Supreme Court rules that Bankruptcy Courts can enter final judgments in Article III controversies where the parties consent by act or deed

Earlier this year, our blog noted that this would be an exciting year for important rulings from the Supreme Court on several bankruptcy related fronts. Rulings have now started coming down.

In Wellness International Network Ltd v Sharif, decided May 26, 2015, the Court resolved what could have been the most serious challenge to the entire bankruptcy system. Both bankruptcy judges and U.S. Magistrates handle a large volume of disputes, such that, as the Court noted, “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 problem is that the Constitution vests the full power of the federal judiciary only in “Article III” judges who have lifetime appointment and salary protection. These judges are confirmed by Congress. Magistrates and bankruptcy judges serve limited terms and are appointed by the District and Circuit Court judges in their district. They serve at the pleasure of those judges and are delegated handling of certain types of matters. Bankruptcy judges have authority to hear and decide all matters coming before them in or arising in a bankruptcy case. That is a lot of decisions to make, folks.

There are certain types of disputes, however, that only Article III District Court judges may issue final rulings on.  Generally, these are claims and disputes that would have had an existence even were there no bankruptcy filing. Examples include common law contract disputes, or whether a transfer of property can be undone as a “fraudulent transfer”. For these types of matters, the Bankruptcy Court can hear the case, but can only issue “proposed findings of fact and conclusions of law” which the District Court must review all over again on the record in a “plenary” manner. This gives the loser in the bankruptcy court a much better chance of getting a “second bite at the apple”.  In Wellness, a creditor sued the debtor to grab the assets of an alleged family trust which the debtor had concealed, claiming the trust was a fiction and that the assets really belonged to the debtor and should be turned over to the trustee to be sold to pay creditors.

The Supreme Court held that the Bankruptcy Court had the authority to make a final ruling on this issue because Sharif had knowingly and voluntarily consented to its doing so. Here, it was argued, Sharif did not expressly consent by statements to the court below even though he had not objected and in fact had applied to the Bankruptcy Court for a ruling in his favor. But the Court ruled that consent may be implied, and pointed to a long history of that being allowed.

The decision was split, with 5 justices ruling with the majority, one justice agreeing in the result but not in the ruling on implied consent, and the remaining 3 dissenting.

Wellness makes clear that gamesmanship on this issue will not be allowed. If a party objects to the Bankruptcy Court making a final ruling in disputes that could have been litigated without any bankruptcy filing, it must say so and take affirmative action, or the objection is waived.

The opinion is well-reasoned and provides much needed guidance to the Bankruptcy Courts and those who practice there.

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