Those words are from Justice Sotomayor’s opinion in the recent decision by the Supreme Court in Wellness International Network, Ltd. v. Sharif, which decision has generated significant press coverage (and blog postings) among bankruptcy practitioners across the country. This author certainly doesn’t intend to add to the noise out there by reciting the facts and procedural history of the case yet again. Rather, I’d like to make certain observations of the 6-3 decision that may provide some insight into how this decision will affect the adjudication of “Stern claims” going forward.
First, the Supreme Court’s decision is a big win for bankruptcy courts and those who champion the power of the 349 judges who currently sit on our bankruptcy courts. The majority opinion appears to have resolved the debate over whether individual parties to a litigation of a “Stern-claim” could waive their rights to adjudicate such claims before an Article III judge. The Supreme Court concluded that “allowing bankruptcy litigants to waive the right to Article III adjudication of Stern claims does not usurp the constitutional prerogatives of Article III courts.”
In so holding, the majority relied on the structural relationship that our bankruptcy courts have with our district courts. As units of the district courts, the powers of our bankruptcy courts are residual in nature to our Article III courts. Mechanically speaking, our district courts can withdraw the reference from our bankruptcy courts and hear matters–core and non-core–directly. This dynamic mitigated against finding a constitutional violation of Article III, which the majority agreed with the dissenting Justices could not be cured by individual consent. Without any separation-of-powers’ violation, the parties could consent to the bankruptcy court entering a final judgment or order on a “Stern claim.”
Second, as pointed out by Justice Roberts in his dissenting opinion, the majority did not address whether the claim at issue in Wellness was in fact a “Stern claim” that required final adjudication by an Article III court. Justice Alito, in a concurring opinion, succinctly defined a “Stern claim” as “a claim that is ‘core’ under the statute but yet ‘prohibited from proceeding in that way as a constitutional matter.’” (citations omitted). In Wellness, the creditor sought a declaratory judgment that a trust administered by the debtor was the debtor’s alter ago and that the property owned by the trust was estate property. In Justice Roberts’ view, the majority overreached by tackling the issue of consent because the alter ego claim arose from the bankruptcy case itself. According to the dissent, the claim fell safely within Article I’s Bankruptcy Clause, which carved out cases and controversies traditionally subject to resolution by bankruptcy judges. In other words, the claim at issue in Wellness was not akin to fraudulent transfer claims, or tort or breach of contract claims, all of which originate from the cloth of common law, rather than from the Bankruptcy Code. Because the claim stemmed from the bankruptcy case, the resolution of which depended at least in part on the Bankruptcy Code, Stern v. Marshall did not apply and the Court did not need to tackle the role of consent in conferring jurisdiction on the bankruptcy court.
Third, both the majority and dissent acknowledge that individual consent cannot cure structural separation-of-powers’ violations. Thus, it remains to be seen whether or not the adjudication by a bankruptcy court of any other “Stern-claim” rises to the level, or falls short, of an Article III violation. Notwithstanding, this decision stands for the fact that, with consent, the core/non-core divide becomes irrelevant; with consent, bankruptcy courts can enter final judgments on both core claims, including “Stern claims,” and non-core claims. With consent, the world may indeed end in a bankruptcy court.