Bankruptcy Judges

Supreme Court Clarifies Bankruptcy Judges’ Authority

June 18th, 2015 by Bunch & Brock

Bankruptcy Judges

The U.S. Supreme Court has clarified the authority of bankruptcy judges. This new ruling allows parties to agree that the bankruptcy court could make decisions that involve the application or interpretation of state law.

The Court made this decision in Wellness International Network, Ltd. v. Sharif, No. 13-935 (U.S. May 26, 2015).

In a 6-3 decision, the Court reversed a Seventh Circuit Court of Appeals ruling that had limited the power of bankruptcy judges to make final decisions concerning whether certain property belonged to a bankruptcy estate.

This case arose after Wellness International sued Sharif for $650,000. Sharif later filed for bankruptcy. Sharif had a state-law counterclaim against Wellness which, under the Supreme Court’s prior holding in Stern v. Marshall, 564 U.S. 2 (2011), could not be adjudicated by the bankruptcy court. The Supreme Court found that the bankruptcy court could make that adjudication if Sharif consented to the bankruptcy court’s authority.

The Court explored the history of bankruptcy judges’ authority within the federal court system. Most notably, the Court distinguished the circumstances from those in Stern, in which the Court held that bankruptcy judges did not have the constitutional authority to decide state law matters.

Justice Sotomayor wrote in Wellness, however, that bankruptcy judges can make final decisions in disputes that arise in bankruptcy proceedings if the parties consent. This decision makes it clear that the Constitution “permits bankruptcy courts to decide [non-bankruptcy] claims submitted to them by consent.” Wellness at 20. In the opinion, Sotomayor also claimed that “adjudication by consent is nothing new.” Id. at 8.

The Court acknowledged practical and constitutional concerns warrant allowing the bankruptcy judges to make final decisions.

“Without the distinguished service of these [bankruptcy judges], the work of the federal court system would grind nearly to a halt.” Id. at 2.

Additionally, the majority reasoned that because the entire bankruptcy process occurs under the control of the federal district court, there was no risk of a bankruptcy court’s removing jurisdiction from the federal courts.

Under this ruling, individuals are free to waive their right to have a federal district court decide their case and opt for a bankruptcy judge to rule on non-bankruptcy matters. Justice Sotomayor wrote that allowing individuals to waive their right posed “no great threat to anyone’s birthright, constitutional or otherwise.” (Id. at 17).

Consent does not have to be in writing, but can be implied by a party’s actions. Additionally, in order for an individual’s consent to be binding, it must be knowing and voluntary.

Justice Alito agreed with the result, but maintained that he thought consent must be expressly given.

Chief Justice Roberts wrote a dissent, joined by Justice Scalia and joined in part by Justice Thomas, warning that the majority ruling allowing individuals to waive their right to have claims heard by district court judges could disrupt separation of powers between the branches of government.

This decision is very important, because it clarifies questions arising from the Stern case regarding the authority of bankruptcy judges. Those judges have broad authority to decide a wider variety of disputes within the bankruptcy context if the parties consent to the court’s authority.