Supreme Court Prepares for Stern v. Marshall Round 3

When the Supreme Court struck down the Bankruptcy Reform Act's grant of authority to bankruptcy judges in 1982, it took it took them 29 years to return to the issue.    This allowed bankruptcy law to develop and mature without constantly fretting about whether the whole system would collapse.   However, since Stern v. Marshall, 131 S.Ct. 2594 (2011), the high court has shown renewed concern with how our nation's courts of financial last resort function.   While this term's unanimous decision in Executive Benefits Insurance Agency v. Arkison, No. 12-1200 (6/9/14) was notable for what it didn't decide (see my prior post here), the Supreme Court is going to try again.   On July 1, 2014, the court granted cert in Wellness International Network Limited v. Sharif, 727 F.3d 751 (7th Cir. 2013).   

What Happened

The Seventh Circuit case began when Richard Sharif sued Wellness International (WIN), claiming it was a pyramid scheme.   Sharif did not cooperate in discovery and ended up on the receiving end of a judgment for $650,000.   When he filed bankruptcy, WIN objected to his discharge and also sought a declaration that a trust was Sharif's alter ego.   After Sharif failed to fully respond to discovery once again, the Bankruptcy Court entered default judgment against him on all counts.   The Seventh Circuit affirmed the Bankruptcy Court's denial of discharge, but found that it lacked authority to enter a final judgment on the alter ego claim.  

The Issues on Cert

The Supreme Court granted cert on two points:

(1) Whether the presence of a subsidiary state property law issue in a 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor’s possession is property of the bankruptcy estate means that such action does not “stem[] from the bankruptcy itself” and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and 

(2) whether Article III permits the exercise of the judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant’s conduct is sufficient to satisfy Article III.

What It Might Mean

If this case produces a direct answer on the issues granted (unlike Executive Benefits), it could be earthshaking.   If the Supremes find that Bankruptcy Courts lack authority to determine state law issues necessary to find whether assets are property of the estate, it would be a crippling blow to the ability of the system to function.   If the court gives a clear answer on consent/waiver, it will provide the answer missing in Executive Benefits.  

Bankruptcy practitioners will be watching with great interest and trepidation as the Supreme Court examines both whether and how our unique courts will be allowed to function  (or not) for the third time this decade.  The fact that the court is taking a second crack at the consent issue suggests that there are some justices on the court who were not satisfied with this term's non-answer.