Dahiya Law Offices LLC
75 Maiden Lane Suite 606
New York NY 10038
Socials
© 2022 Dahiya Law Offices | www.legalpundit.com
Bankruptcy Jurisdiction, an undulating article III turf--plains, plateaus, or mountains
Litigation in bankruptcy forum is not an easy task. Jurisdiction is the biggest challenge for both--those who wish to avail it and others opposing it. Not all courts are created pursuant to article III and there are plenty of such courts, loosely referred to as legislative or article 1 courts. The article 1 courts are created by the Congress pursuant to “necessary and proper” clause of article 1. Examples are United States Court of Appeals for the Armed 10 U.S.C. §§ 941-946a; United States Tax Court, 26 U.S.C. §§ 7441-7487 United States Court of Appeals for Veterans Claims 38 U.S.C. §§ 7251-7299; the Alien Terrorist Removal Court, 8 U.S.C. §§ 1531-1537; and the United States Territorial Courts including the district courts for instance in Guam, the Virgin Island, American Samoa, Am. Samoan Code § 3.0220; the Northern Mariana Islands, Pub. L. 95-157, 91 Stat. 1265 and the Court of Appeals for the District of Columbia and its lower courts, § Pub. L. 91 -358(1970). And the United States Bankruptcy Court, 28 U.S.C. § 151. The interesting part of the bankruptcy court is that it does not have a distinct jurisdiction of its own, rather it is an auxiliary unit tagged with the district courts for their business and support. It is the district court that which has original jurisdiction over the bankruptcy matters, 28 U.S.C. § 1334 with a blanket referral of judicial business to the bankruptcy units, 28 U.S.C. § 157 (a). It would be an error to call the bankruptcy court an article 1 or an article III court. It is neither or it is both. And it has created difficulties for unwary ones. Irrespective, it is has been called a court.
Bankruptcy courts are not staffed by article III judges, rather appointees of the Court of Appeals to serve for 14 years, 28 U.S.C. §152. So, the bankruptcy judges are inferior judicial officer (i.e., officers not appointed by President and confirmed by the Senate), This has created difficulties and delays in the processing of the disputes. Also, because it creates four tiers of adjudication—bankruptcy court to Supreme Court with the district and appeals court as appellate courts.
The present structure and its jurisdictional lines were drawn in 1978 when Congress passed the Bankruptcy Reform Act. The prior system of the Bankruptcy Act of 1898 was replaced with dramatic overhaul of expansion of the bankruptcy system, its court’s jurisdiction and vested with all the powers of a regular federal court. Anything related to the bankruptcy was brought under the same umbrella. An attempt was also made by Reagan Administration to accord article III status to the bankruptcy judge which was opposed by then Chief Justice Warren E. Burger. Some say that Chief Justice lobbied hard. He sent a letter to the then Senate majority leader arguing that such a status would be “a gross misallocation of judicial resources and public funds.”
However, since the bankruptcy court was not a full-fledged federal court as defined by Article III of the Constitution, it was declared unconstitutional by the supreme court. N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, (1982)(Justice Burger dissented)
The Congress attempted to contain or rather streamline the jurisdictional issues with the Bankruptcy Reform Act of 1994. That patch is continuing though at times gnawed by the supreme court. And the jurisdictional issues continue to haunt the bankruptcy turf. Article III is the linchpin of federal adjudication, and this is what the exasperated Supreme Court keeps emphasizing: “The sheer surfeit of factors that the Court was required to consider in this case should arouse the suspicion that something is seriously amiss with our jurisprudence in this area. I count at least seven different reasons given in the Court's opinion for concluding that an Article III judge was required to adjudicate this lawsuit . . . “Stern v. Marshall, 564 U.S. 462, 504, 131 (2011). Stern court held designating state law-based counterclaims as core proceedings to enter final judgment by the bankruptcy court was unconstitutional. This labelling of disputes as core and non-core with “core” being defined broadly solely to retain the bankruptcy court jurisdiction was also earlier chastised as improper by Justice Brenan in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 60–61 (1989)(“Congress simply reclassified a pre-existing, common-law cause of action that was not integrally related to the reformation of debtor-creditor . . . . This purely taxonomic change cannot alter our Seventh Amendment analysis. Congress cannot eliminate a party's Seventh Amendment right to a jury trial merely by relabeling the cause of action to which it attaches and placing exclusive jurisdiction in an administrative agency or a specialized court of equity).
The jurisdiction baffle continues, and the Supreme Court has attempted to keep intact the bankruptcy system with an approach initially propounded by justice White as “balancing” or “workable,” (functionalist) (followed by Justice O’Connor) and not to make article III as litmus test. “That question is what limits Art. III places on Congress' ability to create adjudicative institutions designed to carry out federal policy established pursuant to the substantive authority given Congress elsewhere in the Constitution. Whether fortunate or unfortunate, at this point in the history of constitutional law that question can no longer be answered by looking only to the constitutional text.” N. Pipeline Const. Co. at, 94 He further exhorted, “Article III is not to be read out of the Constitution; rather, it should be read as expressing one value that must be balanced against competing constitutional values and legislative responsibilities. This Court retains the final word on how that balance is to be struck." Id. Same approach was followed by Justice O’ Connor. See Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833 (1986). With all its ups and down, a lawyer of bankruptcy jurisprudence could see the following:
First, the provision that allows the district court to transfer "any or all cases" under 28 U.S.C 157 (Procedure) does not fall within one of the categories identified by the Northern Pipeline plurality -territorial courts, military tribunals, and public rights exceptions. N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).
Second, bankruptcy judges do not fall within N. Pipeline's "adjuncts" theory: bankruptcy judges are not adjuncts to the district courts. Unlike magistrate judges that sit in the district court and are supervised by district courts, bankruptcy judges do not sit in the district court and are not so supervised. See, Stern v. Marshall, 131 S.Ct. 2594, 2611 (2011) (stating that bankruptcy courts cannot "be dismissed as mere adjuncts of Article III any more than could the bankruptcy courts under the 1978 Act. The judicial powers the courts exercise in cases such as this remain the same, and a court exercising such broad powers is no mere adjunct of anyone.").
Third, 28 U.S.C. § 157 cannot be justified under the balancing test used by the Supreme Court if a party has not consented to the bankruptcy court's jurisdiction. Commd'y Futures Trading Comm 'n v. Schor, 478 U.S. 833 (1986). Rather see if the party has proactively sought right to be heard by an article III court.
Fourth, the Supreme Court recognizes, as an exception, that bankruptcy courts may adjudicate issues related to public rights provided the causes of action are related to an integrated regulatory scheme. Thomas v. Union Carbide Agric. Prods. Co.,473 U.S. 568, 589-90, 593-94 (1985)("Congress, acting for a valid legislative purpose pursuant to its constitutional powers under Article I, may create a seemingly 'private' right that is so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution").
Fifth, Article III does not allow Congress to delegate inherently judicial matters, and specifically matters of private rights, away from Article III courts. Article III limits the extent of permissible congressional jurisdictional regulation through the separation of powers. Martin v. Hunter's Lessee, 14 U.S. 304, 330 (1816) (finding that the language of Article III is mandatory and that Congress is required to vest "the whole judicial power" in the federal courts).
Sixth, when a defendant invokes the Seventh Amendment right to a jury trial or the right to be heard by an Article III tribunal, the case is not subject to transfer to a non-Article III court. Article III and the Seventh Amendment are coextensive. Granfinanciera, SA. v. Nordberg, 492 U.S. 33 (1989).
Seventh, a party, having invoked the right to be heard by an independent judge under Article III, cannot be subjected to the bankruptcy judge, as that would violate Due Process. The role of the independent judiciary within the constitutional scheme of tripartite government is to assure impartial adjudication in federal court. United States v. Will, 449 U.S. 200,217-18 (1980); Buckley v. Valeo, 424 U.S. 1, 122 (1976) (per curiam).
Eighth, adjudicating liability of one individual to another being innate to private rights cannot be assigned to non-Article III judge in a federal proceeding context. See Marathon, Schor, Granfinanciera and Stern.
Ninth, the constitutional structural protections are also implicated where a defendant cannot withdraw a referral to a non-Article III tribunal: the Bankruptcy Code allows only discretionary withdrawal and limits mandatory withdrawal to certain circumstances. See generally 28 U.S.C. § 157.
Tenth, the district judge could not have delegated core judicial functions [private rights ones innate to article III] to a bankruptcy judge.
Debtor and or Trustees would want to force a non-article III adjudication—he cannot do that in presence of the foregoing challenges, especially when a party has demanded to be heard by an article III court. Precisely the reason, to maintain the constitutionality scheme of the 1978 Bankruptcy Act that the Congress enacted 28 U.S.C. § 157 to withdraw the reference: The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. Id. The district court may withdraw the reference sua-sponte, for both withdrawals, permissive or mandatory. “Just as the ‘ultimate decision’ whether to invoke [a] magistrate [judge]’s assistance is made by the district court, bankruptcy courts hear matters solely on a district court’s reference, §157(a), which the district court may withdraw sua sponte or at the request of a party, §157(d).” Wellness Intern. Network v. Sharif, 135 S. Ct. 1932 (2015).
Do not depend on the sua-sponte withdrawal. A party will have to do it. And even though district judges have a “virtually unflagging obligation... to exercise the jurisdiction given them,” they will do anything possible to have the case stay back with the bankruptcy court reserving the right to enter judgment.