Alert: Supreme Court Finally Decides Whether Consent to Bankruptcy Court's Final Adjudication of "Stern Claims" Is Constitutional

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June 11, 2015

Despite the Supreme Court’s recent decisions in Executive Benefits Insurance Agency v. Arkinson, 573 U.S. ___ (2014) (Arkinson) and Stern v. Marshall, 564 U. S. ___ (2011) (Stern),which dealt with the division of authority between bankruptcy courts and Article III courts, the question of whether a party could consent to a bankruptcy court’s final adjudication of so-called “Stern claims” remained an open issue. No longer. Recently, in Wellness International Network, Ltd. v. Sharif, ___ U.S. ___ (May 26, 2015) (Wellness), the Supreme Court determined that litigant consent to a bankruptcy court’s final adjudication of such claims is constitutionally permissible.

Federal district courts have original jurisdiction in bankruptcy cases, but they generally refer those cases to the bankruptcy court. A bankruptcy court’s authority to make final determinations in those cases currently depends on whether the matter is a “core” or “non-core” proceeding. In a core proceeding, bankruptcy courts can “hear and determine . . . and enter appropriate orders and judgments,” subject to review by the district court. In a non-core proceeding, the bankruptcy court’s authority to make final determinations is more limited: the court can “enter appropriate orders and judgments” if the parties consent. Without this consent, the bankruptcy court can only “submit proposed findings of fact and conclusions of law,” which the district court reviews de novo.

In Stern, the Supreme Court held that for Stern claims—i.e., proceedings that are defined as “core” but may not, as a constitutional matter, be adjudicated as such—bankruptcy judges are constitutionally barred from rendering a final decision on such claims. It did not, however, provide guidance on what should happen with such Stern claims or whether litigants could nonetheless consent to such adjudication. In Arkison, the Court partially closed the loop by holding that Stern claims should be treated like non-core proceedings—i.e., a bankruptcy judge may propose findings of fact and conclusions of law to the district court for de novo review—but it continued to leave open the issue of consent. Wellness has finally provided the answer.

In Wellness, petitioners sought a declaratory judgment from the bankruptcy court that a trust administered by respondent was an asset that should be included as part of respondent’s bankruptcy estate. The bankruptcy court subsequently entered a final judgment against respondent. While the case was on appeal to the district court, the Supreme Court decided Stern. Respondent moved to file a supplemental brief to raise a Stern objection that petitioners’ complaint presented a Stern claim and the bankruptcy court lacked jurisdiction to render a final decision. The district court denied the motion as untimely and affirmed the bankruptcy court’s judgment. The Seventh Circuit, however, ruled that a litigant could not waive a Stern objection and that because petitioners brought a Stern claim, the bankruptcy court lacked the constitutional authority to enter a final judgment.

In a 6-3 decision, the Supreme Court reversed the Seventh Circuit, holding that litigants may consent to final adjudication of Stern claims by bankruptcy judges and that such consent does not violate Article III of the Constitution. The Court stated that the “entitlement to an Article III adjudicator is ‘a personal right’ . . . ‘subject to waiver.’” Analogizing bankruptcy judges to magistrate judges, the Court found that allowing bankruptcy courts to decide Stern claims by consent would not “impermissibly threate[n] the institutional integrity of the Judicial Branch” as long as federal district and appellate courts maintain supervisory authority. Furthermore, consent to adjudication by the bankruptcy court need not be express; knowing and voluntary consent is sufficient. The Court remanded the case to the Seventh Circuit to determine whether respondent knowingly and voluntarily consented to adjudication by the bankruptcy court. While the Court determined that the bankruptcy court had constitutional authority to enter a final judgment on a Stern claim if the parties consent, the Court sidestepped the question of whether petitioners’ claim was a Stern claim and did “not address, and expresse[d] no view” on that issue.

Thus, finally, four years after Stern, the Supreme Court has answered the question of whether a litigant can consent to final bankruptcy court adjudication of Stern claims. They can. How to indicate consent, however, remains somewhat murky.  It must be knowing and voluntary, but need not be express. That is all the Court was willing to say. Unfortunately, therefore, by providing little guidance as what constitutes consent, the Supreme Court has almost ensured that parties will be litigating the issue for years to come. Care must therefore be taken from the outset of any bankruptcy litigation to establish lack of consent if a litigant wishes its Stern claim to be reviewed de novo by the district court. Defendants should consider early motions to withdraw the reference and should include in their filings an admonition that they do not consent to the final adjudication of the claims asserted in the case by the bankruptcy court and nothing shall be deemed a waiver (by implication or otherwise) of their constitutional right to final adjudication by an Article III court.