A Justice Breyer Legacy: Erasing “Public Rights” From Lexicon Of Controlling Bankruptcy Law

By: Donald L Swanson

Justice Stephen G. Breyer is now retired from the U.S. Supreme Court, serving from August 3, 1994, to June 30, 2022.

One of his legacies—and an exceedingly important one—is this: he has worked, successfully, to erase “public rights” from the lexicon of controlling bankruptcy law.

What follows is a summary of how “public rights” came to be part of that lexicon, and how Justice Breyer works to get it erased.

“PUBLIC RIGHTS” BEGINNING—Northern Pipeline

In the beginning, the U.S. Supreme Court sees the Bankruptcy Code as a Congressional step-too-far.  As the Court casts about for a tool to limit bankruptcy court authority, it lands, through a four-justice plurality, upon “public rights” as the doctrine to do just that.

The opinion is Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 76 (1982). It deals with debtor’s breach of contract and warranty claims against a creditor.  

–Plurality & Concurring

Four justices apply the public rights doctrine and declare: the Bankruptcy Code “impermissibly removed . . . the essential attributes of the judicial power from the Art. III district court, and has vested those attributes” in “a non-Art. III adjunct”—the bankruptcy court.  Id., at 76.  Two justices concur in the result.  Id. at 89-92.

Chief Justice Burger emphasizes that the Norther Pipeline holding is limited and narrow: requiring only that “a ‘traditional’ state common law action . . . must, absent the consent of the litigants, be heard by an Art. III court.” Id. at 92.

–Dissent

The dissent for three justices, says:

• “The distinction between public and private rights” in this context “received its death blow, I had believed, in Crowell v. Benson, 285 U.S. 22 (1932)” (id. at 109);
• The new bankruptcy courts are constitutionally satisfactory because of three points:
  1. “ample provision is made for appellate review by Art. III courts”;
  2. in enacting the Bankruptcy Code, the political branches are not trying “to aggrandize themselves” or to “undermine the authority of constitutional courts”; and
  3. Congress is empowered by the Constitution to address the “stresses placed upon the old bankruptcy system by the tremendous increase in bankruptcy cases.” Id. at 116-17.

[Note: The three points in this dissent ultimately prevail in Wellness International v. Sharif—see below.]

PUBLIC RIGHTS ENTRENCHING–Granfinanciera

Public rights doctrine becomes entrenched in the lexicon of controlling bankruptcy law by Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which addresses a fraudulent transfer claim in bankruptcy court against a creditor who demands a jury trial.

–Majority

Five justices declare:

• “Congress may devise novel causes of action involving public rights free from the strictures of the Seventh Amendment”: but
• “it lacks the power to strip parties contesting matters of private right of their constitutional right to a trial by jury.”  Id. at 51-52 (emphasis added).

–Dissent 

Three justices dissent, declaring:

• “Before today, this Court has never held that a party in a bankruptcy court has a Seventh Amendment right to a jury trial on its claims”;
• “the Court does not actually so hold today, preferring to be obtuse about just where petitioners are going to obtain the jury trial to which the Court deems them entitled”; but
• “in blithely ignoring the relevance of the forum Congress has designated to hear this action . . . the Court turns its back on a long line of cases that have rested, in varying degrees, on that point.” Id. at 81.

PUBLIC RIGHTS RENEWING & QUESTIONED—Stern v. Marshall (over Justice Breyer’s Dissent)

Three decades after Northern Pipeline, five justices refocus on public rights doctrine, to reject a bankruptcy estate’s counterclaim under state law, in Stern v. Marshall, 564 U.S. 462 (2015). [Fn. 1]

–Majority Opinion

A five justices majority declares:

• “Vickie’s counterclaim cannot be deemed a matter of ‘public right’ that can be decided outside the Judicial Branch”; and
• “in Northern Pipeline we rejected the argument that the public rights doctrine permitted a bankruptcy court to adjudicate a state law suit brought by a debtor against a company that had not filed a claim against the estate.” Id., Majority at 22.

–Justice Breyer’s Dissent

By this time, Justice Stephen Breyer is on the bench—appointed in 1994.  He rejects the public rights construct and writes a dissent for four justices, declaring:  

• “The majority . . . overemphasizes the precedential effect of the plurality opinion in Northern Pipeline,” where the Court finds “the jurisdictional provisions” of the Bankruptcy Code to be “unconstitutional” (id., Dissent at 5); and
• “Three years later,” the Court limits Northern Pipeline to prohibit only “binding orders” by bankruptcy courts “in a traditional contract action” that is “without consent of the litigants” and “subject only to ordinary appellate review” (citing Thomas v. Union Carbide, 473 U. S. 568, 584 (1985)) (id. at 6).

PUBLIC RIGHTS RETREATING—Executive Benefits v. Arkison

Executive Benefits Insurance Agency v. Arkison, 134 S.Ct. 2165 (2014) [fn. 2] is a unanimous opinion.

In Executive Benefits, the bankruptcy Trustee sues in bankruptcy court on fraudulent conveyance claims.  The bankruptcy court enters summary judgment in favor of the Trustee.  Executive Benefits appeals to the U.S. District Court, which conducts a de novo review and enters its own judgment in favor of the Trustee.

The U.S. Supreme Court’s unanimous opinion:

• mentions “public rights” only as an “historical backdrop”—e.g., like this: Northern Pipeline “distinguished between cases involving so-called ‘public rights,’ which may be removed from the jurisdiction of Article III courts, and cases involving ‘private rights,’ which may not” (id. at 8); and 

• declares, “even if [Executive Benefits] is correct that the Bankruptcy Court’s entry of judgment was invalid, the District Court’s de novo review and entry of its own valid final judgment cured any error” (id. at 3).

The Supreme Court’s unanimous opinion makes no mention of “public rights” as a basis for its decision.

PUBLIC RIGHTS ERASED—Wellness International

Wellness International Network, Ltd. v. Sharif, 575 U.S. ___ (2015) (fn. 3), is a case questioning bankruptcy court authority over the claim that debtor is Sharif’s alter ego.

–Majority (Five Justices, including Breyer)

The majority opinion makes no mention of the public rights doctrine—none whatsoever!

Here is the essence of the majority decision:

• “In Northern Pipeline . . . , and more recently in Stern, this Court held that Congress violated Article III by authorizing bankruptcy judges to decide certain claims for which litigants are constitutionally entitled to an Article III adjudication”; and
• “We hold that Article III is not violated when the parties knowingly and voluntarily consent to adjudication [of Stern claims] by a bankruptcy judge.” Id. Majority at 2.

Note: The following three points in the Wellness majority opinion are reminiscent of the three points in Northern Pipeline‘s dissent:

1. “Congress gave bankruptcy courts the power to ‘hear and determine’ core proceedings and to ‘enter appropriate orders and judgments,’ subject to appellate review by the district court“ (id. at 4, emphasis added);
2. Article III bars congressional attempts at “emasculating” constitutional courts or to create “the encroachment or aggrandizement of one branch at the expense of the other” — that didn’t happen here (id. at 12); and
3. “The number of magistrate and bankruptcy judgeships exceeds the number of circuit and district judgeships. And . . . without the distinguished service of these judicial colleagues, the work of the federal court system would grind nearly to a halt” (id. at 1-2).

–Concurring (One Justice)

The concurring opinion by one justice makes no mention of “public rights.”

–Two Dissents (Three Justices)

There are two dissenting opinions in Wellness for three justices.  Combined, the two dissenting opinions mention “public rights” no less than 26 times. 

JUSTICE CHANGES

Of the five majority and one concurring justices, in Wellness, three are no longer on the Court, including Justice Breyer. 

Of the three dissenting justices, one is no longer on the Court.

CONCLUSION

The remaining questions are:

• Will Justice Breyer’s legacy, of erasing “public rights” from the lexicon of controlling bankruptcy law, endure? 
• Will that legacy survive his retirement?

The answer to both questions is this:

• Only time will tell.  

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Footnote 1.  Page number cites herein for Stern are to the linked document.

Footnote 2.  Page number cites herein for Executive Benefits are to the linked document.

Footnote 3.  Page number cites herein for Wellness International are to the linked document.

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