(CN) - The Supreme Court agreed Tuesday to decide whether bankruptcy courts have the constitutional authority to decide the fate of property in a debtor's possession.
At issue is a five-count adversarial action Wellness International Network brought against its former distributor Richard Sharif after Sharif sought Chapter 7 protection in Illinois bankruptcy court.
Faced with Wellness International's attempts to collect a six-figure judgment that it obtained against Sharif and others in Texas, the bankruptcy court found that Sharif had failed to comply with a majority of the discovery requests related to the case.
The court granted Wellness International default judgment and allowed his estate to include a revocable living trust that Sharif's sister had previously held. The court deemed that trust was Sharif's alter ego.
As Sharif appealed, the Supreme Court was considering bankruptcy issues involved in the estate of Vicki Lynn Marshall, the late Playboy model more popularly known as Anna Nicole Smith. The court's 2011 decision in Stern v. Marshall
said that Article III of the U.S. Constitution prohibits bankruptcy courts from finally adjudicating certain bankruptcy-related claims.
Sharif claimed that Stern
rendered the bankruptcy court's judgment unconstitutional, but the 7th Circuit largely upheld the default judgment.
In a silver lining for Sharif, however, the court found
that the bankruptcy court lacked constitutional authority to enter a decision on the alter-ego claim.
Wellness International petitioned
the Supreme Court for relief, claiming that the 7th Circuit misinterpreted Stern v. Marshall
decision and is responsible for "a crippling reduction of the bankruptcy court's authority."
In taking up the case Tuesday, the U.S. Supreme Court agreed to answer the narrow question of the bankruptcy court's constitutional jurisdiction. It declined to consider whether a bankruptcy court can submit its proposed findings of fact for a de novo by a district court.