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Doesn't Anyone Want to Talk About Jurisdiction This Week?

posted by Melissa Jacoby

PurpleElephantWith the Second Circuit's ruling in the Argentina/NML case and the now-urgent need to get secured transactions and bankruptcy into the 1L curriculum, Credit Slips has yet to give attention to Wellness International Network, Limited,  issued on Aug 21 by the Seventh Circuit. Luckily, on this issue, I don't mind getting the ball rolling, and then stepping out of the way. 

Cutting to the chase: the bankruptcy court entered a default judgment in a 727 action after years and years of fighting between the parties. One of the counts was an alter ego claim. The Seventh Circuit finds that the bankruptcy court lacked constitutional authority to enter final judgment on an alter ego claim. Given that the bankruptcy court entered a default judgment, the Seventh Circuit had to consider whether Article III objections are waivable. I will quote its resolution to this question: "under current law a litigant may not waive an Article III, sec. 1, objection to a bankruptcy court's entry of a final judgment in a core proceeding." More Supreme Court guidance on some waiver questions is in our future.

As for the rest of the opinion - there's a lot more, and it deliberates for quite a while on how to move forward from the holding  -  reading it for yourself is quite honestly the best advice I can offer now. Rolling, it is.  

Purple elephant photo courtesy of Shutterstock


I love a trick question?

WIN v Sharif was not decided on jurisdictional terms.

The court said:

So we proceed on the assumption that the alter-ego claim was a core proceeding over which the bankruptcy court had authority under § 157(b)(1) to enter final judgment, but the existence of statutory authority will not justify the bankruptcy court’s actions if the court lacked
constitutional authority, cf. Marbury v. Madison, 5 U.S. (1 Cranch) 137, 174–79 (1803).

S-o-o-o, MY QUESTION IS how long the principle of waiver operates and does it defeat res judicata.

For example, let’s say a bankruptcy court issues a sale order enjoining successor liability actions but no body challenged the injunction on appeal, and then a party finally filled a successor action in state court against the buyer, who just happened to fail their good faith finding at the sale, such that statutory mootness was not an issue. On removal the bankruptcy court dismisses pursuant to res judicata.

On appeal it would seem the injunction was not a final constitutional order supporting res judicata, which means the creditors did not need to oppose the injunction at the sale because their opposition could not be waived.

Robert White: You win the purple elephant. Yes, of course, as noted above, the issue is constitutional authority of the bankruptcy court. And then, the core/non-core distinction that I could not bring myself to talk about.

I am going to let more adventurous colleagues and readers try to tackle your hypothetical. If this court didn't like waiver, then that's my excuse to jump out of the way again . . .

Let's see if I can up the odds a little.

If the prohibition against the parties waiving the bankruptcy court's authority to decide an unconstitutionally core issues works to defeat res judicata (because such a decision is not a final ruling on the merits by a court of competent jurisdiction)then we are one Supreme Court decision away (in Executive Benefits) from establishing that such unconstitutionally core decisions may be collaterally challenged.

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