26 May 2015

Law in Plain English: Wellness International Network, Limited v. Sharif

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblogWellness International Network, Limited v. Sharif

Argument: Jan 14 2015 (Aud.)

Background: Richard Shariff was slapped with a judgment in excess of $650,000 as a sanction for his failure to engage in discovery. As a result, Sharif filed for Chapter 7 bankruptcy. Wellness International Network (WIN), one of his bankruptcy creditors, sought to prevent discharge of Sharif’s debts under 11 U.S.C. § 727, and sought a declaratory judgment that a trust of which Sharif was trustee was in fact Sharif’s alter ego. Sharif continued his evasive and dilatory tactics, failing to respond to WIN’s and the bankruptcy trustee’s discovery requests. The bankruptcy court ordered Sharif to comply with the discovery requests and warned him that failure to do so would result in a default judgment. Sharif tendered some discovery but his responses fell far short of full compliance. After a hearing, the bankruptcy judge issued an opinion and order entering default judgment in WIN’s favor and subsequently awarded attorney’s fees to WIN. On appeal, Shariff filed a supplementary motion based on the claim that a bankruptcy judge did not have the authority to enter final judgment under Stern v. Marshall, but had failed to make this argument in his earlier motions. The district judge denied both motions as untimely, holding that a Stern objection to a bankruptcy judge’s authority to enter final judgment is waivable and that Sharif’s failure to raise it earlier constituted waiver. The Seventh Circuit reversed on the Stern objection, finding that a constitutional objection based on Stern is not waivable because it implicates separation‐of‐powers principles. Additionally, the court held that that the bankruptcy judge lacked constitutional authority to enter a final judgment on the alter‐ego claim. The court affirmed the remainder of the judgment, holding that the bankruptcy judge had constitutional authority to enter final judgment on the first four counts of the adversary complaint, each of which were objections to the discharge of Sharif’s debts. Additionally, the court held that that the entry of default judgment and awarding of fees were proper sanctions under the circumstances.

Issue: The questions before the Court are (1) whether the presence of a subsidiary state property law issue in a 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor’s possession is property of the bankruptcy estate means that such action does not “stem[] from the bankruptcy itself” and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action; and (2) whether Article III permits the exercise of the judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant’s conduct is sufficient to satisfy Article III.

Holding: In a 6-3 decision, the Supreme Court ruled that Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent. Consent to adjudication by a bankruptcy court need not be express, but must be knowing and voluntary. The Court stated that the Seventh Circuit should decide on remand whether Sharif’s actions evinced the requisite knowing and voluntary consent and whether Sharif forfeited his Stern argument below. 
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