There’s a new U.S. Circuit Court opinion on a person’s right to a jury trial, when sued by the Securities and Exchange Commission before one of its administrative judges.
The opinion is Jarkesy v. SEC, case No. 20-61007 (5th Cir., issued May 18, 2022).
And guess what:
- the most-cited legal authority in that opinion is [ . . . drumroll . . . ] a bankruptcy opinion from the U.S. Supreme Court: Granfinanciera v. Nordberg, 492 U.S. 33 (1989); and
- the Jarkesy v. SEC opinion specifically names Granfinanciera no-less than 39 times.
Why?
Why would a bankruptcy opinion be the primary authority for an administrative agency issue?
Here’s why:
- when the U.S. Supreme Court first addresses (in 1982) the constitutionality of judicial authority for bankruptcy judges, under the Bankruptcy Code, it applies a legal theory called the public rights doctrine (Fn. 1); but
- theretofore, the public rights doctrine had applied exclusively to federal administrative agencies—to both justify and limit the judicial authority of their administrative judges.
Doubling Down
In 1989, the U.S. Supreme Court doubles down, in Granfinanciera, by applying the public rights doctrine to jury trial rights for private parties sued in bankruptcy courts.
Again . . . the Supreme Court applies a doctrine in bankruptcy that’s designed specifically for federal agency actions against private persons.
Problem—Government as Party
In an action within a federal agency, the federal government is almost always a party:
- the agency is suing a private party to enforce its own regulations; and
- the suit is before the agency’s own administrative judge.
It’s ok to have such a suit (the U.S. Supreme Court says) when the agency is enforcing public rights. But it’s not ok to do such a thing, when private rights are involved—that violates Article III of the U.S. Constitution.
—A Problem in Bankruptcy
A problem for applying the public rights doctrine to bankruptcy disputes is this: the federal government is rarely a party.
In bankruptcy disputes:
- debtors are not the federal government;
- trustees are not the federal government;
- most creditors are not the federal government; and
- U.S. trustees are a part of the federal government . . . but are not a primary disputant in most bankruptcy contexts.
—Justice Scalia
Justice Scalia emphasizes this government-as-party problem, for the public rights doctrine in bankruptcy. He does so in concurring or dissenting opinions, beginning with Granfinanciera:
- by referring to “the longstanding principle that the public rights doctrine requires, at a minimum, that the United States be a party to the adjudication” (492 U.S. at 70).
Entry into Bankruptcy
Public rights doctrine enters the bankruptcy realm through the 1982 plurality opinion (by only four justices). Had it garnered one more vote, that opinion and it’s public rights doctrine would have declared the entirety of the Bankruptcy Code to be unconstitutional. [See fn. 1]
The effect of the public rights doctrine (from that opinion forward) is to limit, substantially, the authority of bankruptcy judges.
An Alternative View
Let’s go back to the Northern Pipeline opinion (see fn. 1) and look at an alternative view, proffered by three dissenting Justices.
This dissenting opinion rejects the public rights doctrine.
It also declares the new bankruptcy courts (established by the Bankruptcy Code) to be constitutionally proper. That’s because:
- ample provision is made, in the Bankruptcy Code, for appellate review of bankruptcy court decisions by Article III courts;
- no one seriously argues that Congress attempted, in enacting the Bankruptcy Code, to aggrandize itself over the other branches of government or to undermine authority of constitutional courts in general; and
- a specialized court is needed to handle bankruptcy cases—that’s because stresses on the old bankruptcy system from tremendous increases in bankruptcy cases are clearly a matter for Congress to address (458 U,S. at 116-17).
—Imagine
Imagine what bankruptcy life would have been like under the alternative view:
- the jurisprudence nightmare created by the public rights doctrine would have been avoided; and
- our life in the bankruptcy world would have been much better and more logical, practical, efficient and predictable.
—Reality
Instead, what we got is a lack of clarity, as explained by a concurring opinion in Wellness International v. Sharif:
- “Our cases examining the constitutionality of statutes allocating the power to the bankruptcy courts have not considered the source of Congress’ authority to establish them”; but
- “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.’”
Reasons for such lack of clarity include:
- public rights doctrine has no rightful place in bankruptcy;
- that doctrine’s imposition upon bankruptcy law, by the U.S. Supreme Court, has created confusion and uncertainty; and
- no one can articulate a rationale for what authority the bankruptcy courts, and their judges, actually have.
Conclusion
The new Jarkesy v. SEC opinion, involving administrative actions by the Securities and Exchange Commission, is a new-and-fresh reminder of the public rights nightmare imposed by the U.S. Supreme Court upon the bankruptcy world, almost accidentally.
Here’s wishing the alternative analysis presented in the Northern Pipeline Dissent had prevailed!
———————-
Footnote 1. The U.S. Supreme Court does so via its Northern Pipeline Construction Co. v Marathon Pipe Line Co., 458 U.S. 50 (1982), opinion.
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