Stern Dissent Takes Majority in Wellness, Holds Parties Can Consent To Bankruptcy Court Final Adjudication of Stern Claims

Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. —- (2015)

On May 26, 2015, the Supreme Court closed the loop on an issue left open by the High Court’s previous decisions in Stern v. Marshall, 564 U.S. ____ (2011) (holding that Article III prevents bankruptcy courts from entering final judgments on Stern claims (i.e., proceedings that are defined as core under 28 U.S.C. § 157(b) but that may not, as a constitutional matter, be adjudicated as such)) and Executive Benefits Insurance Agency v. Arkison, 573 U.S. ___ (2014) (permitting bankruptcy courts to submit proposed findings of fact and conclusions of law on Stern claims to the district courts for review under 28 U.S.C. § 157(c)(1)).  Ruling once again on the bankruptcy court’s authority to issue final judgments with respect to Stern claims, the Court held—in a 6-3 decision—that Article III, § 1, of the Constitution is not violated when a bankruptcy court enters a final order adjudicating a Stern claim on the parties’ consent under 28 U.S.C. § 157(c)(2).  The Court also held that while consent need not be express, it must be given knowingly and voluntarily.

The facts and procedural posture of Wellness are straightforward and undisputed.  Wellness International Network (“Petitioner”) and Richard Sharif (“Respondent”) had a contractual relationship that went south, which led to litigation and a judgment against Respondent.  Respondent later filed for Chapter 7 and listed Petitioner as a creditor.  Petitioner filed an adversary proceeding against Respondent alleging that a trust held certain of Respondent’s assets and seeking, in part, a declaratory judgment under the theory of alter ego that the trust’s assets should be part of the Respondent’s bankruptcy estate (“Count V”).  Respondent answered, admitting that the proceeding was a core proceeding under 28 U.S.C. § 157(b) and requesting judgment in his favor on Count V.  The bankruptcy court ultimately ruled in the Petitioner’s favor on Count V, and appeals ensued.  During his District Court appeal, Respondent did not argue (nor cite the newly issued Stern Opinion) that the bankruptcy court did not have authority to enter a final judgment on Count V because the claim was a Stern claim.  Respondent moved for supplemental briefing to make such argument, but the District Court denied his motion as untimely and affirmed the bankruptcy court’s judgment.  On further appeal, the Seventh Circuit held that the Respondent’s Stern argument could not be waived because the issue pertained to separation of powers under Article III and implicated structural interests, and that the bankruptcy court lacked constitutional authority under Stern to enter a final judgment on Count V.  Because the Circuit Court’s decision was rendered prior to that of Arkison, the Seventh Circuit opined that the reference should be withdrawn so that Count V could be properly adjudicated by the District Court.  The issue before the Supreme Court in Wellness as framed by the majority is whether Article III allows bankruptcy judges to finally adjudicate Stern claims on consent of the parties pursuant to 28 U.S.C. § 157(c)(2).  Despite the criticism of the Wellness dissent (led by Chief Justice Roberts—the author of the Stern majority), the Wellness majority did not feel it necessary to decide whether Count V was a Stern claim because of its conclusion that the parties could consent to adjudication.

In Wellness, the Supreme Court sets the stage for its ruling by stating the broad principle that “[a]djudication by consent is nothing new.”  Op. at 8.  Indeed, as noted by the Court, since the inception of the federal courts, Article III matters have been permitted to be adjudicated on consent of the parties by non-Article III judges, such as arbitrators, referees, and magistrates, because Article III rights are considered by the case law “personal” and thus waivable.  Recent bankruptcy case law does not compel a different result for the majority because the controlling cases, such as Stern and Northern Pipeline Constr. Co. v Marathon Pipe Line Co., 458 U.S. 50 (1982), hinged on the lack of party consent—a point with which the Wellness dissent takes issue.  See, e.g., Roberts, C.J. Dissenting Op. at 14 (“That is not a proper reading of the [Stern] decision.”).

Moreover, while the Court cautions that Article III serves a structural purpose, that is, separating the three branches of the government from encroaching on each other, the majority holds that this purpose is not offended by adjudication by consent so long as Article III courts retain supervisory authority over the process.  To that end, with respect to the specific adjudication of Stern claims on consent, the Court highlights 28 U.S.C. § 157(d), which allows a district court to withdraw the reference sua sponte or by request of a party.   Furthermore, and importantly, the Court notes that any intrusion into the authority of Article III courts by bankruptcy court adjudication of Stern claims is de minimis as bankruptcy courts’ authority to resolve such matters “is limited to ‘a narrow class of common law claims as an incident to the [bankruptcy courts’] primary, and unchallenged, adjudicative function.”  Op. at 13.  And finally, the Court examines the issue from a practical point of view.  In general, the Wellness majority does not believe that Congress intends to derogate the judicial branch through Constitutional delegation.  Rather, as observed by the Court, there are more magistrate and bankruptcy judges than circuit and district court judges and “without the distinguished services of these judicial colleagues, the work of the federal court would grind nearly to a halt.”  Op. at 2.

For Chief Justice Roberts, who penned one of the dissents, the issues in Wellness are clear.  Count V is not a Stern claim if no third party asserts a substantial adverse claim to the trust assets because “[i]dentifying property that constitutes the estate has long been a central feature of bankruptcy adjudication.”  Roberts, C.J. Dissenting Op. at 2, 9.  Moreover, the Constitution’s separation of powers is a “sacred” principle that will be impermissibly threatened and steadily eroded when bankruptcy courts adjudicate to finality Stern claims.  Id. at 11-15.  Article III courts cannot delegate Constitutional authority no matter how closely they control or supervise and no matter how practical or efficient the delegation.  Id. at 15-17.

Over the years, Supreme Court Opinions regarding bankruptcy court authority have acted as a pendulum, swaying back and forth, expanding and contracting.  We are confident that there will be countless commentary written on Wellness despite the fact that the Court’s majority authored an Opinion reaffirming what it believes to be the “unremarkable fact” that adjudication of Article III claims may occur based on litigant consent.  Op. at 17.  However, what is immediately noteworthy to us is the Court’s view that the breadth of Stern claims is narrow, the Court’s acknowledgement of the critical importance of our bankruptcy courts to the judicial branch (a point often overlooked by the Court), and the rise of the Stern dissenters in Wellness (joined now by Justices Kennedy and Alito), who once argued in support of their position in Stern that the delegation of Stern claims was constitutional and made many of the same points set forth in the Wellness majority Opinion—i.e., Article III court oversight, party consent, pragmatism, and the Congressional purpose behind statutory delegation.