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The Importance of the Supreme Court's Recent Bankruptcy Ruling

Posted on in Bankruptcy Attorney
The Importance of the Supreme Court's Recent Bankruptcy Ruling

On May 26, 2015, the Supreme Court of the United States ruled on the case of Wellness International Network, Ltd. v. Sharif, and therein reached a finding on the power that bankruptcy judges may exercise.

What is the Difference Between Federal Judges and Bankruptcy Judges?

Under Article III, Section 1, of the United States Constitution, the judicial power of the United States is vested in the Supreme Court and its inferior courts. The inferior courts are the District Courts and the Circuit Courts, which hear appellate cases. Federal judges have the power to hear any type of cases granted to it by the Constitution. Types of cases that federal judges may hear include: admiralty claims, claims between United States citizens of different states, and claims that arise under the Constitution. These judges also have life tenure and are protected from having their salaries reduced by acts of Congress.

Unlike Article III judges, bankruptcy judges only hear types of cases regarding matters of bankruptcy. In 1978, Congress passed the Bankruptcy Code, which established a new system of bankruptcy courts in which bankruptcy judges would serve for terms of fourteen years. In other words, bankruptcy judges are not Article III judges, as they do not have life tenure.

What Happened Between Wellness and Sharif?

Richard Sharif is a debtor who voluntarily filed bankruptcy under Chapter 7 of the Bankruptcy Code. Wellness International Network (“WIN”), the creditor, is a network marketing company that specializes in health and nutrition.

WIN filed a complaint in bankruptcy court against Sharif, alleging that the trust, which contained over $5 million in assets that Sharif did not list on his bankruptcy schedules was his alter ago. Because of this, WIN contended that the trust should be considered part of his bankruptcy estate. The bankruptcy court entered a default judgment in favor of WIN and Sharif then appealed.

The 7th Circuit Court of Appeals held that WIN's claim was a state-law claim between two private parties that was entirely independent of federal bankruptcy law. Because this claim was not related to federal bankruptcy law, the 7th Circuit held that the bankruptcy court did not have the constitutional power to enter final judgment on the matter.

Stern Claims

In the case of Stern v. Marshall, the Supreme Court held that bankruptcy judges were constitutionally prohibited from entering a final judgment on “core claims.” Core claims, otherwise referred to as Stern Claims, are defined under Section 157 of Title 28 of the United States Code.

The Supreme Court's Findings

In Wellness International Network, Ltd. v. Sharif, the Supreme Court addressed two questions:

1) Whether a bankruptcy judge had the power to enter a final judgment on a creditor's claim against a bankruptcy estate that involved state rights.

2) Whether a debtor's implied consent to litigate in bankruptcy court, based on the debtor's conduct, was sufficient to satisfy Article III of the Constitution.

In a 6-to-3 vote, the Supreme Court held that bankruptcy judges may hear claims that they ordinarily lack the power to hear if the parties consent.

Are You Considering Filing Bankruptcy?

If you or your business is contemplating bankruptcy, it is important that you seek legal assistance. Here at Newland & Newland, LLP, we have a highly skilled legal team that can provide you with the expertise needed to resolve your financial situation. Contact us today to schedule a free phone consultation and discuss your legal options before you make the decision to file for bankruptcy.

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