Federal Arbitration Act vs. Stern v. Marshall: So . . . What’s Fair About This?

By Donald L. Swanson

I’m irritated [not that anyone actually cares]. Here’s why.

Federal Arbitration Act

I’ve been reading some bankruptcy cases on requirements of the Federal Arbitration Act. These cases talk about submitting a bankruptcy dispute to arbitration based on an arbitration provision in the disputing parties’ pre-petition contract. Never mind that the dispute is “related to” the bankruptcy or is a “core” proceeding – to arbitration it must go!

First off, I’ll admit to a bias: I think a bankruptcy court should, generally, hear and decide all disputes relating to the bankruptcy it is handling. And these arbitration requirements are messing with our system.

Incidentally, Federal Rule of Bankruptcy Procedure 9019(c) addresses arbitration and provides:

“(c) Arbitration. On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.”

Such a provision seems reasonable, practical and proper. But the bankruptcy/arbitration cases I’ve seen don’t even reference this Rule.

Stern v. Marshall

What’s particularly irritating is the history, over the last four decades, of U.S. Supreme Court opinions putting Constitutional limitations on the authority and jurisdiction of bankruptcy courts to hear and decide bankruptcy-related disputes. These limitations are based on such tedious and imprecise standards as “public rights” and “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789” [that’s the year the U.S. Constitution became effective].

Stern v. Marshall is the latest of Supreme Court cases declaring parts of the Bankruptcy Code unconstitutional due to a delegation of Article III authority to Article I bankruptcy judges. But Stern v. Marshall does allow for bankruptcy court action on Article III matters, as long as judicial review is provided by an Article III court using a de novo standard of review: “Don’t you dare be using a deferential standard of review!,” is a paraphrased Supreme Court message in Stern v. Marshall.

What’s Fair About This?

After decades of all that Article I / Article III / public rights rigmarole, we’re now told that bankruptcy courts need to defer, even on many core matters, to arbitration agreements between the parties. It’s not that bankruptcy judges have discretion to do so: arbitration is required.  All of this is because, apparently, Congress failed to make a bankruptcy exception in the Federal Arbitration Act.

So . . . let’s get this straight. Despite Stern v. Marshall, and the “public rights” and “courts at Westminster” machinations that preceded it, Congress is allowed to delegate Article III judicial authority on bankruptcy disputes:

–To private judges, who have no responsibility or connection whatsoever to any Article III court;

–Based on the pre-bankruptcy agreement of the disputing parties–often using boilerplate language; and

–With Article III judges providing:

•  after-the-fact approval and enforcement of the private judge’s decision; and

•  a standard of review that is less than de novo and less than deferential—it’s a rubber-stamp standard of review.

Oh . . . and by the way, how about this question:  If a party seeks rubber-stamp approval from a bankruptcy court on a non-core matter, can the bankruptcy court provide such approval?  Or must the bankruptcy court make proposed findings of fact and conclusions of law to the district court on rubber-stamping the arbitration agreement?

Something’s wrong with this picture!

This situation is like two siblings, where one gets in trouble for a few grades slightly less than As and Bs, while the other gets away with hanging out ‘til 3:00 a.m. with a bunch of ne’er-do-wells.

I’m finished. Sorry for the rant.

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