“Thank You, SCOTUS; It’s About Time!”: Supreme Court Grants Cert to Decide Meaningful Stern v. Marshall Questions

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Contributed by Doron P. Kenter.

We at the Stern Files recently expressed our disappointment with the lack of more meaningful guidance in Executive Benefits Insurance Agency v. Arkison regarding the nature and extent of bankruptcy judges’ authority, and it seems our prayers have been answered.

Yesterday, the Supreme Court granted certiorari in Wellness Int’l Network v. Sharif, in which the Seventh Circuit Court of Appeals held, among other things, that bankruptcy courts cannot issue a final judgment in core matters as to which they lack final authority, even where the parties provide their express consent to same. Our prior coverage of Sharif is available here. Though the Court did not certify all four questions posed in the cert petition, it agreed to take up two central questions emanating from Stern and its progeny. Specifically, the Court will address the following two questions:

  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.
  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.

With respect to question #2, as we’ve noted, the Supreme Court did not grant cert in Waldman v. Stone, which raised many of the same questions as did Sharif and was the progenitor, with Arkison, of the existing circuit split regarding the effect of consent on “Stern claims” and on bankruptcy courts’ constitutional authority. But regardless of the Supreme Court’s reasoning for first tackling Arkison on a limited basis, and then addressing the broader questions of consent, we will anxiously await the Supreme Court’s decision in Sharif regarding these … ahem … core issues.

Turning back to question #1, it will also be interesting to see how the Court comes out on the question of whether bankruptcy courts have constitutional authority to finally determine all actions implicating section 541 of the Bankruptcy Code. It may be still more interesting to learn about what types of matters, in the Supreme Court’s eyes, “stem[] from the bankruptcy itself” (in the words of Stern) – indeed, it is at least arguable that all matters that might be raised in a bankruptcy case involve a determination (of some sort) regarding “property of the estate.” (For example, what if a debtor couples a turnover action under section 542, which specifically seeks to recover estate property, with other affirmative claims as to which the bankruptcy court would not have final adjudicatory authority? What about avoidance actions? Should preference actions be within the bankruptcy courts’ final authority because they implicate questions of estate property and therefore “stem” from the bankruptcy case, while fraudulent transfer actions are carved out from the bankruptcy courts’ ability to enter a final judgment? What if both causes of action are asserted?)

Of the two other questions raised in the Sharif petition, one has already been resolved by Arkison – namely, whether bankruptcy courts may issue proposed findings of fact and conclusions of law in core matters as to which they lack final constitutional authority (yes). The final question asked whether the filing of a voluntary bankruptcy petition necessarily constitutes consent by the debtor to adjudication of claims by a non-Article III court. Presumably, this question depends in large part on the threshold question of whether the parties’ consent can confer on the bankruptcy court an ability to finally resolve these “Stern matters” (i.e., core matters as to which the bankruptcy court is otherwise constitutionally barred from issuing a final judgment), which the Court has agreed to address.

As always, we at the Stern Files will continue to provide insightful coverage of further developments as we await briefing, argument, and a (hopefully meaningful) decision in Sharif.