By Louis S. Robin
Law Offices of Louis Robin
Longmeadow, MA
The Supreme Court, in an opinion eagerly
anticipated by bankruptcy practitioners and the bankruptcy judiciary,
has issued its opinion in Wellness International v. Sharif. The Court permitted
parties to consent to entry of final orders in non-core and “Stern” issues. As
a 6 – 3 decision, there are still issues remaining to be decided.
Factual
Background
Richard Sharif was the debtor/defendant in a
dischargeability case which included a count seeking to determine that a trust, which the
debtor alleged he administered for the benefit of his mother and sister was Sharif's alter ego and that its assets were part of the bankruptcy
estate. Although litigation persisted with the alleged consent of the debtor
Sharif, default judgments were eventually issued by the Bankruptcy Court,
including Count V regarding the trust. This trust judgment was reversed by
the Seventh Circuit which ruled that the Bankruptcy Court did not have
jurisdiction, regardless of consent, to issue judgments on these claims which
could be considered “Stern” claims – that is, final judgments on “claims that
seek only to 'augment' the bankruptcy estate” and would otherwise “exis[t]
without regard to any bankruptcy proceeding.” Slip Opinion at 9, citing Stern,
564 U.S.
at ___, ___ (slip Op., at 27, 34). The debtor Sharif's sole defense on appeal
was that the Bankruptcy Court lacked jurisdiction to issue final judgments,
regardless of consent.
Justice
Sotomayor's Opinion for the Majority
Justice Sotomayor wrote for a 6 – 3 majority. This
decision traced the history of consent, noting that reference of disputes to
non-Article III referees, arbitrators, and masters for entry of final decisions
took place in the “early days of the Republic”and cited a
1813 Supreme Court case which affirmed damages in two actions that “were
referred, by consent under a rule of Court to arbitration.” Thornton v. Carson, 7 Cranch 596,
597 (1813). Justice Sotomayor then thoroughly discussed the more recent Commodity
Futures Trading Comm'n v. Schor, 478 U.S. 833 (1986) regarding an Article I
tribunal litigation of state law claims, and then turned to Gomez v. United
States, 490 U.S. 858 (1989) and Peretz v. United States, 501 U.S.
923 (1991) concerning Magistrates' authority for conducting trials resulting
in final determinations. Justice Sotomayor stated that an “expansive reading of Stern,
moreover, would be inconsistent with the opinion's own description . . . that
the question before it was a 'narrow' one, and that its answer did 'not change
all that much'”. Slip Opinion at page 16.
My brief review of Justice Sotomayor's analysis does not do justice (no
pun intended) to her thorough opinion which supports the conclusion she
provided in the introduction of her opinion: “Our precedents make clear that
litigants may validly consent to adjudication by bankruptcy courts.” Slip
Opinion at page 8.
The only remaining issue was the standard of consent
necessary. Justice Sotomayor rejected that the requisite consent must be
“express”. Whether express or implied, it must be “knowing and voluntary.” The
key inquiry is whether “the litigant or counsel was made aware of the need for
consent and the right to refuse it, and still voluntarily appeared to try the
case” before the adjudicator. She referred this finding of fact to the original
trial court for determination.
Justice
Alito's Concurrence
Justice Alito joined the majority in a brief concurring
opinion. He enthusiastically endorsed Justice Sotomayor's analysis by saying
that her reasoning “would seem to fall within the Court's previous rejection of
'formalistic and unbending rules.'” The focus of his opinion, however, was on
consent – he noted that Bankruptcy Rule 7012(b) requires “express” consent for
non-core matters, although the Sharif debtor's failure to raise the consent
issue earlier was fatal in the Justice's opinion.
Chief
Justice Roberts' Dissent
Chief Justice Roberts dissented – not because he
disagreed with the ultimate decision, but because he disagreed with its
reasoning and that the majority opinion threatened constitutional separation
of powers principles. Although the second part of his decision regarding
separation of powers and other constitutional issues is the most significant,
an initial discussion regarding his rationale for approving the result touches
traditional issues that may interest the traditional bankruptcy practitioner,
and I will address that first.
Chief Justice Roberts agreed with the outcome because he
analyzed the issue in terms of “res” – “At its most basic level, bankruptcy is
‘an adjudication of interests claim in a res.’” Chief Justice Roberts,
dissenting, Slip Opinion at page 5, citing Katchem v. Landy, 382 U.S.
323, 329 (1966). It is ironic that Justice Roberts cited Katchem v. Landy,
as that decision, for many years, was cited often in support of bankruptcy
jurisdiction over creditors having previously filed proofs of claims, and even
as support for 28 U.S.C. §158(b)(2)(c)’s definition of core proceedings to
include “counterclaims by the estate against
persons filing claims against the estate”. Indeed, support for broad
Bankruptcy Court jurisdiction based upon adjudication of a “res”, was
generally, if not specifically, rejected in Stern.
Chief Justice Roberts, continued on this path, noted
that “[i]dentifying property that constitutes the estate has long been a central
feature of bankruptcy adjudication.” This charge was present under English
bankruptcy law, America’s
first bankruptcy statute enacted in 1800, and other provisions. Still, Justice
Roberts limited this issue of a “res” as it did not extend to situations where
a “third party asserted a ‘substantial adverse” claim [in the res]”. Chief
Justice Robert, dissenting, Slip Opinion at page 7, citing
Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 433 (1924). Similarly, so that no one could believe that the Court was revisiting Granfinanciera, S.A. v.
Nordberg, 492 U.S. 33 (1989), and equating alter ego claims with fraudulent
transfer claims, Chief Justice Roberts drew a line by stating that a
“fraudulent conveyance claim seeks assets in the hands of a third party, while
an alter ego claim targets only the debtor’s ‘second self.’” Chief Justice
Roberts, dissenting, Slip Opinion at page 8.
I question as to how such factual findings of third
parties’ substantial adverse claims or a debtor’s second self are to be
determined – by the Bankruptcy Court, District Court, or some other party.
These lines are difficult to distinguish because fraudulent transfer claims and
claims of concealment often overlap. See, e.g., In re Charette, 148
B.R. 94 (Bankr. D. Mass.
1992). They are fact intensive, not subject to simple rules. If Bankruptcy
Court authority was expanded to all aspects of the “res”, whether enlarging
the res or simply its distribution, the Bankruptcy forum would operate most
efficiently, although, admittedly, constitutional issues have prohibited this
result.
Although the preceding leads to the same result as the
majority’s position, the second part of Chief Justice Roberts’ dissent concerned
the inherent powers of the Article III judiciary. He started this discussion by
quoting James Madison in the First Congress: “if there is a principle in our
constitution more sacred than another, it is that which separates the
Legislative, Executive, and Judicial powers.” “Sacred,”as the Chief Justice notes,
is a strong word – and Chief Justice Robert’s analysis does justice (again no
pun intended) to such a standard. He discusses the Federalist Papers, Supreme
Court decisions and precedents, and the words of the present Justices. And lest
anyone believe that the issue of an independent Judiciary is a principle whose
importance pales in comparison to others, one only need to look to the
Declaration of Independence, which criticized the King as he “made Judges
dependent on his Will alone, for the tenure of their offices and amount and
payment of their salaries”. Chief Justice Roberts, Slip Opinion at Page 3,
quoting the Declaration of Independence, ¶ 11. Chief Justice Roberts argued
forcefully for the integrity and power of the Judiciary.
If I can point to any lapse by Chief Justice Roberts, it
is his failure to address James Madison’s words in the Federalist Papers that
the “power of establishing uniform laws of bankruptcy is so intimately
connected with the regulation of commerce, and will prevent so many frauds . .
. that the expediency of it seems not likely to be drawn into
question.” (emphasis added). Federalist No. 42, p. 271 (C. Rossiter ed. 1961).
Justice Breyer cited these words in his Stern dissent. Stern v.
Marshall, Justice Breyer dissenting, Slip Opinion at page 14. Although, in
this paragraph’s discussion, I am returning to the first portion of the Chief
Justice’s dissent, I believe that this early reference to expediency should not
be forgotten. The expediency of bankruptcy is a quality that every bankruptcy
practitioner and Bankruptcy Judge recognizes as central to the bankruptcy
forum, and certainly lends itself to an expansive view of “res”. Ironically,
Chief Justice Roberts choose other words of Justice Breyer as support in his
dissent. Slip Opinion at Page 14. Addressing these words of expediency could
have been instructive.
Justice
Thomas' Dissent
Justice Thomas provided a scholarly and lengthy
discussion on various questions, with the last being the “more difficult
question [of] whether consent somehow eliminates the need for an exercise of
the judicial power.” He discussed many opinions, commentaries, and sources.
Ultimately, he declined to provide answers to these questions as the balance of
the Court had decided not to consider them, and, instead joined the first part
of the Chief Justice’s dissent concerning the “res” of the bankruptcy estate.
Conclusion
As a general matter, I believe the issue of consent is
resolved for hereafter – six Justices have joined this majority, not the mere
five that has been often been the case on close issues dividing the
Court. That Justice Alito joined the four other more liberal Justices is certainly unique – I do not keep
“statistics” on such issues, but I wonder how often that Justice Alito joins
Justices Ginsburg, Breyer, Sotomayor, and Kagan, instead of Justices Roberts,
Scalia and Thomas. Perhaps Justice Alito has some experience with the nature of
bankruptcy proceedings in prior practice or as an Appeals Judge. In any event,
it will be difficult for a future Court to find reason to reverse a 6 – 3
decision that enjoys some diverse support.
I also believe that this will result in little change in
the practice before the Bankruptcy Court. We should remember that after
Northern Pipeline v. Marathon, 458 U.S. 50 (1982) was issued, following some
initial disruption, bankruptcy practice proceeded with little disruption.
Further, Bankruptcy Rule 7012(b)(2) requires that the “responsive pleading
shall admit or deny an allegation that the proceeding is core or non-core. If
the response is that the proceeding is non-core, it shall include a statement
that the party does or does not consent to entry of final orders or judgment by
the bankruptcy judge.” This provides an expedited procedural basis for
proceeding. Most often the admission is that the adversary is core or that
consent is given; at least I have never seen a Bankruptcy Judge issue proposed
findings and rulings for the District Court to review. The practitioners that toil in the Bankruptcy
forum understand the necessity of bankruptcy and its “expediency”, and I am
confident that they will make every possible effort to have this system operate
efficiently.
The Bankruptcy Rules should
apply to “Stern” claims as well, in that the party would provide some
admission of core or non-core, and any consent. Further, the District Court of
Massachusetts has provided for resolution of “Stern” claims under Local Rule
206 for the United District Court for the District of Massachusetts, so that
the Bankruptcy Court can issue proposed findings and rulings for the District
Court to consider.
As far as the concept of “res” expanding to protect the
rulings of the Bankruptcy Court in the future, it is doubtful that this concept
will be revisited in the future to reverse prior rulings. The Supreme Court is
protective of its jurisdiction and the Article III Courts. Even with Justice Sotomayor’s comment that
“it is no exaggeration to say that without the distinguished service of these
judicial colleagues [as Bankruptcy Judges], the work of the federal court
system would grind nearly to a halt”, the Court will be hesitant to expand the power of the Bankruptcy Court.
But Chief Justice Roberts discussion of the “res”, is perhaps the
longest and most supportive of this concept – perhaps it will be utilized to
fight off challenges to other aspects of the Bankruptcy Code, such as
jurisdictional challenges to exemptions, determinations of the extent,
priority, and validity of liens, orders approving sales, confirmation orders,
and the variety of other matters concerning the administration of the estate.
I would suggest that all take the time to read the
opinions. My summaries and comments do not do right in characterizing their
fullness. They certainly provide us, as daily participants in the bankruptcy world, comfort that we participate in a worthy forum that is rich in democratic
principles.
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