Can bankruptcy judges determine lawsuits that are related to the bankruptcy proceeding?

The Supreme Court, in a 6-3 decision, recently held that parties in bankruptcy proceedings can consent to allowing a bankruptcy judge to decide their related cases. The ruling arises out of a case where a nutritional supplement distributor sued for breach of contract but failed to comply with discovery demands and owed hundreds of thousands of dollars in legal fees. When the distributor filed for bankruptcy, a creditor wanted the bankruptcy court to declare that a trust asset belonged to the distributor.

The Seventh Circuit Court of Appeals found that the parties could not consent to such a determination. An earlier Supreme Court decision had held that side matters to a bankruptcy proceeding had to be decided by federal judges operating under Article III of the U.S. Constitution. This removed some of the power Congress had given bankruptcy judges to decide disputes that were related to a bankruptcy proceeding.

Now, the Supreme Court reversed the Seventh Circuit and held that parties can waive their right to present a related case to a federal judge and consent to a bankruptcy judge deciding the matter. While bankruptcy judges do not have the same protections as Article III judges (such as life tenure and salary guarantees), they are subject to oversight from the Article III judges. Justice Sotomayor noted in her majority opinion that other areas of law allow parties to consent to an administrative judge determining the ruling subject to oversight by federal judges.

The majority found it beneficial for bankruptcy judges to have this power as it can alleviate the current caseload before federal district courts; however, the dissenting judges believe it jeopardizes the checks and balances system in the government by allowing Congress to take away judicial powers contrary to what Article III of the constitution allows.

If you are considering bankruptcy, the attorneys at Miami Valley Bankruptcy can provide the knowledgeable advice you need. Brian Lusardi is an experienced bankruptcy attorney serving clients in Xenia, Jamestown and Beavercreek, Ohio and the Miami Valley area. Call him today at (937)262-4789 for a free consultation.