3rd Feb 2015

Every year, from October until June, the nine justices on the U.S. Supreme Court are in session.  During this time, they hear oral arguments on cases, conference to make decisions on those cases, and draft (often lengthy) written opinions. Recently, the Court heard oral arguments in an important bankruptcy law case, Wellness International Network Ltd. v. Sharif.  One of the major issues presented in the case is whether bankruptcy courts have the power to decide side issues related to the bankruptcy proceedings if both litigants consent.

The answer is unclear but important, as it has implications for the administration of bankruptcy courts and will impact how debtors, creditors, and attorneys proceed in bankruptcy proceedings.  Under federal law the court system is composed of two different types of courts: Article III courts and Article I courts.  The Articles refer to articles of the U.S. Constitution.

Article I and Article III

Article III establishes a U.S. Supreme Court and lower federal courts with the power to hear cases involving federal law, cases between citizens of different states, cases involving disputes between states and a few others.  Article I grants Congress certain powers including the power to establish bankruptcy laws. It is Congress that has thus created the bankruptcy courts’ implicated separation of powers issues.

Over the past few years, the issue of what power the bankruptcy court has to decide issues beyond the core bankruptcy proceedings has been brought to light.  In 2011, in Stern v. Marshall, 131 S.Ct. 2594 (2011), the U.S. Supreme Court held that Article I bankruptcy courts lacked the authority to issue final rulings on issues that didn’t “stem from” the bankruptcy case.  That case incidentally received more national attention than most bankruptcy cases because it involved a dispute between Anna Nicole Smith (through her estate) and her deceased husband’s son.

The meaning of “stems from” has been the source of many grey hairs for bankruptcy attorneys and the Supreme Court has passed on prior opportunities to elaborate, including in Executive Benefits Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014), a case heard during last year’s session.  Now the Supreme Court has yet another chance to help provide guidance in International Wellness.

International Wellness

International Wellness involves a Chapter 7 bankruptcy case.  The debtor, Sharif, owed International Wellness approximately $500,000.  International Wellness asserted that the bankruptcy court should look to a family trust to pay off Sharif’s debts.  The 7th Circuit held that the bankruptcy court, as an Article I court, didn’t have the power to decide whether the trust could be used because it involved state law issues.

Those watching are hoping the court will decide not only whether such a decision was within the bankruptcy court’s power, but also whether consent of the litigants changes the decision, and, if so, whether a litigant can imply consent through participation in proceedings.

The experienced bankruptcy attorneys at Semmes Law Firm will be watching this and other notable bankruptcy cases in the Supreme Court and federal circuit courts.  To learn more about personal or business bankruptcy, contact us today.

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