Wellness International Network Ltd. v. Sharif
Bankruptcy Judges May Render Final Decisions on Legal Disputes Arising in Bankruptcy if All Parties Consent
By Michael L. Moskowitz and Melissa A. Guseynov
On May 26, 2015, in Wellness International Network Ltd. v. Sharif, the Supreme Court held that Article III of the United States Constitution permits bankruptcy judges to adjudicate so-called “Stern” claims, with the parties’ knowing and voluntary consent. Wellness International Network Ltd. v. Sharif, 135 S.Ct. 1932 (2015).
Because federal bankruptcy judges are not Article III judges, they do not have the authority to enter final judgment in all matters that come before them. More specifically, they may enter final judgment in “all cases under the [Bankruptcy Code],” in certain “core proceedings” as defined by statute, and those that are referred to them by the district court. In certain “non-core” proceedings, a bankruptcy judge may enter final judgment only “with the consent of all the parties to the proceeding.” 28 U.S.C. § 157(c)(1). Without consent, a bankruptcy judge must “submit proposed findings of fact and conclusions of law” that are subsequently reviewed by a district court. 28 U.S.C. § 157(c)(1).
In Stern v. Marshall, 564 U.S. 2 (2011), the Supreme Court held that although bankruptcy courts, as Article I courts, may have statutory authority to enter final judgments on certain state-law counterclaims, they do not have constitutional authority to enter final judgments under Article III of the Constitution. While the Court stated that its ruling was narrow, the decision’s reasoning has resulted in a great deal of uncertainty regarding the authority of bankruptcy courts to issue final decisions on matters that do not directly stem from the bankruptcy process.
In this case, after Richard Sharif (“Sharif”) filed for bankruptcy, Wellness International Network Ltd. (“Wellness”), commenced an adversary proceeding against him, claiming that certain trust assets belonged to Sharif’s bankruptcy estate. Sharif admitted that the adversary proceeding constituted a “core proceeding” under 28 U.S.C. § 157(b). The bankruptcy court ruled in Wellness’ favor, and Sharif appealed to the district court. The district court affirmed the bankruptcy court’s ruling. On appeal, the Seventh Circuit held that Wellness’ claim relating to trust assets constituted a “Stern” claim that the bankruptcy court lacked jurisdiction to adjudicate. However, the Supreme Court reversed the decision.
Writing for the majority, Justice Sotomayor explained that “[a]djudication based on litigant consent has been a consistent feature of the federal court system since its inception.” Wellness International Network Ltd., 135 S.Ct., at 1947. She further explained that nothing in the Constitution requires consent to adjudication by the bankruptcy court to express. The Court remanded the decision as to whether Sharif’s action evinced the requisite knowing and voluntary consent to adjudication by the bankruptcy court.
This decision is noteworthy in that it preserves the viability and power of the bankruptcy courts by allowing parties to waive their right to present their case before an Article III judge. This decision is important for practical reasons as well. As noted by the majority, “It is no exaggeration to say that without the distinguished service of [magistrate and bankruptcy judges], the work of the federal court system would grind nearly to a halt.” Id. at 1938-39.
About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm: Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditor’s rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201)794-7500 or mlm@weltmosk.com. Melissa A. Guseynov is an associate of the firm.
