Bankruptcy’s Uniformity Requirement & Federal Arbitration Act (Nelson v. Carland)

Uniformity (photo by Marilyn Swanson)

By: Donald L Swanson

The U.S. Constitution requires that bankruptcy laws be “uniform . . . throughout the United States.”

Among such uniformity requirements is this: rulings on core bankruptcy issues must be subject to meaningful appellate review—all the way to the U.S. Supreme Court.

Explaining this requirement is the dissent of Justice John Catron in the U.S. Supreme Court opinion of Nelson v. Carland, 42 U.S. 265 (1843).

Nelson v. Carland

The question before the U.S. Supreme Court, in Nelson v. Carland, is this:

“[W]hether the act of 1841, establishing a uniform system of bankruptcy, was constitutional, or otherwise” (id., at 266).

Here’s how the Supreme Court rules:

  • Congress has not given the U.S. Supreme Court jurisdiction over questions addressed by the lower court, under the 1841 bankruptcy act, so that the decision of the circuit court is conclusive.

The Dissent

The dissent in this case is by Justice Catron.  It is unusual because Justice Catron, (i) agrees with the no-jurisdiction result—declaring that Congress needs to act to get a different result, but (ii) expresses grave concerns about the practical damage that will follow.

Justice Catron’s concerns surround the Constitution’s uniformity requirement: appeal rights are severely limited, under the 1841 bankruptcy act, which means the Constitution’s uniformity requirement cannot be satisfied.

Here are specific uniformity concerns, expressed by Justice Catron, about the 1841 bankruptcy act:

  • The act is administered by more than thirty judges, acting separately;
  • A debtor may not appeal to the circuit court (save in the single case of a refusal to finally discharge the bankrupt from his debts), and no debtor appeal is allowed to the Supreme Court;
  • A creditor may not appeal anything in any bankruptcy case, either from the district court to the circuit court or to the Supreme Court; and
  • It follows that the Supreme Court has no power to make uniform the conflicting constructions of the bankruptcy law.

Here are Justice Catron’s elaborations on uniformity concerns:

  • Many discharges are involved in this appeal—some twelve hundred discharge requests will be dismissed unless the decrees are reversed;
  • “No law that Congress ever passed has in it to a greater degree the elements of various construction and confusion than the bankrupt law of 1841”—thirty judges act separately, and all are exempt from the revising power of the Supreme Court, which exists to produce “uniformity of decision and construction”;
  • Unless the Supreme Court has jurisdiction over bankruptcy disputes, it will have no revising power over bankruptcy laws; and
  • Instead of providing a uniform system of bankruptcy, the 1841 bankruptcy act has become, by the conflicting constructions put upon it, little more uniform than the conflicting state insolvent laws.

But, Justice Catron concludes, the remedy is with Congress, either to give this Court jurisdiction or to withhold it.

Federal Arbitration Act

The Federal Arbitration Act requires that arbitration agreements between disputing parties be enforced.

The U.S. Supreme Court enforces the Federal Arbitration Act religiously, with an entrenched reluctance to find exceptions. 

This reluctance is illustrated by the Supreme Court’s January 15, 2019, arbitration opinion (New Prime Inc. v. Oliveira), which Prof. Ronald J. Mann describes as follows:

  • This opinion “rejects a claim for arbitration for the first time in a string of more than a dozen of Supreme Court cases stretching back more than a decade”; and
  • “Indeed, I doubt the court has rejected such a claim in any previous decision since the turn of the millennium.” [Fn. 1]

The Supreme Court has yet to rule on the relationship of the Federal Arbitration Act to disputes under the Bankruptcy Code; so, the opportunity still exists for creating a core-bankruptcy-dispute exception.

Justice Catron’s Reasoning Applied

Justice Catron’s reasoning provides a constitutional basis for creating a core-bankruptcy-dispute exception to the Federal Arbitration Act.  Here’s how the reasoning goes:

  1. The appellate standard of review for an award under the Federal Arbitration Act is a rubber-stamp—reversal requires a showing of misconduct by the arbitrator, such as fraud or corruption; and
  2. Under such a standard, the uniform application of bankruptcy laws throughout the United States cannot be assured—just as Justice Catron explained in 1843.

Timeliness

This subject is timely for two reasons.

First, a Petition for a writ of certiorari is pending before the U.S. Supreme Court on the question of whether a core bankruptcy dispute is subject to arbitration under the Federal Arbitration Act (see GE Capital Retail Bank v. Belton, Supreme Court Case No. 20-481).

  • Every time such a question gets before the Supreme Court, I want to say, “Please, please, please don’t screw up our bankruptcy system by elevating Federal Arbitration Act requirements over Bankruptcy Code necessities!!!” and “Please don’t put our bankruptcy judges in an arbitration straight jacket!”

Second, the U.S. Constitution has been in existence for 2.3 centuries.  During that span, there has been an absence of judicial and scholarly discussion of the Constitution’s bankruptcy clause, and particularly of its uniformity requirement.

Conclusion

Hopefully, Justice Catron’s reasoning from back in 1843, on the constitutional importance of meaningful appellate review of bankruptcy rulings, can find its way into judicial discussions on relationships between the Federal Arbitration Act and the Bankruptcy Code.

————————————-

Footnote 1: Ronald J. Mann, Opinion Analysis, Justices uphold arbitration exemption, Scotusblog, January 15, 2019.

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