The Impact of the Supreme Court’s Decision in Wellness International Network, Ltd. v. Sharif on Bankruptcy Litigation in 2016
On May 26, 2015, the Supreme Court’s decision in Wellness International Network, Ltd. v. Sharif, sheds light on the scope of a bankruptcy court's authority to adjudicate certain state law claims. The Court upheld the authority of bankruptcy judges to hear, with the consent of the parties, matters that fall within the scope of Article III of the U.S. Constitution. Moreover, the Court also held that Article III does not prevent bankruptcy judges from entering final judgment on claims that seek to augment the bankruptcy estate and would exist outside of bankruptcy proceedings, or the so-called “Stern claims”.
In the case, Richard Sharif, the debtor, commenced a Chapter 7 proceeding after a $650,000 default judgment was obtained against him for attorney fees related to federal district court litigation that he had commenced against Wellness International Network Ltd. (WIN). As a creditor in Sharif's bankruptcy, WIN obtained documentation in which Sharif previously attested to having more than $5 million in assets. In response, Sharif claimed that he lied on his loan application and that those assets were not his but the property of the Soad Wattar Trust, of which he was just a trustee. WIN then filed a complaint in the bankruptcy court seeking, among other things, a declaration that the trust was Sharif's “alter ego” and that its assets belonged to the bankruptcy estate. Sharif's answer to WIN's complaint admitted that the adversary proceeding was a "core proceeding" under 28 U.S.C. Section 157(b) such that the bankruptcy court would have authority to enter a final judgment.
In this two-hour LIVE Webcast, a panel of key thought leaders and practitioners assembled by The Knowledge Group will examine how the High Court’s decision in Wellness International Network, Ltd. v. Sharif has defined the issues that can be heard and decided by the bankruptcy court. Speakers will also present their thoughts and opinions on how it will impact ongoing and future bankruptcy litigation.
Key topics include:
- Bankruptcy; Separation Of Powers; Article III
- Recent Bankruptcy Cases and Lessons Learned
- Stern v. Marshall
- Wellness International Network, Ltd. v. Sharif – An Overview
- Consent in Bankruptcy Jurisprudence
Matthew Roose, Attorney
Fried, Frank, Harris, Shriver & Jacobson LLP
- In Stern v Marshall, despite the fact that 28 U.S.C. §157 lists counterclaims against a creditor as a “core proceeding,” the Supreme Court held that is unconstitutional for bankruptcy judge to adjudicate common law counterclaim for tortious interference because only an Article III judge has that power.
- The Supreme Court reasoned that such a counterclaim was a private right not a public right and, therefore, only an Article III life tenured judge can adjudicate a counterclaim.
- The Supreme Court held that by including counterclaims in the list of core proceedings, Congress improperly vested the bankruptcy court with the “judicial Power of the United States,” which is reserved for Article III judges.
- Following Stern, lower courts were divided on whether under Article III a bankruptcy court could adjudicate “Stern” claims with the consent of the parties.
- As a result of this circuit split, the Supreme Court decided Wellness v Sharif.
Jane VanLare, Partner
Cleary Gottlieb Steen & Hamilton LLP
- The Court’s decision made clear that bankruptcy courts do not violate Art. III of the Constitution by entering orders or final judgments on Stern claims so long as the parties consent
- The Court weighed (i) the extent to which the essential attributes of judicial power are reserved to Art. III courts and (ii) the extent to which the particular non-Art. III forum exercises jurisdiction and powers normally vested only in Art. III courts, origins and importance of the right to be adjudicated and concerns that drove Congress to depart from Art. III’s requirements.
- Wellness does not express a view on whether the alter ego declaratory judgment at issue was Stern claim and does little to further explicate what constitutes a Stern claim.
- How much should the practical effects of allowing or not allowing bankruptcy courts to decide Stern claims factor into the determination of whether allowing bankruptcy courts to decide Stern claims violates Art. III?
- Should the Court have decided Wellness on the more limited ground that an alter ego declaratory judgment stemmed from the bankruptcy itself and thus presents no Art. III problem, as Chief Justice Roberts’s dissent suggests?
- Does consent to bankruptcy court adjudication of Stern claims (a) prevent Art. III violations from occurring or (b) allow litigants to impermissibly consent to Art. III violations?
Kyle J. Ortiz, Attorney
Togut, Segal & Segal LLP
- The Consent Issue – Is the right to an Article III tribunal a personal right that can be waived or a structural right that cannot be waived. Is the answer always the same, or is it circumstantial.
- What was at stake on the question of consent? Depending on the view, the outcome would either grind the federal judicial system to a halt or encroach upon the independence of the judiciary.
- The Majority’s opinion and Robert’s dissent – two different interpretations of CFTC v. Schor.
- What is the practical effect of the decision on consent in Wellness International Network, Ltd. v. Sharif. The decision largely preserved the current status quo but leaves some room for maneuvering.
- Implied consent and what constitutes “knowing and voluntary.”
- What was different about Wellness that the Court changed its tune from Stern v. Marshall and the Sternmajority’s position that: “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.”
Who Should Attend:
- Bankruptcy Lawyers and Practitioners
- Banking and Finance Lawyers
- Debtors and Creditors
- Chief Financial Officers
- Corporate Financial Officers
- Financial Reporting Officers
- Finance Executives & Directors
- In-house Counsel
- Multinational Companies
- Private and Public Companies
- Other related/interested Professionals and Organization
Jane VanLare is a partner based in the New York office of Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on representing investors in distressed assets, large financial institutions, and corporations in all matters relating to in- and out-of-court restructurings, bankruptcy, and insolvency, and related litigation. Most recently, Ms. VanLare represented Overseas Shipholding Group, Inc. in its successful global restructuring and Cascade Investment as senior secured party in the recent reorganization of Optim Energy’s operating assets. She also represented the Truvo Group in its Chapter 11 reorganization, and Colony Capital in the dismissal of the Chapter 11 case of debtor JER/Jameson Mezz Borrower II.
Jane VanLare is a partner based in the New York office of Cleary Gottlieb Steen & Hamilton LLP. Her practice …
Mr. Ortiz is a senior associate with Togut, Segal & Segal, LLP and represents clients in all facets of complex business reorganizations. Mr. Ortiz has been involved in representing Chapter 11 debtors in some of the largest Chapter 11 cases ever filed, including Lehman Brothers and American Airlines. Mr. Ortiz also has extensive experience representing creditors’ committee, most recently as part of the team representing the committee in Relativity Fashion. Mr. Ortiz has authored or co-authored dozens of articles on topics covering all aspects of restructuring law and his pro bono work has been awarded by, among others, the Legal Aid Society. Prior to starting his legal career, Mr. Ortiz founded the leading non-profit tuberculosis treatment provider in Cambodia and was a member of the U.S. National Team in short track speed skating. Mr. Ortiz earned his J.D. from the University of Chicago Law School where he was an Edmund Spencer Scholar.
Mr. Ortiz is a senior associate with Togut, Segal & Segal, LLP and represents clients in all facets of complex …
Matthew Roose is a bankruptcy and restructuring associate resident in Fried Frank’s New York office.
Mr. Roose concentrates his practice representing debtors and official and unofficial creditors' and equity committees in chapter 11 cases and out-of-court restructurings. He also represents significant creditors, lenders and third-party purchasers in connection with chapter 11 cases and out-of-court restructuring situations.
Mr. Roose received his JD, cum laude, from Brooklyn Law School in 2006 and his BA from Colgate University in 2001. He is admitted to practice in New York.
Matthew Roose is a bankruptcy and restructuring associate resident in Fried Frank’s New York office. Mr. Roose concentrates his practice …
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A leading international law firm with 16 offices located in major financial centers around the world, Cleary Gottlieb Steen & Hamilton LLP has helped shape the globalization of the legal profession for more than 65 years. Cleary Gottlieb has a proven track record for innovation and providing work of the highest quality to meet the needs of clients worldwide.
About Togut, Segal & Segal LLP
Togut, Segal & Segal LLP is a highly-specialized "boutique" law firm with a national reputation for excellence in bankruptcy, corporate reorganization, fiduciary representatives and creditors' rights. Established in 1980, Togut, Segal & Segal has extensive expertise in representing Chapter 11 debtors, creditors' committees, retiree committees, secured and unsecured creditors, and trustees, having served as court-approved counsel in hundreds of cases.
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