Wellness International Network v. Sharif


1.    Do bankruptcy courts have constitutional authority to make a final judgment on state law claims?

2.    May a bankruptcy court resolve claims otherwise outside its jurisdiction so long as the litigants consent expressly or impliedly?

Oral argument: 

This case presents the Supreme Court with an opportunity to clarify the constitutionality of the allocation of power between federal district courts and bankruptcy courts, as well as an opportunity to clarify the role of the Stern v. Sullivan decision in this power struggle. The parties first dispute the extent of a bankruptcy court’s authority to decide a state law issue, namely one based on an alter ego theory. On the one hand, Wellness contends that an alter ego claim should not be distinguished from the necessary process in any bankruptcy filing of determining which of the debtor’s assets are available to the creditor. Sharif disagrees and believes that adjudicating an alter ego claim is a common law claim, i.e., not a core bankruptcy proceeding, and therefore is exclusively within the jurisdiction of an Article III court. The parties also dispute whether, notwithstanding the outcome of the preceding issue, a party can consent to the bankruptcy court adjudicating an alter ego claim. Wellness believes the right to Article III adjudication here protects personal interests and is therefore subject to waiver by litigants. By contrast, Sharif characterizes this as a separation of powers (i.e., structural) issue that may not be waived. 

Questions as Framed for the Court by the Parties 

1. Whether the presence of a subsidiary state property law issue in a 11 U.S.C. § 541 action brought against a debtor to determine whether property in the debtor's possession is property of the bankruptcy estate means that such action does not “stem[] from the bankruptcy itself” and therefore, that a bankruptcy court does not have the constitutional authority to enter a final order deciding that action.

2. Whether Article III permits the bankruptcy courts to exercise the judicial power of the United States over claims against a debtor where the debtor has consented to the exercise of such judicial power by voluntarily filing for bankruptcy relief.

In addition, this case also presents the two questions currently before the Court in Executive Benefits Insurance Agency v. Arkison, 133 S. Ct. 2880 (2013) (No. 12-1200). Because of the procedural posture of Executive Benefits-there the district court reviewed the bankruptcy court's summary judgment order de novo-it is possible that the Court may conclude that no constitutional violation occurred and thus, not reach the issues on which certiorari was granted. In such event, this case presents the opportunity to address those questions, about which there is also a split among the circuits:

3. Whether Article III permits the exercise of the judicial power of the United States by the bankruptcy courts on the basis of litigant consent, and if so, whether implied consent based on a litigant’s conduct is sufficient to satisfy Article III.

4. Whether bankruptcy courts have the statutory authority to submit proposed findings of fact and conclusions of law for de novo review by a district court in a “core” proceeding under 28 U.S.C. § 157(b).


The facts of this case stem from a “decade-long saga” involving Richard Sharif, the debtor, and Wellness International Network, Ltd., (“Wellness”), the creditor. See Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751, 754 (7th Cir. 2013). The proceedings began in 2003 in the Federal District Court for the Northern District of Illinois (“Illinois District Court”), where Sharif sued Wellness for Wellness’s alleged participation in a pyramid scheme. See id. at 755. The Illinois District Court ultimately dismissed Sharif’s claim and the Seventh Circuit affirmed. Id. Sharif re-filed the suit in the Northern District of Texas (“Texas District Court”), but subsequently ignored all of Wellness’s discovery requests. See id. The Texas District Court granted summary judgment for Wellness and the Fifth Circuit affirmed, noting especially Sharif’s “dilatoriness” and “hollow posturing.” Id. at 755-56. The case was remanded and the Texas District Court awarded Wellness approximately $655,000 in attorney’s fees as a form of punishment against Sharif. See id. at 756. Wellness initiated post-judgment discovery in order to ascertain Sharif’s assets, but Sharif refused to participate. See id. Even after Wellness moved to compel discovery, Sharif continued to refuse, and was arrested and held in civil contempt for a time. See id.

In 2009, Sharif filed for bankruptcy in the Illinois District Court. See Wellness Int'l Network, 727 F.3d at 756. Sharif listed Wellness as a creditor, and Wellness subsequently filed a proof of claim, which included an approved loan application showing that Sharif possessed assets worth over $5 million. See id. Sharif refused to comply with any discovery requests regarding Wellness in the bankruptcy proceedings, and said that he lied on the loan application. See id. at 756-57. Sharif maintained that assets he claimed on the loan application did not belong to him but were rather owned by the Soad Wattar Trust, of which he was a trustee. See id. at 757. Sharif refused to produce any documentation relevant to that trust account. See id. 

Wellness then began adversary proceedings against Sharif in bankruptcy court, alleging several violations under 11 U.S.C. § 727 for concealing assets and submitting false information. See Wellness Int'l Network, 727 F.3d at 757. Sharif continued to delay and refuse cooperation, but was finally deposed in May 2010. See id. at 757-58. In July 2010, the bankruptcy court entered a default judgment against Sharif, finding numerous discovery violations. See id. at 758-59. The bankruptcy court, in four separate judgments, ordered Sharif to pay a litany of fees and costs. See id. at 759.

In August 2011, Sharif appealed the bankruptcy court’s decision to the Illinois District Court, alleging a Fifth Amendment due process violation. See Wellness Int'l Network, 727 F.3d at 759. Additionally, Sharif claimed that the bankruptcy court abused its discretion in awarding the default judgment because Sharif had been a trustee of Soad Wattar Trust rather than a beneficiary. Id. at 759-60. In December 2011, Sharif’s sister filed a motion to withdraw the case, arguing that the recently decided Stern v. Marshall decision denied the bankruptcy court jurisdiction to enter a final judgment on Wellness’s state law complaint. See id. at 760; Stern v. Marshall, 131 S. Ct. 2594 (2011). The district court denied this motion as untimely because it considered the Stern issue to be waivable, and subsequently affirmed all four counts. See id. 

Sharif again appealed to the Seventh Circuit, raising several issues but especially that the bankruptcy court lacked constitutional authority to enter final judgment under Stern. See id. at 760-61. In August 2013, the Seventh Circuit affirmed in part, reversed in part, vacated in part, and remanded the case to the district court. See id. at 782. The Seventh Circuit, on the Stern question, held that the bankruptcy court had jurisdiction to enter final judgment on certain issues relating to discharge of debts, but that it lacked constitutional authority to enter judgment on a state law alter-ego claim. See id. at 775-76. In October 2013, the Seventh Circuit subsequently denied a petition for rehearing en banc. See Brief for Petitioner, Wellness International Network, Ltd. at 1. The Supreme Court of the United States granted certiorari on July 1, 2014. Id. at 1.


The parties disagree on two principal issues. First, Wellness insists it was permissible for the bankruptcy court to decide that the property for which Sharif was a trustee is part of his bankruptcy estate. See Brief for Petitioner, Wellness International Network, Ltd., Ralph Oats, and Cathy Oats at 20. Sharif argues, however, that bankruptcy courts do not have jurisdiction to resolve a common law, non-core bankruptcy claim. See Brief for Respondent, Richard Sharif at 25. Second, Wellness believes that this argument is unavailing to Sharif because Sharif nonetheless consented to the bankruptcy court adjudicating his interest in the trust. See Brief for Petitioner at 42. Sharif counters that he did not consent, nor could he because separation of powers limitations are structural and not waivable by parties. See Brief for Respondent at 50.


In 2011, the Supreme Court issued its opinion in Stern v. Marshall, which further defined the jurisdictional limits on bankruptcy courts. Stern v. Marshall, 131 S. Ct. 2594 (2011). The Seventh Circuit relied on Stern in holding that the bankruptcy court here had no authority to resolve Wellness’s claim—using an alter ego theory—that the property for which Sharif was a trustee could be considered part of his bankruptcy estate. See Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir. 2013). Specifically, the Seventh Circuit found that Wellness’s alter ego claim “is a common law claim for which state law provides the rule of decision, and it is intended only to augment the bankruptcy estate.” Id. at 774 (citing Stern, 131 S.Ct. at 2611–15).

Wellness argues the Seventh Circuit misapplied Stern, extending its holding beyond what the Supreme Court intended. See Brief for Petitioner, Wellness International Network, Limited, Ralph Oats, and Cathy Oats at 19–20. Wellness frames the “operative question” of Stern as “whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” See id. at 19 (quoting Stern, 131 S. Ct. at 2618). And in this regard, Wellness argues, determining what of a debtor’s property belongs to his or her bankruptcy estate is part and parcel of a bankruptcy proceeding, i.e., it “stems from the bankruptcy itself.” Id. at 20 (citing Stern, 131 S. Ct. at 2618). Specifically, bankruptcy courts exercise in rem jurisdiction that depends on securing the debtor’s property and assets to satisfy potential creditors’ claims. Id. at 22. Wellness believes it is therefore a basic function of bankruptcy courts to make a threshold determination of whether a given asset should be included in, or excluded from, the bankrupt’s estate. See id. Wellness also argues that the Court has already recognized this principle. See id. at 23–25. In Mueller v. Nugent, for instance, Wellness notes the Court stated that if a bankruptcy court did not have this power, it would be “seriously impaired” because it would lose the ability to determine what assets it has jurisdiction over. See Brief for Petitioner at 24–25 (quoting Mueller, 184 U.S. at 14); Mueller v. Nugent, 184 U.S. 1 (1902). Sharif, however, limits the comparison to Mueller on the grounds that the property at issue there was unquestionably the debtor’s. See Brief for Respondent, Richard Sharif at 32 (citing Stern, 131 S. Ct. at 2615). But by contrast, where a third party presents a colorable claim to possession of the property (as did Sharif’s sister in this case, Sharif argues), a bankruptcy court has no authority to order that property to be included as part of the bankruptcy estate. See id. (citing Stern, 131 S. Ct. at 2615).

More broadly, however, Sharif argues that Wellness’s argument is flawed foundationally because it presumes that Sharif had a property interest in the Soad Wattar Trust. See Brief for Respondent at 21. Sharif argues this is a faulty premise because, as trustee, he never had a legal or equitable interest in the trust’s assets and those assets therefore could not be considered part of his bankruptcy estate. See id. at 22–23. More specifically, Sharif points to § 541(b)(1) of the Bankruptcy Code, which excludes from a debtor’s estate “any power that the debtor may exercise solely for the benefit of an entity other than the debtor.” Id. at 24 (citing 11 U.S.C. § 541(b)(1)). And in this regard, Sharif argues, Wellness’s alter ego claim seeking to pierce the veil of the Soad Wattar Trust is precisely the type of claim that Stern prohibited—a common law claim that seeks to “augment the bankruptcy estate” available to Wellness. See id. at 24–25 (citing Stern, 131 S. Ct. at 2618).

Wellness rebuts Sharif’s characterization, arguing that both Sharif and the Seventh Circuit incorrectly analogized the claim in Stern and Wellness’s alter ego claim. See Brief for Petitioner at 25–26. First, Wellness notes that the Supreme Court has defined an action that seeks to “augment” a bankruptcy estate as one that “constitute[s] no part of the proceedings in bankruptcy but concern[s] controversies arising out of it.” Id. at 30 (citing Granfinanciera, S.A v. Nordberg, 492 U.S. 33, 56 (1989)). Wellness therefore believes its alter ego claim does not meet this definition because it constitutes part of the bankruptcy proceedings. See id. at 31. In Stern, Wellness explains, the debtor made a tort counterclaim against the creditor for events that transpired before the case was filed in bankruptcy court and was thus not a necessary component of the bankruptcy case. See id. at 26 (citing Stern, 131 S. Ct. at 2601–02). Wellness’s alter ego claim is very different, Wellness argues, because the claim’s existence is premised upon a bankruptcy action being filed in the first instance. See id. And rather than seeking monetary damages, Wellness maintains, the alter ego claim seeks only to define all of Sharif’s assets that properly belong in the bankruptcy estate. See id. at 26, 31. Sharif disagrees, arguing that the alter ego claim is distinct from the issues a bankruptcy court is tasked with resolving—the restructuring of debtor-creditor relations. See Brief for Respondent at 26. Sharif believes that Wellness’s claim is typical of common law contract and debt actions that are governed by state law. See id. at 26–27. In this way, Sharif states, the alter ego claim cannot satisfy Stern because it “exists entirely independent of the bankruptcy” and therefore does not arise from “the bankruptcy itself.” See id. at 26, 27–28 (quoting Stern, 131 S. Ct. at 2618).


Relying on the Court’s 1986 decision in Commodity Futures Trading Commissioner v. Schor, Wellness characterizes the right to have certain claims heard by an Article III court as waivable by litigants because Article III protects “personal,” as opposed to “structural” interests. See Brief of Petitioner at 42–43 (citing Commodity Futures Trading Commissioner v. Schor, 478 U.S. 833, 848–49 (1986)). According to Wellness, the Seventh Circuit erroneously read Stern claims to implicate separation of powers problems, i.e., “structural” concerns. See id. at 44. Wellness notes that there are no structural concerns here because the bankruptcy court only operates subject to the control of Article III courts. See id. at 51–52. Wellness argues that the Seventh Circuit’s conclusion failed to account for a key point—Sharif (at least according to Wellness) did consent to the bankruptcy court adjudicating the dispute. See id. Stern therefore is more limited than what the Seventh Circuit held, Wellness argues; it only addressed separation of powers problems that arise when litigants do not consent. See id. Wellness notes that the Supreme Court even acknowledged this in Stern, stating it held “only that” Congress could not give bankruptcy courts the power to adjudicate traditional state law claims “without consent of the litigants.” See id. at 44–45 (quoting Stern, 131 S. Ct. at 2615). But Wellness emphasizes that even if the bankruptcy court’s determination of the alter ego claim implicates structural concerns, that is not dispositive because the Court has previously stated that structural independence is not inherently unwaivable. See id. at 47 (citing Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 231 (1995)). 

Sharif argues to the contrary that the right to an Article III determination of Wellness’s alter ego claim is not waivable and, nonetheless, he did not consent to the bankruptcy court’s adjudication of it. See Brief for Respondent at 39. Despite Wellness invoking Stern for a more limited holding, Sharif argues Stern held that a bankruptcy court adjudicating a private claim violates separation of powers principles so directly that it cannot be waived. See id. at 41 (citing Stern, 131 S. Ct. at 2620). Wellness’s alter ego claim must fall within this prohibited category of claims, Sharif says, because it is a common law claim that is almost identical to that presented in Stern. See id. at 42. Sharif further argues that Wellness’s reliance on Schor is misplaced. See id. at 45. He notes that consent was not dispositive Schor; rather, it was but one of many considerations the Schor Court weighed to ascertain whether there was an unwaivable right to Article III adjudication in that case. See id.

Sharif believes Wellness’s consent argument also fails because the facts show that he did not in fact consent to bankruptcy court adjudication of the alter ego claim. See Brief for Respondent at 50. Because Sharif considers the alter ego claim to be “non-core,” it is subject to Bankruptcy Rule 7012(b), which states that non-core proceedings cannot be determined by a bankruptcy judge without “the express consent of the parties.” See id. (citing Fed. R. Bankr. P. 7012(b)). In sum, he believes that merely filing for bankruptcy does not suffice as expressly consenting to that court adjudicating Wellness’s alter ego claim; to hold otherwise would strip Rule 7012(b) of any meaning. See id. at 53. While Sharif acknowledges that he mistakenly agreed in his answer to Wellness that Wellness’s alter ego claim was core, Sharif maintains that such a mistake still cannot constitute the knowledge and voluntariness that express consent requires. See id. at 54. And finally, Sharif contends that his filling for summary judgment in the bankruptcy court similarly does not constitute express consent. See id. at 55. Specifically, Sharif notes that he was “never given notice that he could prevent a final adjudication of the alter ego claim simply by withholding his consent.” See id.


This case presents the Supreme Court with an opportunity to clarify the allocation of power between federal district courts and bankruptcy courts, and also to clarify the role of Stern v. Marshall within that framework. See Brief for Petitioner at i; Brief for Respondent at i.  Amicus United States describes the general relationship between district courts and bankruptcy courts. See Brief of Amicus Curiae The United States, in Support of Petitioner at 2-5. A petitioner may voluntarily commence actions in bankruptcy court by filing a petition directly to the court. See id. at 2. Alternatively, the Bankruptcy Amendments and Federal Judgeship Act of 1984 provides that federal district courts have jurisdiction over all bankruptcy proceedings and any related civil matters; the district court may choose to refer the case to the bankruptcy court to be heard in that specialized forum at any time, in whole or in part. See id. at 4. Typically, pursuant to the 1984 Act and Northern Pipeline v. Marathon Pipeline, bankruptcy judges may administer final judgments in “core” proceedings, but may only enter final judgments in “non-core” proceedings with the consent of the parties. See id.; Northern Pipeline v. Marathon Pipeline, 458 U.S. 50 (1982). Any final judgments arising from bankruptcy court are subject to review in the district court. See id. The Stern decision shifted that framework by re-categorizing “core” versus “non-core” claims on the basis of whether federal district courts could constitutionally delegate power to hear certain state law claims in non-Article III forums. See id. at 3, 5.

Wellness argues that although determining property rights is a state law issue, bankruptcy courts may issue final judgments on whether a debtor’s property is part of the debtor’s bankruptcy estate because this action “stems from the bankruptcy itself,” notwithstanding Stern. See Brief for Petitioner, Wellness International Network, Ltd. at 19-21. Conversely, Sharif argues that after Stern, there is a “clear, administrable distinction” between issues that can receive a final decision in bankruptcy court and issues that must receive final decision in federal district court in order to comport with the Constitution. See Brief for Respondent, Richard Sharif at 19.


In support of Wellness, multiple amici argue that interpreting Stern to say that bankruptcy courts cannot give final adjudication to certain claims will severely impact the ability of bankruptcy courts to assist district courts in efficiently administering justice. See Brief of Amicus Curiae The American Bar Association, in Support of Petitioner at 14; Brief of Amicus Curiae The National Association of Bankruptcy Trustees, in Support of Petitioner at 16. The National Association of Bankruptcy Trustees (“NABT”) describes Stern’s characterization of core claims as those which “stem from the bankruptcy itself”, “arise[] under” the Bankruptcy Code, and “arise[] in” a bankruptcy case. See Brief of NABT at 10-11. The NABT goes on to say that state law claims accompanying the bankruptcy proceedings, regardless of their nature, do not affect this characterization for the purposes of bankruptcy court jurisdiction. See id. at 11. According to the NABT, characterizing an alter ego claim as outside of the bankruptcy court’s jurisdiction simply because it turns on issues of state law undermines the bankruptcy court’s ability to determine properly a debtor’s assets and fully decide the debt discharge issue. See id. at 13. The NABT further warns that this would result in an inefficient bifurcation of jurisdiction between bankruptcy and district courts for many issues already codified in the Bankruptcy Code. See id. at 16-18. The American Bar Association (“ABA”) adds that this would result in all Stern and non-core claims needing de novo review in district courts, and this effect would spill over into magistrate courts as well. See Brief of ABA at 14-16. The overall result, says the ABA, is that already heavily burdened district courts will be even more overrun if bankruptcy courts are not allowed to handle their own caseloads. See id. at 16-17.

Sharif counters these contentions by asserting that his interpretation of Stern—not allowing bankruptcy courts to finally adjudicate certain common law claims—will not unequivocally bar bankruptcy courts “from deciding all state-law issues, even when there are ‘incidental.’” See Brief for Respondent at 37. Rather, Sharif maintains, his interpretation of Stern is “only what Stern already requires” and consequently, Sharif’s interpretation of Stern does not significantly alter the present allocation of responsibilities between the district and bankruptcy courts. See id. at 38. 


In support of Sharif, the TOUSA defendants raise the concern that Stern was decided after the instant proceedings were already underway, yet the Seventh Circuit ruled that Sharif’s Stern argument had been waived because it was not asserted from the outset. See Brief of Certain TOUSA Defendants at 13. The TOUSA defendants argue that because the waiver in question implicates a constitutional right, it requires extra scrutiny, and the waiver should be “knowing and unequivocal.” Id. How then, the TOUSA defendants ask, can a party provide such knowing and unequivocal waiver for a right that did not exist at the time the proceedings commenced? See id. at 13, 15. The TOUSA defendants maintain that Stern was an “intervening change in the law” and thus “an exception to normal waiver rules.” See id. at 14, 16. The TOUSA defendants point out that the Court has held that parties, even under the utmost diligence, cannot be clairvoyant, and thus should be allowed to raise a new issue after the typical waiver period if the law has changed. See id. at 14-15. Otherwise, the TOUSA defendants caution, parties will be expected to predict the future and will fill their complaints with every conceivable argument, supported or not. See id. at 15-16.

The United States as amicus curiae addresses this “clairvoyance” concern in support of Wellness. See Brief of the United States at 30-31. According to the United States, although Stern was not decided until proceedings in the instant case were already underway, Sharif was on notice of the direction that the law was going based on the Court’s Granfinanciera, S.A. v. Nordberg decision. See id.at 30-31; Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). The United States argues that Sharif could not have “knowingly” waived his rights, but “the principal building blocks of Stern’s reasoning” were already in place, and the parties in Stern had been litigating their question for over ten years. See Brief of the United States at 30-31. The Court does not require clairvoyance, the United States says, but litigants are required to stay abreast of the law; the legal system does not cure faulty pleas after the fact. See id. at 31.


In this case, the Supreme Court has the opportunity to decide two issues critical to defining the scope of a bankruptcy court’s jurisdiction. First, the Court will consider whether a common law claim, such as an alter ego claim directed at a debtor’s alleged assets, is within a bankruptcy court’s jurisdiction where that claim is meant to define which assets available to a creditor. And second, the Court will consider whether litigants may nonetheless consent to a bankruptcy court deciding common law claims even if the common law claims are not within the bankruptcy court’s jurisdiction. This case will have implications for the separation of powers with regard to Article III courts and bankruptcy courts, and will clarify litigation purporting to make the jurisdiction of bankruptcy courts comport with the Constitution. 

Additional Resources 

•    Supreme Court to Reconsider Authority of Bankruptcy Judges, The Knowledge Effect (July 22, 2014).

•    Jeff Elkin: Wellness International Network v. Sharif: A Return to a Formalist Reading of Article III?, The Legislation & Policy Blog (Oct. 29, 2014).