Supreme Court Denies Cert (GE v. Belton): A Bankruptcy Code v. Arbitration Act Reprieve — And Constitution’s Bankruptcy Exception

By: Donald L Swanson

We’ve dodged the bullet . . . again!

Yesterday, the U.S. Supreme Court denied certiorari in GE Capital Retail Bank v. Belton (Case No. 20-481), where the question presented is:

• Which federal statutory scheme takes precedence in resolving important bankruptcy issues — the Bankruptcy Code or the Federal Arbitration Act?

Context

In proceedings below, both the Bankruptcy Court and the District Court denied arbitration of a discharge enforcement dispute. The Second Circuit Court of Appeals affirmed, declaring: “though the text and history of the Bankruptcy Code are ambiguous as to whether Congress intended to displace the Federal Arbitration Act in this [bankruptcy] context, . . . the two statutes are in inherent conflict on this issue.”

Conflict

The Bankruptcy Code and the Federal Arbitration Act are in conflict because the two statutory schemes have opposing purposes:  the Bankruptcy Code is designed to centralize disputes into a single court, while the Arbitration Act is designed to disperse disputes to arbitrators.

The conflict is sharpened because, (i) many bankruptcy courts and their appellate overseers are loath to send important bankruptcy issues to arbitration, while (ii) the Supreme Court is loath to find Arbitration Act exceptions.

Problem — No Statutory Standard

Unfortunately, as the Second Circuit suggests, there is no clear statutory guidance for resolving the conflict between these two statutory schemes. Such lack of guidance makes the Bankruptcy Code vs. Federal Arbitration Act conflict perilous for the bankruptcy system — the Supreme Court’s reluctance to find Arbitration Act exceptions might prevail.

Solution — A Constitutional Standard

Fortunately, however, the Bankruptcy Code is nearly unique among all federal laws, because the U.S. Constitution demands “uniform Laws on the subject of Bankruptcies throughout the United States” (emphasis added).

Accordingly, a bankruptcy exception to the Federal Arbitration Act rests on this constitutional basis:

• rulings on important bankruptcy issues must be subject to meaningful appellate review—all the way to the U.S. Supreme Court—to assure uniformity; and
• standards for reviewing and overturning an arbitration ruling are a rubber-stamp standard and cannot satisfy the Constitution’s “uniform Laws” demand.

Nelson v. Carland

I’m not making this constitutional standard up. Explaining the uniformity requirement in an appellate review context is Justice John Catron, in the U.S. Supreme Court case of Nelson v. Carland, 42 U.S. 265 (1843).

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).

Justice Catron issues an independent opinion. His concern is that appeal rights are severely limited under the Bankruptcy Act of 1841, which means the Constitution’s uniformity requirement cannot be satisfied.

Here are specific uniformity concerns, expressed by Justice Catron, about the Bankruptcy Act of 1841:

• 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.

Justice Catron’s Reasoning Applied

Justice Catron’s reasoning provides a constitutional basis for creating an exception to the Federal Arbitration Act for important bankruptcy disputes.  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 (it’s not enough to show that the arbitrator applied the wrong law or applied the correct law wrongly); 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.

Conclusion

Now that the Supreme Court has denied certiorari in GE v. Belton, opportunities exists for further development of a bankruptcy exception to the Federal Arbitration Act.

Hopefully, Justice Catron’s constitutional “uniformity” analysis will find its way into the further development of the bankruptcy exception.

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