By: Donald L Swanson

“The Congress shall have Power To . . . establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.” 

–U.S. Constitution’s Bankruptcy Clause (Art. 1, Sec. 8, cl. 4).

An Old Losing Streak—Article III

We all know about bankruptcy travails, at the U.S. Supreme Court, when the U.S. Constitution’s Bankruptcy Clause is pitted against the Constitution’s Article III provisions on “judicial Power”: the Bankruptcy Clause loses (see, e.g., Northern Pipeline in 1982, Granfinanciera in 1989, and Stern v. Marshall in 2011).

But even that string of losses starts to turn in a positive direction (in 2014 and 2015) with:

• Executive Benefits v. Arkison in 2014 (a bankruptcy court opinion is legitimized by an Article III court’s de novo review on appeal); and   
• Wellness International v. Sharif in 2015 (bankruptcy courts can decide Stern disputes by consent of the parties).

A Three-Opinion Winning Streak—Against Other Clauses

Last week the U.S. Supreme Court issues its Siegel v. Fitzgerald opinion (summarized below) in which the Bankruptcy Clause prevails—for the third consecutive time—when pitted against clauses of the U.S. Constitution other than Article III.

What follows is a summary of how, in each of those three cases, the Bankruptcy Clause prevails.

First: Over Commerce Clause (Railway Labor v. Gibbons—1982)

Railway Labor Executives’ Assn. v. Gibbons, 455 U.S. 457 (1982), involves a railroad company ceasing operations because of a rail strike and then liquidating in bankruptcy.  During the bankruptcy, Congress enacts a law requiring Debtor to pay $75 million to its employees as an administrative expense—Congress does so, ostensibly, under the Constitution’s Commerce Clause.  

In response, the Supreme Court declares the law unconstitutional because it violates the uniformity requirement of the Bankruptcy Clause:

• Congress may not circumvent the Bankruptcy Clause’s uniformity requirement by enacting a law under the Constitution’s Commerce Clause; and
• The law in question is enacted under the Bankruptcy Clause because:
  • The Bankruptcy Clause contemplates an adjustment of a failing debtor’s obligations, extends to all cases where the law causes property of the debtor to be distributed among creditors, and includes the power to impair the obligations of contracts (which States are forbidden to do); and
  • The law requires payment of Debtor’s employee claims from Debtor’s assets as administrative expenses.

Second: Over Sovereign Immunity Clause (Central Virginia v. Katz—2006)

Central Virginia Community College v. Katz, 546 U.S. 356 (2006), involves a bankruptcy trustee recovering preferential transfers from a state agency.  The agency defends by citing sovereign immunity rights established in the U.S. Constitution’s Eleventh Amendment.

The U.S. Supreme Court rejects the sovereign immunity defense.  Here’s why:

• framers of the Constitution, in adopting the Bankruptcy Clause, understood that the power to enact bankruptcy legislation carries with it the power to subordinate state sovereignty;
• in ratifying the Bankruptcy Clause, the States acquiesced in a subordination of their sovereign immunity in bankruptcy proceedings; and
• Congress may, in enacting bankruptcy laws, (i) treat States in the same way as other creditors, or (ii) exempt States from the operation of such laws—its  power to do so arises from the Bankruptcy Clause itself, and the relevant “abrogation” is effected in the plan of the Convention, not by statute.

Third: Over Necessary and Proper Clause (Siegel v. Fitzgerald—2022)

Siegel v. Fitzgerald, U.S. Supreme Court Case No. 21-441 (decided June 6, 2022), considers the constitutionality of disparate administrative fee amounts charged to Chapter 11 debtors in 48 states under the U.S. Trustee system, as compared to Chapter 11 debtors in 2 states under the Bankruptcy Administrator system.

One party argues that the differing fees are NOT a substantive bankruptcy law under the Bankruptcy Clause, with its uniformity requirement.  Instead, the differing fees are an administrative law adopted under the Constitution’s Necessary and Proper Clause, which says:

“The Congress shall have Power . . . To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”  Art. I, Sec. 8, cl. 18.

The U.S. Supreme Court rejects the Necessary and Proper Clause argument as follows:

• the Constitution’s “laws on the subject of Bankruptcies” language, though incapable of final definition, includes nothing less than the subject of the relations between a debtor and debtor’s creditors;
• the Bankruptcy Clause grants plenary power to Congress over the whole subject of “bankruptcies” and does not “limit” the scope of Congress’ authority;
• the general powers of the Necessary and Proper Clause must be added to the Bankruptcy Clause’s “specific grant” of power to Congress to legislate on the subject of bankruptcies;
• Congress cannot evade the uniformity requirement of the Bankruptcy Clause by enacting legislation under other grants of authority in the Constitution;
• all courts to have considered the law in question (even those that have found it constitutional) agree that the law in question is subject to the Bankruptcy Clause’s uniformity requirement; and
• the law in question affects the “substance of debtor-creditor relations” by increasing mandatory fees paid out of the debtor’s estate and, thereby, decreasing funds available to creditors.

 Conclusion

The U.S. Constitution’s Bankruptcy Clause is on a three-opinions winning streak at the U.S. Supreme Court, when pitted against other non-Article III clauses in the same Constitution. 

And the Bankruptcy Clause’s prior losing streak (to Article III provisions) has made a positive turn since the last loss in 2011 (Stern v. Marshall).

In other words, the Bankruptcy Clause is on a roll!!

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