July 24, 2014

Unfinished Business: SCOTUS Grants Certiorari on More Stern v. Marshall Issues

by Guest Blogger


If a time-traveler had visited me in the mid-1990s and told me that I would attend law school, I wouldn't have believed it. If that visitor told me that I would graduate and subsequently become a bankruptcy lawyer, I would have said "that's an oddly-specific prediction, but I still don't believe you." If the time-traveler then told me that the 1996 bankruptcy of then-model/actress Anna Nicole Smith would haunt me and other bankruptcy lawyers with vexing constitutional questions for the ensuing 20 years, and would entail three (and counting!) trips to the Supreme Court, I would have checked myself into a mental institution.

But alas, here we are. On July 1, less than one month after the Supreme Court settled some Stern-related questions in Bellingham (my post on that decision can be found here: https://www.creditorssidebar.com/2014/06/scotus-closes-statutory-gap-in-bellingham/), it granted certiorari in the case of Wellness Int'l Network, et al. v. Sharif, 727 F.3d 751 (7th Cir. 2013) to address some business left unfinished by Bellingham itself. Scotusblog's page on the case is located here, and sets out the merits briefing schedule.

Recall that Bellingham held that bankruptcy courts have authority to enter findings/recommendations in non-core matters, so long as they are subject to de novo review by an Article III jurist. But Bellingham did not attempt to address the thornier, constitutional question of whether parties can ever consent (either affirmatively or via waiver) to entry of final judgment by an Article I judge. The Seventh Circuit in Wellness had held, among other things, that separation-of-powers concerns prohibited the debtor in the case from waiving a Stern-related objection. The specific objection that the debtor had untimely asserted was whether a bankruptcy court had the authority to decide whether certain trust-owned assets were -- under a state law alter ego theory asserted by the creditor/plaintiff -- property of the debtor's estate.

Wellness is an interesting case for a lot of reasons, not the least of which is that the party attempting to avoid entry of the final judgment by a bankruptcy judge was the debtor itself, not a reluctant creditor with nowhere else to assert a claim, or an avoidance-action defendant hauled into bankruptcy court kicking and screaming. The qualitative nature of the "consent" seems especially meaningful when the consenting party is the one who files a petition and requests that an Article I judge liquidate his property. It's an important question beyond the bankruptcy context, becasue consent to entry of final judgment is often at play elsewhere: think magistrate judges, or enforcement of arbitration awards.

It's hard to predict how the Supreme Court will settle the consent issue, but I would be shocked if it holds that bankruptcy judges are not empowered to apply state law to determine what constitutes property of the estate. That has been a fundamental part of the job description since the Supreme Court ruled in Butner v. United States that in bankruptcy, state law determines who owns what property. If bankruptcy judges decide what constitutes estate property (and the whole notion of a centralized bankruptcy depends on this), they have to be able to apply state law. Why? Because there is no federal substantive law of property. Butner was decided, by the way, in 1979, when Anna Nicole Smith was 12. Since we are apparently going to be wrestling with the fallout of her case indefinitely, I propose that we adopt "The __th Year of Anna Nicole Smith" or "YANS __" as our new date convention in future Stern-related writing.

Respectfully submitted this 24th day of July, YANS 46.