Who Says Bankruptcy Judges Don’t Have Article III Independence?!

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Independence (photo by Marilyn Swanson)

By: Donald L Swanson

Actually, the U.S. Supreme Court does . . . but they’re wrong. Here’s why.

Some History

Back in early 1980s, when the Bankruptcy Code was but a few years old, the U.S. Supreme Court struggled with bankruptcy court jurisdiction.

Northern Pipeline

That struggle resulted in the Supreme Court’s 1982 Northern Pipeline v. Marathon Pipe Line decision, which almost killed the Code.

Here’s the essence of the Supreme Court’s four-Justice plurality opinion in Northern Pipeline:

“The judicial power of the United States must be exercised by judges who have the attributes of life tenure and protection against salary diminution specified by Art. III”;

“These attributes . . . ensure the independence of the Judiciary from the control of the Executive and Legislative Branches”’;

“There is no doubt that bankruptcy judges created by the Act are not Art. III judges”; and

Bankruptcy courts are not among “the historically recognized situations” where “the principle of independent adjudication” required by Art. III “does not apply.”

–1984 Act

In response, Congress adopted the Bankruptcy Amendments and Federal Judgeship Act of 1984 that created, (i) a division of labor between bankruptcy and district courts on “core” and “related to” bankruptcy matters, and (ii) control by Article III judges over bankruptcy courts and judges.

Granfinanciera

The U.S. Supreme Court reacted to Congress’s 1984 Act with its 1989 Granfinanciera v. Nordberg decision, in which a majority opinion still chafed at changes wrought by the Bankruptcy Code.

Granfinanciera dealt with the right to jury trial in fraudulent conveyance lawsuits filed in bankruptcy courts. Here is one of the majority opinion’s principal concerns:

“judges who are appointed for fixed terms may be beholden to Congress or Executive officials.”

Stern v. Marshall

Fast forward to the Supreme Court’s 2011 Stern v. Marshall decision, in which a majority opinion is still focused on a danger of bankruptcy judge dependence upon the executive or legislative branches:

“In establishing the system of divided power in the Constitution, the Framers” considered it essential that “the judiciary remain truly distinct from both the legislature and the executive”;

“As Hamilton put it, quoting Montesquieu, ‘there is no liberty if the power of judging be not separated from the legislative and executive powers’”; and

“Article III imposes some basic limitations that the other branches may not transgress,” which limitations “serve two related purposes”—

(i) “Separation-of-powers principles . . . protect each branch of government from incursion by the others,” and

(ii) “Article III protects liberty” by preventing what happened in Great Britain, where the King “made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.”

Dependence Error

Each of these three opinions (plurality in Northern Pipeline and majorities in Granfinanciera and Stern v. Marshall) starts with the proposition that bankruptcy judges are dependent upon the executive and/or legislative branches, because of their 14-years term and because their salaries are set by statute.

But none of those three opinions—not one—bothers to dig deeper or to explain how, exactly, such dependence exists. An obvious reason they don’t bother to do so is this:

–Because they can’t.

Article III Control over Bankruptcy Judges

What follows is a list of details about bankruptcy judges, established by Congress in the 1984 Act. As you read through the following list, ask yourself this question:

–How can the legislative branch or executive branch exercise control over bankruptcy judges?

–The List

Bankruptcy judges:

Serve as “judicial officers of” the U.S. district courts, which are “established under Article III of the Constitution” (28 U.S.C. § 152(a)(1));

Are appointed by judges of the federal courts of appeals—which are Article III judges (28 U.S.C. § 152(a)(1));

Are removable by the circuit judicial counsel (made up of federal court of appeals and district court judges—all of which are Article III judges) and only for cause (28 U.S.C. § 152(e));

Have salaries pegged by statute to the salaries of federal district court judges—which are Article III judges (28 U.S.C. § 153(a));

Have the costs of their courthouses and other work-related expenses paid by the Judiciary (28 U.S.C. § 156);

Have limited authority to decide only “core” matters and can handle “related to” matters only by presenting proposed findings of fact and conclusions of law to the district courts (and their Article III judges) or as the parties may otherwise consent (28 U.S.C. § 157);

Are subject to any dispute being withdrawn “for cause shown,” at any time, by the district court judge (an Article III judge) from consideration by the bankruptcy judge (28 U.S.C. § 157(d)); and

Are subject to appellate oversight by the U.S. district courts, the U.S. circuit courts of appeals and the U.S. Supreme Court (see 28 U.S.C. § 158)—all of which are staffed by Article III judges.

So . . . where, exactly, does dependence of bankruptcy judges on the legislative or executive branch arise?

–The reality is this: there isn’t any dependence—none.

Progress Away from Form Over Substance

The U.S. Supreme Court didn’t care in Stern v. Marshall—not one whit—whether actual independence exists or not.  It’s the form that counts.  Here’s what the majority said:

“It does not affect our analysis that” bankruptcy judges “are appointed by the Article III courts, rather than the President”; and

If a bankruptcy court “exercises the essential attributes of judicial power . . . reserved to Article III courts, . . . it does not matter who appointed the bankruptcy judge . . . The constitutional bar remains.”

By 2015, the Supreme Court had backtracked significantly on this form-over-substance point.  In its 2015 Wellness International v. Sharif opinion, the Supreme Court said (emphasis added):

“allowing Article I adjudicators to decide claims submitted to them by consent does not offend the separation of powers so long as Article III courts retain supervisory authority over the process”; 

Article III questions must not be decided by “formalistic and unbending rules,” but “with an eye to the practical effect that the” practice “will have on the constitutionally assigned role of the federal judiciary”; and

Practical attention to substance rather than doctrinaire reliance on formal categories should inform application of Article III”.

Conclusion

The reality is this: bankruptcy judges serve at the appointment, direction and control of Article III judges, and they serve in complete independence from both the legislative and executive branches of government.

Here’s hoping the U.S. Supreme Court will, one day, recognize and adopt this reality.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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