Wellness International n Network, Ltd. v. Sharif, ___F.3d___, 2013 Westlaw 4441926 (7th Circuit 2013)
SUMMARY:
In Wellness International n Network, Ltd. v. Sharif, ___F.3d___, 2013 Westlaw 4441926 (7th Circuit 2013) , disagreeing with the Ninth Circuit, the Seventh Circuit has held that a debtor’s objection to a bankruptcy court’s constitutional authority to enter a final judgment cannot be waived.
Facts: After a creditor obtained a judgment against a debtor, the debtor filed a Chapter 7 bankruptcy petition. The creditor then brought an adversary complaint seeking to block his discharge and seeking a declaratory judgment that a trust administered by the debtor was actually his alter ego. As the result of discovery violations, the court entered a default judgment against the debtor.
Following the publication of the Supreme Court’s opinion in Stern vs. Marshall, – U.S. –, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), sharply limiting the authority of bankruptcy judges to enter final judgments, the debtor in the Wellness case appealed to the district court but failed to challenge the bankruptcy judge’s authority to enter a final judgment in his opening brief. After the Stern issue was later raised, the district court nevertheless affirmed the bankruptcy court’s decision, ruling that the debtor had effectively waived the Stern issue. On appeal to the Seventh Circuit, the debtor successfully argued that the Stern issue was not waivable.
Reasoning: The court noted that the Ninth Circuit had held that the Stern issue could be waived, in In re Bellingham Ins. Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Executive Benefits Ins. Agency v. Arkison,133 S.Ct. 2880 (2013). On the other hand, the Sixth Circuit had held that this issue was not waivable, in Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012), cert. denied, 133 S.Ct. 1604, 185 L.Ed.2d 581 (2013).
After an exhaustive review of Stern, and after a careful discussion of the subtle differences between subject matter jurisdiction and constitutional authority, the court held that Stern, despite its discussions of the doctrine of waiver, had never explicitly authorized the waiver of a constitutional defect: "We discern nothing in Stern that supports the proposition that a party may waive an Article III objection to a bankruptcy judge’s entry of final judgment."
Comment: Commentator is not sure that the court’s analysis of the differences between subject matter jurisdiction and constitutional authority are supported by the reasoning in Stern; commentator does not think that Stern articulated that distinction clearly. Nevertheless, commentator predicts affirmance, if certiorari is granted. It is one thing to consent to jurisdiction by filing a claim, as discussed in Stern. It is quite another to have that consent infect that same party’s ability to defend against a claim. That distinction was the basis for commentator’s prediction that Bellingham will be reversed; see 2012 Comm. Fin. News. 100, Although Bankruptcy Courts Lack Jurisdiction to Hear and Determine Fraudulent Transfer Claims, They May Issue Reports and Recommendations, and Defendant May Waive Objection to Lack of Jurisdiction:
The discussion in Stern . . . , addressing the issue of consent, dealt with the act of the litigant in affirmatively filing a claim in the bankruptcy court; when he did so, he consented to an adjudication of that claim.
But the Stern court emphatically did not say that a litigant who has not filed a claim and who is simply a target of a claim filed by the estate can waive the jurisdictional defect. When one considers the facts in Stern, the opposite is evidently true. The non-bankrupt litigant in that case did file a claim in the bankruptcy, consenting to the adjudication of that claim. Nevertheless, the Supreme Court held that this consent did not extend to a claim asserted by the estate against him.
Looking beyond the fascinating metaphysical questions posed by Stern, this whole issue is a deplorable waste of time and money. Even if (as seems likely) Stern is broadly construed and applied, it will result in nothing more than an elaborate charade. The district courts, facing their own crowded dockets, will almost invariably rubber-stamp the bankruptcy courts’ "Reports and Recommendations," properly deferring to the bankruptcy judges’ expertise in such matters. For an excellent analysis of the practical consequences of Stern and its progeny, see J. Tanner, Stern v. Marshall: the Earthquake that Hit the Bankruptcy Courts and the Aftershocks that Followed, 45 Loy. L.A. L. Rev. 587 (2012).
Finally, a truly pedantic note: the Bellingham court capitalized the word "Chapter," as in "Chapter 7." So did the Seventh Circuit in the Wellness decision. So does the heading to Chapter 7 of Title 11 of the United States Code. I know that bankruptcy petitioners generally don’t capitalize that word, but I do not understand why that word should be singled out for capital punishment. As far as I can tell, no published treatise or reported case has made a persuasive case for lower case.
The foregoing analysis is from the Insolvency Law Committee – Business Law Section of the State Bar of California, from the Insolvency Law Committee’s 082813 e-newsletter