Thursday, January 22, 2015

SCOTUS to Decide if Bankruptcy Courts Are (Still) Unconstitutional

By Michael Fuller, The Underdog Lawyer ®

Last Wednesday, in Wellness International Network v. Sharif, the Supreme Court heard arguments that called into question the authority of bankruptcy courts to enter final judgments in certain matters.

Three Constitutional provisions are relevant to the Wellness International case.

See related post from June 9, 2014: Supreme Court Clarifies "Stern Claim" Treatment in Bankruptcy Litigation

What Does the Constitution Say About Bankruptcy?

Article I of the Constitution assigned Congress to establish bankruptcy laws.

Article III of the Constitution assigned the federal court system to resolve legal disputes. The Constitution makes clear that federal court judges are entitled to serve for life with guaranteed pay that can never be reduced.

See related post: Portland federal judges earn $174,000 per year

The Seventh Amendment to the Constitution entitles parties to jury trials in most civil cases. Courts have held that jury trials under the Seventh Amendment must be conducted by Article III judges. Courts have also held that a party may waive its right to a jury trial under the Seventh Amendment.

How Are Bankruptcy Judges Created?

Rather than give all federal judges lifetime tenure and guaranteed pay, Congress decided to create a second tier of "Non-Article III" judges.

This second tier of judges includes magistrates, bankruptcy judges, administrative law judges, etc.

What is the Bankruptcy Code?

In 1978, Congress passed the Bankruptcy Code, pursuant to its Article I authority. Congress envisioned that non-Article III bankruptcy judges would decide all core bankruptcy matters.

However, in its 2011 opinion Stern v. Marshall, the Supreme Court ruled that the Constitution did not permit a bankruptcy judge to enter final judgment in a core bankruptcy matter because the state law counterclaim at issue wouldn't necessarily be resolved in the bankruptcy claims process.

The Wellness International Case

The Supreme Court's decision in Wellness International may finally require Congress to re-tool the Bankruptcy Code.

The case involves a bankrupt businessman who objected to the entry of final judgment against him by the bankruptcy judge on a certain state law claims involving his family trust.


Absent consent of all the parties involved, the Constitution simply doesn't allow a non-Article III judge to exercise the power of the federal judicial system.

In 1982, the Supreme Court warned Congress that the Bankruptcy Code and Bankruptcy Reform Act was unconstitutional. Rather than fix the problem, Congress passed the similarly unconstitutional Bankruptcy Amendments and Federal Judgeship Act of 1984, which was held unconstitutional by the Supreme Court in 2011.

It may be possible to maintain the current system on a case-by-case basis where all parties consent to entry of final judgments by a bankruptcy judge. However, this "consent" option will often defeat the very purpose of using specialized bankruptcy judges by creating uncertainty, and drawn out, expensive, bifurcated litigation.

Congress should either (1) authorize bankruptcy judges under Article III, or (2) withdraw the reference of bankruptcy matters to bankruptcy judges all together, and let the judiciary decide how to handle cases under Title 11.

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