Professor Kenneth N. Klee on the Supreme Court's Grant of Certiorari in Wellness

Professor Kenneth N. Klee on the Supreme Court's Grant of Certiorari in Wellness


I. Introduction

The Supreme Court granted certiorari in Wellness International Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013) [an enhanced version of this opinion is available to subscribers]cert. granted, 2014 U.S. LEXIS 4693 (July 1, 2014) (No. 13-935) ("Wellness"), potentially to resolve a circuit split on the question whether the right to an Article III tribunal identified in Stern v. Marshall, 131 S. Ct. 2594 (2011) ("Stern"), is subject to waiver by litigant consent [enhanced version]. The Court recently ducked this very issue in Executive Benefits Insurance Agency v. Arkison, 573 U.S. __, 134 S. Ct. 2165 (2014) ("EBIA") [enhanced version]. Wellness places the question squarely before the Court again. The Court's holding in Wellness is also likely to help clarify what types of proceedings are so-called "Stern claims" (i.e., claims that are statutorily "core" but can be finally adjudicated only by an Article III tribunal).

II. Brief Overview of Stern and EBIA

In Stern,the Supreme Court granted certiorari to resolve whether the bankruptcy court had authority to enter a final judgment on a debtor's counterclaim for tortious interference. The Court held that 28 U.S.C. § 157(b)(2)(C) [an annotated version of this statute is available to subscribers]  , in giving bankruptcy judges statutory core authority to finally determine counterclaims not necessary to the allowance of claims, unconstitutionally delegated the judicial power of the United States to non-Article III bankruptcy judges. The Court stated that "[t]he Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Stern,131 S. Ct. at 2620. The majority opinion emphasized the distinction drawn in Granfinanciera v. Nordberg, 492 U.S. 33 (1989) [enhanced version], between actions "to augment the bankruptcy estate" and actions to determine a creditor's right to receive "a pro rata share in the bankruptcy res." 131 S. Ct. at 2618. The implication is that bankruptcy courts may have authority to finally decide the latter, but not the former, causes of action.

Moreover, the Court ruled that the filing of a proof of claim does not, by itself, result in consent to the bankruptcy court's resolution of the counterclaim. To the contrary, the Court observed that "the notion of 'consent' does not apply in bankruptcy proceedings as it might in other contexts." Id. at 2615 n.8. The Court repeatedly suggested that its decision was a "narrow" one, unlikely to have significant "practical consequences" or "change all that much" beyond invalidating the "one isolated respect" in which 28 U.S.C. § 157(b)(2)(C) exceeded Congress' powers under the Constitution. See id. at 2619-21. Courts interpreting Stern have struggled with how "narrow" the decision actually is, including whether bankruptcy courts continue to have the authority to enter final judgments regarding fraudulent transfer claims and other "core" matters, and whether the Article III right identified in Stern is waivable.

The Court had an opportunity to address some of the questions left open in Stern when it granted certiorari in EBIA. Many courts and commentators anticipated a highly significant opinion on the question of whether litigants can explicitly or impliedly consent to the bankruptcy court's final adjudication of Stern claims. Instead, the Court ducked the consent issue and resolved EBIA on narrow grounds. Relying on an uncodified severability provision, the Court held that when Article III of the Constitution prohibits a bankruptcy court from entering final judgment on a claim that is statutorily designated as "core" under 28 U.S.C. § 157(b), the bankruptcy court may nevertheless issue proposed findings of fact and conclusions of law to the district court for de novo review pursuant to 28 U.S.C. § 157(c). 134 S. Ct. at 2170. Moreover, even when the bankruptcy court erroneously enters final judgment on such a claim, the district court can "cure" the bankruptcy court's error by reviewing the judgment de novo and separately entering judgment, even if the district court is reviewing the judgment on appeal rather than through the report and recommendation process. Id. at 2174-75. This narrow holding, based on questionable statutory interpretation, allowed the Court to "reserve . . . for another day" the thorny question whether a litigant may waive a constitutional objection to bankruptcy court adjudication. Id. at 2170 n.4.

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