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U.S. Supreme Court Rules Again for Prof. John Pottow on Issue of Bankruptcy Court Authority U.S. Supreme Court Rules Again for Prof. John Pottow on Issue of Bankruptcy Court Authority

June 1, 2015

The Supreme Court of the United States' 6-3 decision in Wellness International Network, Limited v. Sharif was somewhat déjà vu for Professor John Pottow.

Almost a year to the date of its 9-0 ruling in Executive Benefits Insurance Agency v. Arkison (EBIA v. Arkison)—which Pottow argued before the Court in January 2014—the U.S. Supreme Court issued a second decision bolstering bankruptcy court authority in Wellness International Network, Limited v. Sharif (May 26)—a case in which Pottow, the John Philip Dawson Collegiate Professor of Law, joined Jenner & Block's Catherine Steege to represent Wellness International. Also part of the Jenner team which helped prepare the case were Michigan Law graduates Melissa Root, '03, and Landon Raiford, '08.

“Better late than never, the Court gets it right and notes that its holding is ‘nothing new,'" Pottow said. "In vindicating our reading of historical precedents and accepting our best practices reading of the recent fumble of Stern v. Marshall, the Court will calm the bankruptcy waters it disrupted four years ago.”

In an opinion authored by Justice Sonia Sotomayor, the Court reversed an appellate court decision ruling that the bankruptcy court did not have the constitutional authority to determine even though the parties consented to that exercise of jurisdiction. The ruling also found that such consent may be implied and need not be express so long as the consent was knowing and voluntary.

Both EBIA and Wellness International Network serve to clarify the Court's 2011 ruling in Stern v. Marshall, which created jurisdictional chaos by invalidating a central provision of the Judicial Code by calling into question the power of bankruptcy judges to rule on key issues that arise in bankruptcy cases.

At issue in Wellness International Network, Limited v. Sharif was the question of whether assets seemingly held by Richard Sharif were actually held in a family trust, as he alleged when they were discovered. Wellness said they were his, and he said they were not. Confident he was right, Sharif asked the Bankruptcy Court to enter summary judgment in his favor, but the court ended up entering a default judgment against him when he refused to comply with discovery orders related to producing the alleged trust documents.

After Stern came down, in his subsequent appeals, Sharif argued the bankruptcy court had no authority to adjudicate the question whether the assets were the debtor’s (his) or someone else’s under the new constitutional landscape post-Stern, regardless of his consent to its authority, because Stern identified new structural rights under Article III that were “unconsentable.” He thus argued that the bankruptcy court could not adjudicate his claim even if (which he denied) he consented. The District Court rejected his Stern argument as untimely, but the Seventh Circuit Court of Appeals sided with Sharif, ruling that Stern objections were not only structural but could be neither waived nor forfeited.

The case was submitted to the Supreme Court in December 2013 and Steege delivered oral argument on behalf of Wellness International on Jan. 14, 2015. The Court decided Stern’s violation of Article III turned on the objection of the litigant being dragged before a non-Article III judge, but nothing in that case intended to overturn the historical practice of consensual adjudication before magistrates, bankruptcy judges, and arbitrators on proper consent. It remanded to the Seventh Circuit the question whether on fair implication Sharif did, in fact, consent under these facts.

More on EBIA v. Arksion.

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