Wellness International: U.S. Supreme Court Rules That Bankruptcy Courts May Adjudicate 'Stern Claims' With Litigants' Consent

"In Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S. Ct. 1932 (2015), a divided U.S. Supreme Court resolved the circuit split regarding whether a bankruptcy court may, with the consent of the litigants, adjudicate a claim that, though statutorily denominated as "core," is not otherwise constitutionally determinable by a bankruptcy judge. The majority held that so long as consent—whether express or implied—is "knowing and voluntary," Article III of the U.S. Constitution is not violated by a bankruptcy court's adjudication of such a claim. The ruling builds upon the Supreme Court's recent decisions in Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594 (2011), and Executive Benefits Insurance Agency v. Arkison, ___ U.S. ___, 134 S. Ct. 2165 (2014). Wellness nonetheless leaves many significant jurisdictional and constitutional questions unanswered.

Bankruptcy Jurisdiction in a Post-Stern v. Marshall World

Article III, Section 1 of the U.S. Constitution provides that "[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish." It further states that such judges "shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office."

Given these provisions, the exercise of the "judicial Power of the United States" is vested in so-called Article III judges. Bankruptcy judges, however, are not Article III judges. They do not have life tenure, and their salaries are subject to diminution. Instead, bankruptcy judges are technically authorized under Article I, which governs the legislative branch and authorizes the establishment of a uniform system of federal bankruptcy laws. Under principles of separation of powers, bankruptcy judges cannot exercise the judicial power reserved for Article III judges.

Thirty-three years ago, in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the Supreme Court struck down certain provisions of the Bankruptcy Act of 1978 because it conferred Article III judicial power upon bankruptcy judges who lacked life tenure and protection against salary diminution. After more than two years of delay, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 to fix the statutory infirmity identified in Marathon. The jurisdictional scheme for bankruptcy courts continues in force today. Or nearly so.

Congress established the jurisdiction of the bankruptcy courts in the Federal Judicial Code, 28 U.S.C. §§ 1 et seq. ("title 28"). As amended in 1984, 28 U.S.C. § 1334 provides that the district courts shall have "original and exclusive jurisdiction of all cases under title 11" and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." Section 151 of title 28 provides that each bankruptcy court is "a unit of the district court" in the federal district where it is located. Each district court may—but need not—refer cases and matters within the scope of bankruptcy jurisdiction to the bankruptcy court in its district.

Section 157(b) of title 28 provides that "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." Thus, a bankruptcy court may enter a final order with respect to all bankruptcy cases before it and all matters within the scope of its "core" jurisdiction. Such a final order is subject to appellate review by the applicable district court or bankruptcy appellate panel (and, thereafter, by the applicable court of appeals). Section 157(b)(2) of title 28 provides a nonexclusive list of matters that purportedly fall within "core" jurisdiction.

A bankruptcy court may also hear a noncore proceeding that is "related to" a bankruptcy case, but absent consent of the litigants, a bankruptcy court cannot enter a final order when exercising related to jurisdiction. Instead, it may issue only a proposed order, which is reviewed de novo by the district court.

In 2011, the Supreme Court in Stern shook up the jurisdictional scheme...