In the event a bankruptcy matter involves an equitable or legal claim, can the bankruptcy court handle this matter or must the litigant resolve the issue separately? 

In a consumer or business bankruptcy matter, there often exists collateral matters that arise as parties settle with creditors or discharge debts. In 2011, the U.S. Supreme Court considered a bankruptcy action wherein the parties were in dispute over a common law matter, and the Court held that the bankruptcy judge had no actual jurisdiction to make a decision on the issue. While the U.S. Constitution clearly articulates this jurisdiction to the “Article III” Courts (i.e., federal district courts), the requirement to re-litigate collateral claims outside bankruptcy court was proving to be not only inconvenient, but wasteful and time consuming. 

In 2015, the Supreme Court revisited the issue, and arrived at an alternative conclusion in a 6-3 opinion penned by Justice Sonia Sotomayor. The case, described more fully below, stands for the notion that a collateral common law or equitable matter directly related to a bankruptcy filing can be decided by a bankruptcy judge, and U.S. bankruptcy courts should have jurisdiction to hear these issues – provided the issues are incident to the overriding bankruptcy claims. 

Court’s Decision in Wellness International Network, et. al. v. Richard Sharif

The Wellness case involved an individual consumer debtor seeking to have a debt owed to Wellness International discharged. Pursuant to the filing, Wellness International sought a declaratory judgment that Mr. Sharif maintained several trust accounts that should be accessible to creditors and available to help pay off or reduce debts prior to discharge. In the interim, the Supreme Court rendered its decision in the aforementioned 2011 case, and declared that only direct bankruptcy issues are to be decided by bankruptcy courts – and that a declaratory judgment does not fit into that category. 

In a contrasting decision, the Court reconsidered its position and held that parties may mutually agree to litigate non-bankruptcy matters in bankruptcy courts, so long as all parties consent to the decision voluntarily. More specifically, the Court premised its holding on the notion that “[a]djudication based on litigant consent has been a consistent feature of the federal court system since its inception.  Reaffirming that unremarkable fact, we are confident, poses no great threat to anyone’s birthrights, constitutional or otherwise.”

If you are considering consumer bankruptcy and would like to discuss your rights and obligations under current laws, please do not hesitate to contact our Miami Valley bankruptcy attorneys at today by calling (937)262-4789.