Analysis

The Supreme Court’s recent strong record of confining bankruptcy judges within a tight sphere of power seemed a bit shaky on Tuesday, but mainly because the Court spent significant time looking beyond bankruptcy law.  Concerns about the impact that a decision in a Chapter 7 case may have on the ranks of federal magistrate judges, workhorse jurists who take a great deal of pressure off regular judges, and even on arbitrators who keep a lot of private disputes out of courts, were evident during the argument on Executive Benefits Insurance Agency v. Arkison.

That case is about the power that federal law appears to give to a bankruptcy judge, and is a test of whether, if that power contradicts the limits of the Constitution’s Article III, the power can be exercised anyway because the parties consent to it.  (The case is also, on a secondary level, about how that consent might be expressed.)

It was immediately clear that, if the insurance firm of Executive Benefits wins the case, the chances are good that bankruptcy judges would have less power than Congress wanted them to have, and that the lost power could not be revived just because the parties agreed that it should exist.

With Justice Antonin Scalia, the Court’s strongest proponent of a strict construction of the Constitution, taking the lead, there were fervent comments from the bench suggesting that bankruptcy judges who are not true judges under Article III might well wind up in a decision in this case with a diminished role:  they could not issue final decisions on a good many debtors’ disputes, and might not even be able to propose decisions for adoption by a regular Article III judge.

That impression was consistent with the Court’s most recent major decision on bankruptcy court authority, the 2011 decision in Stern v. Marshall.  In that ruling, the Court made clear that it would not permit Congress to enlarge bankruptcy judges’ authority to resolve disputes just by changing the labels on the kind of bankruptcy case at issue.  That, the decision stressed, is an invasion of the powers of the regular, life-tenured Article III judges.

Chief Justice John G. Roberts, Jr., the author of the main Stern opinion, bluntly suggested on Tuesday that, if Congress cannot act to beef up the roles of bankruptcy judges without violating Article III, why would the Court permit “people taken off the street” to do so just because they were parties to a case and had consented to enlarged bankruptcy court authority?

He told a lawyer for a trustee, who was defending a quite expansive role for bankruptcy judges, that the lawyer’s argument amounted to a claim that courts had the power to “overcome the structural arrangements of the Constitution.”  Roberts said he knew of no Court ruling that would support such a proposition.

As the Court focused on the specific legal issues at stake in the Executive Benefits case, the Justices struggled at times to make sense of the arcane laws that govern judicial power over bankruptcy.  But they also allowed themselves to look beyond bankruptcy law, and to the potential effect of a decision in this case on other forms of dispute resolution in the federal system.

Very early in the argument of the attorney for Executive Benefits, Washington lawyer Douglas Hallward-Driemeier, Justice Samuel A. Alito, Jr., questioned whether there was any difference between handing off some Article III judicial powers to magistrate judges, who have an important role in filtering cases in the federal district courts, and the system of bankruptcy law under which regular Article III judges can hand a dispute for an initial review to a bankruptcy judge.  “I don’t see a difference,” Alito said.

Justice Elena Kagan also wondered if a ruling curbing bankruptcy judges’ powers would also mean that the system of magistrate judges would similarly run afoul of Article III.  Hallward-Dreimeier said it would, on the basis of the same arguments he was making against the bankruptcy court ruling against his client.   He said the same thing when Justice Alito followed Kagan in pressing the issue.

Later in the argument, Kagan also voiced some worry that the outcome in this case might impair the powers of independent arbitrators to resolve disputes without involving the legal machinery of regular courts.  The Chief Justice stepped in to try to deflect that argument, saying that arbitration was different because it was the result of a contractual agreement between the parties.

Both the trustee’s attorney in the case, University of Michigan law professor John A.E. Pottow, and Justice Department lawyer Curtis E. Gannon did not appear to have persuaded a majority of judges that the bankruptcy system itself is so much based on a system of consent of the parties that this should be controlling on the extent of a bankruptcy judge’s powers in cases like this one.

In reaction to that argument, for example, Justice Scalia said that the Constitution would not allow parties to insist on a decision in their dispute from a federal court, just because using that system was what they both wanted and were willing to accept the outcome.

Posted in Executive Benefits Insurance Agency v. Arkison, Analysis, Featured, Merits Cases

Recommended Citation: Lyle Denniston, Argument recap: Bankruptcy and the slippery slope, SCOTUSblog (Jan. 14, 2014, 2:53 PM), http://www.scotusblog.com/2014/01/argument-recap-bankruptcy-and-the-slippery-slope/