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Argument preview: Justices hope third time is a charm as they try once again to explain Article III limitations on bankruptcy courts

Wellness International Network v. Sharif is a case fated to go down in history as the third of a trilogy – the efforts of the Roberts Court to specify the limits that Article III imposes on the ability of Congress to localize the bankruptcy process in the bankruptcy courts.  The Court’s 2011 decision in Stern v. Marshall invalidated a portion of the statutory bankruptcy jurisdiction, holding that the state-law counterclaim was outside the bankruptcy power.  Last spring’s decision in Executive Benefits Insurance Agency v. Arkison accepted the process by which the district courts supervise the adjudicative proceedings of the bankruptcy courts.

This dispute started when respondent Richard Sharif brought a suit against petitioner Wellness more than a decade ago.  After the district court dismissed the action based on Sharif’s discovery abuse (pattern beginning), the court awarded Wellness more than a half-million dollars in fees.  Wellness sued Sharif to collect, but Sharif’s refusal to respond to discovery led to his being held in contempt and arrested.

When Sharif was released from jail, he filed for relief under Chapter 7.  Eventually, Wellness filed an objection to Sharif’s discharge, claiming that he had lied about the ownership of certain property he had not listed as property of the estate.  As part of that claim, Wellness sought a declaratory judgment that the assets in question were property of the estate.  Again, the bankruptcy court ruled in Wellness’s favor — not on the merits, but as a sanction for Sharif’s continuing discovery abuse.

Fast forward to this Court: the big question of the day is whether the claim Wellness brought against Sharif can constitutionally be placed in the bankruptcy jurisdiction.  On the one hand, Wellness can argue that the ownership of the property is an element of the determination whether the property in question is part of the bankruptcy-created “estate.”  For centuries, cases have suggested that determining what is in the estate is at the core of the bankruptcy power.  On the other side, Sharif can portray this as a purely state-law claim; his contention is that the assets in fact are in a trust, which makes the claim by Wellness really a claim to extinguish the interests of the third parties in those assets.

The subsidiary question is whether Sharif’s protracted consent to the proceedings – among other things, he filed a motion seeking summary judgment in his favor in the Wellness proceeding – can be treated as an implied consent that would resolve any constitutional defect in the bankruptcy court’s authority.

To the outside observer, the subtext is much more important than any summary of the detailed arguments.  What Wellness has going for it is administrative convenience.  Every informed observer would agree that the bankruptcy system would function better if bankruptcy courts had clear and undisputed authority to hear claims like the ones at issue here and in Stern.  The same goes for the consent question; assuming that the Court isn’t going to retreat from Stern, it would be tremendously valuable for bankruptcy courts to be able to determine up front – by asking for consent – if they can proceed to resolve a case.  It is a travesty of ordinary process for cases (like this one and Stern) to proceed in adversarial litigation for years, only to have the loser claim (successfully?) on appeal that the court which ruled against him had no jurisdiction over the controversy.

What Sharif has going for him is, well, the fact that administrative convenience is wholly irrelevant.  The whole point of the Article III jurisprudence is that it is inconvenient.  Indeed, it is only a slight exaggeration to say that the Court’s jurisprudence in this area for the last forty years has reflected a perverse sense that the more administratively crucial something is for the bankruptcy court, the less likely it is to pass constitutional muster.  But what is worse than the rulings narrowing the bankruptcy power is the delphic nature of the Court’s pronouncements.  The dynamic in this area is like the Court’s patentability cases of the last few years.  The Court keeps trying to explain what it wants (in Bilski v. Kappos and Alice Corporation Pty. Ltd. v. CLS Bank International), and the more the Federal Circuit tries to follow instructions, the more absurd the opinions become.

We can only hope for more clarity this time around.

Recommended Citation: Ronald Mann, Argument preview: Justices hope third time is a charm as they try once again to explain Article III limitations on bankruptcy courts, SCOTUSblog (Jan. 13, 2015, 9:56 PM),