May 27, 2015


by Stites & Harbison, PLLC

World on Fire

In a six to three majority decision, the Supreme Court limited the impact of Stern v. Marshall, 564 U.S. 2 (2011) by holding in Wellness International Network, Ltd. v. Sharif, 575 U.S.___(2015) ( decided on May 26, 2015), that private litigants may consent to have their claims adjudicated by a Bankruptcy Court. Since the release of Stern in 2011, the Courts at all levels of the federal system have struggled with the question of what authority as Article I courts do the Bankruptcy Courts have to decide questions vested in the federal District and Appeals Courts under Article III of the United States Constitution. Wellness does not alter that debate which rages on within the walls of the Supreme Court, but the decision reaches a practical result grounded in the necessity of the needs of every day litigants and lawyers by holding that private parties may consent to have their disputes resolved by a Bankruptcy Judge.

At issue in Wellness was the ability of the Bankruptcy Court to enter a final judgment finding that assets which had been placed in a trust by a debtor as part of an effort to conceal them were property of the bankrupt estate on the theory that the trust was an alter ego of the debtor. In the appeal below, the Seventh Circuit reversed the Bankruptcy Court and held that the entry of the declaratory judgment exceeded the powers of an Article I Bankruptcy Court. In the majority opinion authored by Justice Sotomayer, the Court found that private parties could consent to be bound by the determinations of a bankruptcy court without offending the separation of powers between the congressionally created bankruptcy judges under Article I and the constitutionally mandated powers invested in the judiciary under Article III of the United States Constitution.

In reaching the decision that parties may consent to have their matters decided by a bankruptcy judge, the majority noted the practical fact that during the one year time frame prior to the release of Wellness, 349 bankruptcy judges handled 963,739 new cases. That number represents new filings alone, and does not begin to address the docket load of multi-year cases such as litigated matters, complex chapter 11 cases or chapter 13 cases which typically have a five year shelf life. As appropriately said by Justice Sotomayer, "it 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."

The Wellness decision reflects a serious doctrinal divide between the majority and the minority. Chief Justice Roberts, writing for the minority, wrote in harsh words that the majority decision gives away a "sacred birthright" by allowing congressionally created courts to decide matters otherwise vested in the judiciary branch of the government. In reply, Justice Sotomayer quipped that, "to hear the principal dissent tell it, the world will end not in fire, or ice, but in a bankruptcy court." To be sure, the Supreme Court will again revisit the question of bankruptcy jurisdiction, but for now, the law seems clear that private litigants may consent to the jurisdiction of the bankruptcy courts.

The nature of what consent is required after Wellness remains uncertain. While holding that parties' consent may be implied, the Supreme Court declined to delineate the factors necessary to determine consent, and remanded the case to the Seventh Circuit for that determination. Instead, the Supreme Court suggested a "best practices" approach and encouraged litigants to always affirmatively indicate their consent to be heard by a Bankruptcy Judge. The manner of electing consent no doubt will be the subject of many local rules and operating procedures by the federal courts in the weeks and months to come, whether it be by rule requiring each party to affirmatively consent to jurisdiction in each case, or by negative implication on the basis that the mere filing of a pleading evokes consent to be heard by a bankruptcy court. Regardless of the procedural mechanisms proscribed by the Courts, the ruling in Wellness does much to simplify the lives of litigants and practitioners who have been in a jurisdictional morass since the release of Stern in 2011.

For more discussion of Stern, see these blogs: Unfinished Business: SCOTUS Grants Certiorari on More Stern v. Marshall Issues and SCOTUS Closes Statutory Gap in Bellingham.