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Bar News - July 19, 2013

Federal Practice and Bankruptcy: The Question of Judicial Authority and Its Impact on Bankruptcy Practice


The question of whether US Bankruptcy Court judges have the authority to enter final judgments, as well as whether parties can consent to that authority, will be considered next year by the United States Supreme Court.

On June 24, 2013, the Supreme Court granted certiorari in the Ninth Circuit case of Executive Benefit Insurance Agency v. Arkison (In Re: Bellingham Insurance Agency). Certiorari was granted with respect to two questions: (a) whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a core proceeding under 28 USC 157(b); and (b) whether Article III permits the exercise of the judicial power of the United States by bankruptcy courts on the basis of litigant consent and, if so, whether that consent can be implied from the litigant’s conduct.

In addition to having broad, national implications, including potentially posing a threat to the litigation of Chapter 11 cases in existing bankruptcy courts, the outcome of the case could result in changes to the administrative rules in New Hampshire’s Bankruptcy Court, which uses litigant consent to assure judicial authority.

The Ninth Circuit Court of Appeals’ 2012 decision held that the defendant’s consent could waive challenge to the jurisdiction of the bankruptcy court to enter final orders. That Ninth Circuit decision conflicts with the Sixth Circuit Court of Appeals’ 2012 decision in Waldman v. Stone, which held that litigant consent does not cure the constitutional Article III defect.

Article III v. Non-Article III Judges
To fully understand the issue, it’s important to view it in historical context.

Bankruptcy courts are not courts – at least, they are not courts in the sense that the judges who sit on them are not judges under Article III of the United States Constitution. Bankruptcy judges are not Article III judges, because they do not have life tenure and their salaries are subject to diminution. Until 1973, when they became “judges,” the analogous functions to today’s bankruptcy judges were served by bankruptcy “referees.” The limited jurisdiction of the bankruptcy referee (later judge) caused much inefficient litigation.

The Bankruptcy Code of 1978 solved that problem by granting the District Courts jurisdiction over “all cases under title 11” and over “all civil proceeding arising under title 11 or arising in or related to cases under title 11.” 28 USC §1471 (1979) (now repealed). The bankruptcy courts were then authorized to exercise “all of the jurisdiction conferred by this section on district courts.” Id.

The 1978 Code (P.L. 95-598) as enacted adopted a compromise between the Senate and the House versions. The House version (HR 8200), which was not adopted, proposed full Article III status for bankruptcy judges.

In Northern Pipeline Construction v. Marathon Pipe Line, the Supreme Court, without a majority opinion, held that bankruptcy judges who do not have life tenure or a guarantee against salary diminution could not constitutionally determine a contract claim brought by the debtor against a defendant who had not filed a proof of claim. The plurality’s analysis was that Congress could establish non-Article III courts only in three very limited circumstances: (1) military tribunals; (2) territorial courts; and (3) matters involving public rights. The plurality determined that the contract dispute was a private right and therefore outside the ken of a non-Article III court.

In response, Congress amended the Bankruptcy Code with the Bankruptcy Amendments and Federal Judgeship Act of 1984. In that amendment, Congress established a new role for bankruptcy courts. Jurisdiction over all matters related to the bankruptcy case was granted to the district court, and the district court was granted the power to refer those matters to the bankruptcy court.

The matters referred to the bankruptcy court are of two types: “core,” and “non-core.” Upon referral by the district court, bankruptcy judges are statutorily authorized to enter findings and rulings in “core” proceedings. But with respect to non-core proceedings, bankruptcy judges are authorized only to make recommendations, with the final order to be entered by the district court after de novo review. As to non-core proceedings, Congress specifically authorized the parties to consent to the jurisdiction of the bankruptcy court.

In the 2011 decision in Stern v. Marshall, the Supreme Court held that some of the causes of action delineated by Congress as “core” are, nevertheless, not within the constitutional power of the bankruptcy court, because it is not an Article III court. (Stern dealt with a mandatory counterclaim to a proof of claim, but the same analysis probably applies to preference claims and fraudulent conveyance claims as matters involving private rights and not public rights.)

Our New Hampshire rules attempt to deal with the jurisdictional ambiguity through litigant consent. A plaintiff bringing an adversary proceeding, such as a fraudulent conveyance claim, in the Bankruptcy Court must allege whether the proceeding is core or non-core. The Bankruptcy Rules require that, in the event that the matter is non-core, the pleader must indicate whether it consents to the entry of a final order and ruling by the bankruptcy court.

Our local Administrative Orders require that even if the matter is a core proceeding, the pleader must state whether that party consents or does not consent to the entry of final orders and rulings by the bankruptcy court.

The Ninth Circuit case Executive Benefit Insurance Agency v. Arkison (In Re: Bellingham Insurance Agency) and the Sixth Circuit Waldman v. Stone put into question whether that consent structure works. The Sixth Circuit held that consent does not work to cure the Article III deficiency, because the requirement of an Article III court does not work to protect private rights. Instead, it protects “the structural principle advanced by Article III. And that principle is not [the litigant]’s to waive.”

The Sixth Circuit sees the need for an Article III judge as a matter of protecting the judiciary against the diminution of its power and authority. The Ninth Circuit, on the other hand, sees it as a matter predominantly concerned with the litigant’s private rights, which may be waived.

If the Supreme Court were to hold that consent does not cure the constitutional infirmities of an Article III bankruptcy judge entering an order on a fraudulent conveyance claim, the possible ramifications might include the evisceration of the Chapter 11 process.

If the Chapter 11 process is perceived as the reordering of private rights and not the implementation of a public right, then it is conceivable that an order confirming a Chapter 11 plan could only be entered by an Article III judge. Such an outcome would be breathtaking, and most would opine that such an outcome could not occur, because the plan-confirmation process is the essence of reorganizing debtor-creditor relations, and reorganizing debtor-creditor relations is the core of the “public right” that supports a non-Article III bankruptcy court’s jurisdiction.

However, in footnote 7 in Stern v. Marshall, and in footnote 6, in Belllingham, both the Ninth Circuit and the Supreme Court have pointed out that the Supreme Court has never held that the reorganizing of debtor-creditor relations is a public right. Perhaps reorganization involves no public right. The plan of reorganization essentially modifies many sets of private contract rights. Modifying many private rights may not add up to a public right.

If reorganizing debtor-creditor relations is not a public right, there would seem to be little present certainty that the Chapter 11 process in a non-Article III court will survive. Such an outcome could bring the Bankruptcy Code full circle to the structure proposed by the House in 1978, which envisioned full Article III Bankruptcy Judges.

Edmond Ford practices in Portsmouth NH with Ford & Associates, PA. He is a panel Chapter 7 Trustee and has been practicing in New Hampshire since 1982.

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