For Forty Years, the U.S. Supreme Court Has Shunned the Constitution’s Bankruptcies Clause!

By: Donald L Swanson

The Bankruptcy Code began in 1978 by acts of Congress and the President. And it became operative in October of 1979.

I started practicing in 1980. So, my career has spanned the entirety of the Bankruptcy Code’s existence.

1978 to 2011: U.S. Supreme Court Disapproves of the Bankruptcy Code

What I learned, during the first three decades of my career, is this: the U.S. Supreme Court does not like the Bankruptcy Code – at all. Here’s how:

• In 1982, the U.S. Supreme Court comes within a single vote of declaring the entire Bankruptcy Code unconstitutional (Northern Pipeline v. Marathon Pipe Line, 458 U.S. 50 (1982));
• In 1989, the U.S. Supreme Court majority derides the Bankruptcy Code for instituting “sweeping changes” and “radical reforms” (Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)), with only two Justices declaring in dissent that Congress should be permitted “at long last” to “fashion a modern bankruptcy system”; and
• As late as 2011, the U.S. Supreme Court is still doubling down on the Northern Pipeline v. Marathon Pipe Line plurality opinion by validating, anew, its public rights doctrine for restricting bankruptcy court authority (Stern v. Marshall, 564 U.S. 462 (2011)).

Before 1978: U.S. Supreme Court Cites and Applies the Constitution’s Bankruptcies Clause

Prior to enactment of the Bankruptcy Code, the U.S. Supreme Court looked with favor upon Congress’s bankruptcy enactments because of the Bankruptcies Clause in the U.S. Constitution [Fn 1]. For example, U.S. Supreme Court Justices issued such pre-1978 declarations as these (from 1966 all the way back to 1843):

• “The Bankruptcy Act, passed pursuant to the power given to Congress by Art. I, § 8, of the Constitution . . . converts the creditor’s legal claim into an equitable claim to a pro rata share of the res. . . . So, in cases of bankruptcy, many incidental questions arise . . . which would ordinarily be pure cases at law, and . . .triable by jury, but . . . they become cases over which the bankruptcy court . . . exercises exclusive control”  (Katchen v. Landy, 382 U.S. 323 (1966)).

[NOTE: The U.S. Supreme Court rejects this ruling in Granfinanciera.]

• “Article I, § 8, cl. 4 of the Federal Constitution vests Congress with the power ‘to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States’ . . . From the beginning, the tendency of legislation and of judicial interpretation has been uniformly in the direction of progressive liberalization in respect of the operation of the bankruptcy power” (Continental Illinois Nat. Bank v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648 (1935)).

[NOTE: The U.S. Supreme Court breaks from this uniform direction in Northern Pipeline v. Marathon Pipe Line.]

• The Constitution’s bankruptcy power “extends to all cases where the law causes to be distributed the property of the debtor among his creditors; this is its least limit. Its greatest is a discharge of the debtor from his contracts. And all intermediate legislation . . . are in the competency and discretion of congress . . . the courts have no concern; it belongs to the law makers” (In re Klein (1843), by Supreme Court Justice Catron (see this linked article, at 998-999)).

[NOTE: The U.S. Supreme Court ignores this concept in Marathon, Granfinanciera and Stern.]

After 1978: Shunning the Bankruptcies Clause at U.S. Supreme Court

Enactment of the Bankruptcy Code created a different bankruptcy environment at the U.S. Supreme Court. Here’s an example:

Since enactment of the Bankruptcy Code, the U.S. Supreme Court majority opinions have refused to cite or even mention the Bankruptcies Clause, let alone discuss how it might apply to issues raised in cases like Marathon, Granfinanciera and Stern.

Here’s how a bankruptcy professor describes the situation:

“The Bankruptcy Clause was not mentioned, even in passing, in Marathon or Granfinanciera, and appears only as an aside in the dissent in Stern and in a brief passage near the end of Justice Thomas’s dissent in Wellness.” [Fn. 2]

So, for the past four decades, the U.S. Supreme Court has been shunning the Constitution’s Bankruptcies Clause. “Shunning” means: taking pains to avoid or reject something or someone, out of motives of dislike or caution.

It’s as if they don’t want to mention it because, in doing so, they’d have to give it weight and authority.  And they haven’t wanted that!

The Present: Progress . . . But Still Shunning

In recent years (since 2011), the U.S. Supreme Court is taking a friendlier attitude toward bankruptcy laws. The current trend seems to be in the direction of making bankruptcy laws work efficiently and well, rather than limiting what can be accomplished under the Bankruptcy Code. Examples are:

• Executive Benefits Insurance Agency v. Arkison, 573 U.S. ___ (2013), upholds a bankruptcy court determination, since the district court, on appeal, treated the case as a non-core proceeding; and
• Wellness International Network, LTD v. Sharif, 575 U.S. ___ (2014), authorizes bankruptcy court action on certain bankruptcy disputes based on consent of the parties.

But even these majority opinions fail to cite or recognize the existence of the Constitution’s Bankruptcies Clause.

So, we are still awaiting that momentous and post-1978 occasion when a majority opinion of the U.S. Supreme Court actually cites, explicitly, the Bankruptcies Clause and uses that Clause to approve some type of bankruptcy court authority.

That will be something when it happens!

The Upshot

It’s time for the U.S. Supreme Court’s to stop shunning the Bankruptcies Clause of the U.S. Constitution.

It’s time for the U.S. Supreme Court, in its pronouncements on bankruptcy law and the extent of bankruptcy court authority, to revert to the practices of former decades and explicitly cite the Constitution’s Bankruptcies Clause and explain how that Clause affects and supports bankruptcy court authority.

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Footnote 1:  The U.S. Constitution’s Bankruptcies Clause provides: “The Congress shall have Power . . . To Establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” (Art. I, Sec. 8).

Footnote 2:  Ronald J. Mann, Bankruptcy and the U.S. Supreme Court § 5.7 (Cambridge University Press 2017).

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