Federal Arbitration Act is Superseded by U.S. Constitution’s “Uniform Laws on . . . Bankruptcies” Clause

img_0373
Uniformity

By: Donald L. Swanson

The Congress shall have Power To . . . establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”

U.S. Constitution, Art. 1, Sec. 8 (emphasis added).

Bankruptcy law is special, to begin with. There is no other area of law quite like it — either legally or practically.

“Uniform Laws” Requirement

Bankruptcy is special, legally, under the U.S. Constitution—as shown by the quote above.

There aren’t many areas of law specifically identified in the U.S. Constitution. And the Constitution requires uniformity in only two other areas: in (i) “Duties, Imposts and Excises,” and (ii) “Naturalization.”

So, bankruptcy law is not merely special—it’s nearly unique because of the Constitution’s uniformity requirement.

–Not Mere Surplusage

The Constitution’s “uniform” bankruptcy laws requirement is not mere surplusage. In Central Virginia Community College v. Katz, 546 U.S. 356 (2006), for example, the Supreme Court used the Constitution’s “uniform laws” provision to subject a state entity to preference liability in bankruptcy, despite that entity’s 11th Amendment rights of sovereign immunity.

–Uniformity in Both Enactment and Application

Katz declares, moreover, that the Constitution’s “uniform” bankruptcy laws provision requires Congress to, (i) enact bankruptcy laws that are uniform, and (ii) ensure uniformity in the application of such laws throughout the United States (see second paragraph of Katz’s Footnote 13).

Application to Arbitration

Credit One v. Anderson

Bankruptcy’s special status is apparent from the U.S. Supreme Court’s recent denial of certiorari in Credit One Bank, N.A. v. Anderson (Case No. 17-1652), where the Supreme Court let a denial of arbitration stand in a core bankruptcy dispute. Keep in mind that the Supreme Court has yet to grant an exception to Federal Arbitration Act requirements.

In Anderson, Debtor accused Creditor of violating the discharge injunction and filed a motion for redress. Creditor demanded arbitration under the Federal Arbitration Act and an agreement between the parties. The Bankruptcy Court denied arbitration—and appellate courts affirmed.

Creditor petitioned the U.S. Supreme Court for a Writ of Certiorari. But the Supreme Court denied the Petition on October 1, 2018.

—Latitude to Develop

This denial allows bankruptcy courts, and their appellate overseers, latitude to continue developing the law of arbitration in bankruptcy.

Arbitration’s Rubber-Stamp Standard of Review Destroys Uniformity

Here’s hoping that courts will begin focusing, in developing the law of arbitration in bankruptcy, on the Constitution’s requirement for the “uniform” application of bankruptcy laws “throughout the United States”!  Here’s why that’s important.

Judicial confirmations of arbitration rulings in U.S. district courts apply a rubber-stamp standard of review; and

No federal court, anywhere, can assure the uniform application of bankruptcy laws “throughout the United States” under a rubber-stamp standard of review.

—The Rubber-Stamp Standard

Here is the rubber-stamp standard, established by statutes, for confirming an arbitration award in a U.S. district Court:

  • 9 U.S.C. § 9 provides (emphasis added):

“any party . . . may apply to the court . . . for an order confirming the [arbitration] award, and thereupon the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title”;

  • 9 U.S.C. § 10(a) provides:

“the United States [district] court . . . may make an order vacating the award . . . —
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators . . . ;
(3) where the arbitrators were guilty of misconduct . . . or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award . . . was not made”; and

  • 11 U.S.C. § 11 provides :

“the United States [district] court . . . may make an order modifying or correcting the award . . . —
(a) Where there was an evident material miscalculation of figures or . . . in the description of any person, thing, or property . . .
(b) Where the arbitrators have awarded upon a matter not submitted to them . . .
(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.
The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.”

—Uniformity = Impossible

Such standards are rubber-stamp, indeed. As a result, nearly all arbitration awards must be confirmed by a district court—even when an award fails to conform with established bankruptcy laws.

Ensuring uniformity in the application of bankruptcy laws “throughout the United States” is, therefore, an impossibility when bankruptcy disputes (especially those of a “core” variety) are sent to arbitration

Bankruptcy Laws on Arbitration—Since 1898

Bankruptcy statutes and rules on arbitration have a long and continuous history—dating back to § 26 of the National Bankruptcy Act of 1898.

The current bankruptcy law on arbitration, in nearly the same form as the 1898 statute, is Fed.R.Bankr.P. 9019(c), which 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 laws predate the Federal Arbitration Act (enacted in 1925) and have had a continuous existence. Such fact reveals an intent to maintain a bankruptcy exception to the Federal Arbitration Act.

Such an exception, moreover, is mandated by the Constitution’s requirement that Congress establish “uniform Laws on the subject of Bankruptcies throughout the United States.”

Conclusion

Bankruptcy law is, indeed, special—both practically and under the words of the U.S. Constitution.

The Constitution’s uniformity requirement should enable bankruptcy courts, and their appellate overseers, to address “core” bankruptcy issues under Fed.R.Bankr.P. 9019(c), rather than under the Federal Arbitration Act.

For a prior article on this subject, see: “Screwing Up Our Bankruptcy World Again:  Arbitration Petition at U.S. Supreme Court.”

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

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 )

Google+ photo

You are commenting using your Google+ 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 )

Connecting to %s

Blog at WordPress.com.

Up ↑

%d bloggers like this: