Commentary: Wellness after Stern

Daniel J. Bussel is a Professor of Law at UCLA School of Law.

Stern v. Marshall was more about Article III of the Constitution, or one particular formalistic approach to Article III frozen in the nineteenth and early twentieth centuries, than about bankruptcy law and procedure. Indeed, the Stern majority expressly took the position that Article III must prevail notwithstanding any practical concerns of the bankruptcy system, nay though the heavens themselves may fall. But in Tuesday’s decision in Wellness International Network v. Sharif, we see that when the heavens do start to crumble even the Supreme Court pays attention. It is unsurprising to me that on calm reflection (that is, by the third time the issue had presented itself in four years) a majority of the Supreme Court sees no point in bringing down a bankruptcy system more than thirty years in place (and perhaps the magistrate system too) to protect the independence of the federal judiciary when the independence of the federal judiciary is in no practical sense under threat from the bankruptcy system, except perhaps by the potential havoc Stern itself might have played with district court dockets.

Professor Roger S. Foster had it just about right in 1935, when he analogized the historic relationship of the Supreme Court and the bankruptcy community to that of the Greek gods and mere mortals:

The decisions of the Supreme Court may fall like thunderbolts from Almighty Jove. There is a blinding flash, perhaps some spectacular damage to a restricted area. Temporarily there is terror and repentance. But soon calm is restored and with it confidence that, granted a proper observance of prescribed rituals and occasional adaptation of their form to the whims of an angry god, there is likely to be very little interference with the actual plans of those who walk the earth below.

And so perhaps with Stern v. Marshall.   My read of the Wellness majority, especially in tandem with last year’s decision in Executive Benefits Insurance Agency v. Arkison, is that the Supreme Court majority now very much wants the bankruptcy system to move past Stern and keep adjudicating cases more or less as it has done since Section 157 of the Judicial Code was enacted in 1984 in the wake of an earlier thunderbolt, the Court’s decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co.   Even in dissent, Chief Justice John Roberts and Justice Clarence Thomas find ways to ensure that the bankruptcy court’s ruling in Wellness could stand as a final judgment and no mere report and recommendation, in Roberts’s case by adopting an expansive view of property of the estate, and in Thomas’s by suggesting the existence of a brand-new fourth “bankruptcy” exception to the traditional trilogy of Article III exceptions of courts martial, territorial courts, and matters of public right. All the Wellness opinions provide fodder for limiting the scope of Stern to, well pretty much to, Section 157. Of course issues remain, and there will be more Stern litigation. In bankruptcy cases, we will continue to see more reports and recommendations and withdrawal motions than we were previously used to seeing. Procedures for handling them still need to be both elaborated and refined. There will be a diversion of some workload from Article I bankruptcy appellate panels (and to a much lesser degree, bankruptcy courts) to Article III district courts. But the workload shifts will not be all that great, those bankruptcy court recommendations will be reviewed pretty much on the same basis as an appeal would be (albeit only after formally reciting the magic Article III words “de novo review”), and most of those withdrawal motions will continue to be denied. Arkison ensures that a formal error in mischaracterizing a Stern claim as having been adjudicated by summary judgment in the bankruptcy court won’t undermine finality at least so long as an “appeal” is taken. Wellness, by permitting an inference of consent from conduct to cure a Stern defect, limits the parties’ ability to strategically manipulate the Stern rule. Wellness and Arkison both eschew the formalism of Stern and adopt functionalist perspectives to Article III to uphold pre-Stern practices. The Supreme Court majority does not seem to have any stomach for the enterprise of creatively re-imagining and then enforcing the notoriously opaque summary v. plenary distinctions under the Bankruptcy Act of 1898, or eighteenth-century English bankruptcy commissioner-style limitations on modern bankruptcy court authority, as has been warned or feared, or in some cases, gleefully anticipated.

Perhaps ironically in light of his passionate Wellness dissent, the Wellness majority has proved Chief Justice Roberts right after all when he pooh-poohed pragmatic concerns regarding the Court’s ruling in Stern with his prediction that Stern would not change “all that much.”