U.S. Supreme Court: Flip-Flopping On Constitution’s Bankruptcy Clause

By: Donald L Swanson

“The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” (U.S. Const., Article I, §8, cl. 4).

Once upon a long time ago, the U.S. Constitution’s Bankruptcy Clause, and its “uniform Laws” requirement, meant something at the U.S. Supreme Court.  For example:

• In 1843, Justice Catron of the U.S. Supreme Court declares that the Bankruptcy Act of 1841 violates the Constitution’s “uniform Laws” requirement, by failing to provide meaningful rights of appeal to the U.S. Supreme Court, from bankruptcy rulings. Without such appeal rights, there is no assurance that bankruptcy laws will be applied uniformly (see Nelson v. Carland).

The Flip

But that all changed, more than a century later, when Congress passed the Bankruptcy Reform Act of 1978 (the current Bankruptcy Code).

From the beginning, the Supreme Court did not like the Bankruptcy Code.  In 1982, for example, the Supreme Court comes within a single vote of declaring the entire Bankruptcy Code unconstitutional.  It opts, instead, to limit bankruptcy court power dramatically (Northern Pipeline v. Marathon Pipe Line, plurality opinion).  Notably, however, that opinion:

• Fails to even mention, let alone analyze or apply, the Constitution’s Bankruptcy Clause; and
• Establishes a “public rights” basis for hog-tying the authority of bankruptcy judges—a basis that’s not even mentioned in the Constitution.

The Supreme Court demonstrates antagonism toward the Bankruptcy Code in its 1989 Granfinanciera opinions.  Here’s how:

• Majority opinion derides the Bankruptcy Code for instituting “sweeping changes” and “radical reforms”: while
• Dissenting opinion emphasizes the importance of “permitting Congress at long last to fashion a modern bankruptcy system which places the basic rudiments of the bankruptcy process in the hands of an expert equitable tribunals.”

Flopping Back

In 2006, the Supreme Court declares that the U.S. Constitution’s Bankruptcy Clause is preeminent over the Constitution’s sovereign immunities clause (contained in the 11^th Amendment).  See Central Virginia Community College v. Katz.  Here’s the Katz ruling (emphasis added):

• Congress’s power to abrogate Eleventh Amendment sovereign immunity rights, “as concerns ‘Laws on the subject of Bankruptcies,’ . . . arises from the Bankruptcy Clause itself.”

So . . . in 2006, it’s beginning to look a lot like the Supreme Court is focusing on the Constitution’s Bankruptcy Clause as a preeminent part of U.S. laws on the subject of bankruptcies.

Flipping Again

Then come Stern v. Marshall (in 2011) and Wellness International (in 2015).  In both opinions, the Supreme Court focuses on the authority of bankruptcy courts to resolve disputes.  And the Supreme Court reaches opposite results in the two cases:

• Bankruptcy court authority continues to be limited by the public rights doctrine (Stern); but
• Bankruptcy courts can try Stern disputes by consent of the parties (Wellness).

What’s common to both Stern and Wellness majority opinions is this: neither even mentions the Constitution’s Bankruptcy Clause.  Prof. Ronald Mann, in his 2017 book, Bankruptcy and the U.S. Supreme Court, explains the reality like this: the Bankruptcy Clause of the U.S. Constitution,

• “was not mentioned, even in passing, in Marathon or Granfinanciera”; and
• “appears only as an aside in the dissent in Stern.“

The Supreme Court’s refusal to recognize the Bankruptcy Clause’s existence (in its Marathon, Granfinanciera, Stern and Wellness plurality/majority opinions) is acknowledged by the Wellness dissent as follows:

• Bankruptcy courts “adjudicate a far broader array of disputes than their earliest historical counterparts”;
• Yet, “this Court has remained carefully noncommittal about the source of their authority to do so”;
• And “our cases examining the constitutionality of statutes allocating the power to the bankruptcy courts have not considered the source of Congress’ authority” to do so; and
• That’s even though “the obvious textual basis is the fourth clause of Article I, §8, which empowers Congress to “establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.”

What about today?

Issues are percolating right now—important ones—where the U.S. Constitution’s Bankruptcy Clause and its “uniform Laws” requirement could be crucial.  Such issues include:

• Does a bankruptcy exception exist to requirements of the Federal Arbitration Act (e.g., since standards for approval of an arbitration award are rubber-stamp only, how can the uniform application of bankruptcy laws be assured)?;
• How can Alabama and North Carolina have their own bankruptcy administrator system (e.g., no state, other than those two, has ever had any right to choose the administrator system)?; and
• How can a plan confirmation order escape appellate review on grounds of equitable mootness (e.g., without appellate review, how can the the uniform application of plan confirmation laws be assured)?

But so far, the Supreme Court has been punting on such issues:

• The Supreme Court recently denied certiorari on the equitable mootness issue;
• The Alabama/North Carolina system has been allowed to exist for four decades, without ever facing scrutiny by the Supreme Court—even though it has been declared unconstitutional by multiple courts; and
• The Supreme Court has a chance to address the administrator system issue (it is “DISTRIBUTED for Conference of 12/7/2022” on a petition for writ of certiorari–that’s tomorrow!), and it will be interesting to see what happens there;

“Uniform Laws” is meaningless?

There seems to be a general idea floating around that the “uniform Laws” requirement of the U.S. Constitution’s Bankruptcy Clause is meaningless.  The idea seems to be an evolutionary thing: the words “uniform Laws” may have started out with actual meaning, but that meaning has dissipated toward nothingness by failures of enforcement.

Examples of such dissipating [let’s call them “lame excuses”] include:

• The Bankruptcy Code incorporates state laws into the bankruptcy system—and there is nothing uniform about those laws.  Here’s why that’s a lame excuse: the incorporation of state laws applies uniformly to every person in every state.
• The Bankruptcy Code’s system of exemptions allows some states to adopt federal exemptions, while other states can choose to use their own.  Here’s why that’s a lame excuse: the availability of such choice applies uniformly to every person in every state—they all have the same election opportunity.
• An old Supreme Court opinion upholds a regionalized bankruptcy law to address a railroad problem, even though there’s nothing uniform about a regionalized law.  Here’s why that’s a lame excuse: the railroad problem in that situation only existed in the specified region, so the regional limitation was mere surplasage.

Conclusion

It’s time for the U.S. Supreme Court to stop flip-flopping. 

It’s time to explicitly recognize, once again (and permanently, this time), the existence of the Constitution’s Bankruptcy Clause and its “uniform Laws” requirement as an actual, constitutional reality with a real meaning that must be applied and enforced.

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