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Wellness: To Consent or Get the Bankruptcy Judge Anyway

A collective sigh of relief was the main effect of this week’s much-awaited Supreme Court decision on bankruptcy jurisdiction in Wellness International Network, Ltd. v. Sharif, No. 13-935, ___ U.S.___ (May 26, 2015, Sotomayor, J.). While a number of minor issues remain, the majority’s ruling that bankruptcy judges can issue judgments and final orders with the parties’ consent means that the current bankruptcy system can continue to function normally.

The Wellness case involved the bankruptcy court’s jurisdiction to determine whether assets purportedly held in a trust were actually property of the debtor’s bankruptcy estate. The case presented the Court with two possible issues involving bankruptcy jurisdiction. The first was whether the non-Article III bankruptcy judges could constitutionally exercise jurisdiction over that dispute and the second was whether the debtor’s alleged consent permitted the bankruptcy judge to enter a final order even if it otherwise lacked the constitutional authority to do so. The majority and dissenting opinions disagreed on which issue was the easier one and the one that should be resolved first. The majority chose to avoid the question of bankruptcy court power by holding that consent cured any problem that might otherwise exist. This is consistent with prior Supreme Court case law upholding the consent jurisdiction of federal magistrate judges.

It is also a good practical solution to the problem. The consent approach will allow bankruptcy judges to issue almost all of the rulings they issued before their powers were questioned by Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594 (2011). This is because parties likely will consent in almost all cases.

Why would you refuse to consent? Maybe you think you will get a better outcome from the district judge. Will that work? If one party refuses to consent, the most likely response will be to have the bankruptcy judge hear the matter and submit proposed findings of fact and conclusions of law to the district judge. This approach still leaves most of the proceedings in front of the same bankruptcy judge. Might there still be an advantage to withholding consent? If the fear is that the bankruptcy judge will interpret the law differently from the district judge, withholding consent should make no difference because the district judge would review the legal conclusions de novo in both cases. However, if the concern is that the bankruptcy judge will make an unfavorable factual determination, withholding consent may provide an advantage because the party can get de novo review of the bankruptcy judge’s factual findings. However, that factual review likely will be on a cold record. There may also be some perceived advantage in the delay and extra steps added by this process.

The other option for dealing with a refusal to consent would be for the district judge to withdraw the reference and both hear and determine the matter. While this may be the non-consenting party’s desired outcome, it will likely be a rare result. It might occur if the matter is the type that the district judge would have withdrawn anyway, but in that case there is no Stern effect (other than the fact that refusing to consent may add a little weight to the withdrawal side of the equation). The other situation where withdrawal might occur is where the matter is of such urgency that there is no time for the proposed order, de novo review approach. In such a case, a party might succeed in moving the matter to the district judge even though that would not have happened before Stern. This possibility should arise in a fairly small number of matters so it should be well within the ability of the district courts to manage without greatly diminishing the efficiency of the bankruptcy process.

Thus, after the adjustment made by Wellness, Chief Justice Roberts’ statement in Stern that the decision did “not meaningfully change the division of labor” between the bankruptcy and district judges may be true. Of course, Justice Roberts dissented in Wellness so maybe that wasn’t what he meant by those words.

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Businesses faced with changes in the competitive global economy and within their own industries increasingly turn to financial restructuring as an option to reorganize and de-leverage core businesses, shed excess assets for underperforming divisions, and reformulate long-term objectives. Greenberg Traurig's internationally recognized Restructuring & Bankruptcy Practice has broad advisory and litigation experience with the often-complex issues that arise in reorganizations, restructurings, workouts, liquidations, and distressed acquisitions and sales, in both domestic...

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