that a Stern objection is not waivable because it implicates separation-of-powers principles.

Five members of the Supreme Court, in an opinion by Justice Sotomayor, found that bankruptcy judges may adjudicate Stern claims with the parties’ knowing and voluntary consent. The majority opinion, which largely focused on practical considerations such as the heavy workload of non-Article III courts (without which the “federal court system would grind nearly to a halt”), found that the right to adjudication by an Article III court is a “personal” right and therefore subject to waiver. The Court acknowledged that if separation-of-powers principles were implicated, then “the parties cannot by consent cure the constitutional difficulty.” But the majority concluded that such principles were not implicated “so long as Article III courts retain supervisory authority over the process.”

The majority also held that the consent may be either express or implied, but must be “knowing and voluntary.” The Court did not shed light on how “knowing and voluntary” consent might be implied. Instead, the majority encouraged lower courts to seek express statements of consent or nonconsent, noting that in adversary proceedings, the Federal Rules of Bankruptcy Procedure require pleadings to “contain a statement that the proceeding is core or non-core and, if non-core, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge.”

Justice Alito filed a brief opinion concurring on the basis that the Court’s previous opinion in Commodity Futures Trading Com v. Schor,which held that the right to adjudication before an Article III court is personal and therefore subject to waiver, was controlling and the Court had not been asked to revisit that opinion. Justice Alito did note, however, that the issue of whether consent could be implied did not need to be decided.

Conclusion

The Supreme Court’s opinion in Wellness makes it clear that where the parties knowingly and voluntarily consent, a bankruptcy judge may issue a final order even on matters otherwise required to be decided by Article III courts. While the decision will go a long way towards easing fears raised by the Court’s decision in Stern as to the scope of bankruptcy courts’ authority, it requires parties to exercise vigilance in protecting their rights to a trial before the district court, in Stern type claims. Parties should consider including statements on consent or non-consent to final adjudication by the bankruptcy court whenever they open a proceeding in the bankruptcy court (filing a complaint or a motion), or oppose a proceeding. Otherwise, litigants may face a risk that even slight delays will be used opportunistically by their adversaries against them.

Uncertainty still remains as to the scope of Stern type claims; the majority opinion specifically declined to address whether or not the claim at issue was a Stern claim, while Chief Justice Roberts, joined by Justices Scalia and Thomas (in a dissent), held that that it was not.

Footnotes

1) 2015 U.S. LEXIS 3405 (U.S. May 26, 2015).

2) 131 S. Ct. 2594 (U.S. 2011).

3) Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272 (1856).

4) 134 S. Ct. 2165 (U.S. 2014).

5) 478 U.S. 833 (U.S. 1986).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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