May 27, 2015


BANKRUPTCY JUDGES & FEDERAL POWER:  The domain of bankruptcy was allotted to the federal government by the constitution itself where it says, “The Congress shall have Power To…establish…uniform Laws on the subject of Bankruptcies throughout the United States…. .”   This clause eventually led to the creation of the current federal bankruptcy system in 1978.   Federal bankruptcy judges were appointed to the bench in every District throughout the United States.  These federal judges, however, were not given the same power as full “Article III” judges (or the power of a regular federal judge to hear all federal and state matters-at least within the confines of their jurisdiction).

Certainly, a bankruptcy judge can hear ALL matters that pertain to bankruptcy, correct?  The answer to that question would surprisingly be NO at least according to the ruling of the famous Stern v. Marshall bankruptcy case which involved the famous (now deceased) Anna Nicole Smith.  This ruling greatly limited (and confused) federal judges’ ability to try cases that involved any State Court matters.  The jurisdiction of federal bankruptcy judges was limited to any dispute that “stems from the bankruptcy itself.”

Therefore, even if a matter is fully relevant, related, and essential to proper administration of a bankruptcy case, a federal bankruptcy judge may have no jurisdiction or authority over the matter.   If a state or federal court matter exists and it “does not stem from the bankruptcy itself,” the federal bankruptcy judge may have no power to decide on such matters.    Even a consent to jurisdiction for such a matter may not give the bankruptcy judge sufficient authority to decide such a matter.   Well, at least until very recently.

In Wellness International Network vs.  Sharif, the Supreme Court of the United States recently has given bankruptcy judges new authority to make final judgments on bankruptcy disputes that contain state issues.  If the parties consent to the jurisdiction, this new ruling appears to give federal bankruptcy courts full jurisdiction over such matters.   Federal Bankruptcy court can now serve as a useful and all-inclusive venue for deciding complex bankruptcy-related matters in one place.

Although Bankruptcy Judges are still not full “Article III” Federal Judges, the Supreme Court’s new holding greatly increases bankruptcy judges’ power to take care of bankruptcy disputes.   Most parties would naturally assume (or at least prefer) that all disputes related to bankruptcy can be determined in one place: bankruptcy court.   Now, with the consent of parties, it appears that all bankruptcy-related matters can be determined in one place: by the Federal Bankruptcy Judge.

~Indianapolis Bankruptcy Attorney John F. Bymaster

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