Bankruptcy courts have a seemingly obvious purpose—to settle bankruptcy claims. However, bankruptcy courts may also hear and decide matters that would traditionally be argued in a federal district court if those matters are related to the bankruptcy proceeding and the parties consent to arguing the issues in the bankruptcy court. To clarify why this matters, we first must understand core versus non-core bankruptcy matters.
Core proceedings are those bankruptcy matters that Congress gave bankruptcy courts the authority to hear and decide. On core matters, a bankruptcy court may enter final orders and judgments subject to review by district courts. Non-core proceedings, however, are matters over which a bankruptcy court has the limited authority to submit proposed findings of fact and conclusions of law to the district court for review. Non-core matters are issues that litigants have a constitutional right to argue in a traditional district court. Parties to a bankruptcy proceeding may waive this right, allowing the bankruptcy court to decide non-core matters in bankruptcy court.
The Supreme Court’s recent decision in Wellness International Network, Ltd. v. Sharif clarifies what constitutes waiver in these circumstances. In the case, a debtor filed for bankruptcy but failed to provide requested documents relating to a trust he managed. Creditors argued the trust was really just the debtor’s “alter ego” and should be included in the bankruptcy estate, but the debtor claimed he only managed the trust for the benefit of another. The bankruptcy court decided the trust was part of the debtor’s personal assets to be included in the bankruptcy estate. The debtor appealed that decision, arguing the bankruptcy court did not have authority to decide the matter of whether the trust was his personal property; instead, the debtor argued, the decision should be considered non-core and therefore merely a report and recommendation.
The Supreme Court decided that parties to litigation in bankruptcy courts may consent to having non-core matters heard and decided in bankruptcy court as long as the district courts retain supervisory authority over the process. This is the case in our judicial system for many reasons; for example, district courts refer matters to bankruptcy courts and may recall them on their own or by request of a party to the litigation, and the narrow authority to decide some non-core matters incident to the bankruptcy proceeding does not threaten the authority of the district courts in general.
One important point in this case that parties to a bankruptcy proceeding should note is that express consent is not required to allow non-core matters to be decided in bankruptcy court. Actions may be used to imply a party’s consent as long as the party was aware of its right to refuse consent and voluntarily proceeded with the matter in bankruptcy court anyway. Implied consent is good enough to bind a party to a bankruptcy court’s decision on a matter that party had the right to argue in a district court. Parties must be careful not to inadvertently give up rights simply through continued participation in these non-core proceedings. Understanding the nuances of bankruptcy law can be critical to success in a litigation proceeding. The lawyers of the Creditor’s Rights and Bankruptcy Law Practice Group can provide the sound counsel necessary to succeed despite the nuances involved.