A Unified Theory of Bankruptcy Court Jurisdiction: Wellness International v. Sharif

IMG_0236
A unified view

By Donald L. Swanson

Federal courts in the U.S. bankruptcy system have been struggling for decades with the extent and limits of bankruptcy court jurisdiction under the U.S. Constitution.

The difficulty begins with Articles I and III of the U.S. Constitution:

–Article I, Section 8, says:

“The Congress shall have power to . . . establish . . . uniform laws on the subject of bankruptcies throughout the United States.”

–Article III, Section 1, says:

“The judicial power of the United States, shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish. The judges . . . shall hold their offices during good behaviour, and shall, at stated times, receive for their services, a compensation, which shall not be diminished during their continuance in office.”

The problem arises because bankruptcy courts are established under Article I (not under Article III), yet the end product of a bankruptcy court’s efforts is a judicial decision. So, we have an Article I judge serving an Article III – type role. This creates a separation-of-powers (between Congress and the judiciary) issue, and separation-of-powers is a crucial part of the constitutional system in these United States.

A Headache

This separation-of-powers issue has created, over many years, a headache for nearly everyone dealing with it. In the latest pronouncement on the issue by the U.S. Supreme Court (in Wellness International v. Sharif, decided May 26, 2015), we get a sense of that headache.

–The issue in Wellness is whether a bankruptcy court can hear and resolve the claim that a business entity is an alter ego of the bankruptcy debtor. The dissenting opinion authored by Chief Justice Roberts explains how the bankruptcy court, (i) has no constitutional authority to resolve a fraudulent transfer claim, but (ii) does have constitutional authority to resolve an alter ego claim.

[Editorial  Note: This minute distinction illustrates the technical difficulties involved.]

–The dissenting opinion authored by Justice Thomas emphasizes, (i) the difficulties and complexities of issues surrounding the constitutional authority of bankruptcy courts to issue judicial rulings, (ii) the need to grapple with and resolve these difficulties and complexities, and (ii) the failure of the majority opinion to do so in the Wellness case.

–The majority opinion rules that bankruptcy courts have authority to resolve all the types of disputes that Congress has assigned to it when the parties consent, either explicitly or by implication, to that authority.

–The majority opinion describes any constitutional concerns over its consent ruling as “de minimis”; while the dissenting opinion authored by Chief Justice Roberts sees great constitutional peril in the majority’s jurisdiction by consent ruling – it’s a slippery-slope type of concern he is expressing; and the dissenting opinion authored by Justice Thomas sees a middle ground in which the Supreme Court needs to grapple with and resolve the difficulties and complexities involved.

As a practical matter, the Wellness International ruling should resolve most constitutional issues on bankruptcy court authority. But it’s still troubling that there is no complete-consensus, on the U.S. Supreme Court, for a unified constitutional theory of bankruptcy court authority.

[Editorial Note:  It will be interesting to see how Justice Gorsuch fits into all of this.]

The Justice Thomas dissent describes the problem like this:

Modern bankruptcy courts “adjudicate a far broader array of disputes than their earliest historical counterparts. And this Court has remained carefully noncommittal about the source of their authority to do so.”

A Unified Theory

But it seems that the U.S. Supreme Court has, in fact, provided a unified theory of bankruptcy court jurisdiction in the Wellness International v. Sharif opinion. Here are the elements of that theory.

1. The source of authority is the specific “bankruptcies” reference in Article I of the Constitution;

2. Congress has properly expanded on the specific reference in Article I by making bankruptcy courts and bankruptcy judges a “unit” of the Article III district courts and subject to Article III control;

3. Congress has properly allocated the division of labor between Article III district courts and their bankruptcy court units, with the core/non-core and “related to” distinctions and the “proposed findings of fact and conclusions of law” mechanism; and

4. Stern v. Marshall issues are a limited exception to the proper allocation, but bankruptcy courts can still address these issues by consent of the parties or by “proposed findings and conclusions” to the district court.

Why wouldn’t these elements work as a unified theory? Answer: They should, according to the Supreme Court majority.

Why do we need to continue grappling with such history-based distinctions as public rights v. private rights that create confusion and difficulty? Answer: We don’t, according to the Supreme Court majority.

And how could this unified theory degenerate into the slippery-slope problem that Chief Justice Roberts envisions? Answer: It shouldn’t, according to the Supreme Court majority.

Remaining Constitutional Authority Question

The only remaining constitutional authority question is this:

–Which issues still require “de novo” review (absent consent of the parties) under Stern v. Marshall, rather than a deferential review as a final judicial order?

Surely this narrow question can be resolved with dispatch and efficiency.

Conclusion

It looks like a unified theory of bankruptcy court jurisdiction is now provided by the U.S. Supreme Court!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

Up ↑