The right to adjudication before an Article III court is personal and waivable according to a divided United States Supreme Court. Wellness Int’l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S. Ct. 1932 (2015). The Court further held that consent to a bankruptcy court’s jurisdiction may be implied as well as express, apparently eroding some of the strictures of the Court’s opinion in Stern v. Marshal, 564 U.S. ___, 131 S. Ct. 2594 (2011) (“Stern”).
Facts And History. After a creditor obtained a judgment against a debtor, debtor filed a Chapter 7 bankruptcy petition. The creditor then brought an adversary complaint seeking denial of his discharge as well as declaratory relief that a trust administered by debtor was actually his alter ego. As a discovery sanction, the bankruptcy court entered a default judgment against debtor.
During debtor’s appeal to the district court, the Supreme Court issued its opinion in Stern, sharply limiting the authority of bankruptcy judges to enter final judgments. However, debtor failed to raise Stern and challenge the bankruptcy judge’s authority to enter a final judgment in his opening brief. The district court denied debtor’s motion to supplement his brief to properly raise a Stern objection and affirmed the bankruptcy court’s decision, ruling that the Stern issue was waived. On further appeal, the Seventh Circuit determined that debtor’s Stern objection could not be waived.
The Seventh Circuit, noting a split between the Ninth Circuit (holding that the Stern issue could be waived) and the Sixth Circuit (holding that the issue was not waivable), sided with the Sixth Circuit stating that, “we discern nothing in Stern that supports the proposition that a party may waive an Article III objection to a bankruptcy judge’s entry of final judgment.” Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 767 (7th Cir. 2013) cert. granted in part, 134 S. Ct. 2901 (2014) and rev’d, 135 S. Ct. 1932 (2015). The Supreme Court reversed and remanded the case back to the Seventh Circuit.
Supreme Court Reasoning. The Supreme Court, explaining that, “adjudication by consent is nothing new,” stated, “allowing Article I adjudicators [bankruptcy and magistrate judges] to decide claims submitted to them by consent does not offend the separation of powers so long as Article III courts retain supervisory authority over the process.” Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. at 1944. The Court, in applying the factors articulated by its opinion in Commodity Futures Trading Comm’n v. Schor, 478 U.S. 883 (1986), 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.
As with district court magistrates (for whom the court also sustained the power of parties to waive their rights to proceedings before an Article III judge in Peretz v. United States, 501 U.S. 923 (1991)), the Court noted that the entire jurisdictional process begins with and ultimately always rests in the hands of the district courts that supervise the process from start to finish. It is left to the parties whether to consent to bankruptcy court jurisdiction to enter a final order and there is no indication that in permitting such consent Congress was trying to bypass the dignity of Article III courts wholesale. To the contrary, according to the Court, Congress’ purpose was to help the district courts by granting them the assistance of bankruptcy and magistrate judges – “and it is no exaggeration to say that without the distinguished service of these judicial colleagues, the work of the federal court system would grind nearly to a halt.” Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. at 1939.
The Court disregarded the argument that Stern somehow conflicted with its decision. Stern was decided on the lack of consent of one of the parties. Additionally, Stern’s recital that it did “not change all that much” the allocation of labor between district and bankruptcy courts would be disingenuous if it stood for the proposition that bankruptcy judges could no longer exercise their longstanding authority to resolve claims submitted to them by consent. “Adjudication based on litigant consent had been a consistent feature of the federal court system since its inception. Reaffirming that unremarkable fact, we are confident, poses no great threat to anyone’s birthrights, constitutional or otherwise.” Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. at 1947.
The Court also held that consent could be implied as well as express, citing its decision in Roell v. Withrow, 538 U.S. 580 (2003), where it legitimized implied consent in the context of rendering final decisions by magistrate judges. It saw no distinction between consent in that situation and consent given to a final decision rendered by a bankruptcy judge. It also pointed out that the statutory authority for consent to final decisions by bankruptcy courts in non-core matters found in 28 U.S.C. § 157(c)(2) does not require express consent.
Noting that waiver of the right to Article III adjudication must be knowing and voluntary, even if implied, the Court in a footnote suggested that bankruptcy courts require parties to expressly articulate at the outset of a proceeding their consent (or nonconsent) to avoid litigation over this issue. The Court remanded the case back to the Seventh Circuit to make the factual determination whether debtor’s actions amounted to a knowing and voluntary waiver of the right to Article III adjudication and entry of final judgment by the bankruptcy court.
Impact. The majority in Stern ended up falling into the minority in Wellness. The Wellness majority appears more concerned with judicial efficiency at the expense of strict adherence to the strictures of Stern. Since Stern, there has been increased judicial workload associated with bankruptcy litigation, as the district courts now must consider de novo a bankruptcy court’s findings of fact and conclusions of law before rendering a final order. As stated above, the Court’s opinion acknowledges that, “without the distinguished service of [bankruptcy and magistrate judges], the work of the federal court system would grind nearly to a halt.” However, despite the Court’s desire to promote judicial efficiency, the majority opinion may have the opposite effect. The majority ultimately failed to resolve the case on its merits and remanded for a factual hearing on whether the waiver was knowing and voluntary when it could have simply held that the failure to timely raise a Stern objection constitutes waiver per se (as suggested by Justice Alito’s concurrence). As a result, every case of implied consent will require a factual hearing – ostensibly further increasing the judicial workload.
For further information regarding bankruptcy law in general, or the Stern case in particular, please contact
Donald H. Cram, III at dhc@severson.com.