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Bankruptcy Proceedings: Dare We Hope for Some Clarity on Stern?

Only three weeks after its underwhelming decision in Executive Benefits Insurance Agency v. Arkison, ___U.S. ___ (June 9, 2014), the Supreme Court has granted certiorarion the consent issue that it dodged in Arkison.  See Wellness Int’l Network Ltd. v. Sharif, 272 F.3d 751 (7th Cir. 2013), cert. granted, __ U.S.L.W. __ (U.S. Jul. 1, 2014) (No. 13-935).  While the deep split in the circuits virtually assured that the Court would have to revisitStern sooner rather than later, this is much sooner than expected.  See Stern v. Marshall,___ U.S. ___, 131 S.Ct. 2594 (2011).  It remains to be seen, however, whether the Court will actually resolve the consent issue in the coming term because the Wellness case can also be decided without reaching that issue.

In Wellness, the Court granted certiorari on two questions, both of which are critical to the efficient operation of the bankruptcy system.  While the question whether parties constitutionally can consent to have bankruptcy judges determine Stern claims is important because it could provide an easy mechanism for bankruptcy judges to resolve most of the matters that they decided prior to Stern, the other question the Court agreed to consider goes to the meaning of Stern. 

Stern indicated that bankruptcy judges could determine only those actions that stem from the bankruptcy itself, and not actions that are “in no way derived from or dependent upon bankruptcy law” that “would exist without regard to any bankruptcy proceeding.”  Stern,131 S.Ct. at 2618.  This passage led to much confusion regarding the scope of Sternbecause so many issues that arise in bankruptcy cases are based on non-bankruptcy law.  The Wellness case presents a good example.   Wellness involved the very basic bankruptcy issue of whether certain assets were property of the estate under 11 U.S.C. § 541.  However, that question turned on the state property law question of what belonged to the debtor – a question that was not dependent on bankruptcy law and which would exist whether or not there was a bankruptcy.  The Seventh Circuit held that Stern applied to prevent the bankruptcy judge from deciding the issue.  Of course, such a reading ofStern seriously limits the ability of bankruptcy judges to administer estates.

Predictions of what the Court will do are dangerous, but it is interesting to note that the Court has not yet stated that a non-Article III bankruptcy judge can constitutionally resolveany issue.  Even in Stern, the Court avoided that question.  While a narrow reading of Stern would allow the bankruptcy judge to determine the property of the estate issue, such a holding normally would require the Court to reach the Article III question it has carefully avoided.  By granting certiorari on the consent issue, the Court has preserved the option to decide Wellness without reaching the other Article III issues.  Thus, there is reason to hope that we will get some helpful clarity whichever way the Court approachesWellness.

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About this Author

Prof. G. Ray Warner, Of Counsel, Greenberg Traurig law firm
Of Counsel

Prof. G. Ray Warner is a professor of law and the director of the Masters in Bankruptcy Program at St. John's University School of Law in New York. Prior to joining the St. John's faculty, Professor Warner was the William B. Boreland Distinguished Scholar and Professor of Law at the University of Missouri-Kansas City School of Law.

Professor Warner has practiced law in Atlanta and Chicago and has held leadership positions in several bankruptcy organizations, including service as Secretary to the American Bankruptcy Institute and as Chair of the American Board of Certification....