Justices Scalia and Kennedy — Their Impact on Bankruptcy Court Authority

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Justices Scalia and Kennedy (photos from nationaljournal.com)

By Donald L. Swanson

Two long-standing members of the U.S. Supreme Court—each served three decades—are recently departed from the Bench:

  • Justice Antonin Scalia served from September 26, 1986, until his death on February 13, 2016; and
  • Justice Anthony Kennedy served from February 18, 1988, until his retirement on July 31, 2018.

Both of these Justices had an impact on bankruptcy law—especially on limiting bankruptcy court authority under the Constitution’s Article III. But here’s how they differed:

  • As time went along, Justice Kennedy acknowledged the independence of bankruptcy courts and was willing to grant them broader authority; but
  • Over the same time, Justice Scalia never wavered in asserting that Article III requires a limited role for bankruptcy courts.

Three bankruptcy cases show the growing distance between them over time:

  1. In 1989, both joined the Granfinaciera majority, with Scalia writing a concurring opinion;
  2. In 2011, both joined the Stern v. Marshall majority, with Scalia writing a concurring opinion; but
  3. In 2015, they parted ways in Wellness International—Kennedy joined the majority, while Scalia joined the dissent.

What follows is a look at their respective positions in these three cases (Granfinanciera, Stern v. Marshall and Wellness International).

Case No. 1: Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)—Must the government be a party to a “public rights” dispute?

The Granfinanciera question is whether a fraudulent conveyance lawsuit filed in bankruptcy court is subject to the Constitution’s Seventh Amendment jury trial right. The Supreme Court answers this question in the affirmative.

In Part IV of its opinion, however, the Granfinaciera majority discusses its “public rights” exception to the Constitution’s Article III requirements.

–Scalia Concurring

While agreeing with a limited role for bankruptcy judges, Justice Scalia never accepted the “public rights” doctrine as relevant to the analysis.  Here’s what Scalia’s concurring opinion says about the majority’s Part IV analysis:

“I join all but Part IV of the Court’s opinion” because a matter of “public rights” must, “at a minimum, arise `between the government and others'”—the majority’s contrary view is “entirely inconsistent with the origins of the public rights doctrine” and with “language of Article III itself”;

“Public rights” are “rights of the public,” pertaining to claims brought by or against the United States” and involving a “waiver of sovereign immunity”;

In 1985,  “by sheer force of our office,” we pronounced that a “public right” is one “so closely integrated into a public regulatory scheme” that an agency can resolve it; and

There is “no constitutional basis for that decision”—our “system of separation of powers” must be “anchored in rules” and not “set adrift in some multi-factored ‘balancing test.’”

–Kennedy Majority

In response, the majority opinion, in which Justice Kennedy joined, says:

We reject the view that “public rights” must, “at a minimum,” arise between the Federal Government “and others”; and

Instead, the “crucial question” is whether Congress created “a seemingly ‘private’ right” that is “so closely integrated into a public regulatory scheme” that an agency may resolve it “with limited involvement” of an Article III court.

Case No. 2: Stern v. Marshall, 564 U.S. 462 (2011)—How is the “public rights” exception to be applied?

Vicki Marshall files bankruptcy, where her husband’s son files a proof of claim for defamation. Vicki objects to the son’s claim and also asserts tort counterclaims against him in bankruptcy court.

The Stern v. Marshall question is whether the bankruptcy court has authority to decide the tort counterclaims. The Supreme Court answers this question in the negative on a five-to-four split vote—and both Kennedy and Scalia are in the majority.

–Kennedy Majority

Here’s what the majority opinion says, in which both Scalia and Kennedy join:

11 U.S.C. §157(b)(2)(C) allows the bankruptcy court to enter final judgment on Marshall’s counterclaim, but “Article III of the Constitution does not”;

Article III is “an inseparable” and essential “element of the constitutional system of checks and balances” and “separation of powers”; and

The “public rights” doctrine does not allow the bankruptcy court to decide Marshall’s counterclaims because they are disputes “under state law” and “between two private parties.”

Additionally, the majority opinion elevates form over substance:

They insist that their analysis must not be swayed by the fact that bankruptcy judges are appointed by Article III courts, rather than by the President; because

When a bankruptcy court is exercising “the essential attributes of judicial power” reserved to Article III courts, it doesn’t matter who makes the appointment—the “constitutional bar remains.”

–Scalia Concurring

Justice Scalia remains unmoved.  In his concurring opinion, he emphasizes that “public rights” doctrine has no place in the discussion:

–“I adhere to my view” that a “matter of public rights … must at a minimum arise between the government and others.”

He even chides the majority on the “surfeit” of factors they used to decide the case:

“I count at least seven different reasons given in the Court’s opinion for concluding that an Article III judge was required to adjudicate this lawsuit,” which “arouses the suspicion that something is seriously amiss with our jurisprudence in this area”; but

The “more fundamental flaw” with “the many tests” is that “they have nothing to do with the text or tradition of Article III” and “have entered our jurisprudence almost randomly.”

He makes a possible concession:

“Perhaps historical practice permits” bankruptcy judges to “process claims against the bankruptcy estate”; but

He won’t commit, even to that, because “the subject has not been briefed.”

Case No. 3: Wellness International Network v. Sharif, Case No. 13-935 (2015)—Jealously guarded doctrine v. practical effect analysis.

The Wellness International question is whether parties can, by consent, authorize a bankruptcy court to decide an alter-ego claim. The Supreme Court answers this question in the affirmative.

–Kennedy Majority

The majority opinion, joined by Justice Kennedy (but not by Justice Scalia), says this:

“Our precedents make clear that litigants may validly consent to adjudication by bankruptcy courts” because “the entitlement to an Article III adjudicator” is “a personal right” that is ordinarily “subject to waiver”;

This “does not offend the separation of powers” as long as “Article III courts retain supervisory authority over the process”;

So, the question is whether a bankruptcy court deciding Stern claims “by consent” would “impermissibly threaten the institutional integrity of the Judicial Branch”;

Such question must not be decided by “formalistic and unbending rules” but “with an eye to the practical effect” that it will have “on the constitutionally assigned role of the federal judiciary,” looking to “substance” instead of “doctrinaire reliance” on formalities; and

In giving bankruptcy courts authority to decide Stern claims, Congress was not trying to “aggrandize itself” or “humble the Judiciary” or emasculate constitutional courts

Here are some practicalities the majority opinion cites:

Bankruptcy judges, (i) “are appointed and subject to removal by Article III judges,” (ii) “serve as judicial officers of the United States district court,” and (iii) “constitute a unit of the district court”;

Congress could “rest the full share” of bankruptcy responsibilities “on the shoulders of Article III judges” and increase the number of district judgeships to do so, but Congress chose, instead, to supplement district court capacities “through the able assistance of bankruptcy judges”;

So long as bankruptcy judges “are subject to control by the Article III courts, their work poses no threat to the separation of powers”; and

Cases in which we found an Article III violation involve a defendant forced to litigate involuntarily before a non-Article III court.

–Scalia Dissent

Justice Roberts pens a dissent, which Scalia joins, that says:

Private parties cannot “consent to an Article III violation” because Article III is “an inseparable element of the constitutional system of checks and balances” that must “be jealously guarded”;

The majority justifies its result “largely on pragmatic grounds”—“I would not yield so fully to functionalism”; and

The “next time Congress takes judicial power from Article III courts, the encroachment may not be so modest—and we will no longer hold the high ground of principle.”

In an interesting twist, the dissent insists that the bankruptcy court did, in fact, have jurisdiction over the Wellness alter-ego claim. Here’s how:

Bankruptcy is “an adjudication of interests claimed in a res”;

Wellness seeks a declaration that “assets held by Sharif are part of that res”;

Identifying “property of the estate” is “inescapably central to the restructuring of the debtor-creditor relationship”; and

Bankruptcy courts, therefore, have jurisdiction to hear and decide the alter-ego claim in Wellness—even without consent of the parties.

Conclusion

With six decades of service between them, Justices Scalia and Kennedy have left their mark on bankruptcy laws in these United States. A primary impact has been to limit the role and authority of bankruptcy courts, especially in Granfinanciera and Stern v. Marshall.

By the time of Wellness International, Justice Kennedy took a more pragmatic approach, allowing bankruptcy courts to act on consent of the parties. But Justice Scalia stuck very close, throughout the entirety of his three decades of service, to the restrictive viewpoint he announced, back in 1989, in Granfinanciera.

As their replacements step into the picture and address bankruptcy issues, it’s impossible to know what positions they will take on the extent of bankruptcy court authority. Here’s hoping that both replacements will be more favorable than their predecessors to bankruptcy court authority.

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