The Supreme Court is currently considering the case of Wellness International Network, Ltd. v. Shariff. As discussed in the blog post on February 16, 2015, at issue in the Wellness International Network case is “whether Article III of the United States Constitution permits the exercise of judicial powers 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.” Put another way, the Supreme Court is currently wrestling with the amount of judicial power a bankruptcy judge may exercise, if the consent of the litigants – whether implied or explicit – affects the ability of a bankruptcy judge to enter final orders determining the controversy at issue.
In contrast to judges of the United States district courts, judges of the circuit courts of appeal, and Supreme Court justices, bankruptcy judges are not appointed by the President and confirmed by the Senate under Article III of the United States Constitution. Rather, they are appointed by federal courts of appeal and do not enjoy the life-time tenure and other constitutional privileges and protections granted to Article III judges. While the judicial power of such non-Article III judges has been a matter of debate for decades, the issue has become especially heated since the 2011 Supreme Court decision in Stern v. Marshall, where the Court limited a bankruptcy judge’s ability to enter final orders on certain matters that are not “core” to the administration of a bankruptcy case.
The Supreme Court is expected to decide the Wellness International Network case at some point this summer. In the meantime, lower courts continue to struggle with the issue of where to draw the lines regarding a bankruptcy court’s judicial power. A February 13, 2015 decision by the United States District Court for the Central District of California provides a recent example. The case involves the Chapter 11 bankruptcy filing of individual Georges Marciano, the co-founder of clothing retailer Guess, Inc. In 2008, Marciano filed a lawsuit in California state court against Art Pack, Inc. and several other parties, alleging various claims including fraud, conspiracy, and theft of artwork. The California court later granted summary judgment in favor of Art Pack. Other defendants in the lawsuit then cross-claimed against Marciano and obtained a $100 million judgment against him. Thereafter, those parties filed an involuntary Chapter 11 bankruptcy petition against Marciano.
In the bankruptcy case, Art Pack filed a proof of claim that asserted damages related to Marciano’s alleged malicious prosecution in the state court action. The Chapter 11 trustee litigated the matter in bankruptcy court in order to determine the amount of the Art Pack claim. Art Pack participated in the litigation, including filing lengthy briefs, introducing evidence, and attending the trial. At the conclusion of the trial, the bankruptcy court took the matter under advisement. Art Pack later filed a motion with the district court seeking to withdraw the reference from the bankruptcy court, on the grounds that the matters at issue involved personal injury tort claims, and therefore were outside the core matters that a bankruptcy court could decide.
The district court made short work of Art Pack’s arguments in support of its motion to withdraw the reference. The court pointed out Art Pack’s substantial and lengthy participation in the bankruptcy court trial, and stated, “To permit Art Pack to make an about-face after remaining silent on its objection and belatedly raising the error only if the case does not conclude in its favor would be to permit the unacceptable ‘sandbagging’ of the court that the Supreme Court warned against” in the Stern decision. The district court also refused to accept Art Pack’s argument that it would somehow preserve judicial economy for the district court to take over on the basis that the bankruptcy court had not yet entered an order following the trial. The district court concluded that the reference would not be withdrawn on the grounds that Art Pack consented to the bankruptcy court’s judicial power to enter a final decision in the matter.
The Marciano decision also referred to a 2012 Ninth Circuit decision – In re Bellingham Insurance Agency – which provided that litigant consent can permit a bankruptcy court to enter a final order in non-core matters. To the Marciano court, Bellingham was binding precedent. However, courts of appeals in other jurisdictions – including the Fifth Circuit – have held that consent does not factor into the issue of a bankruptcy court’s judicial power. Whether the Supreme Court will use the Wellness International Network case to agree with the Bellingham point of view, or whether the Court will go in a different direction with respect to litigant consent and the power of the bankruptcy court, is anyone’s guess.