High Court Expands Bankruptcy Courts’ Power

Article III of the U.S. Bankruptcy Code permits bankruptcy judges to decide the final outcome of property in a debtor’s possession if all parties in the case agree to let that court decide the case, according to a  Supreme Court of the United States decision announced Tuesday.

Justices ruled 6-3 to overturn the Seventh Circuit decision, which found that bankruptcy courts lack such jurisdiction in Wellness International Network, Limited v. Richard Sharif. The court’s decision states, “Consent to adjudication by a bankruptcy court need not be express, but must be knowing and voluntary.” It further states that “the Seventh Circuit should decide on remand whether Sharif’s actions evinced the requisite knowing and voluntary consent and whether Sharif forfeited his Stern [Stern v. Marshall] argument.”

It was the third time justices addressed the constitutional limits that Article III imposes on the bankruptcy court’s jurisdiction. This issue was first brought to the court’s attention in 2011 in the matter of Stern v. Marshall, where it determined that a final decision on a state law counterclaim was not within the power of the bankruptcy court.

Wellness had asked the bankruptcy court to decide what property became part of the Sharif’s bankruptcy estate on the day that he filed. The case presented two points for the Supreme Court to address:
  • If the issue is whether or not property in the debtor’s possession 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 v. Marshall, the bankruptcy court would not have jurisdiction.

- Diana Mota, NACM associate editor
For deeper analysis of this case and its impact on bankruptcy and/or B2B credit, read this week's edition of NACM's eNews, available late Thursday afternoon.

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