In Wellness International Network v. Sharif, the Supreme Court recently weighed in again on the scope of a bankruptcy court’s jurisdiction, holding in a 6-3 opinion that Article III authorizes bankruptcy judges to exercise judicial power over Stern claims (claims that challenge a bankruptcy court’s power to enter final judgment on a case) when the parties consent to such adjudication.

As previously reported, the Wellness case arises out a complaint filed in bankruptcy court by Wellness International Network against Sharif, a chapter 7 debtor. Wellness claimed that Sharif administered a trust fund that was actually his personal property and part of his bankruptcy estate. Later, the bankruptcy court found that Sharif violated the court’s discovery order, and subsequently entered a default judgment against him, treating the property from the trust fund as part of his bankruptcy estate. Upon appeal to the Seventh Circuit, the court ruled that, following Stern, the Bankruptcy Court did not have constitutional authority to enter final judgment and the parties could not consent to waive jurisdictional issues. The Supreme Court granted certiorari and decided the following issue:

“[W]hether Article III allows bankruptcy judges to adjudicate [Stern] claims with the parties’ consent.” Wellness Int’l Network v. Sharif, No. 13-935, slip op., at 2 (2015).

In Stern, the Court decided that Article III disallows bankruptcy courts from implementing final judgments on claims that “seek only to ‘augment’ the bankruptcy estate . . .” Wellness, slip op. at 2. That standard now has an exception as held in Wellness, which permits bankruptcy courts to implement final judgments on claims, even if they are only augmenting a bankruptcy estate, as long as the parties consented to adjudication in bankruptcy court. The Court noted, “[A]llowing Article I adjudicators to decide claims submitted to them by consent does not offend the separation of powers so long as Article III courts retain supervisory authority over the process,” which was the case in Wellness. Wellness,slip op. at 12.

Furthermore, as mentioned by the Court, such consent need not be express. However, it must be knowing and voluntary. That is, “the key 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 adjudicator,” such as a bankruptcy court, which is an Article I adjudicator. Wellness, slip op. at 19 (quoting Roell v. Withrow, 538 U.S. 580, 590 (2003)).

Thus, in holding that Article III permits bankruptcy courts to decide Stern claims to which the litigants consented, the Court remanded the case to the Seventh Circuit to decide whether Sharif’s actions had the requisite “knowing and voluntary consent” to litigate the case in bankruptcy court. Chief Justice Roberts—the author of the Stern decision limiting bankruptcy court jurisdiction—wrote a 20-page dissent criticizing the majority decision as establishing precedent to allow Congress to strip the judiciary of other powers.

The Impact of Wellness

After Stern, bankruptcy courts could not enter a final judgment on a case that could “exis[t] without any bankruptcy proceeding.” However, as the Court in Wellness noted, that ruling hinged on the fact that a litigant in the case “did not truly consent to” adjudication in bankruptcy court. Thus, what Stern decided was that non-consent is a bar to the bankruptcy court’s entering a final judgment—it did not decide the inverse situation, whether consent allows the court to enter a final judgment. Wellness answers this latter question, confirming that consent—both express and implied—are sufficient for the bankruptcy court to enter a final judgment on the case. That is, while Stern was premised on non-consent to adjudication in a bankruptcy court as a “constitutional bar” on a bankruptcy court’s ability to hear the case, Wellness was premised on consent to adjudication in bankruptcy court as authorizing the court to exercise judicial power over the case and waiving the litigants’ right to litigate in an Article III court. What is left unclear, however, is what exactly amounts to “consent,” but as this case gets remanded to the Seventh Circuit to determine whether Sharif consented to adjudication in bankruptcy court, and as future courts provide their interpretations on the scope of consent, Wellness’s implications will become clearer.

In a unanimous opinion written by Justice Clarence Thomas, the Supreme Court today upheld a Ninth Circuit decision allowing a bankruptcy court to issue proposed findings of fact and conclusions of law on issues outside their constitutional jurisdiction for de novo review by the district court.  As previously reported here, the Supreme Court was presented with two questions: (i) whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III; and (ii) whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. § 157(b).

In reaching its decision, the Court relied on the reasoning set forth in Stern v. Marshall, a landmark bankruptcy decision on the constitutional limitations of bankruptcy judges’ power arising from the legal dispute between Anna Nicole Smith and the heirs of her former husband, the late J. Howard Marshall II.  In Stern, the Supreme Court held that, notwithstanding statutory authority granted by Congress, a bankruptcy court lacked constitutional authority to finally adjudicate certain claims reserved for Article III judges.  But, because the statute only explicitly allowed bankruptcy courts to issue findings of fact and conclusions of law on issues defined by the statute as “non-core,” the lower courts found a “statutory gap” in the treatment of claims defined by the statute as “core” that were outside of the scope of the bankruptcy court’s constitutional jurisdiction under Stern.  Applying the severability clause of the statute, the Court concluded:

We hold today that when, under Stern’s reasoning, the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court.

Because it was not necessary to reach the first question presented, the Court “reserve[d] . . . for another day” the question of whether a party can consent to the Bankruptcy Court’s adjudication of a Stern claim.

On January 14, 2014, the Supreme Court heard oral arguments in Executive Benefits Insurance Agency v. Arkison, which revisits the issue of constitutional limits on federal bankruptcy judges’ power that the Supreme Court addressed two years ago in Stern v. Marshall.  The petition for certiorari challenged a Ninth Circuit decision and presented two questions to the Supreme Court about which lower courts have disagreed in the wake of Stern:  (i) whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent, and, if so, whether “implied consent” based on a litigant’s conduct, where the statutory scheme provides the litigant no notice that its consent is required, is sufficient to satisfy Article III; and (ii) whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. § 157(b).

Executive Benefits Insurance Agency had relied on Stern to argue before the Ninth Circuit that the bankruptcy court that ruled in favor of Arkison, as trustee for the estate of Bellingham Insurance Agency, lacked constitutional authority to enter a final judgment in a fraudulent conveyance action against a non-claimant to the bankruptcy estate.  The Ninth Circuit agreed as to the fraudulent conveyance claims asserted by non-claimants, but also found that parties could waive their rights to an Article III hearing, which Executive Benefits had done by waiting until after briefing before the Ninth Circuit was complete to allege the Article III violation, thereby rendering the bankruptcy court’s ruling binding.  Further, the Ninth Circuit held that bankruptcy courts did have the power to submit findings of fact and conclusions of law in “core” proceedings even where they cannot enter a final judgment.

Executive Benefits argued to the Supreme Court that the Ninth Circuit’s decision was wrong because (i) assigning the authority to enter final judgment on private claims to non-Article III judges violates the separation of powers upheld by the Supreme Court in Stern and that the consent of private parties cannot cure an Article III defect; (ii) even if consent could cure an Article III defect, that consent must be knowing and voluntary; and (iii) the bankruptcy court lacked statutory authority to issue proposed findings of fact and conclusions of law in “core” proceedings.

In response, trustee Arkison emphasized the long history of consensual resolution of private rights in the judicial system, and noted that the Supreme Court has previously explained “as a personal right, Article III’s guarantee of an impartial and independent federal adjudication is subject to waiver.”  The trustee also compared bankruptcy judges to magistrate judges, thus suggesting that a ruling in favor of Executive Benefits could undercut the authority of magistrate judges in the judicial system.  The trustee noted that, although Executive Benefits’ consent to the bankruptcy court’s jurisdiction was properly implied, the Supreme Court need not decide this factual question.  Because an Article III district court conducted a full de novo review of the summary judgment order and entered its own judgment, Executive Benefits received the Article III consideration to which it was entitled.  Finally, the trustee asserted that bankruptcy judges may issue proposed findings of fact and conclusions of law on “Stern claims” if the parties do not consent to final judgment in bankruptcy court.

The U.S. Solicitor General’s office also argued as amicus in support of the trustee.  Both parties garnered support from numerous other amici, including seven states as well as Irving Picard, as trustee for the Securities Investor Protection Act (SIPA) liquidation of the Madoff estate, all joining in support of the trustee.

Early interpretation of the arguments suggests that a majority of the Supreme Court was likely not persuaded that the parties’ consent should control the parameters of bankruptcy judges’ power in cases like Executive Benefits.