Awaiting Supreme Court’s Bankruptcy Protection Decision

Bankruptcy Protection

The United States Supreme Court is in session and for the second year in a row, it has an important bankruptcy case on its docket, Wellness International Network Ltd. v. Sharif.  As mentioned in an earlier post on Adam Law Group last year, the Supreme Court in Executive Benefits Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014) passed on providing clarification regarding the power of bankruptcy courts to decide issues “stemming from” bankruptcy protection proceedings.
concept of bankruptcy
At its core, the power of bankruptcy courts is a constitutional issue.  As Article III court, its jurisdiction is more limited than Article I federal courts, but exactly how limited is a question that is unclear and that bankruptcy law professionals have been hoping the Supreme Court would help clarify for a number of years now.  (see our July 11 blog post for more on the Article I/Article III distinction)
Like many cases that eventually find themselves before the Supreme Court, this one has been going on in one form or another for more than ten years.  It began when Richard Sharif  (“Sharif”) sued Wellness International Network (“WIN”) accusing WIN, a health and wellness product company, of running a pyramid scheme.  The judge found that it was Sharif that was behaving badly and sanctioned him for discovery abuse during the case.  The end result was a judgment against Sharif for over half a million dollars.
Sharif seemed to pay little regard to this judgment and ignored WIN’s post-judgment discovery requests.  This disregard landed him in jail for contempt.  Upon release, Sharif filed for Chapter 7 Bankruptcy Protection, the liquidation form of bankruptcy most frequently filed by individuals.  Not deterred, WIN requested that the bankruptcy court declare that property owned by Sharif in trust (which he had not listed) was part of the bankruptcy estate.
That’s where the issue arises: does the bankruptcy court make this determination?  The answer might seem like an easy “yes,” as certainly the bankruptcy court should have the authority to decide what assets are part of the bankruptcy estate.  This is the position WIN takes.
But, it isn’t quite that simple.  In a 2011, the Supreme Court in Stern v. Marshall, 564 US 2 (2011), found that as an Article III court, the bankruptcy court lacked authority to issue a decision on a state law counterclaim.  You may not recognize the name, but you may have heard about the case – which involved the bankruptcy proceedings of former Playboy playmate, Anna Nicole Smith.  Sharif claims that WIN’s request for a declaratory judgment regarding the whether property owned in he trust should be considered part of the bankruptcy estate requires a decision regarding state trust law and is thus, not within the bankruptcy courts powers.  Oral arguments were held last week and a decision is expected by the end of June.
The dispute between Sharif and WIN is a particularly messy dispute.  The reality is that some bankruptcies, whether under Chapter 7, 11, or 13, are straightforward while others are legally and factually complex.  The experienced Jacksonville, Florida bankruptcy protection attorneys at Adam Law Group can help you with both types and anticipate issues that debtors representing themselves may be completely unaware of.