In a 6-3 decision, the Justices gave significantly more power to bankruptcy judges, provided that they use this authority under carefully controlled circumstances.
The underlying dispute in Wellness International v. Sharif began in 2005, when Wellness obtained a $650,000 default judgment against Richard Sharif. Four years later, Mr. Sharif filed bankruptcy in Illinois. He claimed he had no assets, but Wellness asked the bankruptcy court to include a trust that he controlled in the bankruptcy estate. Somewhat predictably, Mr. Sharif failed to participate in the lawsuit in any meaningful fashion. The Bankruptcy Court declared that the trust’s assets, for all practical purposes, belonged to Mr. Sharif and therefore were part of the bankruptcy estate.
In 2011, even as the Wellness/Sharif dispute continued, the Supreme Court decided Stern v. Marshall, which seemingly held that bankruptcy judges had no power to hear other civil matters. Based on Stern, the Seventh Circuit overturned the Bankruptcy Court’s judgement against Mr. Sharif.
The Supreme Court reinstated the Bankruptcy Court’s judgment. Writing for the majority, Justice Sonia Sotomayor essentially said that Stern had been misinterpreted. She bluntly stated that “Our precedents make clear that litigants may validly consent to adjudication by bankruptcy courts,” and Stern did not change that pattern.
Instead, in order to determine the Bankruptcy Judge’s authority, a reviewing court must ask two questions:
- Was the civil matter pertinent to the bankruptcy case?
- Did both parties consent to that civil matter being heard by someone who is not a federal district judge?
The Court returned the case to the Seventh Circuit, because it was a bit unclear whether or not both parties gave effective consent.
It is not uncommon for a civil suit to be tied to a bankruptcy case. All these lawsuits are subject to the automatic stay. Creditors may not take any action against debtors without special permission from the presiding judge. Unless the debtor consents to the arrangement, the bankruptcy judge has no jurisdiction over these cases and they must be suspended, pending the discharge order.
If the lawsuit involved a suit on account, such as a medical bill or past-due utility bill, these unsecured debts are nearly always discharged, and the case goes away. In the case of a suit on a sworn account, such as a credit card or student loan, the case may or may not resume, depending on the type of debt. When a secured debt is involved, such as a mortgage or car note, the lawsuit nearly always resumes, unless the debtor is no longer in violation of the security agreement (i.e. has caught up on payments).
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