Wellness International Network, Ltd. v. Sharif
727 F.3d 751
| 7th Cir. | 2013Background
- WIN obtained a >$650,000 Texas judgment against Sharif and pursued post-judgment discovery; Sharif repeatedly evaded discovery and was held in contempt in Texas.
- Sharif filed Chapter 7 in N.D. Ill.; WIN filed an adversary complaint with five counts: four § 727 objections to discharge and a state-law alter-ego claim against the Soad Wattar Trust.
- Bankruptcy court ordered Sharif to comply with discovery by April 28, 2010 and warned that failure would result in default; Sharif produced incomplete, unsigned, and late materials and admitted many deficiencies at deposition.
- Bankruptcy court entered default judgment on all five counts as a discovery sanction and awarded attorney’s fees; Sharif appealed to the district court, which affirmed.
- On further appeal to the Seventh Circuit, the panel addressed (1) whether an Article III objection based on Stern v. Marshall is waivable and (2) whether the bankruptcy court had constitutional authority to enter final judgment on each claim; it also reviewed the sanction and fee awards.
Issues
| Issue | Plaintiff's Argument (Sharif) | Defendant's Argument (WIN) | Held |
|---|---|---|---|
| Whether a Stern-based Article III objection to a bankruptcy judge’s entry of final judgment is waivable | Objection is jurisdictional/nonwaivable and may be raised at any time | Objection is waivable by litigation conduct and failure to raise earlier | Not waivable for core proceedings implicating Article III structural interests; objection may be raised despite late presentation |
| Whether the bankruptcy court had constitutional authority under Article III to enter final judgment on the § 727 discharge objections (Counts I–IV) | Bankruptcy lacked authority to enter final judgment on any state-law–related aspects | Bankruptcy had authority to enter final judgment on statutory discharge objections | Court held bankruptcy judge had constitutional authority to enter final judgment on § 727 discharge objections (Counts I–IV) |
| Whether the bankruptcy court had constitutional authority to enter final judgment on the alter-ego claim (Count V) | Stern/Ortiz require Article III adjudication for state-law claims like alter-ego | Alter-ego related to discharge issues and could be resolved in bankruptcy forum | Court held bankruptcy judge lacked Article III authority to enter final judgment on the alter-ego (state-law) claim; that judgment vacated and remanded for district-court disposition |
| Whether default judgment and fee awards as discovery sanctions were appropriate | Sanctions violated due process / responses were in substantial compliance | Sanctions were justified by prolonged, willful noncompliance; fees appropriate | Default judgment and sanctions were not an abuse of discretion; fee awards upheld but remanded for recalculation to account for one vacated count |
Key Cases Cited
- Stern v. Marshall, 131 S. Ct. 2594 (2011) (bankruptcy court lacks Article III authority to enter final judgment on a state-law counterclaim not resolved in ruling on a proof of claim)
- In re Ortiz, 665 F.3d 906 (7th Cir. 2011) (applied Stern to hold bankruptcy court lacked constitutional authority over certain state-law claims)
- Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (Article III limits on non–Article III adjudication; plurality discussing public-rights/adjunct concerns)
- Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (fraudulent-transfer/state-law claims require Article III protections; Seventh Amendment implications)
- Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833 (1986) (consent and waiver can affect Article III analysis for private rights, but structural limits may preclude dispositive waiver)