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Bankruptcy attorneys wait for ruling from Supreme Court on Wellness International case.

Byline: Ed Silverstein

A lesser-known Chapter 7 bankruptcy case now before the U.S. Supreme Court could have wider implications for business bankruptcies and Chapter 11 cases.

Wellness International Network, Limited v. Sharif was recently the subject of oral arguments and bankruptcy lawyers are awaiting a decision from the nation's highest court.


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On a simple level, the case relates to Richard Sharif declaring bankruptcy. He owed about $500,000 to Wellness International. In an effort to get the money, the company sued Sharif in bankruptcy court. Their argument was that money in a trust should be available to pay his debt.

The case went to 7th Circuit Court of Appeals, which said the bankruptcy court did not have authority from the U.S. Constitution to say if the assets in the trust fund were part of the bankruptcy estate. State legal issues are involved, too, especially state laws on trusts and estates.

The debtor had argued that the assets in the family trust were not his, but were held in trust. On the other hand, the lawsuit brought by Wellness International claimed that the trust is the "alter-ego" of the debtor and "should be subject to the claims of creditors," Joseph Sgroi, a bankruptcy attorney at Honigman, where he leads of the Bankruptcy, Reorganization and Creditor Rights practice, said in an interview with InsideCounsel.

One key issue in the case, he explained, is whether "Bankruptcy judges have the authority to enter final orders when the claim at issue doesn't stem from the bankruptcy case."

Depending on how the Supreme Court rules, Sgroi predicts it could impact all bankruptcy cases. "It calls into question fundamental things bankruptcy judges do," he added. "This case has a public policy impact."

Bankruptcy cases are already complicated and often expensive, and a ruling in this case could possibly add to the cost and complexity, Sgroi said.

"It would not only impact bankruptcy cases in general, (but) potentially could impact the magistrate system," Sgroi predicted. "This case may not be getting the attention it deserves."

If the Supreme Court upholds the appeals court's decision, it may question "the bankruptcy courts' authority in the context of many types of disputes that the bankruptcy courts generally rule on in the ordinary course of a Chapter 11 case," Sgroi said in a statement. "For instance, if the Court upholds the 7th Circuit's decision, a bankruptcy judge may question his or her constitutional authority to enter a final order on a host of routine bankruptcy matters, such as whether an executory contract or unexpired lease can be assumed by the debtor and assigned to a third party or whether a transaction constitutes a fraudulent transfer."

In addition, Charles Tabb, an attorney at Foley & Lardner and who has taught bankruptcy law at the University of Illinois, said in a statement that "the determination of whether property held by a debtor is in fact Cyproperty of the bankruptcy estate' under section 541 of the Bankruptcy Code goes to the very core of the bankruptcy process, and accordingly under the Supreme Court's jurisprudence (indeed, even under an expansive reading of Stern), should be considered to fall within the constitutional power of the non-Article III bankruptcy judge to enter a final order."

"The resolution of the section 541 issue requires looking at state law does not and should not change that conclusion -- and indeed a contrary argument would prove too much -- because the absolute core essence of a bankruptcy process, viz., the gathering of the debtor's property and the assessment of claims, always depends on underlying state law as to the questions of Cywhat is property' and Cywhat is a claim,'" he added.
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Publication:Inside Counsel Breaking News
Date:Jan 26, 2015
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