The impact of the Supreme Court's decision in Wellness on bankruptcy litigation and the Seventh Circuit's recent response to the Supreme Court's remand.
Professor Erwin Chemerinsky recently prognosticated that the Supreme Court's ruling in Wellness International Network, Ltd. v. Sharif1, issued on May 26, 2015, will spawn "a great deal of litigation in courts across the country." Chemerinsky: These 4 lesser-known SCOTUS decisions are sure to spawn more litigation. The issue over which this litigation will supposedly occur is whether a party has implicitly consented to have a bankruptcy court finally decide a non-bankruptcy claim, typically state law based. Just a week ago, the Seventh Circuit Court of Appeals chimed in on this question, ruling in response to the Supreme Court's remand of the Wellness case.
The Wellness opinion was the latest in a trilogy of decisions concerning the constitutional authority of bankruptcy courts to decide claims that are not "core" to the bankruptcy process, which began with Stern v. Marshall, 131 S. Ct. 2594 (2011). The Stern decision, written by Chief Justice Roberts, held that a bankruptcy court overstepped its constitutional authority when it decided a state law tort claim asserted by the late Anna Nicole Smith (Vickie Lynn Marshall) while she was a debtor in bankruptcy. In the Wellness ruling, from which the Chief Justice dissented, the Court narrowed the impact of its decision in Stern by holding that parties can consent to have bankruptcy courts decide these non-core claims, notwithstanding the constitutional right to have such claims decided by district courts. This, in and of itself, is not why there will be future litigation. The question that Wellness left for the lower courts is, in the absence of a party's express consent, what type of conduct will constitute implied consent sufficient to waive the constitutional right to have an Article III court—a district court—decide a claim?
On August 4, 2015, the Seventh Circuit issued its ruling in response to the Supreme Court's remand of the implied consent issue in the Wellness case. See No. 12-1349 (7th Cir. Aug. 4, 2015) (ECF No. 57). The Seventh Circuit concluded that "Sharif forfeited his Stern argument when he was first before us" by failing to raise the issue in his first appellate brief (he first raised this issue in his reply brief filed with the Seventh Circuit). Id. at 2 (slip op.). The Seventh Circuit further noted that "[t]he Supreme Court's decision made clear that a litigant's right to an Article III adjudicator is 'a personal right,' and, thus, can be waived through consent" and "can also be forfeited if not properly raised." Id. (citing Wellness, 135 S. Ct. at 1944–45).
Practicality, rather than strict formalism, guided the Wellness decision. It clarifies, contrary to previous decisions by the Fifth, Sixth and Seventh Circuit Court of Appeals, but consistent with the Ninth Circuit, that litigants can consent to a bankruptcy judge finally determining a state-law based (non-core) claim. What this means for parties involved in bankruptcy court litigation, particularly creditors and other defendants, is that they will need to carefully weigh whether to consent to the entry of final judgment by the bankruptcy court. And, if not, how to conduct themselves within the litigation so an appellate court will not later find that they implicitly consented to a final judgment by the bankruptcy court. In this situation, a party will need to clearly express, as early and often as possible, that their consent is neither given nor waived.
But the question remains, what types of claims are sufficiently non-bankruptcy or non-core, such that a party has the constitutional right to a decision by an Article III court? In other words, for what types of claims should a party be concerned about protecting and not forfeiting its constitutional right to a decision by a district court? This begs the more nuanced question that the Supreme Court did not decide, but which may spawn just as much litigation, which is the type of claims that are sufficiently non-bankruptcy (or non-core) such that they run afoul of the constitutional limitation on bankruptcy court authority set forth in Stern. To use the words of the Supreme Court, does the claim "stem from the bankruptcy itself[?]" Stern, 131 S. Ct. at 2618.
The Wellness case concerned claims that property allegedly held in a trust was actually owned by the debtor, Mr. Sharif, such that the property should be part of the bankruptcy estate. The Supreme Court did not address whether this type of claim stemmed from the bankruptcy itself, instead reversing the Seventh Circuit Court of Appeal's decision because Mr. Sharif, through filing the bankruptcy and engaging in litigation, might have implicitly consented to have the bankruptcy court finally determine this dispute. On remand the Seventh Circuit was instructed to determine whether Mr. Sharif's actions evinced a "knowing and voluntary consent." Wellness, 135 S. Ct. at 1937. If so, then the bankruptcy court's ruling did not violate Article III of the Constitution.
This issue, whether certain claims "stem from the bankruptcy itself," will continue to be sorted out by the bankruptcy courts with, no doubt, varying results. Likewise, these decisions will continue to work their way up to the courts of appeals and potentially, once again, to the Supreme Court.
Footnote
1. This decision was issued on May 26, 2015 and is available at 135 S. Ct. 1932 (2015) or on the Supreme Court's website, www.supremecourt.gov, Case No. 13-935, at http://www.supremecourt.gov/opinions/14pdf/13-935_i4dj.pdf
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