(Reuters) - The U.S. Supreme Court ruled on Tuesday that bankruptcy judges can resolve disputes that otherwise would have to be decided in a federal court, in an opinion tied to the legal legacy of the late Anna Nicole Smith.
The 6-3 ruling, which stemmed from the Chapter 7 bankruptcy of Richard Sharif of Chicago, recognized the authority of U.S. bankruptcy judges to decide nonbankruptcy disputes, such as breaches of contract, with the consent of the parties.
Bankruptcy judges, like magistrate judges, are appointed by federal judges for set terms. They are not judges under Article III of the U.S. Constitution, which provides lifetime tenure and salary protections to ensure independence.
In a 2011 case known as Stern v Marshall, the Supreme Court held that bankruptcy judges lack the authority to hear some state law matters, sparking confusion in the lower courts. The ruling stemmed from a battle between Howard Stern, a representative of Smith, and Elaine Marshall over the estate of Smith’s late husband, billionaire J. Howard Marshall.
Smith, a former Playboy Playmate and actress, died of a drug overdose in 2007.
“We hold that Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge,” Justice Sonia Sotomayor wrote for the high court.
She noted that if bankruptcy judges were barred from deciding matters outside the bankruptcy code, the federal judiciary would grind to a halt.
“The decision is really a victory for the system,” said Craig Goldblatt, a bankruptcy attorney with Wilmer Cutler Pickering Hale and Dorr in Washington.
The case began with Wellness International Network winning a court judgment for $655,596 against its former business partner Sharif, which prompted Sharif to file for bankruptcy in 2009.
Wellness won a declaration from U.S. Bankruptcy Judge Jacqueline Cox in Chicago that a trust with potentially $5 million in assets actually belonged to Sharif, bringing that money into his bankruptcy estate.
Sharif appealed and convinced the U.S. Court of Appeals in Chicago that ownership of the trust assets was a state law matter and outside the jurisdiction of the bankruptcy court.
On Tuesday, Chief Justice John Roberts wrote in a 20-page dissent that parties cannot waive the right to an Article III judge and warned that the ruling threatened an independent judiciary.
“The majority’s acquiescence in the erosion of our constitutional power sets a precedent that I fear we will regret,” he wrote.
Reporting by Tom Hals in Wilmington, Del.; Editing by Matthew Lewis