As we have previously discussed , the Supreme Court held in Stern v. Marshall that Congress did not have the authority under the Constitution to empower bankruptcy judges to decide legal claims that are based entirely on state law – even if such claims were specifically enumerated in the Bankruptcy Code as “core.” In Executive Benefits Ins. Agency v. Arkinson , the Supreme Court clarified Stern and held that when a bankruptcy court is presented with a Stern claim, the proper course of action is to treat the claim as “non-core” and to issue proposed findings of fact and conclusions of law for de novo review by the appropriate federal district court. Now, in Wellness International Network, Ltd. v. Sharif , the Supreme Court has answered a question remaining after Arkinson about the ability of bankruptcy judges to adjudicate Stern claims upon consent of the parties.
In Sharif , the Supreme Court held that bankruptcy courts have the ability to adjudicate Stern claims as long as the parties consent to the bankruptcy court’s jurisdiction. Moreover, while the consent of the parties must be knowing and voluntary, it does not have to be expressly given. Rather, if the parties are aware of the need for consent and still appear voluntarily before the bankruptcy court, they may consent via their actions.
The Court took a functional approach to deciding this issue, stating that the question of whether permitting bankruptcy courts to decide Stern claims by consent violated the constitutional requirements of Article III must be decided with eye on the practical effect the practice would have on Article III courts. The Court found that because bankruptcy judges are appointed by Article III judges, serve as officers of the district court, hear matters solely on reference by the district court, and do not possess “free-floating” authority to decide claims traditionally heard by Article III courts, any intrusion on the Judicial Branch is minimal. Thus, so long as the bankruptcy courts are subject to control by Article III courts, there is no threat to the separation of powers where the parties have consented to the bankruptcy court’s jurisdiction.
Ultimately, by allowing bankruptcy courts to adjudicate Stern claims upon consent of the parties, the Court increased the scope of a bankruptcy court’s jurisdiction, and cleared the future dockets of many district courts from having to adjudicate Stern claims.