High Court Considers Limits on Bankruptcy Court … Once More

For a third time, the Supreme Court of the United States will address the limits on the Bankruptcy Court’s jurisdiction under Article III of the U.S. Constitution. Justices heard arguments on January 14 in Wellness International Network v. Richard Sharif, asking it to clarify what property became part of the debtor’s bankruptcy estate under bankruptcy code.

This issue was first brought to the court’s attention in 2011 in Stern v. Marshall, where it determined that a final decision on a state law counterclaim was not within the power of the Bankruptcy Court. And in the spring, Executive Benefits Insurance Agency v. Arkison accepted the process by which the district courts supervise the adjudicative proceedings of the Bankruptcy Courts.

In Wellness v. Sharif, the Supreme Court will also decide whether or not litigants may consent to Bankruptcy Court jurisdiction; and if so, whether or not implied consent is sufficient instead of actual written consent.

The history of Wellness v. Sharif goes back for more than a decade. In a district court action, Wellness was granted more than $500,000 in fees and sued Sharif to collect those fees. During the course of that action, Sharif was held in contempt and jailed. After being released, Sharif filed a Chapter 7 petition in bankruptcy. Wellness objected to Sharif obtaining a discharge on the grounds that Sharif lied about ownership of certain property and attempted to hide it from being pulled in to the property of the bankruptcy estate. Sharif argued that the property belonged to a trust, was not property of the estate and any attempt by Wellness to pull it into the bankruptcy estate was actually an attempt to have the Bankruptcy Court wipe out the rights of third parties (not in bankruptcy) to property not belonging to the estate. Sharif argued that this was a state law issue and not appropriate for a Bankruptcy Court to determine. The case will attempt to address the following points:

  • If the issue is whether or not this property is property of the estate, then this is a “core” issue and the Bankruptcy Court has jurisdiction
  • If the issue is actually whether or not the Bankruptcy Court can determine a state law issue over the ownership of this property, then this is not a “core” issue and under Stern, the Bankruptcy Court would not have jurisdiction.
The Supreme Court will also make a determination regarding litigants’ consent to jurisdiction. In Wellness, Sharif participated in every aspect of the case, even filing a motion for summary judgment against Wellness. Sharif did not raise an objection to jurisdiction until the appeal was taken and being briefed.

Personally, I believe the Bankruptcy Court’s jurisdiction should be expanded to hear these types of claims. However, the Supreme Court in the Stern case said Article III does not give the Bankruptcy Court this power. Bankruptcy practitioners will disagree as to whether or not the powers of the Bankruptcy Court should be expanded. Disagreement also exists as to whether or not consent to jurisdiction should enable the Bankruptcy Court to proceed.

A decision from the Supreme Court on Wellness v. Sharif, which may not come for months, will be welcome to hopefully clarify, once and for all, what is or is not within the jurisdictional purview of the Bankruptcy Court.

- Wanda Borges, Esq., principal member, Borges & Associates, LLC
Diana Mota, NACM associate editor, contributed to this article.

1 comment:

  1. Interest in a Trust should not be excluded from the reach of the Bankruptcy Court when determining the value of someone's estate. It should be up to the Trustee to determine if the interest held by the petitioner holds any value which could be reduced to money and distributed to satisfy creditors in a VOLUNTARY Chapter 7 proceeding. We can all bet that if Mr. Sharif knew losing his interest in the Trust would be a residual product of the filing in the first place, he may have acted differently. Likewise, if his interest in the Trust were of no value he would not be working so hard to preserve said interest.