Wellness International Network v. Sharif

PETITIONER: Wellness International Network, Ltd., et al.
RESPONDENT: Richard Sharif
LOCATION: US Bankruptcy Court, Northern District of Illinois,
 Eastern Division


DOCKET NO.: 13-935
DECIDED BY: Roberts Court (2010-2016)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 575 US (2015)
GRANTED: Jul 01, 2014
ARGUED: Jan 14, 2015
DECIDED: May 26, 2015

ADVOCATES:
Curtis E. Gannon - Assistant to the Solicitor General, Department of Justice, for the United States as amicus curiae, for the petitioners
Jonathan Hacker - for the respondent
Catherine Steege - for the petitioners

Facts of the case

Richard Sharif and others entered into distributorship contracts with Wellness International Network (WIN) for the sale of health and wellness products. Sharif and others later sued WIN and claimed that WIN was running a pyramid scheme. The district court granted summary judgment for WIN and awarded $655,596.13 in attorney's fees as a sanction against Sharif and his co-plaintiffs for ignoring some of WIN's discovery requests. WIN attempted to discover Sharif's assets, but Sharif ignored all attempts until he was held in civil contempt for discovery violations and arrested. In 2009, Sharif filed for Chapter 7 bankruptcy. WIN filed an adversary proceeding in bankruptcy court and claimed that Sharif had continuously concealed property and information pertaining to his assets. The bankruptcy court found in favor of WIN and ordered Sharif to pay WIN's attorney's fees along with other sanctions.

Sharif appealed to federal district court, but before he filed his first brief, the U.S. Supreme Court decided Stern v. Marshall, which held that a bankruptcy court lacked the authority to enter a final judgment on a state-law counterclaim against a creditor. Sharif subsequently attempted to advance an argument based on Stern, but the district court did not allow it. Instead, the district court held that such an objection can be waived and that Sharif's failure to bring up to argument earlier constituted an implied waiver. The U.S. Court of Appeals for the Seventh Circuit affirmed in part and vacated in part. The Court of Appeals held that an objection based on Stern cannot be waived and that the bankruptcy court only had the authority to enter a final judgment on some of WIN's claims.

Question

(1) Does the presence of a subsidiary state law issue to determine whether property in a debtor's possession is part of the bankruptcy estate mean that the issue does not stem from the bankruptcy itself and therefore that the bankruptcy court does not have jurisdiction to issue a final ruling?

(2) Can bankruptcy courts exercise the judicial power of the United States by litigant consent, and if so, can that consent be implied?

Media for Wellness International Network v. Sharif

Audio Transcription for Oral Argument - January 14, 2015 in Wellness International Network v. Sharif

Audio Transcription for Opinion Announcement - May 26, 2015 in Wellness International Network v. Sharif

John G. Roberts, Jr.:

Justice Sotomayor has our opinion this morning in Case 13-935, Wellness International v. Sharif.

Sonia Sotomayor:

This case comes to us on writ of certiorari to the Court of Appeals for the Seventh Circuit.

It concerns the authority of bankruptcy judges to decide certain claims for which litigants are constitutionally entitled to an Article III adjudication.

Article III is basically the federal judge's provision.

The question presented is whether Article III allows bankruptcy judges to adjudicate such claims with the party's consent.

Respondent Richard Sharif tried to discharge a debt he owed petitioners Wellness International Network and its owners in his Chapter 7 bankruptcy.

Wellness sought a declaratory judgment from the Bankruptcy Court, contending that the assets of the trust Sharif claimed to administer were in fact his personal property and part of the bankruptcy estate.

The Bankruptcy Court eventually entered a default judgment against Sharif.

While Sharif's appeal was pending in the District Court, but before briefing concluded this Court held in Stern v. Marshall that Article III forbids Bankruptcy Courts to enter final judgment on certain kinds of claims.

After briefing closed Sharif sought permission to file a supplemental brief raising a Stern objection.

The District Court denied the motion, finding it untimely and affirmed the Bankruptcy Court's judgment.

The Seventh Circuit reversed, holding that Sharif's Stern objection could not be waived, because it implicated structural constitutional interests.

We granted certiorari and now reverse.

The question here is whether allowing Bankruptcy Courts to decide Stern claims by consent would, as we said in Commodity Futures Trading Commission v. Schor, impermissibly threaten this institutional integrity of the judicial branch?

That question must be answered pragmatically, with an eye to the practical effect that the practice will have on the constitutionally assigned role of the federal judiciary.

Bankruptcy judges are appointed and may be removed by Article III judges, serve as judicial officers of the United States District Courts and collectively constitute a unit of the District Court for the district in which they serve.

Bankruptcy Courts hear matter solely on a District Court's reference and possess no free-floating authority to decide claims traditionally heard by Article III courts.

The decision to invoke the Bankruptcy Courts' authority is left entirely to the parties and the power of Article III judges to retake jurisdiction remains in place.

Finally, there is no indication that Congress gave Bankruptcy Courts the ability to decide Stern claims in an effort to aggrandize itself or humble the judiciary.

In light of these considerations we conclude that allowing bankruptcy judges to adjudicate Stern claims with litigant consent does not usurp the constitutional prerogatives of Article III courts.

We further conclude that consent to adjudication by a bankruptcy judge does not need to be expressed.

Neither the Constitution, nor the relevant statute mandates express consent.

Indeed, the implied consent standard we adopted for proceedings conducted by magistrate judges supplies the appropriate rule for Bankruptcy Court adjudications.

That standard makes clear that a litigant's consent, whether express or implied, must be knowing and voluntary.

The Seventh Circuit misunderstood the role of consent in the Article III analysis and so we reverse its judgment.

On remand the Seventh Circuit should decide whether Stern's actions evens the requisite knowing and voluntary consent and whether Sharif forfeited his Stern argument below.

Justice Alito has filed an opinion concurring in part and concurring in the judgment.

The Chief Justice has filed a dissenting opinion, in which Justice Scalia joins, and in which Justice Thomas joins as to Part 1.

Justice Thomas has filed a dissenting opinion.

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