Academic journal article Harvard Law Review

Article III - Separation of Powers - Bankruptcy Jurisdiction

Academic journal article Harvard Law Review

Article III - Separation of Powers - Bankruptcy Jurisdiction

Article excerpt

Over the past several Terms, the Supreme Court has struggled to define the limits that Article III of the Constitution places on Congress's power under Article I to define the jurisdiction of the bankruptcy courts. In Stern v. Marshall (1) in 2011, the Court held that bankruptcy courts, as non-Article III courts, (2) were constitutionally prohibited from entering final judgment on certain state law claims raised in bankruptcy proceedings. (3) But whether the consent of the parties could cure this constitutional infirmity remained an open question; in Executive Benefits Insurance Agency v. Arkison (4) in 2014, the Court considered but did not decide this issue. (5) Last Term, in Wellness International Network, Ltd. v. Sharif, (6) the Supreme Court held that Article III is not violated when parties consent to bankruptcy court adjudication of Stern claims. (7) The majority's breezy pragmatism skirted several rigid, formalist approaches to defining the contours of Article III, suggesting that the Court will adopt a more flexible approach in considering future challenges to the constitutionality of non-Article III tribunals. But the Court's less-than-satisfying consideration of the role of consent in the separation of powers calculus will likely limit the applicability of the decision outside the Article III context.

Wellness International Network, a manufacturer of health and nutrition products, entered into a contract with Richard Sharif for distribution of its products. It didn't go well. (9) Wellness ultimately secured a judgment against Sharif for over $650,000 in attorneys' fees. (10) In 2009, Sharif filed for Chapter 7 bankruptcy in the Northern District of Illinois, listing Wellness as a creditor. (11) During the bankruptcy proceeding, Wellness obtained evidence that suggested that Sharif had more than $5 million in assets, (12) but Sharif claimed that the assets were unavailable in the bankruptcy as they were owned by a trust that he administered. (13)

Wellness sued in the bankruptcy court. (14) Among other relief, Wellness sought a declaration that the trust was Sharif's alter ego and that its assets should be included in Sharif's bankruptcy estate. (15) Sharif conceded that Wellness's alter ego claim was a "core proceeding," which could be finally determined by the bankruptcy court. (16) The bankruptcy court ruled against Sharif, declaring the trust assets to be property of the bankruptcy estate and denying Sharif's request to discharge his debts. (17)

Sharif appealed to the U.S. District Court for the Northern District of Illinois. (18) Though Sharif did not mention Stern in his briefs, (19) after briefing was complete, Sharif moved for supplemental briefing in light of Stern and its progeny. (20) The district court denied Sharif's motion as untimely and affirmed the judgment of the bankruptcy court. (21)

The Seventh Circuit affirmed in part and reversed in part, vacating the judgment on Wellness's alter ego claim. (22) Writing for the panel, Judge Tinder (23) held that the bankruptcy court lacked constitutional authority to enter final judgment on Wellness's alter ego claim, even with Sharif's consent. (24) The court discussed the "two separate interests" protected by Article III: litigants' rights to impartial adjudication and the judiciary's freedom from encroachment by the political branches. (25) The court found that the first protection was waivable but that the second, structural protection, also implicated here, was not. (26)

The Supreme Court reversed. Writing for the Court, Justice Sotomayor (27) opened the majority opinion with a discussion of the history and contemporary practice of bankruptcy adjudication outside of Article III. (28) The opinion then discussed the history of adjudication by consent, (29) focusing on two earlier cases where the Court had permitted such adjudication by non-Article III tribunals: CFTC v. Schor, (30) which involved an independent agency, (31) and Peretz v. …

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