© 2015 The Texas Lawbook.
By Mark Curriden
(May 26) – The Supreme Court of the United States, in a precedent-setting decision, ruled Tuesday that federal bankruptcy judges are able to decide legal issues outside of their normal authority if the parties in the case consent.
The decision by the nation’s highest court is a major victory for Plano-based Wellness International Network, a maker of nutritional products, which has been involved in an expensive decade-long legal battle with one of its former contract distributors.
Lawyers for Richard Sharif argued that bankruptcy judges do not have the constitutional authority to rule on factual or legal matters that are usually decided by the U.S. District courts. To do so, they said, violated the constitutional separation of powers because bankruptcy judges are not Article III jurists.
Michael Lang, a partner at Gruber Hurst Elrod Johansen Hail Shank in Dallas, said the Supreme Court rejected the argument because Sharif and his lawyers consented to the bankruptcy judge’s jurisdiction.
By a 6-3 vote, the Supreme Court agreed with Lang.
“Article III is not violated when parties knowingly and voluntarily consent to adjudication by a bankruptcy judge,” Justice Sonia Sotomayor wrote for the majority. “Adjudication 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.”
The litigation began in 2005 when Sharif, a Chicago resident, sued Wellness for breach of contract and fraud. He sought $1 million in damages.
Lang convinced U.S. District judge Jane Boyle to dismiss the case and eventually ordered Sharif to pay Gruber Hurst $650,000 in legal fees for filing a frivolous claim.
Sharif appealed to the U.S. Court of Appeals for the Fifth Circuit, which rejected his arguments in very colorful language.
“A review of the record on appeal demonstrates… a lengthy history of dilatoriness and hollow posturing interspersed with periods of non-performance or insubstantial performance and compliance by [Sharif and his lawyers], leaving the unmistakable impression that they have no purpose other than to prolong this contumacious litigation for purposes of harassment or delay, or both,” the Fifth Circuit wrote.
“The time is long overdue to terminate Appellants’ feckless litigation at the obvious cost of time and money to the Defendants,” the appellate judges said.
Sharif responded by filing for bankruptcy in Chicago in 2009 in hopes of seeking to protect himself and his assets from the $650,000 court judgment.
“We asked for information relating to $5 million in assets that he listed on a mortgage application,” Lang said. “After three separate meetings of promising to provide the information, he ultimately refused and claimed that those assets were part of a trust and he is the trustee. We asked for information showing the formation and funding of the trust, but he refused.”
Lang and his colleagues at Gruber Hurst filed an adversary proceeding seeking to have the bankruptcy dismissed because Sharif concealed the $5 million in assets and because he used the trust to perpetrate a fraud on the court.
The judge agreed and entered a default judgment against Sharif when he didn’t comply with discovery requirements. The judge ordered Sharif to pay an additional $90,000 in fees.
The legal question that Sharif appealed to the Supreme Court was whether the bankruptcy judge had the constitutional authority to issue a final judgment. The Supreme Court said yes.
“This decision is not only sensible, but also equitable, Lang said. “The debtor chose to seek jurisdiction in bankruptcy court as a procedural tactic to avoid paying a judgment incurred by his own litigation-based misconduct. The Court’s decision makes clear that he is not able to now avoid he ramifications of that choice after losing yet again.”
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