Judges: Tinder
Filed: Aug. 21, 2013
Latest Update: Mar. 02, 2020
Summary: In the United States Court of Appeals For the Seventh Circuit No. 12-1349 WELLNESS INTERNATIONAL NETWORK, LIMITED, RALPH OATS AND CATHY OATS, Plaintiffs-Appellees, v. RICHARD SHARIF, Defendant-Appellant. Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:10-cv-05303 — Harry D. Leinenweber, Judge. ARGUED SEPTEMBER 18, 2012 — DECIDED AUGUST 21, 2013 Before FLAUM, SYKES, and TINDER, Circuit Judges. TINDER, Circuit Judge. This appeal is the mo
Summary: In the United States Court of Appeals For the Seventh Circuit No. 12-1349 WELLNESS INTERNATIONAL NETWORK, LIMITED, RALPH OATS AND CATHY OATS, Plaintiffs-Appellees, v. RICHARD SHARIF, Defendant-Appellant. Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:10-cv-05303 — Harry D. Leinenweber, Judge. ARGUED SEPTEMBER 18, 2012 — DECIDED AUGUST 21, 2013 Before FLAUM, SYKES, and TINDER, Circuit Judges. TINDER, Circuit Judge. This appeal is the mos..
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In the
United States Court of Appeals
For the Seventh Circuit
No. 12‐1349
WELLNESS INTERNATIONAL NETWORK,
LIMITED, RALPH OATS AND CATHY
OATS,
Plaintiffs‐Appellees,
v.
RICHARD SHARIF,
Defendant‐Appellant.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:10‐cv‐05303 — Harry D. Leinenweber, Judge.
ARGUED SEPTEMBER 18, 2012 — DECIDED AUGUST 21, 2013
Before FLAUM, SYKES, and TINDER, Circuit Judges.
TINDER, Circuit Judge. This appeal is the most recent chapter
in a decade‐long saga spanning two circuits involving the
debtor, Richard Sharif, and his judgment creditors, Wellness
International Network, Ltd., Ralph Oats, and Cathy Oats
2 No. 12‐1349
(collectively, “WIN”). After being slapped with a judgment in
excess of $650,000 in the Northern District of Texas as a
sanction for his failure to engage in discovery, Sharif filed for
Chapter 7 bankruptcy in the Northern District of Illinois. WIN
filed a five‐count adversary complaint in the bankruptcy court.
Counts I through IV sought to prevent discharge of Sharif’s
debts under 11 U.S.C. § 727, and Count V sought a declaratory
judgment that a trust of which Sharif was trustee was in fact
Sharif’s alter ego. Sharif continued his evasive and dilatory
tactics, failing to respond to WIN’s and the bankruptcy
trustee’s discovery requests. The bankruptcy court ordered
Sharif to comply with the discovery requests and warned him
that failure to do so would result in a default judgment. Sharif
tendered some discovery but his responses fell far short of full
compliance. After a hearing, the bankruptcy judge issued an
opinion and order entering default judgment in WIN’s favor
and subsequently awarded attorney’s fees to WIN. Sharif
appealed to the district court. See 28 U.S.C. § 158(a)(1).
After the bankruptcy judge’s entry of judgment but before
briefing on the appeal in the district court, the Supreme Court
decided Stern v. Marshall, 131 S. Ct. 2594 (2011), in which it
held that a bankruptcy court lacked constitutional authority to
enter final judgment on a debtor’s state‐law counterclaim
against a creditor, even though Congress had granted the
bankruptcy court statutory authority to do so. A few months
after Stern was decided, Sharif filed his opening brief in the
district court, but he did not challenge the bankruptcy judge’s
authority to enter final judgment on the adversary complaint.
In December 2011, Sharif’s sister filed a motion in the district
court to withdraw the reference on the basis of Stern. Later that
No. 12‐1349 3
month, our court decided Ortiz v. Aurora Health Care, Inc. (In re
Ortiz), 665 F.3d 906 (7th Cir. 2011), in which we dismissed a
direct appeal from a bankruptcy court on the ground that there
was no final judgment because the bankruptcy judge had
lacked constitutional authority to enter one under Stern.
Shortly thereafter, Sharif filed a motion for supplemental
briefing in the district court so that he could advance a Stern
argument. The district judge denied both motions as untimely,
holding that a Stern objection to a bankruptcy judge’s authority
to enter final judgment is waivable and that Sharif’s failure to
raise it earlier constituted waiver, and affirmed the bankruptcy
court’s entry of default judgment. Sharif’s sister did not appeal
the denial of her motion to withdraw the reference, but Sharif
appealed the balance of the district court’s decision to this
court.
We hold that a constitutional objection based on Stern is not
waivable because it implicates separation‐of‐powers principles.
We also hold that the bankruptcy judge lacked constitutional
authority to enter a final judgment on the alter‐ego claim. In
contrast, we hold that the bankruptcy judge had constitutional
authority to enter final judgment on the first four counts of the
adversary complaint, each of which were objections to the
discharge of Sharif’s debts. Finally, we hold that the entry of
default judgment and awarding of fees were proper sanctions
under the circumstances, though we remand for a recalculation
of fees.
4 No. 12‐1349
I. Background
A. Texas Litigation
The parties’ relationship began when Sharif entered into
distributorship contracts with WIN for the sale of health and
wellness products. In January 2003, Sharif and others sued
WIN in the Northern District of Illinois claiming that WIN was
running a pyramid scheme. Sharif v. Wellness Int’l Network, Ltd.,
376 F.3d 720, 722 (7th Cir. 2004). In 2004, our court reversed the
district court’s denial of WIN’s motion to compel arbitration on
some of the claims. Id. at 726–27. On remand, the district court
dismissed without prejudice the claims that were not subject to
arbitration pursuant to forum‐selection clauses in the contracts
requiring suit to be filed in the Northern District of Texas, and
this court affirmed. Muzumdar v. Wellness Int’l Network, Ltd.,
438 F.3d 759 (7th Cir. 2006).
Sharif and his co‐plaintiffs refiled their suit in the Northern
District of Texas. See In re Sharif, 447 B.R. 853, 854 (Bankr. N.D.
Ill. 2011). They ignored WIN’s discovery requests, resulting in
the material facts being deemed admitted against them. The
district court subsequently granted summary judgment for
WIN, and the Fifth Circuit affirmed, observing as follows:
A review of the record on appeal demonstrates
that Appellants’ untimely performance in this
court mirrors a lengthy history in the district
court of dilatoriness and hollow posturing inter‐
spersed with periods of non‐performance or
insubstantial performance and compliance by
Appellants and their counsel, leaving the unmis‐
No. 12‐1349 5
takable impression that they have no purpose
other than to prolong this contumacious litiga‐
tion for purposes of harassment or delay, or
both. The time is long overdue to terminate
Appellants’ feckless litigation at the obvious cost
of time and money to the Defendants by affirm‐
ing all rulings of the district court but remanding
the case to that court for the reinstatement of its
consideration of Appellees’ motion for attorney’s
fees. In so doing, we caution Appellants that any
further efforts to prolong or continue proceed‐
ings in this court, including the filing of petitions
for rehearing, will potentially expose them to the
full panoply of penalties, sanctions, damages,
and double costs pursuant to FRAP 38 at our
disposal.
Sharif v. Wellness Int’l Network, Ltd., 273 F. App’x 316, 317 (5th
Cir.), cert. denied, 555 U.S. 1085 (2008). On remand, the district
court awarded $655,596.13 in attorney’s fees to WIN as a
sanction against Sharif and his co‐plaintiffs. No.
3:05–CV–01367–B, 2008 WL 2885186 (N.D. Tex. July 22, 2008).
Thereafter, WIN served Sharif with post‐judgment discov‐
ery requests to discover Sharif’s assets, but Sharif ignored
them. In November 2008, the Texas district court granted
WIN’s motion to compel discovery and ordered Sharif to
respond to WIN’s outstanding discovery requests; Sharif
ignored the court’s order and failed to appear for his deposi‐
tion. WIN followed‐up with a motion for civil contempt. In
February 2009, Sharif was arrested and held in civil contempt
6 No. 12‐1349
for discovery violations, but the Texas district court released
him on his own recognizance after he promised to respond to
the post‐judgment discovery requests and to reimburse WIN
for fees and other costs associated with the motion to compel
and the motion for civil contempt. See 447 B.R. at 855; Wellness
Int’l Network v. J.P. Morgan Chase Bank, N.A., 407 B.R. 316, 318
(Bankr. N.D. Ill. 2009). Sharif again ignored the district court’s
orders.
B. Sharif Files for Bankruptcy
Two weeks later, on February 24, 2009, Sharif filed for
bankruptcy under Chapter 7 in the Northern District of Illinois.
The bankruptcy petition listed WIN as a creditor, along with
various members of Sharif’s family to whom he allegedly owed
$271,000 in undocumented loans. WIN was the only creditor to
file a proof of claim.
At some point, WIN obtained a June 14, 2002, loan applica‐
tion that Sharif had submitted to the now‐defunct Washington
Mutual on which he claimed to have owned the following
assets: (1) three businesses worth $2,400,000; (2) three parcels
of real property worth $1,400,000; (3) a retirement account
worth $1,400,000; and (4) three bank accounts containing
$180,000 in cash (“Loan Assets”). Thus, in 2002 Sharif had
represented to a financial institution that he had assets worth
$5,380,000, and Washington Mutual had approved a loan
based on those representations. WIN had requested documents
related to these assets during the Texas litigation, but Sharif
had never tendered them.
On March 25, 2009, the bankruptcy trustee, Horace Fox, Jr.,
held the initial creditors’ meeting, see 11 U.S.C. § 341, and at
No. 12‐1349 7
this meeting both WIN and Fox requested that Sharif provide
documents related to the Loan Assets; Fox continued the
meeting until April so that Sharif could gather the documents.
On April 21, the § 341 creditors’ meeting resumed but Sharif
failed to provide the requested documentation. Instead, Sharif
informed WIN and Fox that he had lied on the loan application
and that he never had owned the Loan Assets; rather, those
assets were owned by the Soad Wattar Trust, of which Sharif
was trustee. WIN then requested that Sharif produce docu‐
mentation evidencing the formation and funding of the Soad
Wattar Trust. Fox again continued the § 341 meeting so that
Sharif could gather the requested documents, but Sharif never
produced any of them.
C. Adversary Proceeding
WIN subsequently initiated an adversary proceeding in the
bankruptcy court. The amended complaint asserted five
counts: Count I alleged that Sharif had “continuously con‐
cealed property that he owns by holding such property in the
name of the Soad Wattar Living Trust with improper intent to
deceive” in violation of 11 U.S.C. § 727(a)(2)(A). Count II
alleged that Sharif had “concealed, destroyed, mutilated,
falsified, or failed to keep or preserve any recorded informa‐
tion” in violation of § 727(a)(3). Count III alleged that Sharif
had knowingly and fraudulently made a false oath or account
with regard to his bankruptcy case in violation of
§ 727(a)(4)(A). Count IV alleged that Sharif had failed to
explain the disappearance of the more than $5 million of Loan
Assets in violation of § 727(a)(5). And Count V sought a
declaratory judgment pursuant to 28 U.S.C. §§ 2201 and 2202
that the Soad Wattar Trust is Sharif’s alter ego and that its
8 No. 12‐1349
assets should therefore be treated as part of Sharif’s bank‐
ruptcy estate.
On February 10, 2010, WIN served requests for production
and interrogatories on Sharif in both his individual capacity
and in his capacity as trustee for the Soad Wattar Trust; all
responses were due on March 15. On March 12, Sharif re‐
quested an indefinite extension of time to respond to all
discovery requests; his counsel indicated that Sharif had gone
to Syria to tend to his terminally ill mother. On March 24,
Sharif failed to appear for his deposition and through counsel
filed a motion for an extension of time, which the bankruptcy
court subsequently denied. WIN’s counsel and Sharif’s counsel
conferred on April 13 to resolve the unfulfilled discovery
requests. WIN requested that Sharif provide complete re‐
sponses to the outstanding discovery requests by April 23 and
provide potential dates for his deposition. Sharif’s counsel did
not agree to these requests because he did not know if or when
Sharif would return to the United States.
On April 15, WIN filed a motion for sanctions and, in the
alternative, a motion to compel discovery. On April 21, the
bankruptcy court granted WIN’s motion to compel discovery,
ordering “[t]hat Richard Sharif, individually and as Trustee has
to April 28, 2010 to comply with all of [WIN’s] outstanding
discovery requests, including document production, interroga‐
tories, and [Rule] 2004 examination, and it is further ordered that
in the event Richard Sharif fails to comply by April 28, 2010, an
order of default will be entered against him in the proceeding, and
the [Motion for Sanctions] is continued for proof of compliance
to April 28, 2010.” (Emphasis added.) The bankruptcy court’s
order effectively gave Sharif a six‐week extension from the
No. 12‐1349 9
date his discovery responses were initially due. On April 27,
Sharif produced approximately 1,500 pages of documents; the
court rescheduled the hearing on the motion for May 24 to
allow WIN time to review whether the tendered discovery
fulfilled the discovery requests.
WIN finally deposed Sharif on May 13. Sharif admitted that
he had not provided any documentation concerning the
creation and funding of the Soad Wattar Trust. Nor had he
provided source data and documents used to complete his tax
returns or his signed tax returns. He also admitted that he had
not provided information about multiple bank accounts. On
May 20, more than three weeks after the court‐ordered
deadline, Sharif’s counsel produced additional documents. The
bankruptcy court held a hearing on May 24 and took the
matter under advisement. Almost a month later, on June 22,
Sharif filed a motion for summary judgment.
On July 6, the bankruptcy court issued its opinion and
order entering default judgment for WIN on all five counts of
the adversary complaint. The bankruptcy judge found that
Sharif had violated the discovery order as follows:
Sharif and his attorney had signed the interrogatory
responses as trustee of the Soad Wattar Trust but the
responses lacked a statement of verification as
required by Federal Rule of Civil Procedure 33(b)
(made applicable to bankruptcy proceedings by
Federal Rule of Bankruptcy Procedure 7033), see, e.g.,
Hindmon v. Nat’l Ben Franklin Life Ins. Corp., 677 F.2d
617, 619 (7th Cir. 1982).
10 No. 12‐1349
Sharif had not signed the interrogatory responses
directed toward him in his individual capacity; only
his attorney had signed them.
Sharif had ignored the bankruptcy court’s October
20, 2009, order requiring that he turn over docu‐
ments related to the Loan Assets to Fox.
Sharif had failed to turn over documents related to
the Loan Assets in response to WIN’s requests for
production.
Sharif had failed to produce any documents related
to any trust in which he had an interest, despite the
fact that in his sworn bankruptcy petition he had
claimed to control property of the Richard Sharif
Revocable Trust.
Sharif had failed to produce bank statements and
account records relating to himself and the Soad
Wattar Trust and instead provided only names and
addresses of three financial institutions with corre‐
sponding account numbers.
Sharif had failed to produce documents relating to
his personal bank accounts and instead stated that
the documents were available at JP Morgan Chase
Bank.
Sharif had failed to disclose AG Edwards accounts
in his bankruptcy petition, and he had failed to
produce documents concerning those accounts.
o He had failed to produce documents concern‐
ing approximately $752,050 in assets held by
No. 12‐1349 11
AG Edwards in joint tenancy for Sharif and
his mother, Soad Wattar, and he had failed to
produce any documents to support his depo‐
sition testimony that those assets had been
transferred to Wachovia.
o He had failed to produce documents related
to a variable annuity worth $39,248 held at
AG Edwards for his and his sister’s benefit as
joint tenants.
Sharif had failed to disclose information related to
numerous other accounts that he had admitted
having an interest in during his deposition.
Sharif had failed to disclose why he no longer held
a 10% ownership interest in Logan Square MRI &
Diagnostic Center, Inc., that he had once claimed.
Sharif had failed to disclose why he no longer held
100% ownership interest in Sharif Pharmacy, though
he had claimed such an interest on his 2002 federal
tax return—he said the tax return was incorrect and
that he owns only a 10% interest in the pharmacy,
but he provided no documentation of that interest.
Sharif had failed to produce corporate records of
Sharif Pharmacy and Hermosa Medical Center after
2006.
Sharif had failed to produce documents evidencing
the formation and funding of the Soad Wattar Trust.
o He claimed that the trust had been funded
with a $2 million inheritance that had been
12 No. 12‐1349
transferred by international wire from Beirut,
Lebanon, through Dubai, United Arab
Emirates, but he did not produce any docu‐
ments related to such a transfer.
o He had failed to produce documents show‐
ing transfers of assets to the Soad Wattar
Trust, with the exception of one house.
o He had produced amendments to the Soad
Wattar Trust but he had not produced the
original trust instrument.
Sharif had failed to produce his signed federal and
state tax returns.
Sharif had failed to produce the source documents
used to prepare his tax returns.
Sharif had failed to produce documents related to
the $271,000 that he allegedly owed his family
members.
The bankruptcy court rejected Sharif’s contention that, while
there were deficiencies, he had made a good‐faith effort to
comply with all discovery requests. It also noted that Sharif’s
“supplemental production” on May 20 had occurred several
weeks after the court‐imposed April 28 deadline and after the
May 13 deposition. In response to Sharif’s argument that WIN
had not consulted with his attorney after the discovery had
been tendered, the bankruptcy court noted “that a phone call
would have been futile because [Sharif] was so grossly out of
compliance with his discovery obligations.” The court con‐
cluded that Sharif had “failed to comply with most of [WIN’s]
No. 12‐1349 13
discovery requests” and that his “lack of compliance is a
pattern that has continued from the time of the underlying
litigation in Texas to the instant bankruptcy case and adversary
proceeding.” Accordingly, the bankruptcy judge entered a
default judgment in WIN’s favor on all five counts of the
adversary complaint and ordered Sharif to pay WIN’s attor‐
ney’s fees.
Judgment was entered in both the bankruptcy proceeding
and the adversary proceeding. Subsequently, on August 9, the
bankruptcy court issued an order awarding WIN $54,405.99 in
attorney’s fees and $8,349.75 in other costs in connection with
the motion for sanctions. And on November 18, the court
awarded WIN additional fees and other costs it had incurred
in connection with the § 341 creditors’ meetings. Sharif timely
appealed all four judgments to the district court.
D. Appeal to the District Court
On August 9, 2011, Sharif filed his opening appellate brief
in the district court, asserting only two claims of error. First, he
argued that his right to due process under the Fifth Amend‐
ment had been violated because WIN had not conferred with
his counsel after the discovery responses were tendered, so he
was never given notice of the particular deficiencies prior to
the hearing on the motion for sanctions. Second, he argued that
the bankruptcy court had abused its discretion in entering a
default judgment because he had been a trustee of the Soad
Wattar Trust, not a beneficiary.
14 No. 12‐1349
On December 12, 2011, Ragda Sharifeh, Sharif’s sister, filed
a motion to withdraw the reference in the district court.1 She
argued that the bankruptcy court had lacked jurisdiction to
enter a final judgment on WIN’s adversary complaint under
Stern v. Marshall, 131 S. Ct. 2594 (2011). On January 12, 2012,
Sharif filed a motion for supplemental briefing on Stern and
this court’s then‐two‐week‐old decision in In re Ortiz, 665 F.3d
906 (7th Cir. 2011).
The district court denied both Ragda’s motion to withdraw
the reference and Sharif’s motion for supplemental briefing as
untimely and affirmed the bankruptcy court’s judgment.
Sharifeh v. Fox, Nos. 11 C 8811, 09 BK 05868, 09–AP–00770,
10–AP–02239, 10 C 5303, 10 C 5333, 10 C 6057 & 11 C 175, 2012
WL 469980 (N.D. Ill. Feb. 10, 2012). With regard to the Stern
issue, the court assumed that Ragda had standing to raise the
issue but concluded that objections based on the bankruptcy
court’s authority to enter a final judgment are waivable
because they do not implicate subject‐matter jurisdiction and
that, by failing to raise the issue sooner, Ragda had voluntarily
waived the issue. Id. at *5–7. It similarly denied Sharif’s motion
for supplemental briefing because, although Ortiz had only
recently been decided, Stern had been decided a month and a
half before Sharif submitted his opening brief, yet Sharif had
1
This was not Ragda’s first attempt to undo the bankruptcy court’s
judgment. See 457 B.R. 702, 720–32 (Bankr. N.D. Ill. 2011); 447 B.R. 853,
865–68 (Bankr. N.D. Ill. 2011); 446 B.R. 870, 883–85 (Bankr. N.D. Ill. 2011).
Indeed, Ragda initiated her own adversary proceeding against Sharif and
Fox (though she asserted claims only against Fox), which the bankruptcy
court dismissed. 457 B.R. at 720–32. Her appeal of that dismissal is currently
pending before a different district judge.
No. 12‐1349 15
not raised the issue then. Id. at *10. On the merits, the court
applied a deferential standard of appellate review, considering
whether the bankruptcy court’s entry of sanctions constituted
an abuse of discretion and whether its factual findings were
clearly erroneous. Id. at *7. It first rejected Sharif’s due‐process
argument, concluding that Sharif had received notice and an
opportunity to be heard and that the bankruptcy court had
expressly warned Sharif in its April 21 order that failure to
comply with the discovery requests would result in a default
judgment. Id. at *8–9. The court then concluded that the
bankruptcy judge had not abused her discretion in finding that
Sharif had failed to comply with the order compelling discov‐
ery and that he had acted willfully and in bad faith. Id. at *9.
The district court therefore affirmed the four judgments of the
bankruptcy court in their entirety, id. at *10, and Sharif now
appeals (though Ragda does not).
Between his opening and reply briefs, Sharif raises several
issues in this court. Specifically, he contends that the bank‐
ruptcy court lacked jurisdiction to enter a final judgment under
Stern; that the bankruptcy court abused its discretion in
awarding default judgment as a discovery sanction; that the
bankruptcy court erred in awarding fees and costs to WIN; that
the judgment on Count V is void because Illinois law required
WIN to join the Soad Wattar Trust’s beneficiaries; and that the
alter‐ego claim should have been brought by Fox, not WIN.
The purple elephant in this case is whether the bankruptcy
court had authority to enter a final judgment and, if not,
whether that is an issue that may be waived. We begin there.
16 No. 12‐1349
II. The Bankruptcy Court’s Authority
Sharif argues that the bankruptcy court lacked constitu‐
tional authority to enter final judgment, default or otherwise,
on WIN’s adversary complaint under the holdings of Stern v.
Marshall, 131 S. Ct. 2594 (2011), and In re Ortiz, 665 F.3d 906
(7th Cir. 2011). WIN responds that Sharif waived this argument
by failing to present it sooner and, through his litigation
conduct, consented to final adjudication by the bankruptcy
judge. Sharif replies that this issue is not waivable and may be
raised at any time.
As we discuss later, whether Sharif’s objection to the
bankruptcy court’s constitutional authority is waivable is a
thorny question. The only two circuits to have addressed the
issue head‐on since Stern was decided issued their respective
decisions after we heard oral argument in this appeal and came
to opposite conclusions. In re Bellingham Ins. Agency, Inc., 702
F.3d 553, 566–70 (9th Cir. 2012) (waivable), cert. granted, 133 S.
Ct. 2880 (2013) (No. 12–1200); Waldman v. Stone, 698 F.3d 910,
917–18 (6th Cir. 2012) (not waivable), cert. denied, 133 S. Ct. 1604
(2013). On June 24, 2013, the Supreme Court granted a petition
for a writ of certiorari in the case from the Ninth Circuit, which
raised the issue of whether a Stern objection is waivable. Exec.
Benefits Ins. Agency v. Arkison, 133 S. Ct. 2880 (2013) (No.
12–1200). A final answer to that question is likely to be ren‐
dered when the Supreme Court decides that case next term.
But we think the path to resolution of that issue is sufficiently
clear that we should address it now rather than further
extending the litigation between Sharif and WIN by waiting for
the conclusion of the Executive Benefits case. We therefore
proceed to consider Sharif’s appeal, but before addressing the
No. 12‐1349 17
constitutional issues, we must determine whether the bank‐
ruptcy court had statutory authority to enter final judgment on
WIN’s claims. In re Ortiz, 665 F.3d at 911; see Stern, 131 S. Ct. at
2604–08.
A. Statutory Authority
District courts have “original and exclusive jurisdiction of
all cases under title 11,” and they have original jurisdiction “of
all civil proceedings arising under title 11, or arising in or
related to cases under title 11.” 28 U.S.C. § 1334(a)–(b). Bank‐
ruptcy courts are units of the district courts, 28 U.S.C. § 151,
and the bankruptcy judges “serve as judicial officers of the
United States district courts established under Article III of the
Constitution,” § 152(a)(1). The district courts may refer “any or
all” bankruptcy cases and proceedings to their respective
district’s bankruptcy judges, § 157(a), which is how the
bankruptcy judge came to preside over Sharif’s bankruptcy
proceedings and WIN’s adversary complaint, see N.D. Ill. Local
R. 40.3.1(a).
Congress has granted bankruptcy judges the authority to
hear, determine, and enter final orders and judgments in “all
cases under title 11 and all core proceedings,” subject to
traditional appellate review in the district court. §§ 157(b)(1) &
158. Proceedings “that arise in a bankruptcy case or under Title
11” are “core proceedings.” Stern, 131 S. Ct. at 2605; see also
§ 157(b)(2) (providing nonexhaustive list of sixteen types of
core proceedings). Proceedings that do not arise in a bank‐
ruptcy case or under title 11 but are otherwise related to a case
under title 11 are noncore proceedings. See Stern, 131 S. Ct. at
2604–05. A bankruptcy judge may hear noncore proceedings
18 No. 12‐1349
but, absent consent of the parties, see § 157(c)(2), may only
“submit proposed findings of fact and conclusions of law to
the district court, and any final order or judgment shall be
entered by the district judge after considering the bankruptcy
judge’s proposed findings and conclusions and after reviewing
de novo those matters to which any party has timely and
specifically objected,” § 157(c)(1).
The first four counts of WIN’s adversary complaint clearly
are core matters, and Sharif does not argue otherwise. In those
counts, WIN objected to the discharge of Sharif’s debts under
11 U.S.C. § 727(a). Congress has explicitly identified “objec‐
tions to discharges” as core proceedings. 28 U.S.C.
§ 157(b)(2)(J). The bankruptcy court therefore had statutory
authority to enter final judgment on WIN’s first four claims.
Sharif asserts that the fifth count, the alter‐ego claim, is a
noncore matter, which would mean that the bankruptcy court
lacked statutory authority to enter final judgment unless the
parties consented. Unlike objections to discharge, alter‐ego
claims are not expressly listed as core proceedings in
§ 157(b)(2), but that list is not exhaustive and the fact that it is
a state‐law claim is not dispositive, see § 157(b)(3) (“A determi‐
nation that a proceeding is not a core proceeding shall not be
made solely on the basis that its resolution may be affected by
State law.”). Courts have reached differing conclusions as to
whether alter‐ego claims are core matters. Compare Cent. Vt.
Pub. Serv. Corp. v. Herbert, 341 F.3d 186, 192 (2d Cir. 2003)
(core), with Mirant Corp. v. Southern Co., 337 B.R. 107, 117 (N.D.
Tex. 2006) (noncore). But we need not determine whether the
alter‐ego claim is core or noncore because Sharif has waived
the issue. Unlike the murky issue of waiver surrounding the
No. 12‐1349 19
bankruptcy court’s constitutional authority, it is clear that a
party can waive an argument concerning the core/noncore
status of a claim under § 157. See Stern, 131 S. Ct. at 2606–08;
Waldman, 698 F.3d at 917–18. Sharif never argued in either the
bankruptcy court or the district court that the alter‐ego claim
was a noncore matter. See, e.g., Puffer v. Allstate Ins. Co., 675
F.3d 709, 718 (7th Cir. 2012) (“It is a well‐established rule that
arguments not raised to the district court are waived on
appeal.” (citations omitted)). Furthermore, in this court, he
merely asserts in his jurisdictional statement that the alter‐ego
claim was not a core matter, without any supporting argument
or authority. See, e.g., United States v. Dunkel, 927 F.2d 955, 956
(7th Cir. 1991) (per curiam) (“A skeletal ‘argument’, really
nothing more than an assertion, does not preserve a claim.”
(citation omitted)). So we proceed on the assumption that the
alter‐ego claim was a core proceeding over which the bank‐
ruptcy 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).
B. Constitutional Authority
Article III, § 1, vests the “judicial Power of the United
States” in a judiciary with judges who enjoy life tenure (subject
to removal only by impeachment) and whose salaries may not
be diminished. United States ex rel. Toth v. Quarles, 350 U.S. 11,
16 (1955). “Article III is ‘an inseparable element of the constitu‐
tional system of checks and balances’ that ‘both defines the
power and protects the independence of the Judicial Branch.’”
Stern, 131 S. Ct. at 2608 (quoting N. Pipeline Constr. Co. v.
20 No. 12‐1349
Marathon Pipe Line Co., 458 U.S. 50, 58 (1982) (plurality opin‐
ion)). It “could neither serve its purpose in the system of
checks and balances nor preserve the integrity of judicial
decisionmaking if the other branches of the Federal Govern‐
ment could confer the Government’s ‘judicial Power’ on
entities outside Article III.” Id. at 2609. Therefore, as a general
rule, Congress may not “withdraw from judicial cognizance
any matter which, from its nature, is the subject of a suit at the
common law, or in equity, or admiralty.” Murray’s Lessee v.
Hoboken Land & Improvement Co., 59 U.S. (18 How.) 272, 284
(1855). So suits that are made of “the stuff of the traditional
actions at common law tried by the courts at Westminster in
1789,” N. Pipeline, 458 U.S. at 90 (Rehnquist, J., concurring in
judgment), must be decided by Article III judges when brought
within the bounds of federal jurisdiction. Stern, 131 S. Ct. at
2609.
Bankruptcy judges are not Article III judges. They are
appointed to 14‐year terms “by the court of appeals of the
United States for the circuit in which [their] district is located,”
28 U.S.C. § 152(a), and a bankruptcy judge may be removed
“for incompetence, misconduct, neglect of duty, or physical or
mental disability” by a majority vote of “the judicial council of
the circuit in which the judge’s official duty station is located,”
§ 152(e). And although by statute their salaries are equivalent
to “92 percent of the salary of a judge of the district court of the
United States,” § 153(a), since they are not Article III judges
their salaries may be diminished by Congress, cf. N. Pipeline,
458 U.S. at 53 (plurality opinion).
Stern v. Marshall held that a bankruptcy court lacked
authority under Article III, § 1, to enter final judgment on a
No. 12‐1349 21
bankruptcy petitioner’s state‐law counterclaim for tortious
interference that was not resolved in the process of ruling on
a creditor’s proof of claim. 131 S. Ct. at 2620. But Stern was not
the Supreme Court’s first foray into the Article III thicket
surrounding bankruptcy judges and, as explained shortly, the
Court’s decision in Stern was heavily influenced by its two
previous decisions concerning Article III limitations in the
bankruptcy context.
In Northern Pipeline, the Court held that a bankruptcy court
lacked constitutional authority to enter final judgment on a
debtor’s state‐law contract claim against a noncreditor, but no
rationale commanded a majority of the Justices. 458 U.S. at
63–87 (plurality opinion); id. at 90–92 (Rehnquist, J., concurring
in judgment). A majority, however, agreed on two basic
principles, namely, that adjudication of the contract claim at
issue did not implicate the so‐called “public rights” doctrine,
id. at 67–76 (plurality opinion); id. at 91 (Rehnquist, J., concur‐
ring in judgment), and that the bankruptcy courts were not
mere adjuncts to the district courts, id. at 76–87 (plurality
opinion); id. at 91 (Rehnquist, J., concurring in judgment). After
Northern Pipeline, Congress enacted the current statute, the
Bankruptcy Act of 1984, in which (among other changes) it
created the core/noncore distinction.
A few years later, the Court returned to the Article III issue
presented by bankruptcy courts, albeit in a less direct manner.
In Granfinanciera, S.A. v. Nordberg, a bankruptcy trustee had
brought an action to recover an allegedly fraudulent monetary
conveyance from third parties that had not submitted claims
against the bankruptcy estate, and the third parties had
demanded a jury trial under the Seventh Amendment. 492 U.S.
22 No. 12‐1349
33, 36–37 (1989). The Court explained that “the question
whether the Seventh Amendment permits Congress to assign
[a cause of action’s] adjudication to a tribunal that does not
employ juries as factfinders requires the same answer as the
question whether Article III allows Congress to assign adjudi‐
cation of that cause of action to a non‐Article III tribunal.” Id.
at 53. It then concluded that the fraudulent‐conveyance actions
at issue could be resolved only by Article III courts because
they did not involve “public rights” and instead were
“quintessentially suits at common law that … resemble[d]
state‐law contract claims brought by a bankrupt corporation to
augment the bankruptcy estate.” Id. at 56. As a result, the
Court held that the third parties were constitutionally entitled
to a jury trial, notwithstanding the fact that Congress had
designated fraudulent‐conveyance actions as core proceedings.
Id. at 36, 49–64.
Stern v. Marshall involved a long‐running dispute between
Vickie Marshall (commonly known as Anna Nicole Smith) and
Pierce Marshall concerning the sizeable will of J. Howard
Marshall (Vickie’s husband and Pierce’s father). Before J.
Howard died and left Vickie nothing in his will, she filed suit
in Texas probate court claiming that Pierce had fraudulently
induced J. Howard to sign a living trust that excluded her and
that J. Howard had intended to give Vickie half his estate. Id.
at 2601. After J. Howard died, Vickie filed for bankruptcy in
the Central District of California. Pierce filed a complaint in the
bankruptcy proceeding, asserting that Vickie had defamed him
and seeking a declaration that his defamation claim was not
dischargeable in the bankruptcy proceedings. He subsequently
filed a proof of claim for the defamation action so that he could
No. 12‐1349 23
recover damages for it from Vickie’s bankruptcy estate. See 11
U.S.C. §§ 523(a) & 501(a). Vickie responded with a counter‐
claim for tortious interference with the gift she had expected
from J. Howard, the same claim that she had asserted in Texas
probate court. 131 S. Ct. at 2601. The bankruptcy court granted
summary judgment for Vickie on Pierce’s defamation claim
and, after a bench trial, entered judgment for Vickie on her
counterclaim. In response to Pierce’s objection that the bank‐
ruptcy court lacked jurisdiction over Vickie’s counterclaim, the
bankruptcy court concluded that Vickie’s counterclaim was a
core proceeding under 28 U.S.C. § 157(b)(2)(c) and, therefore,
that it had power to enter judgment on the counterclaim under
§ 157(b)(1). 131 S. Ct. at 2601–02. Meanwhile, the Texas probate
court had conducted a jury trial on the merits of the tortious‐
interference suit and had entered judgment in Pierce’s favor.
Id. at 2602.
Pierce appealed to the district court, which held that
Vickie’s counterclaim was not a “core proceeding” under
§ 157(b)(2)(C). Accordingly, the district court treated the
bankruptcy court’s judgment as proposed, not final, and
conducted de novo review in accordance with § 157(c)(1). Even
though by that time the Texas probate court had already issued
its judgment, the district court declined to give that judgment
preclusive effect and found in Vickie’s favor. 131 S. Ct. at 2602.
The Ninth Circuit reversed on a different issue and in turn was
reversed by the Supreme Court in Marshall v. Marshall, 547 U.S.
293 (2006). On remand, the Ninth Circuit held that Vickie’s
counterclaim was not a core proceeding, which meant that the
Texas probate court’s judgment had been first in time and that
the district court had erred in failing to give that judgment
24 No. 12‐1349
preclusive effect. In re Marshall, 600 F.3d 1037, 1055–65 (9th Cir.
2010). The Supreme Court again granted certiorari, 131 S. Ct.
63 (2010), but this time it affirmed the Ninth Circuit, albeit on
different grounds.
The Court first rejected Pierce’s argument (and the Ninth
Circuit’s holding) that Vickie’s counterclaim was not “a core
proceeding” under § 157(b)(2)(C), which specifies that core
proceedings include “counterclaims by the estate against
persons filing claims against the estate.” 131 S. Ct. at 2604–05;
see also id. at 2605 (“Under our reading of the statute, core
proceedings are those that arise in a bankruptcy case or under
Title 11.”). As a result, the Court held that the bankruptcy court
had been granted statutory authority to enter judgment on the
counterclaim. Id. at 2605.
After addressing another statutory argument (which we
explore later), the Court turned to the constitutionality of the
bankruptcy court’s entry of final judgment and concluded that
the bankruptcy court had impermissibly exercised the “judicial
Power of the United States.” See id. at 2620 (“The Bankruptcy
Court below lacked the constitutional authority to enter final
judgment on a state law counterclaim that is not resolved in
the process of ruling on a creditors’ proof of claim.”). The
Court reasoned that the state‐law counterclaim did not involve
“public rights” and did not stem from a federal statutory
scheme or involve a particularized area of law. Id. at 2614–15;
see also Granfinanciera, 492 U.S. at 54–56. Rather, it “involve[d]
the most prototypical exercise of judicial power: the entry of
final, binding judgment by a court with broad substantive
jurisdiction, on a common law cause of action, when the action
No. 12‐1349 25
neither derives from nor depends upon any agency regulatory
regime.” Id. at 2615.
The Court then rejected Vickie’s argument that Pierce’s
filing of a claim in the bankruptcy proceeding took her
counterclaim outside the confines of Article III, explaining that
Pierce’s defamation claim did not affect “the nature of Vickie’s
counterclaim for tortious interference as one at common law
that simply attempt[ed] to augment the bankruptcy estate.” Id.
at 2616. Vickie based her argument on both Katchen v. Landy, in
which the Court held that a bankruptcy referee could rule on
a trustee’s voidable‐preference claim against a creditor who
had filed a claim because resolution of the preference issue was
necessary to resolve the creditor’s claim, 382 U.S. 323, 329–36
(1966), and Langenkamp v. Culp, in which the Court held that a
preferential‐transfer claim against a creditor who had filed a
claim could be heard in bankruptcy because under those
circumstances “the ensuing preference action by the trustee
become[s] integral to the restructuring of the debtor‐creditor
relationship,” 498 U.S. 42, 44 (1990) (per curiam). But Katchen
and Langenkamp were distinguishable, the Court explained,
because unlike in those cases there “was never reason to
believe that the process of ruling on Pierce’s proof of claim
would necessarily result in the resolution of Vickie’s counter‐
claim.” Stern, 131 S. Ct. at 2617. Another difference was that the
preference actions in Katchen and Langenkamp were rights of
recovery created by federal bankruptcy law, whereas Vickie’s
counterclaim was neither derived from nor dependent upon
bankruptcy law but instead was “a state tort action that
exist[ed] without regard to any bankruptcy proceeding.” Id. at
2618. The Court concluded “that Congress may not bypass
26 No. 12‐1349
Article III simply because a proceeding may have some bearing
on a bankruptcy case; the question is whether the action at
issue stems from the bankruptcy itself or would necessarily be
resolved in the claims allowance process.” Id.
The Court also rejected Vickie’s argument that the bank‐
ruptcy courts were merely “adjuncts” of the district courts. See
id. at 2618–19; see also N. Pipeline, 458 U.S. at 84–86 (plurality
opinion); id. at 91 (Rehnquist, J., concurring in judgment).
Bankruptcy courts, the Court explained, “do not ‘ma[k]e only
specialized, narrowly confined factual determinations regard‐
ing a particularized area of law’ or engage in ‘statutorily
channeled factfinding functions.’” 131 S. Ct. at 2618 (brackets
in original) (quoting N. Pipeline, 458 U.S. at 85 (plurality
opinion)). Rather, they “resolve ‘[a]ll matters of fact and law in
whatever domains of the law to which’ the parties’ counter‐
claims might lead,” id. at 2618–19 (brackets in original)
(quoting N. Pipeline, 458 U.S. at 91 (Rehnquist, J., concurring in
judgment)), thereby exercising “the essential attributes of
judicial power,” id. at 2618. And unlike the adjunct agency in
Crowell v. Benson, which had no independent authority to
enforce its orders and instead relied on the district courts’
decisions to enforce or set aside the agency’s orders, 285 U.S.
22, 44–45, 51–65 (1932), “a bankruptcy court resolving a
counterclaim under 28 U.S.C. § 157(b)(2)(C) has the power to
enter ‘appropriate orders and judgments’—including final
judgments—subject to review only if a party chooses to
appeal.” 131 S. Ct. at 2619 (citing §§ 157(b)(1), 158(a)–(b)). In
view of its authority to make the final determination in core
proceedings, the Court concluded, “a bankruptcy court can no
more be deemed a mere ‘adjunct’ of the district court than a
No. 12‐1349 27
district court can be deemed such an ‘adjunct’ of the court of
appeals.” Id.
In re Ortiz applied Stern and held that a bankruptcy court
lacked constitutional authority to enter final judgment on
debtors’ claims that were grounded in Wisconsin law. 665 F.3d
at 911–14. Aurora Health Care, Inc., had filed proofs of claim
in approximately 3,200 bankruptcy cases in the Eastern District
of Wisconsin that had listed the debtors’ medical treatment
information. Id. at 908. A group of debtors (actually, two
groups) filed a class‐action lawsuit against Aurora, alleging
that Aurora had willfully violated a Wisconsin statute barring
disclosure of patients’ healthcare records. The bankruptcy
judge dismissed the suit on summary judgment, concluding
that the Wisconsin statute required proof of actual damages
and that the debtors had failed to marshal evidence of actual
damages. Id. at 910; see 430 B.R. 523, 534–358 (Bankr. E.D. Wis.
2010). A few months before Stern was decided, we authorized
the parties to bring a direct appeal to this court under 28 U.S.C.
§ 158(d)(2).
Based on Stern, we held that, although the debtors’ claims
were “core proceedings,” the bankruptcy court had lacked
constitutional authority to enter final judgment. In re Ortiz, 665
F.3d at 911–14. The debtors’ disclosure claims, we explained,
were “simply ordinary state‐law claims,” in all material
respects identical to the counterclaim in Stern: they involved
private parties litigating interests defined by state law that
were not historically determined by the executive or legislative
branches; no governmental parties were involved; the claims
did “not flow from a federal statutory scheme,” id. at 913; and
the claims did not involve “a particularized area of the law”
28 No. 12‐1349
where Congress had established a body with particular
expertise to determine certain factual matters in an efficient
and inexpensive manner. Id. at 914 (quotations omitted) (citing
Stern, 131 S. Ct. at 2609, 2612–16). Also, just as in Stern, the fact
that Aurora had filed “proofs of claim in the debtors’ bank‐
ruptcies did not give the bankruptcy judge authority to
adjudicate the debtors’ state‐law claims.” Id. While there was
some factual overlap between the debtors’ claims and Aurora’s
proofs of claim, the debtors’ claims were not necessarily
resolvable in the claims‐allowance process, nor were they
“‘integral to the restructuring of the debtor‐creditor relation‐
ship.’” Id. (quoting Stern, 131 S. Ct. at 2617). The debtors’
claims simply sought “‘to augment the bankruptcy estate—the
very type of claim that … must be decided by an Article III
court.’” Id. (quoting Stern, 131 S. Ct. at 2616). Therefore, the
bankruptcy judge had lacked constitutional authority to enter
final judgment on the debtors’ claims, id., and because there
was no final judgment, we had to dismiss the appeal for lack
of appellate jurisdiction, id. at 915; see 28 U.S.C. § 158(d).
Sharif contends that under Stern and Ortiz the bankruptcy
judge lacked constitutional authority to enter final judgment
on WIN’s adversary complaint, in particular the alter‐ego
claim. Under ordinary principles of waiver, however, Sharif’s
argument is not preserved because he waited too long to assert
it. But the parties dispute whether ordinary principles of
waiver apply to a Stern objection.
1. Waiver
WIN asserts, and the district court held, that Stern itself
indicates that Sharif’s Article III objection is waivable and that,
No. 12‐1349 29
through his litigation conduct and failure to raise the objection
sooner, Sharif in fact waived it. See Sharifeh, 2012 WL 469980, at
*10; see also id. at *5–7 (denying Ragda’s motion to withdraw
the reference on the ground that she had waived her Stern
objection). Sharif, on the other hand, contends that his Stern
objection is not waivable and can be raised at any time because
it concerns the bankruptcy court’s subject‐matter jurisdiction.
Neither view is persuasive.
In Stern, the Court held that Pierce had waived his alterna‐
tive, nonconstitutional argument that the bankruptcy court had
lacked jurisdiction over his defamation claim under 28 U.S.C.
§ 157(b)(5) (“personal injury tort and wrongful death claims
shall be tried in the district court”). 131 S. Ct. at 2606–08. The
Court reasoned that neither the text nor the context of
§ 157(b)(5) had the hallmarks of a jurisdictional statute and
explained that “we are not inclined to interpret statutes as
creating a jurisdictional bar when they are not framed as such.”
Id. at 2607 (citing Arbaugh v. Y & H Corp., 546 U.S. 500, 516
(2006)). Section 157 in general merely “allocates the authority
to enter final judgment between the bankruptcy court and the
district court” and “does not implicate questions of subject‐
matter jurisdiction.” Id. (citations omitted). And § 157(b)(5)
merely “specifies where a particular category of cases should
be tried.” Id. The Court held that these “statutory limitation[s]”
were waivable and that, given his “course of conduct” in the
bankruptcy court, Pierce had “consented to that court’s
resolution of his defamation claim (and [had] forfeited any
argument to the contrary).” Id. at 2607–08.
At first blush, then, Stern appears to support WIN’s waiver
argument. But there is a significant difference between the
30 No. 12‐1349
waived objection in Stern and Sharif’s objection, namely, the
argument in Stern concerned only the bankruptcy court’s
statutory authority, whereas Sharif’s argument concerns the
bankruptcy court’s constitutional authority. We discern nothing
in Stern that supports the proposition that a party may waive
an Article III objection to a bankruptcy judge’s entry of final
judgment. In point of fact, a different portion of the Stern
opinion casts serious doubt on whether notions of waiver and
consent have any role in bankruptcy, given that creditors must
go to the bankruptcy court to pursue their claims. See 131 S. Ct.
at 2614–15 & n.8; see also Granfinanciera, 492 U.S. at 59 n.14. For
these reasons, we do not think Stern supports WIN’s position.
As for Sharif’s argument, it is true that questions of subject‐
matter jurisdiction may be raised at any time, as parties cannot
consent to subject‐matter jurisdiction; indeed, such questions
must be considered by a court sua sponte. See, e.g., Steel Co. v.
Citizens for a Better Env’t, 523 U.S. 83, 94–95 (1998); Capron v.
Van Noorden, 6 U.S. (2 Cranch) 126, 127 (1804). But we disagree
with Sharif that his Article III, § 1, objection concerns the
bankruptcy court’s subject‐matter jurisdiction, for several
reasons. First, as noted above, Stern held that § 157 constitutes
a statutory allocation of authority between the bankruptcy
courts and the district courts, and Article III, § 1, can be viewed
similarly, that is, as an allocation of authority between Article
III courts and non‐Article III courts. Second, in resolving the
constitutional issue in Stern, the Court never asserted that the
bankruptcy court in that case had lacked subject‐matter
jurisdiction; rather, it held that “[t]he Bankruptcy Court …
lacked the constitutional authority to enter a final judgment on
a state law counterclaim that is not resolved in the process of
No. 12‐1349 31
ruling on a creditor’s proof of claim,” 131 S. Ct. at 2620
(emphasis added). Third, the constitutional bases of federal
subject‐matter jurisdiction are set forth in Article III, § 2,
whereas Sharif’s objection to the bankruptcy court’s entry of
final judgment is based on Article III, § 1. Finally, Sharif’s
reliance on Ortiz for the proposition that a Stern objection is
jurisdictional is misplaced, as the jurisdictional issue in Ortiz
concerned whether there was a valid final judgment for
purposes of appellate jurisdiction, given the unique procedural
posture of that appeal (a direct appeal from the bankruptcy
court); Ortiz did not hold that the bankruptcy court had lacked
jurisdiction. Consequently, we do not think the waiver issue
can be resolved under the well‐established principle that
questions of subject‐matter jurisdiction are not waivable.
Nevertheless, we agree with Sharif that under current law his
constitutional objection to the bankruptcy court’s entry of final
judgment is not waivable.
Although consent has no role under Article III, § 2, the
Supreme Court has acknowledged a limited role for notions of
consent and waiver under Article III, § 1. See Stern, 131 S. Ct. at
2613–14; id. at 2625–26, 2627–28 (Breyer, J., dissenting); Peretz
v. United States, 501 U.S. 923, 936–39 (1991); Granfinanciera, 492
U.S. at 59 n.14; Commodity Futures Trading Comm’n v. Schor, 478
U.S. 833, 848–57 (1986); cf. Roell v. Withrow, 538 U.S. 580 (2003)
(holding that under 28 U.S.C. § 636(c)(1) parties may consent
to proceedings before a magistrate judge through their
litigation conduct).
This appears to stem from the fact that § 1 protects two
separate interests—it safeguards litigants’ right to have their
cases decided by independent and impartial judges, and it also
32 No. 12‐1349
operates as an inseparable element of separation of powers by
protecting the judicial branch from encroachment by the
political branches. Stern, 131 S. Ct. at 2608–09; Schor, 478 U.S. at
848–50; N. Pipeline, 458 U.S. at 58 (plurality opinion). The
guarantee of an independent and impartial judiciary serves
primarily to protect personal interests, and so it “is subject to
waiver, just as are other personal constitutional rights that
dictate the procedures by which civil and criminal matters
must be tried.” Schor, 478 U.S. at 848–49 (citations omitted).
The role that § 1 plays in our system of checks and balances,
however, protects the larger structural interests of our constitu‐
tional government, and “[t]o the extent that this structural
principle is implicated in a given case, the parties cannot by
consent cure the constitutional difficulty for the same reason
that the parties by consent cannot confer on federal courts
subject‐matter jurisdiction beyond the limitations imposed by
Article III, § 2.” Id. at 850–51 (citation omitted). “When these
Article III limitations are at issue, notions of consent and
waiver cannot be dispositive because the limitations serve
institutional interests that the parties cannot be expected to
protect.” Id. at 851; see also Freytag v. C.I.R., 501 U.S. 868, 896–98
(1991) (Scalia, J., concurring in judgment). But cf. Plaut v.
Spendthrift Farm, Inc., 514 U.S. 211, 231 (1995) (rejecting
proposition “that legal defenses based upon doctrines central
to the courts’ structural independence can never be waived”);
Freytag, 501 U.S. at 893–901 (same).
The dual nature of Article III, § 1, renders notions of waiver
and consent more nuanced than they are in other areas. The
practical problem, of course, is the difficulty of separating out
the waivable personal safeguard from the nonwaivable
No. 12‐1349 33
structural safeguard, for in every case an argument that a party
waived the personal protection can be met with the argument
that the court must still consider the objection because the
structural aspect cannot be waived. The net result would be
that an Article III, § 1, argument can never be waived and that
parties can never consent to adjudication by a non‐Article III
tribunal, which would render Schor’s discussion of the
waivability of the personal protections meaningless. But a close
examination of Schor demonstrates how this difficulty is to be
resolved.
Schor involved an Article III challenge to an agency’s
authority to decide a state‐law counterclaim. A customer
brought a claim for reparations against his commodity futures
broker before the Commodity Futures Trading Commission
(CFTC), and the broker filed a state‐law counterclaim for the
same amount. After the CFTC ruled in favor of the broker on
both the claim and the counterclaim, the customer appealed on
the ground that the CFTC’s adjudication of the counterclaim
ran afoul of Article III, § 1. The Court held that the CFTC’s
assumption of jurisdiction over the state‐law counterclaim was
not unconstitutional. Although the customer had consented to
proceed before the CFTC rather than an Article III court, id. at
849–50, the Court explained that consent could not be
dispositive due to the structural interests protected by Article
III, § 1, id. at 851. The Court then examined several factors and
held that “the congressional scheme [did] not impermissibly
intrude on the province of the judiciary.” Id. at 851–52. While
the counterclaim at issue was a private right (rather than a
public right) traditionally decided by courts, the Court found
it significant that the CFTC dealt only with a “‘particularized
34 No. 12‐1349
area of law,’” id. at 852 (quoting N. Pipeline, 458 U.S. at 85
(plurality opinion)); the CFTC’s adjudicatory powers departed
from the traditional agency model in only one respect, its
jurisdiction over state‐law counterclaims, id.; like in Crowell,
285 U.S. 22, the CFTC’s orders were enforceable only by a
district court, its factual findings were reviewed under a
“weight of the evidence” standard, and its legal conclusions
were reviewed de novo, Schor, 478 U.S. at 853; and the CFTC’s
counterclaim jurisdiction was “limited to that which [was]
necessary to make the reparations procedure workable,” id. at
856. Therefore, the Court concluded, “the magnitude of any
intrusion on the Judicial Branch [could] only be termed de
minimis.” Id.; see also Peretz, 501 U.S. at 936–37 (holding that a
criminal defendant in a felony trial may consent to jury
selection presided over by a magistrate judge: no structural
issues were implicated because magistrates were appointed
and subject to removal by Article III judges; the district court
made the ultimate decision to invoke the magistrate’s assis‐
tance, subject to veto by the parties; and the decision whether
to empanel the jury whose selection was overseen by the
magistrate remained entirely with the trial judge).
As noted earlier, since we heard oral argument, two of our
sister circuits have addressed the waiver issue head‐on and
have come to divergent conclusions; both circuits relied on
Schor. In Waldman v. Stone, the Sixth Circuit held that a Stern
objection to the bankruptcy court’s constitutional authority is
not waivable. 698 F.3d at 917–18. Stone filed for bankruptcy
and initiated an adversary proceeding against Waldman,
seeking both discharge of his debts to Waldman and affirma‐
tive relief (e.g., fraud, specific performance). After a bench trial,
No. 12‐1349 35
the bankruptcy court discharged Stone’s obligations and
awarded him a little over $3 million on his affirmative claims.
Id. at 915–16. On appeal, the court held that Waldman could
and had in fact waived any objection to the bankruptcy court’s
statutory authority, but it held that Waldman could not waive
the constitutional objection. Id. at 917–18. The court rejected the
argument that, in bankruptcy cases like Stone’s, the “personal
right” character predominates. Id. While acknowledging that
the case did not pose a great risk of aggrandizement of the
legislative and executive branches, the court explained that this
took “too narrow a view of the interests preserved by Article
III,” which is also concerned with diminution of the judicial
branch. Id. at 918; see also id. (“To the extent that Congress can
shift the judicial Power to judges without [the tenure and
salary] protections, the Judicial Branch is weaker and less
independent than it is supposed to be.” (citing Schor, 478 U.S.
at 850)). And because Waldman’s objection implicated both his
personal rights and the structural interests advanced by Article
III, the objection could not be waived. Id.
The Ninth Circuit reached the opposite conclusion in In re
Bellingham Insurance Agency, Inc., 702 F.3d at 566–70. In that
case, Bellingham Insurance Agency, Inc., filed a Chapter 7
bankruptcy petition, after which the trustee filed a complaint
against Executive Benefits Insurance Agency, Inc., seeking to
recover allegedly fraudulent conveyances and to hold Execu‐
tive Benefits liable for Bellingham’s debts. The bankruptcy
court granted summary judgment to the trustee, and the
district court affirmed. Prior to oral argument before the Ninth
Circuit, Executive Benefits argued for the first time that the
bankruptcy judge was constitutionally prohibited from
36 No. 12‐1349
entering final judgment on the trustee’s claims. Id. at 557. The
court held that Executive Benefits had waived its right to have
an Article III judge decide the matter, see id. at 566–70, finding
the waivable nature of an Article III, § 1, objection to be “well
established,” id. at 566–67 (citing MacDonald v. Plymouth Cnty.
Trust Co., 286 U.S. 263, 267 (1932)). Like the Sixth Circuit it
relied on Schor: “Following the genesis of the modern bank‐
ruptcy system, the Supreme Court clarified that ‘Article III,
§ 1’s guarantee of an independent and impartial adjudication
by the federal judiciary of matters within the judicial power of
the United States … serves to protect primarily personal, rather
than structural, interests.’” Id. at 567 (quoting Schor, 478 U.S. at
848). In a footnote, the court acknowledged that Schor held
“that ‘notions of consent and waiver cannot be dispositive’ of
Article III problems when ‘the encroachment or aggrandize‐
ment of one branch at the expense of the other’ is at stake,
because in such cases structural principles are implicated in
addition to private rights entitlements.” Id. at 567 n.9 (quoting
Schor, 478 U.S. at 850–51). But it reasoned that while aggran‐
dizement was an issue in Schor (because that case involved an
executive agency adjudicating a state‐law counterclaim), “the
allocation of authority between bankruptcy courts and district
courts does not implicate structural interests, because bankruptcy
judges are ‘officer[s] of’ the district court and are appointed by
the Courts of Appeals.” Id. (emphasis added) (citing 28 U.S.C.
§§ 151, 152(a)(1)). Therefore, the court concluded, “‘as a
personal right, Article III’s guarantee of an impartial and
independent federal adjudication is subject to waiver.’” Id. at
567 (quoting Schor, 478 U.S. at 848). In another footnote, the
court commented that it is this principle that allows “federal
No. 12‐1349 37
magistrate judges, acting with the consent of the litigants, to
enter final judgments in proceedings that would otherwise be
the exclusive province of Article III courts.” Id. at 567 n.10
(citing 28 U.S.C. § 636(c)(1)). It also noted that consent to a
magistrate’s entry of final judgment “may be implied from a
litigant’s actions.” Id. (citing Roell, 538 U.S. at 586–87). Finally,
the court observed that Ҥ 157(c)(2) expressly provides that
bankruptcy courts may enter final judgments in non‐core
proceedings ‘with the consent of all the parties to the proceed‐
ing,’” id. at 567, and it concluded that “[i]f consent permits a
non‐Article III judge to decide finally a non‐core proceeding,
then it surely permits the same judge to decide a core proceed‐
ing in which he would, absent consent, be disentitled to enter
final judgment,” id.
We think the Sixth Circuit has the better view under current
law. Schor holds that waiver or consent may be a factor in
determining whether delegation of judicial business to non‐
Article III tribunals is unconstitutional, but it cannot be
dispositive because of the structural role of Article III, § 1. And
Stern unequivocally holds that 28 U.S.C. § 157(b) violates the
structural protections of Article III, § 1, in permitting a bank‐
ruptcy judge to enter final judgment in certain “core proceed‐
ings.” In other words, unlike Schor, where party consent was
permissible because the statutory scheme at issue did not
implicate structural concerns, the Supreme Court has already
held that the statutory scheme granting bankruptcy judges
authority to enter final judgment in core proceedings does
implicate structural concerns where the core proceeding at
issue is “‘the stuff of the traditional actions at common law
tried by the courts at Westminster in 1789,’” Stern, 131 S. Ct. at
38 No. 12‐1349
2609 (quoting N. Pipeline, 458 U.S. at 90 (Rehnquist, J., concur‐
ring in judgment)). Therefore, we cannot agree with our
colleagues on the Ninth Circuit that the allocation of authority
between bankruptcy courts and district courts with regard to
core proceedings does not implicate structural interests. We
also observe that in Stern the Court rejected the proposition
that the fact that bankruptcy judges are appointed by Article III
judges makes a difference; the Court explained that since it
was the bankruptcy court itself that “exercise[d] ‘the essential
attributes of judicial power [that] are reserved to Article III
courts,’ it [did] not matter who appointed the bankruptcy
judge or authorized the judge to render final judgments in
such proceedings. The constitutional bar remain[ed].” Id. at
2619 (second alteration in original) (quoting Schor, 478 U.S. at
851).
It is true that under 28 U.S.C. § 157(c)(2) parties may
consent to final resolution of a noncore proceeding by a
bankruptcy judge, but we do not think that this inexorably
leads to the conclusion that parties may consent to final
adjudication of a core proceeding by a bankruptcy judge or
waive a Stern objection. For one thing, the Supreme Court has
not passed on the constitutionality of § 157(c). Cf. Stern, 131 S.
Ct. at 2615 n.8 (observing that “the notion of ‘consent’ does not
apply in bankruptcy proceedings as it might in other con‐
texts”); Granfinanciera, 492 U.S. at 59 n.14 (“Parallel reasoning
[to Schor] is unavailable in the context of bankruptcy proceed‐
ings, because creditors lack an alternative forum to the
bankruptcy court in which to pursue their claims.”). In any
event, the statutory scheme established by Congress for core
proceedings differs in significant respects from the scheme for
No. 12‐1349 39
noncore proceedings. Whereas Congress has vested bank‐
ruptcy judges with authority to enter final orders and judg‐
ments in core proceedings subject only to review by the district
court under traditional appellate standards, see §§ 157(b),
158(a), in noncore proceedings Congress has vested bank‐
ruptcy judges with authority to hear the matter and submit
proposed findings of fact and conclusions of law to the district
court, and it is the district court that enters final judgment after
de novo review, § 157(c)(1). Section 157(c)(2) permits a bank‐
ruptcy judge to enter final judgment in a noncore proceeding,
but only if the parties consent and the district court decides to
refer the matter to the bankruptcy court. Thus, a strong
argument can be made that with respect to noncore proceed‐
ings Congress has left the essential attributes of judicial power
to Article III courts, and so the structural interests at issue with
regard to core proceedings are not present under the current
statutory scheme applicable to noncore proceedings, thereby
allowing room for notions of waiver and consent. Cf. Peretz,
501 U.S. at 936–37; United States v. Raddatz, 447 U.S. 667, 681–84
(1980) (holding that there was no Article III impediment to a
magistrate judge’s submission of proposed findings of fact and
conclusions of law concerning suppression motion because
ultimate suppression decision was made by the district judge).
In this case we need not, and do not, express an opinion on the
constitutionality of § 157(c)(2), or for that matter § 636(c)(1),
which permits litigants to consent to entry of final judgment by
a magistrate judge, cf. Technical Automation Servs. Corp. v.
Liberty Surplus Ins. Corp., 673 F.3d 399, 404–07 (5th Cir. 2012)
(declining to hold that Stern affected a magistrate judge’s
authority to enter final judgment on a state‐law counterclaim
40 No. 12‐1349
under § 636(c)(1)). Our discussion is intended only to show
that, unlike the Ninth Circuit, we do not think that a party’s
Stern objection to a bankruptcy court’s entry of final judgment
in a core proceeding is waivable simply because Congress has
authorized litigants to consent to a bankruptcy judge’s final
adjudication of a noncore proceeding.2
2
We also disagree with the Ninth Circuit that MacDonald v. Plymouth
County Trust Co., 286 U.S. 263 (1932), supports the notion that the
waivability of an Article III, § 1, objection is “well established.” In re
Bellingham Ins. Agency, Inc., 702 F.3d at 566–67. Prior to the Bankruptcy Act
of 1978, federal district courts served as bankruptcy courts and employed
a “referee” system. See N. Pipeline, 458 U.S. at 53 (plurality opinion). In
MacDonald, the Court held that the parties could consent to have an action
to set aside voidable preferences summarily tried by a referee—i.e., the
parties could agree to waive the benefits of the procedures employed in
plenary suits tried to the district courts. 286 U.S. at 265–68. But MacDonald
was decided on statutory grounds—the question was whether the referee
had statutory jurisdiction, and the Court’s holding was based on its
conclusion that the relevant statutory definitions of “courts” and “court of
bankruptcy” included the referee. Id. at 268. The MacDonald Court did not
mention the Constitution, let alone Article III, § 1. Furthermore, as the
plurality in Northern Pipeline observed, the particular adjunct functions
exercised by the bankruptcy referees prior to the 1978 Act were “never …
explicitly endorsed by” the Supreme Court, and the bankruptcy courts
created under the 1978 Act, which are very similar to the bankruptcy courts
in existence today, differed significantly from the old referee system. 458
U.S. at 79 n.31. We simply do not see how a decision interpreting an old
statute that differs considerably from current law can support the proposi‐
tion that waiver of an Article III, § 1, objection is “well established.” See
Plaut, 514 U.S. at 232 n.6 (“Of course the unexplained silences of our
decisions lack precedential weight.” (citations omitted)); Webster v. Fall, 266
U.S. 507, 511 (1925) (“Questions which merely lurk in the record, neither
brought to the attention of the court nor ruled upon, are not to be consid‐
(continued...)
No. 12‐1349 41
In sum, we hold that under current law a litigant may not
waive an Article III, § 1, objection to a bankruptcy court’s entry
of final judgment in a core proceeding. We thus turn to
consider Sharif’s constitutional objection to the bankruptcy
court’s authority, despite the fact that he waited so long to
assert it.
2. The Bankruptcy Court Lacked Constitutional
Authority
Sharif maintains that the bankruptcy judge lacked constitu‐
tional authority to enter final judgment on Count V of WIN’s
adversary complaint, the alter‐ego claim. He concedes,
however, that the bankruptcy court had authority to enter final
judgment on the first four counts of the complaint, which
objected to discharge of Sharif’s debts under 11 U.S.C. § 727.
We agree with Sharif on both points.
The first four counts of the complaint sought to prevent
discharge of Sharif’s debts. These claims stem from federal law,
not state law, as the provisions of 11 U.S.C. § 727 provide the
relevant rules of decision. Moreover, whether to grant or deny
discharge is central to the restructuring of the debtor‐creditor
relationship. Although it is debatable whether such restructur‐
ing falls under the rubric of public rights, see Stern, 131 S. Ct. at
2614 n.7; Granfinanciera, 492 U.S. at 56 n.11; but cf. N. Pipeline,
458 U.S. at 71 (plurality opinion) (“[T]he restructuring of
debtor‐creditor relations, which is at the core of the federal
2
(...continued)
ered as having been so decided as to constitute precedents.” (citations
omitted)).
42 No. 12‐1349
bankruptcy power, must be distinguished from the adjudica‐
tion of state‐created private rights, such as the right to recover
contract damages … . The former may well be a ‘public right,’
but the latter obviously is not.”), it is clear that WIN’s objec‐
tions to discharge differ markedly from the state‐law claims at
issue in Stern, Granfinanciera, Northern Pipeline, and Ortiz. The
Supreme Court has not come close to holding that an Article III
judge must decide claims for which the Bankruptcy Code itself
provides the rule of decision, and we will not do so here,
where the parties concede that the bankruptcy judge had
authority.
Our analysis of the alter‐ego claim is somewhat hampered
by the posture of this case. Because the bankruptcy court
entered default judgment it had no need to address the merits
of the alter‐ego claim and thus no need to identify what WIN
substantively would have been required to show to establish
that the Soad Wattar Trust was Sharif’s alter ego, and the
parties have not filled that informational void. Our independ‐
ent research of Illinois law reveals that the alter‐ego theory of
liability most commonly, if not exclusively, arises in the context
of piercing the corporate veil, in which creditors attempt to
disregard the corporate form to reach the personal assets of the
shareholders. See, e.g., Van Dorn Co. v. Future Chem. & Oil Corp.,
753 F.2d 565, 569–73 (7th Cir. 1985); Main Bank v. Baker, 427
N.E.2d 94, 101–02 (Ill. 1981). “Piercing the corporate veil” is an
equitable doctrine that depends on the circumstances in each
case. Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d
1339, 1345 (7th Cir. 1987); see Main Bank, 427 N.E.2d at 102.
There are two showings that must be made to establish that a
corporation is merely an alter ego: “‘first, there must be such
No. 12‐1349 43
unity of interest and ownership that the separate personalities
of the corporation and the individual no longer exist; and
second, circumstances must be such that an adherence to the
fiction of separate corporate existence would sanction a fraud
or promote injustice.’” Koch Refining, 831 F.2d at 1345 (quoting
Gallagher v. Reconco Builders, Inc., 415 N.E.2d 560, 563–64 (Ill.
App. Ct. 1980)); see also Main Bank, 427 N.E.2d at 101. “The
degree of control one entity holds over another [(i.e., the first
element)] has been measured in Illinois by evidence of misrep‐
resentation; commingling of funds, assets, or identities;
undercapitalization; failure to operate at arm’s length; and
failure to comply with corporate formalities.” Koch Refining,
831 F.2d at 1345 (citing Main Bank, 427 N.E.2d at 102); see also
Van Dorn Co., 753 F.2d at 570 (listing similar factors). “Once the
first element of the test is established, either the sanctioning of
a fraud (intentional wrongdoing) or the promotion of injustice,
will satisfy the second element.” Van Dorn Co., 753 F.2d at 570.
It is unclear whether Illinois recognizes an analogous alter‐
ego theory to disregard the separate legal identity of a trust. Cf.
In re Vebeliunas, 332 F.3d 85, 90 (2d Cir. 2003) (“The question
whether the ‘alter ego theory’ of piercing applies to trusts is a
matter of state law.” (citation omitted)). WIN cites no cases to
support such a cause of action, and the only case cited by
Sharif involved a court’s refusal to impose a resulting trust due
to the party’s inequitable conduct, see Am. Nat’l Bank & Trust v.
Vinson, 653 N.E.2d 13, 15–16 (Ill. App. Ct. 1995). But we
proceed on the assumption that such a theory exists and that
it is governed by the standards for piercing the corporate veil
because the parties have so assumed and the merits are not at
issue in this appeal.
44 No. 12‐1349
In almost all material respects, WIN’s alter‐ego claim is
indistinguishable from the tortious‐interference counterclaim
in Stern, the fraudulent‐conveyance claim in Granfinanciera, the
contract claim in Northern Pipeline, and the disclosure claims in
Ortiz. The alter‐ego claim is a state‐law claim that does not
involve “public rights.” The dispute is between private parties
and involves no governmental parties. It stems from state law
rather than a federal regulatory scheme. And it does not
involve a particularized area of law. Instead, it is a common‐
law claim for which state law provides the rule of decision, and
it is intended only to augment the bankruptcy estate. See Stern,
131 S. Ct. at 2611–15; Granfinanciera, 492 U.S. at 49–59; N.
Pipeline, 458 U.S. at 67–76 (plurality opinion); id. at 91
(Rehnquist, J., concurring in judgment); In re Ortiz, 665 F.3d at
914. Furthermore, it is beyond dispute that the bankruptcy
court was not acting as an adjunct to the district court. See
Stern, 131 S. Ct. at 2618–19; N. Pipeline, 458 U.S. at 76–87
(plurality opinion); id. at 91 (Rehnquist, J., concurring in
judgment).
WIN argues that the bankruptcy court had authority to
enter judgment on the alter‐ego claim because WIN had to
establish that the Soad Wattar Trust was Sharif’s alter ego in
order to establish the grounds for denying discharge under 11
U.S.C. § 727. Though it is not clear, WIN appears to be trying
to fit this case within the narrow confines of Katchen, 382 U.S.
at 329–36, and Langenkamp, 498 U.S. at 44, but for several
reasons we are not persuaded. First, WIN’s alter‐ego claim
technically was asserted against a nonparty to the bankruptcy
proceedings, the Soad Wattar Trust (of which Sharif was
trustee). The holdings of Katchen and Langenkamp can come
No. 12‐1349 45
into play only where the party against whom the action is
asserted has filed a claim against the bankruptcy estate. See
Stern, 131 S. Ct. at 2615–18; In re Ortiz, 665 F.3d at 914. Second,
while the alter‐ego claim may have some overlap with the
objections to discharge, nothing indicates that it has any
relation to the claims‐allowance process. See Stern, 131 S. Ct. at
2618 (“Congress may not bypass Article III simply because a
proceeding may have some bearing on a bankruptcy case; the
question is whether the action at issue stems from the bank‐
ruptcy itself or would necessarily be resolved in the claims
allowance process.”); In re Ortiz, 665 F.3d at 914. Third, the
trustees’ rights of recovery in Katchen and Langenkamp were
creatures of federal bankruptcy law, whereas the alter‐ego
claim here, like the counterclaim in Stern, “is in no way derived
from or dependent upon bankruptcy law; it is a state [claim]
that exists without regard to any bankruptcy proceeding.”
Stern, 131 S. Ct. at 2618. Finally, it simply cannot be said that by
resolving WIN’s objections to discharge the bankruptcy court
necessarily would have needed to resolve the alter‐ego claim.
To be sure, there is some factual overlap, particularly with
respect to Count I, which alleged that Sharif had continuously
concealed property in the Soad Wattar Trust with intent to
deceive. But in passing on the merits of the alter‐ego claim, the
bankruptcy court would have had to determine, first, whether
Illinois law recognizes an alter‐ego theory for piercing a trust
and, second, whether the evidence satisfied the applicable
standard. Assuming that the standard for trust piercing is
similar to that for corporate‐veil piercing, that would require
not only a showing of concealment of assets in the trust with
intent to deceive, but also that there was a unity of ownership
46 No. 12‐1349
(or a merger of the legal and equitable estates, in trust lingo)
such that the trust and Sharif ceased to exist as separate
entities. Thus, even if we could look past the facts that the Soad
Wattar Trust did not file a claim and that the objections to
discharge have nothing to do with the claims‐allowance
process, we cannot say that in resolving WIN’s claims under 11
U.S.C. § 727 the bankruptcy court necessarily would have
resolved the alter‐ego claim had it reached the merits (as
opposed to entering default judgment). See Stern, 131 S. Ct. at
2617–18; In re Ortiz, 665 F.3d at 914.
In sum, WIN’s alter‐ego claim is a state‐law claim between
private parties that is wholly independent of federal bank‐
ruptcy law and is not resolved in the claims‐allowance process.
Accord In re Madison Bentley Assocs., 474 B.R. 430, 439 (S.D.N.Y.
2012). Consequently, we hold that although the bankruptcy
court had constitutional authority to enter final judgment on
WIN’s objections to discharge, it lacked constitutional author‐
ity to enter final judgment on WIN’s alter‐ego claim. Cf.
Waldman, 698 F.3d at 919–21 (holding that although bankruptcy
court had constitutional authority to enter final judgment on
debtor’s disallowance claims against creditor, it did not have
constitutional authority to enter final judgment on debtor’s
state‐law claims).
3. Remedy
So the bankruptcy court lacked constitutional authority to
enter final judgment on the alter‐ego claim, but what is the
proper remedy? Sharif requests the relatively modest remedy
of remanding to the district court and allowing him to object to
the bankruptcy court’s July 6, 2010, order as a report and
No. 12‐1349 47
recommendation. The district judge could then enter final
judgment “after considering the bankruptcy judge’s proposed
findings [of fact] and conclusions [of law] and after reviewing
de novo those matters to which any party has timely and
specifically objected.” 28 U.S.C. § 157(c)(1). While perhaps the
most practical and equitable remedy, there are serious ques‐
tions as to whether it is authorized by statute.
Recall that Sharif waived his contention that the alter‐ego
claim is a noncore proceeding and that, as a result, we pro‐
ceeded on the assumption that it is a core proceeding. In core
proceedings, “§ 157(b)(1) authorizes bankruptcy courts to ‘enter
appropriate orders and judgments,’ not to propose them.”
Waldman, 698 F.3d at 921. No statutory provision authorizes a
bankruptcy court to propose findings of fact and conclusions
of law in a core proceeding; such a report and recommendation
from the bankruptcy court is statutorily authorized only in
noncore proceedings, see § 157(c)(1). So “[f]or the bankruptcy
judge’s orders to function as proposed findings of fact or
conclusions of law …, we would have to hold that the [alter‐
ego claim was] ‘not a core proceeding’ but [is] ‘otherwise
related to a case under title 11.’” In re Ortiz, 665 F.3d at 915
(quoting § 157(c)(1)). But see In re Bellingham Ins. Agency, Inc.,
702 F.3d at 566 n.8 (rejecting Ortiz as not “thoroughly rea‐
soned”).
In Waldman, the Sixth Circuit did precisely that, even
though (like Sharif) the party raising the Stern objection had
waived his statutory argument that the affirmative claims were
noncore. 698 F.3d at 921–22. The court reasoned that “the
fortuity of Waldman’s waiver of his own rights does nothing
to diminish the bankruptcy court’s authority under
48 No. 12‐1349
§ 157(c)(1).” Id. at 922. And because the court concluded that
the affirmative claims for fraud were noncore, it remanded the
matter to the district court with instructions to treat the
bankruptcy court’s purported entry of final judgment as
proposed findings and conclusions and to review them de
novo under § 157(c)(1). Id.
We find the Sixth Circuit’s approach to be reasonable, but
given the total lack of argument from Sharif and WIN on
whether the alter‐ego claim is truly core or noncore, we will
leave it to the district court to make that determination in the
first instance. Because the core/noncore status of the alter‐ego
claim is not apparent, we explore the proper course of action
should that claim turn out to be a core proceeding.
Assuming that the alter‐ego claim is in fact a core matter, it
is difficult to find a statutory basis on which the district court
could rely to treat the bankruptcy court’s order as proposed
findings and conclusions. To be sure, the bankruptcy court
never reached the merits of the claim because it entered default
judgment as a discovery sanction. But there is no statutory
provision authorizing a bankruptcy court to preside over
discovery, apart from its authority over core and noncore
matters. It is true that magistrate judges often preside over
pretrial matters such as discovery, even if the district court
ultimately decides the claims for which discovery is sought,
but 28 U.S.C. § 636(b)(1)(A) expressly authorizes a district
judge to “designate a magistrate judge to hear and determine
any pretrial matter pending before the court,” with certain
exceptions and subject to reconsideration by the district judge
if “the magistrate judge’s order is clearly erroneous or contrary
to law.” No analogous statutory authorization exists for
No. 12‐1349 49
bankruptcy judges. It appears, therefore, that if the alter‐ego
claim is in fact a core proceeding, the only statutorily autho‐
rized remedy would be for the district court to withdraw the
reference, see § 157(d), and then set a new discovery schedule.
Of course, this would present a windfall to Sharif, but it is
difficult to see any other solution under the peculiar circum‐
stances of this case.
Accordingly, on remand the district court shall first
determine whether the alter‐ego claim is a core or a noncore
proceeding. If it concludes that it is a noncore proceeding, then
the court may treat the bankruptcy court’s order purporting to
enter final judgment on the alter‐ego claim as proposed
findings of fact and conclusions of law to be reviewed de novo.
See Fed. R. Bankr. P. 9033(d) (“The district judge shall make a
de novo review upon the record or, after additional evidence,
of any portion of the bankruptcy judge’s findings of fact or
conclusions of law to which specific written objection has been
made in accordance with this rule. The district judge may
accept, reject, or modify the proposed findings of fact or
conclusions of law, receive further evidence, or recommit the
matter to the bankruptcy judge with instructions.”). If, on the
other hand, the court determines the alter‐ego claim to be a
core proceeding, then it shall order that the reference of the
alter‐ego claim to the bankruptcy court be withdrawn and
conduct fresh discovery proceedings in the district court,
though the district judge will have discretion in setting a more
abbreviated schedule given that prior discovery has been had.
50 No. 12‐1349
III. Appellate Jurisdiction
We must next determine what effect, if any, our holding
that the bankruptcy court lacked constitutional authority to
enter final judgment on the alter‐ego claim has on our appel‐
late jurisdiction over the remainder of Sharif’s appeal. See, e.g.,
In re Ortiz, 665 F.3d at 910; India Breweries, Inc. v. Miller Brewing
Co., 612 F.3d 651, 657 (7th Cir. 2010). As noted earlier, in Ortiz
we concluded that the bankruptcy court’s lack of constitutional
authority to enter final judgment on the debtors’ claims
deprived us of appellate jurisdiction, but that was due to the
unique posture of that appeal, namely, we had permitted the
parties to bypass the district court and bring a direct appeal
from bankruptcy court. 665 F.3d at 914–15. Here, Sharif first
appealed to the district court and then brought this appeal
from the district court’s judgment affirming the bankruptcy
court, so Ortiz does not control our jurisdictional inquiry.
As a general rule, we have jurisdiction over a bankruptcy
appeal that has first been appealed to the district court only if
both the bankruptcy court’s original order and the district
court’s order reviewing the bankruptcy court’s original order
are final. In re Rimsat, Ltd., 212 F.3d 1039, 1044 (7th Cir. 2000);
see 28 U.S.C. § 158(a)(1) & (d)(1). Finality in the bankruptcy
context “is considerably more flexible than in an ordinary civil
appeal taken under 28 U.S.C. § 1291,” In re Gould, 977 F.2d
1038, 1040–41 (7th Cir. 1992), as it does not require that the
entire bankruptcy proceeding have been terminated, see, e.g.,
In re Kilgus, 811 F.2d 1112, 1116 (7th Cir. 1987). Rather, the test
for finality in this context “is whether an order resolves a
discrete dispute that, but for the bankruptcy, would have been
No. 12‐1349 51
a stand‐alone suit.” Zedan v. Habash, 529 F.3d 398, 402 (7th Cir.
2008); In re USA Baby, Inc., 674 F.3d 882, 883 (7th Cir. 2012).
The bankruptcy court’s order entering default judgment on
WIN’s adversary complaint was a final, appealable judgment,
as it resolved all claims of the complaint against all parties. See
Zedan, 529 F.3d at 402 (“We have consistently explained that
the final disposition of any adversary proceeding falls within
our jurisdiction.”); In re Teknek, LLC, 512 F.3d 342, 345 (7th Cir.
2007). That the entry of default judgment was a discovery
sanction makes no difference because, unlike monetary
sanctions, a sanction such as default judgment or dismissal that
completely eliminates the possibility of a decision on the merits
is final for purposes of appeal. See In re Golant, 239 F.3d 931,
934–35 (7th Cir. 2001). Nor does our conclusion that the
bankruptcy judge lacked authority to enter final judgment on
the alter‐ego claim alter finality. The only claims over which
the bankruptcy judge had constitutional authority were
objections to the discharge of Sharif’s debts, and the denial of
discharge in the adversary proceeding finally resolved those
claims. See In re Marchiando, 13 F.3d 1111, 1113–14 (7th Cir.
1994) (“an order declaring the debt either dischargeable or not
is a final, appealable order” (citing In re Riggsby, 745 F.2d 1153,
1154 (7th Cir. 1984))); see also In re Weber, 892 F.2d 534, 537 (7th
Cir. 1989); cf. Zedan, 529 F.3d at 407 (Easterbrook, C.J., concur‐
ring) (arguing that objections to discharge are better handled
as contested matters rather than adversary proceedings and
requesting the appropriate committees to look into this subject,
as the manner in which the objection is presented affects
appellate review). There was nothing else for the bankruptcy
court to do with respect to WIN’s adversary complaint.
52 No. 12‐1349
The district court’s judgment affirming the bankruptcy
court’s judgment is also a final, appealable judgment. While it
is true that a district judge’s decision to remand for further
proceedings in the bankruptcy court may destroy the finality
of the bankruptcy court’s order, see In re Lopez, 116 F.3d 1191,
1192 (7th Cir. 1997); In re Riggsby, 745 F.2d at 1155, the district
judge in this case affirmed the bankruptcy court’s judgment
and that affirmance is a final decision, see In re Golant, 239 F.3d
at 935; In re Weber, 892 F.2d at 538. That the bankruptcy court
lacked constitutional authority to enter judgment on the alter‐
ego claim does not alter this conclusion. The district judge
reviewed the alter‐ego claim under traditional standards of
appellate review rather than de novo, but that does not alter
the fact that it entered a final judgment; it simply constitutes a
defect in the final judgment, not a lack of finality. We thus have
appellate jurisdiction under § 158(d) to consider the remaining
balance of Sharif’s appeal.
IV. Sanctions Were Not an Abuse of Discretion
Sharif challenges the district court’s affirmance of both the
default judgment and the award of attorney’s fees to WIN as
discovery sanctions, see Fed. R. Civ. P. 37(b); see also Fed. R.
Bankr. P. 7037 (rendering Fed. R. Civ. P. 37 applicable in
adversary proceedings), though he focuses almost exclusively
on the default judgment. A court’s imposition of sanctions
under Rule 37 is reviewed for an abuse of discretion, Nat’l
Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 642
(1976) (per curiam); In re Thomas Consol. Indus., Inc., 456 F.3d
719, 724 (7th Cir. 2006), which requires the appealing party to
demonstrate clearly “that no reasonable person would agree
[with] the trial court’s assessment of what sanctions are
No. 12‐1349 53
appropriate,” Marrocco v. Gen. Motors Corp., 966 F.2d 220, 223
(7th Cir. 1992). When reviewing a district court’s affirmance of
a bankruptcy court’s ruling we apply the same standards as
the district court, In re Snyder, 152 F.3d 596, 599 (7th Cir. 1998),
reviewing factual findings for clear error and legal conclusions
de novo, In re UNR Indus., Inc., 986 F.2d 207, 208 (7th Cir. 1993).
A. Default Judgment
Sharif challenges the bankruptcy court’s entry of default
judgment on two fronts. First, he contends that the bankruptcy
court violated his right to due process by entering default
judgment without providing him notice that his discovery
responses were deficient. Second, he maintains that his
discovery responses were in substantial compliance with the
discovery order and, therefore, that the bankruptcy court
abused its discretion in imposing the severe sanction of
default. Neither argument is persuasive.
The sanctions of dismissal and entry of default judgment
are strong medicine, so before a court imposes such a sanction
it must find by clear and convincing evidence that the party
against whom the sanction is imposed displayed willfulness,
bad faith, or fault. Maynard v. Nygren, 332 F.3d 462, 467–68 (7th
Cir. 2003). Although courts are strongly encouraged to make
such a finding explicitly, on appeal it may be inferred from the
sanction order. In re Golant, 239 F.3d at 936. Another necessity
flowing from the severity of the sanction is that a court must
give at least the party’s attorney notice and an opportunity to
respond before entering a default judgment (or dismissing the
case), but there need not be repeated warnings formalized in
writing. See, e.g., Ball v. City of Chicago, 2 F.3d 752, 755 (7th Cir.
54 No. 12‐1349
1993) (“‘Due warning’ need not be repeated warnings and
need not be formalized in a rule to show cause. A judge is not
obliged to treat lawyers like children. But there should be an
explicit warning in every case.”); Halas v. Consumer Servs., Inc.,
16 F.3d 161, 164 (7th Cir. 1994) (“a formal, written order to
comply with discovery is not required under Rule 37(b); an
oral directive from the district court provides a sufficient basis
… if it unequivocally directs the party to provide the requested
discovery”). Moreover, despite the severity of the sanction, a
court is not required to issue less severe sanctions before
deciding to enter default judgment (or to dismiss the case). See
Patterson v. Coca‐Cola Bottling Co., 852 F.2d 280, 284 (7th Cir.
1988) (“a district court is not required to fire a warning shot”).
In arguing deficient notice, Sharif relies in part on the
requirement that in a motion to compel disclosure or discovery
the moving party “must include a certification that the movant
has in good faith conferred or attempted to confer with the
person or party failing to make disclosure or discovery in an
effort to obtain it without court action.” Fed. R. Civ. P. 37(a).
We are unable to see how Rule 37(a) supports Sharif’s argu‐
ment. Sharif’s responses to WIN’s discovery requests were due
on March 15, 2010, but Sharif ignored those requests. On April
13, WIN’s counsel conferred with Sharif’s counsel and re‐
quested complete responses to discovery requests by April 23.
Sharif’s counsel would not agree to WIN’s request, so on April
15 WIN filed its motions to compel and for sanctions in the
bankruptcy court. Accordingly, WIN satisfied its Rule 37(a)
obligation to confer in good faith with Sharif prior to filing its
motion to compel with the bankruptcy court.
No. 12‐1349 55
Sharif also maintains that he was not given proper notice
that his production was deficient and that WIN made no
demands and identified no deficiencies between April 28 and
the evidentiary hearing on May 24. On April 21, the bank‐
ruptcy court granted the motion to compel and continued the
motion for sanctions. In its order, the court expressly stated
that an order of default would be entered if Sharif did not
comply with the discovery requests by April 28 (approximately
six weeks after the original due date). Cf. In re Thomas Consol.,
456 F.3d at 727 (warning was sufficient where district court
warned trustee’s lawyer that case would “never get to a trial”
if he continued failing to comply with orders). After five years
of Sharif refusing to produce requested documents (including,
of course, the prior litigation), on April 27 he produced
approximately 1,500 pages of documents. But his response fell
woefully short of the discovery that WIN had requested. As set
forth earlier in this opinion, Sharif failed to produce any
documents on several matters that were the focus of WIN’s
requests. He failed to produce documents related to the Loan
Assets, documents concerning several accounts in which he
had an interest, documents concerning business ventures with
which he had claimed to be involved, his signed federal and
state tax returns, source documents used to prepare his tax
returns, and documents related to the $271,000 he allegedly
owed his family. Perhaps most importantly, he failed to
produce any documents concerning the formation and funding
of the Soad Wattar Trust. Additionally, much of the discovery
that he tendered was deficient—for example, he failed to verify
and/or sign his interrogatory responses, and instead of
producing bank statements and other records related to his
56 No. 12‐1349
bank accounts he provided the names and addresses of the
banks with corresponding account numbers. Cf. Fed. R. Civ. P.
37(a)(4) (“an evasive or incomplete disclosure, answer, or
response must be treated as a failure to disclose, answer, or
respond”); In re Thomas Consol. Indus., 456 F.3d at 725. During
his deposition on May 13, Sharif admitted many of these
deficiencies, including his failure to produce any documenta‐
tion concerning the creation and funding of the Soad Wattar
Trust. On May 20, Sharif tendered supplemental discovery,
which did not address the deficiencies. Then on May 24, the
bankruptcy court held a hearing to determine whether Sharif
had complied with the court’s order compelling discovery.
Sharif had notice and he had an opportunity to be heard (he
failed to show up for the May 24 hearing, but he was repre‐
sented by counsel and he does not claim that the court pre‐
vented him from attending). This is not a case where the
question of compliance is a close call. We agree with both the
bankruptcy court and the district court that a phone call to
Sharif’s counsel “would have been futile” in light of the gross
deficiencies in Sharif’s responses to WIN’s discovery requests,
not to mention the then‐five‐year pattern of Sharif engaging in
dilatory tactics to avoid his obligations to WIN. Sharif was
provided ample notice that WIN sought discovery of his and
the Soad Wattar Trust’s finances. He also had notice that if he
failed to respond WIN would seek sanctions, including default
judgment. The bankruptcy court then expressly informed
Sharif (at least, Sharif’s counsel, which is all that was required)
that failure to comply with the discovery requests would result
in default. The bankruptcy court, rather than issuing default
merely on WIN’s say so at the May 24 hearing, conducted its
No. 12‐1349 57
own, independent analysis. This case is thus far afield from
Kruger v. Apfel, 214 F.3d 784, 787–88 (7th Cir. 2000) (per
curiam), relied upon by Sharif, in which we reversed a sanction
of dismissal where there had been one mistake (a missed filing
deadline) and the only “notice” had been a magistrate’s
recommendation of dismissal, which the district court had
accepted without review, id. at 786. The fact that the bank‐
ruptcy court did not afford Sharif more bites at the apple does
not mean that his due process rights to notice and opportunity
to be heard were violated.
We also conclude that the bankruptcy court’s implied
finding of willfulness, bad faith, or fault was not clearly
erroneous and that it did not abuse its discretion in imposing
the severe sanction of default. Sharif does not dispute that the
discovery responses tendered on April 27 were deficient—he
admitted most of those insufficiencies at his deposition. Yet he
appears to claim that the supplemental discovery he tendered
on May 20 and the materials he submitted in his June 22
motion for summary judgment placed him in substantial
compliance. We decline to consider the materials he presented
after the bankruptcy court’s deadline of April 28 passed. We
also note that when he made the same argument before the
bankruptcy court he failed to specify the documents produced
after the deadline, the information contained therein, whether
they were responsive to WIN’s requests, and why they had not
been produced sooner. His failure to develop his argument
below waives it on appeal. See, e.g., Williams v. Dieball, No.
12–3348, 2013 WL 3942932, at *3–4 (7th Cir. Aug. 1, 2013).
Considering only the discovery that Sharif tendered before the
April 28 deadline, there is clear and convincing evidence that
58 No. 12‐1349
Sharif’s noncompliance with the discovery order was willful
and in bad faith. The evidence of bad faith becomes over‐
whelming once Sharif’s history of dilatory and feckless tactics
is taken into account. Cf. Smith v. Smith, 145 F.3d 335, 344 (5th
Cir. 1998) (“In making its ‘bad faith’ determination, the district
court was entitled to rely on its complete understanding of the
parties’ motivations. Defendants present no authority for the
proposition that the district court is prevented from consider‐
ing a party’s actions in a related case in making its bad faith
determination under Fed. R. Civ. P. 37. Moreover, the dilatory
and obstructive conduct of the defendants has been well‐
documented and the extreme sanction of default judgment was
warranted by their actions.” (internal citations omitted)).
In many respects this case is similar to Golant, in which we
upheld a bankruptcy court’s entry of default judgment as a
discovery sanction, where the court had repeatedly ordered
Golant to comply with discovery requests and he had failed to
do so; Golant had admitted failing to produce numerous
documents; and Golant had produced a fair number of
documents in response to the discovery requests but had failed
to produce “many important documents.” In re Golant, 239 F.3d
at 936–37. Entry of default judgment, we concluded, was the
only adequate sanction, reasoning that “[w]here a debtor in
bankruptcy refuses to be completely forthright with informa‐
tion regarding his financial dealings and resources—informa‐
tion that is of paramount importance to an efficient and fair
bankruptcy proceeding—the bankruptcy court is left with little
recourse but to enter default judgment against the debtor,” id.
at 937. As in Golant, the bankruptcy court here did not abuse its
discretion in imposing the sanction of default judgment. See
No. 12‐1349 59
also In re Kilgus, 811 F.2d at 1118 (“Judges must be able to
enforce deadlines. Doing so means the use of sanctions, even
severe ones such as default, when parties ignore the ongoing
proceedings and demand the right to set their own deadlines.
The entry of defaults may be especially important in bank‐
ruptcy cases, which may involve hundreds or thousands of
parties.”).
B. Attorney’s Fees
The district court entered two separate orders against Sharif
awarding WIN attorney’s fees and costs. Sharif has appealed
both, but he made no argument in his opening brief as to why
the fee awards are erroneous, so WIN contends that he has
waived any claims concerning them. Sharif responds that
reversal of the fee awards is the “natural corollary” to reversal
of the sanction of default judgment.
Sharif’s failure to develop an argument in his opening brief
has waived any claim he may have to the propriety of award‐
ing fees and costs in the first place. We have concluded that the
bankruptcy court did not abuse its discretion in entering
default judgment as a discovery sanction on the first four
counts of the complaint, so the “natural corollary” is that the
fee awards should be upheld unless there is an independent
reason that they are improper. Even in his reply brief Sharif
fails to identify an independent basis as to why the fee awards
should not be upheld if the sanction of default is upheld.
Nevertheless, we agree that a remand to the bankruptcy
court is necessary for a recalculation of the fee awards. The
bankruptcy court premised its calculations on WIN having
successfully obtained a default judgment on all five counts of
60 No. 12‐1349
the adversary complaint. But the court had constitutional
authority to enter judgment on only four of those counts. It
seems eminently reasonable that the fee awards should be
adjusted to reflect that fact. We therefore direct the district
court to remand the fee awards to the bankruptcy court for a
recalculation of each.
V. Conclusion
In sum, the portion of the district court’s judgment affirm‐
ing the bankruptcy court’s entry of default judgment denying
discharge of Sharif’s debts is AFFIRMED. The portion of the
district court’s judgment affirming the bankruptcy court’s
entry of default judgment on WIN’s alter‐ego claim is RE‐
VERSED, the bankruptcy court’s judgment on the alter‐ego claim
is VACATED, and the case is REMANDED to the district court for
further proceedings consistent with the instructions set forth in
this opinion. Lastly, the district court’s judgment affirming the
bankruptcy court’s two fee awards is REVERSED and REMANDED
to the district court with instructions to remand the orders to
the bankruptcy court for recalculation.
