Bankruptcy Judge Grossman, an able judicial mind, decisive with words and wisdom has authored an intelligent judgment. In re Anelia Teherneva, Case No. 19-71413-reg (EDNY, Feb. 28, 2022). The decision cuts off loss-mitigation from the court’s practice or rather judicial indulgence. Yes, it was an indulgence, as this loss-mitigation, a judicially crafted one was and being done without any authority, rather in clear violation of article III strictures. Perhaps bankruptcy judge could get away from the constrains of article III, as they are deemed to be article 1 judges. Article III justiciable doctrines, like standing, ripeness, mootness and or political question might not apply to article I judges. But still, a bankrupt debtor must satisfy the bankruptcy rules and the bankruptcy code requirement besides justiciability doctrine. These loss mitigation candidates come to bankruptcy court to have their obligation/contracts with the creditors rewritten—something that the bankruptcy courts just cannot do under the law. But then why raise judicial scepter to force a settlement. The bankruptcy judges’ acts are ultra vires and exceed limited jurisdiction.
Some consumer bankruptcy bar members are stunned and view this decision as heartless Robespierre kind of move, a cold move to thwart equitable judicial relief. But their grievance is misplaced. Judge Grossman did what a bright judge would do. He guarded well the judicial turf, hearkening us back to the limits of a federal court and reinforcing an important theme of a democratic power structure, i.e., separation of powers—judges do not write (or create) laws, rather interpret. Its time that some senator observe this talented judge and recommend his alleviation to an article III court.
Bankruptcy courts’ sponsored loss-mitigation, at the peril of sanction/pressure is unconstitutional and illegal. It could not have been justiciable. First where did the bankruptcy court get the authority to run a parallel non-code (not found in the Bankruptcy Code) relief camp? Bankruptcy alleged courts are not even plenary courts for that matter. Statute does not create such a court. Rather, section 151 is explicit, “in each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court.” 28 U.S.C. § 151. Further, none of the bankruptcy matter is filed with such “unit,” all bankruptcy matters are assigned to the district court. The bankruptcy jurisdiction granting statute, 28 U.S.C. § 1334 is clear—"district courts shall have original and exclusive jurisdiction of all cases under title 11.” Now this entire bankruptcy business is assigned in toto to the unit presided over by the bankruptcy judge, i.e., “each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.” 28 U.S.C. § 157. Thus, we find ourselves before the bankruptcy judge via reference under section 157. Those who are not happy with the same could file a motion to withdraw the reference under section 157 (c). However, mind you that you cannot withdraw the reference, it is the discretion of the district court, which again is unlawful. This façade of filing cases in district court and rerouting of the business to the bankruptcy units and with a safety valve of withdrawal of reference was an ad hoc patch applied by the Congress to meet exigent circumstances created by supreme court decision in Northern Pipeline Construction Company v. Marathon Pipeline Company, 458 U.S. 50 (1982). The patch stayed on as the Congress could not find any other alternative. Congress had also backed down from its initial proposal of making all bankruptcy judges as article III judge, but then Chief Justice Burger vehemently opposed such a sweeping elevation of the judges, for he felt that this mass conversion could dilute the prestige of sitting article III judges. Chief Judge had threatened to go on a public campaign against it. Anyway, we are where we find ourselves. We have article I judges that vacillate between leeway presumed under and by article I judges in the hallows of article III, conducting article III work, without its attendant covenants of justiciability. But then, we perhaps a hybrid judiciary dealing with article III business in line with Supreme Court’s utterance in Palmore v. United States, where the court declared that “the requirements of Article III, which are applicable where laws of national applicability and affairs of national concerns are at stake, must in proper circumstances give way to accommodate plenary grants of power to Congress to legislate with respect to specialized areas having particularized needs and warranting distinctive treatment.” This patch is perhaps the “confluence of practical consideration,” of Justice Harlan in Glidden Co v. Zdanok, 370 U.S. 530 (1962). The practical consideration is only if something is legislatively done, not what a bankruptcy judge would feel.
Loss mitigation as implemented by the bankruptcy court is not justiciable and is also unlawful. No law directs such a task by the bankruptcy court. No doubt, “courts created by statute can have no jurisdiction but sch as the statute confers” Christianson v. Cold Industries Operating Corp., 486 U.S. 800, 818 (1988). No where does the bankruptcy code as codified under Title 11 incorporate such a relief. Also nowhere does the jurisdictional grant to the federal courts envisions such a relief where the parties want to alter state created or adjudicated mortgages (property rights governed by state laws). See United States Dept. of Energy v. Ohio, 503 U.S. 607, 625 (1992)(“We have read the phrasing ‘arising under’ federal law to exclude cases in which the plaintiff relies on state laws, even when the State’s exercise of power in the particular circumstances is expressly permitted by federal law”). As the redressability of an injury is impossible without the bankruptcy code authorizing such help, what the bankruptcy courts are essentially doing is advisory. Also, the approval of such loan modification by the judicial official imprimatur is essentially collusively seeking the court approval.
Secured creditors cannot be told to restructure their debts without running afoul of contract clause. Or taking away their rights without running afoul of the Fifth Amendment as it overrides bankruptcy. Justice Brandies declaring invalid Frazier-Lemke Act which compromised the collective rights of a farm mortgagee as running afoul of Fifth Amendment. Louisville Joint Stock Land Bank v. Radford 294 U.S. 648 (1935). See also, United States v. Security Industrial Bank. 459 U.S. 70 (1982).(finding retroactive lien avoidance pursuant to 1978 Bankruptcy Reform Act could be unconstitutional). Not always could the rights of the secured creditors be left intact, they have been tempered with in the past, however legislatively. Just a year before the Radford decision, the Supreme Court had in Home Building & Loan Association v. Blaisdell 459 U.S. 70 (1982), upheld the Minnesota Moratorium Law of 1933. The challenged law here had extended the Minnesota statutory redemption period for an additional two years. The law had equally forbidden deficiency judgments during the grace period of two years thus impairing the contract. The Court upheld the law as a valid exercise of police power to meet the special times of depression.
Here loss mitigation did not result from any bankruptcy statute or any other statue applicable, rather bonhomie of the bankruptcy judges. Equity alone does not confer jurisdiction. Rather equity adhere to the court where there is lawful jurisdiction based on a statute. But a right has to be shown whose vindication would redress the grievance. There is no right to have the loss mitigation so far, thus not a proper candidate for equity. “Once a right and a violation have been shown, the scope of a district court's equitable powers ... is broad, for breadth and flexibility are inherent in equitable remedies.” Swann v. Charlotte-Mecklenburg Bd. of Ed., 402 U.S. 1 (1971). Indeed, “where a court's federal subject matter jurisdiction is implicated, the concepts of equity, waiver, and estoppel are inapplicable.” Herod v. Potter, 255 F. App'x 894, 896 (5th Cir. 2007).
Judge Grossman is correct. Section 105 cannot be the basis of loss mitigation. Nor can such a case be filed solely for the purposes of availing loss mitigation, as the court just lacks subject matter jurisdiction. Section 105 does not create special powers, rather it allows the courts the exercise powers to achieve results warranted by other provisions of the laws. Indeed, “whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.” Norwest Bank Worthington v. Ahlers, 485 U.S. 197(1988)
Yes of course the reinstatement of the loan, sale of the estate property and or discharge from the debts are a routine normal reason for seeking chapter 13 bankruptcy protection. But to use the bankruptcy forum that too through the bankruptcy judges created relief is extra-judicial and transgress the line of limited jurisdiction, justiciability principles. And an attorney who files the case solely to achieve loss mitigation might in fact be violating rule 11.
Judge Grossman very properly disagrees with the cohorts of the loss mitigation, finding that “inherent power to manage their dockets under U.S.C. § 105(a) which authorizes courts to implement orders or rules” as a source of judicially sponsored is misplaced. Provisions of the bankruptcy codes are enforced by bankruptcy rules. And the rules of the courts are subject to Rules Enabling Act (28 U.S.C. § 2075) which states that rules of practice and procedure (as authored by Supreme Court) shall not “abridge, enlarge or modify any substantive right.” Of course, the creditors rights are being forced to alter to accommodate the debtors. Also, the rule making power is not further delegated to the bankruptcy judges to further innovate on them. If the Supreme Court cannot alter substantive rights with rules, how could the bankruptcy judge do the same? There is no denying the fact that “courts have the inherent authority to manage their dockets and courtrooms with a view toward the efficient and expedient resolution of cases.” Dietz v. Bouldin, 579 U.S. 40, 47 (2016). But “because inherent powers are shielded from direct democratic controls, they must be exercised with restraint and discretion.” Roadway Exp., Inc. v. Piper, 447 U.S. 752, 764 (1980). “The extent of these powers must be delimited with care, for there is a danger of overreaching when one branch of the Government, without benefit of cooperation or correction from the others, undertakes to define its own authority.” Degen v. United States, 517 U.S. 820, 823 (1996). Irrespective, inherent power is not a license to assume jurisdiction where none exist.
Rather than force loss-mitigation, the courts must scrutinize the paperwork filed by the creditors with inflated claims, prepared by grossly abusive mortgage servicers—that would go a long way. Also you will find that lot of the loss mitigation memorialized are not ultimately a reduction of the debt, rather the debt is actually inflated and temporarily moved to corpus of the loan with a reduced monthly mortgage payment resulting in a balloon payment at the end of the loan term. One is ill served with such a loan accommodation. Bankruptcy court must encourage the attorneys to come forward and challenge the proof of claims as filed—they are sloppily prepared and usually inflated. Trustees even though entrusted with the task of challenging such claims will not do the same in New York districts—it is for the able consumer attorney to pick up the gauntlet.