Supreme Court now decides to answer the questions it ducked in Arkison-what can a bankruptcy court decide, when and how?

A short time ago we reported on Executive Benefits v Arkison, where some critical questions about the powers of bankruptcy courts were left hanging.  In Wellness International Network, Limited v. Sharif,  the Supreme Court has now decided to take up a case where those issues are clearly presented. On July 1, 2014 it granted Certiorari to review a decision of the Seventh Circuit Court of Appeals in that case.

The issues presented in the case turn on the extent of the Bankruptcy Court’s power to render final decisions and in what types of matters. You will recall that Bankruptcy Courts are Article I courts, appointed without the lifetime tenure granted to federal district court judges and other Article III judges.

Generally, Article I jurisdiction is centered on “bankruptcy specific” issues, that would not exist as controversies outside of bankruptcy. What property is included in a bankruptcy estate would seem clearly to fall within this area, yet  in Sharif, the Court is being asked to decide whether the presence of a subsidiary state property law issue necessary to decide this question takes the controversy outside Article I territory, so that a bankruptcy court does not have the constitutional authority to enter a final order deciding that matter.

The second issue in Sharif concerns whether,  under Article III of the Constitution, litigants by either express or implied consent can empower bankruptcy courts to enter final decisions in matters that are beyond Article I. The Seventh Circuit said no.

Decision on these matters is expected next term. If the Court decides against bankruptcy court powers on either question, the result will be to upend bankruptcy practice, causing many or all routine bankruptcy matters to grind to a halt as much or all of the bankruptcy court docket is shifted to already-overburdened federal district court judges.

The Court has already upheld the power of another class of Article I judges to render final decisions by consent, and a different ruling here could have drastic effects across the Federal Court system. In Roell v. Withrow, 538 U.S. 580 (2003), the Court held that U.S. Magistrate Judges could proceed by implied consent of the parties based on their lack of objection and other conduct, even though the Federal Magistrate Act of 1979 required written consent. Magistrates work as an arm of the District Courts. The Magistrate Act specifically provides that “upon the consent of the parties, a full-time United States magistrate judge . . . may conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court.” 28 U.S.C. § 636(c)(1) [28 USCS § 636(c)(1)]. Unlike  nonconsensual referrals of pretrial but case-dispositive matters under § 636(b)(1), which leave the district court free to do as it sees fit with the magistrate judge’s recommendations, a § 636(c)(1) referral gives the magistrate judge full authority over dispositive motions, conduct of trial, and entry of final judgment, all without district court review.  A judgment entered by “a magistrate judge designated to exercise civil jurisdiction under [§ 636(c)(1)]” is to be treated as a final judgment of the district court, appealable “in the same manner as an appeal from any other judgment of a district court.” § 636(c)(3).”  Roell v Withrow, 538 U.S., at 585.

Bankruptcy Courts are given jurisdiction by another Congressional enactment, embodied in 28 USC 157,  which gives them power to act as “a unit of the district court.” The statute provides that “with the consent of all the parties” the District Courts may refer Article III matters to the bankruptcy courts for final decision. In New Jersey and throughout the country, the District Courts have entered Standing Orders of Reference. 28 USC 157(c) also provides a mechanism for the parties to opt out and by a “withdrawal of the reference” insist on the district court making the rulings in the first instance.

We would hope that the Court would see this as putting bankruptcy courts in the same posture and status as US Magistrates. If not, the Court will have to confront whether Roell is still good law, and if not, how the federal courts can handle the enormous caseload now routinely disposed of by bankruptcy court as well as US Magistrates.

It is going to be an interesting year in bankruptcy practice. We can expect litigants interested in hindering or delaying decisions by the bankruptcy courts to raise these issues. Clarification has been delayed, and is overdue.



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