Wellness Int'l Network, Ltd. v. Sharif
135 S. Ct. 1932, 2015 U.S. LEXIS 3405, 189 L. Ed. 2d 854 (2015)
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Rule of Law:
Article III of the Constitution is not violated when a bankruptcy judge enters a final judgment on a claim for which the judge lacks constitutional authority (a Stern claim), provided the parties knowingly and voluntarily consent to the adjudication.
Facts:
- Wellness International Network, Ltd. (Wellness) and Richard Sharif entered into a contract for Sharif to distribute Wellness's products.
- After the business relationship soured, Wellness obtained a judgment against Sharif for over $650,000 in attorney's fees from a prior lawsuit.
- Sharif filed for Chapter 7 bankruptcy, listing Wellness as a creditor.
- During the bankruptcy proceedings, Wellness discovered a loan application in which Sharif had listed more than $5 million in assets.
- Sharif claimed these assets were not his but were owned by the Soad Wattar Living Trust (Trust), which he stated he administered on behalf of his mother.
- Wellness alleged that the Trust was Sharif's alter ego and that its assets were his personal property, which should be included in the bankruptcy estate.
- Sharif repeatedly failed to comply with discovery requests for information about the Trust.
Procedural Posture:
- Richard Sharif filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois.
- Wellness International Network, Ltd. (Wellness) filed an adversary complaint against Sharif in the Bankruptcy Court.
- The Bankruptcy Court entered a default judgment in favor of Wellness.
- Sharif, as appellant, appealed the judgment to the U.S. District Court for the Northern District of Illinois, with Wellness as appellee.
- The District Court denied Sharif's untimely motion to raise a constitutional objection under Stern v. Marshall and affirmed the Bankruptcy Court's judgment.
- Sharif, as appellant, appealed to the U.S. Court of Appeals for the Seventh Circuit, with Wellness as appellee.
- The Seventh Circuit reversed in part, holding that the constitutional objection was structural and could not be waived, and thus the Bankruptcy Court lacked authority to enter a final judgment on the alter ego claim.
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Issue:
Does Article III of the Constitution permit a bankruptcy court to enter a final judgment on a claim for which it lacks constitutional authority (a Stern claim) if the parties knowingly and voluntarily consent to the court's adjudication?
Opinions:
Majority - Justice Sotomayor
Yes. Article III of the Constitution is not violated when parties knowingly and voluntarily consent to adjudication by a bankruptcy judge. The right to an Article III adjudicator is a personal right that can be waived, similar to other constitutional rights. While Article III also serves a structural function to protect the role of the judiciary, allowing consensual adjudication by bankruptcy courts does not impermissibly threaten that structure. This is because bankruptcy judges operate under the control and supervision of Article III courts; they are appointed by Article III judges, hear cases only on reference from the district court, and the district court can withdraw that reference. The Court distinguished Stern v. Marshall, which established the constitutional limitation on bankruptcy court authority, by noting that Stern involved a litigant who did not consent to the bankruptcy court's jurisdiction. Therefore, Stern's constitutional bar does not apply in cases of consent. Such consent does not need to be express and can be implied by a party's conduct, so long as it is knowing and voluntary.
Concurring - Justice Alito
Yes. The Court correctly applies the precedent of Commodity Futures Trading Comm’n v. Schor to hold that a bankruptcy judge’s resolution of a Stern claim with the parties’ consent does not violate Article III. However, the Court should not have decided whether consent can be implied. The case could and should have been decided on the narrower grounds that Sharif forfeited his Stern objection by failing to raise it in a timely and proper manner in the lower courts.
Dissenting - Chief Justice Roberts
No. The structural protections of Article III cannot be waived by the consent of private litigants. The Court should have first decided the narrower question of whether the claim was a Stern claim at all, as an alter ego claim to define the bankruptcy estate is arguably a core bankruptcy matter not barred by Article III. By bypassing this issue, the majority wrongly concludes that litigant consent can cure a structural constitutional violation. Stern v. Marshall concluded that allowing bankruptcy courts to decide such claims is a separation-of-powers violation that threatens the integrity of the Judicial Branch, and the consent of the parties does not change that fundamental constitutional problem. The majority misreads Stern as a case about non-consent, when it was fundamentally about the constitutional limits on the power of non-Article III courts.
Dissenting - Justice Thomas
No. The case should have been remanded to determine if the alter ego claim was a Stern claim. The majority's consent analysis is flawed because individuals cannot consent to a constitutional violation, as that would improperly bestow power on the government beyond what the Constitution allows. The correct inquiry is whether consent prevents a violation from occurring in the first place by transforming the nature of the power being exercised. The majority fails to grapple with the antecedent question of whether a constitutional violation actually occurs when parties consent, skipping a complex analysis of judicial power and public versus private rights. Because individuals cannot authorize the government to exceed its constitutional boundaries, their consent cannot cure an Article III violation.
Analysis:
This decision significantly clarifies the practical impact of Stern v. Marshall by confirming its holding is limited to non-consenting litigants. It reinforces the doctrine that Article III's right to an independent federal judge has a waivable, personal component, and it defines the boundaries of the non-waivable structural component, finding that consensual adjudication within the bankruptcy system does not threaten judicial integrity. By endorsing implied consent, the ruling promotes judicial economy and efficiency, allowing bankruptcy courts to finally resolve a wider range of disputes and discouraging litigants from strategically withholding jurisdictional objections until after receiving an unfavorable judgment. This provides more certainty for the bankruptcy system and reduces the shuttling of cases between bankruptcy and district courts.
