Follow Up: Supreme Court Weighs Power of BK Judges (Wellness International Network Ltd. v. Sharif)

From Sara Randazzo of the Wall Street Journal

The Supreme Court appeared open Wednesday to clarifying the powers of nearly 1,000 judges in the federal court system, a group whose constitutional authority has come into question since a 2011 high-court decision involving the late Playboy playmate Anna Nicole Smith.

Depending on how the court rules in a case argued Wednesday, the bankruptcy-court system could remain mired in confusion over when it has the power to offer final judgments on certain issues. By extension, the ruling could also curtail the ability of the federal magistrate system to handle some of the work of district-court judges.

“This case is enormously important for the workload of the federal district courts,” said Erwin Chemerinsky, a constitutional scholar and dean of the law school at the University of California, Irvine.

Bankruptcy-court judges have worked under a cloud of uncertainty since a 2011 Supreme Court decision that found bankruptcy judges only have the authority to offer a final ruling on a dispute that “stems from the bankruptcy itself”—a phrase whose definition has become cause for much debate. Other issues, the court ruled, must be decided by the district court.

During arguments Wednesday, the justices questioned why the court should limit the powers of the bankruptcy court when district-court judges routinely sign off on decisions reached by arbitrators—independent parties not affiliated with the court system—that litigants use as an alternative to the courts to settle disputes.

“The arbitrator case seems to me much more threatening to the integrity of the federal judicial system than a system of bankruptcy courts which are, from the very beginning all the way through, supervised by—by district courts,” Justice Elena Kagan said.

Unlike district-court judges, who are confirmed by the Senate and who serve for life under Article III of the Constitution, bankruptcy judges are appointed by the federal appellate courts and serve 14-year terms.

Until the 2011 case, an inheritance dispute between Anna Nicole Smith and the son of her deceased husband known as Stern v. Marshall, courts relied on a division of labor laid out by Congress that differentiated between “core” and “non-core” bankruptcy matters.

Stern’s new dividing line caused confusion over what can and can’t be decided by the courts. “Now they’ve seen they left too many open windows and they need to close some,” said Melissa Jacoby, a bankruptcy professor at University of North Carolina School of Law. “If they’re serious about not having major constitutional concerns about the bankruptcy court, this is the time to do it.”

The high-court appeal stems from the Chapter 7 bankruptcy of Chicago resident Richard Sharif. Wellness International, a company to which Mr. Sharif owed a half-million dollars, sued him in bankruptcy court, claiming that assets in a family trust tied to Mr. Sharif should be used to pay off his debts.

The Seventh U.S. Circuit Court of Appeals sided with Mr. Sharif, finding the bankruptcy court didn’t have the constitutional authority to decide whether the property in question belonged to the bankruptcy estate because the dispute also involved state law issues.

Apart from settling whether the bankruptcy court can rule on the type of property-law issue that came up in Mr. Sharif’s case, the court could also rule on whether the bankruptcy court can be the final arbiter of disputes if everyone involved consents to the arrangement.

The court punted on the consent question in two previous cases, and could do so again here. The justices Wednesday turned to the lawyers arguing both cases to ask which of the two questions before them they thought were more important.

Catherine Steege, a Jenner & Block partner arguing for Wellness International, said both were important but that the consent question has left bankruptcy practitioners with concerns.

“The situation that you have today is that both parties could consent, and the bankruptcy judge could enter a judgment, and then the party who loses can turn around and say, well, there’s a question about whether I really consented or not or whether it was appropriate,” Ms. Steege said.

The Supreme Court is expected to issue a decision in Wellness International Network Ltd. v. Sharif by the end of June.

Link to WSJ Story:

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