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Opinion analysis: Justices reaffirm authority of bankruptcy judges based on parties’ consent

The Bankruptcy Code of 1978 granted bankruptcy judges broad authority to resolve disputes related to debtors and their estates, but it did not grant them Article III protections against the removal or reduction of their salaries. The Court has struggled for thirty years over how to accommodate the practical justifications for that grant with the constitutional vesting of the judicial power in courts with Article III protections.

In Northern Pipeline Construction Company v. Marathon Pipe Line Co., a divided Court held that the Constitution prevented bankruptcy courts from adjudicating a state-law breach of contract claim, even though it was brought by a creditor against the estate of the bankrupt. The Court extended that decision twice – first in Granfinanciera SA v. Nordberg (fraudulent conveyance claim brought by an estate) and again in Stern v. Marshall (counterclaim brought by an estate against a creditor).   Last Term’s decision in Executive Benefits Insurance Agency v. Arkison considered a bankruptcy court’s adjudication in the first instance of a so-called Stern claim (a claim that requires Article III adjudication under Stern and its predecessors); the Court held that a district judge’s subsequent entry of judgment following de novo review satisfied the requirements of Article III.

Yesterday’s decision in Wellness International Network v. Sharif followed Arkison, holding that a bankruptcy court adjudication of a Stern claim is permissible under Article III so long as the parties consent. The Court’s holding is not nearly so startling as the reasoning and commentary offered to support it. The practical consequences of a contrary ruling are considerable: in general, a contrary ruling probably would have required direct district-court adjudication of a wide variety of matters currently handled by bankruptcy judges. That is not to say it would have been shocking for the Court to have come out on the other side of this one: the opinions in Marathon, Granfinanciera, and Stern displayed a readiness to make potentially disruptive changes to the bankruptcy process if a majority of the Justices found transgressions on Article III.

At least to me, what is most striking about Justice Sonia Sotomayor’s opinion is the undergirding perspective of a deep-seated respect for the bankruptcy judges. Even apart from the willingness to disrupt the bankruptcy process mentioned above, any reader of decisions like RadLAX Gateway Hotel v. Amalgamated Bank, Bank of America National Trust and Savings Ass’n v. 203 N. LaSalle Street Partnership, BFP v. Resolution Trust Corp., and Dewsnup v. Timm will know that the Court has often been skeptical of the capability of bankruptcy judges, acting to limit their discretion in a wide variety of substantive areas. {Apologies to Douglas Baird and Anthony Casey for theft of their reasoning on that subject.}

Here, however, the Court in ways small and large displays unalloyed appreciation for the contribution of those judges to the judicial system. To get a sense of the tone, consider the Court’s statement early in its opinion that “it is no exaggeration to say that without the distinguished service of these judicial colleagues [i.e., magistrates and bankruptcy judges], the work of the federal court system would grind nearly to a halt.” Nothing could be farther from the tone of Justice William Brennan’s opinions in Marathon and Granfinanciera, which zealously policed congressional efforts to push adjudicatory responsibility to the very same “distinguished” judicial “colleagues.”

The sentiment bears doctrinal fruit in the basic analytical move that supports the Court’s holding: conflation of the hitherto-dubious constitutional position of bankruptcy judges with the well-established constitutional legitimacy of magistrates. It has been settled for decades that magistrates properly handle the matters delegated to them by district judges, at least so long as the parties consent. Placing the two groups in a single category, the Wellness Court emphasized that
Article III judges appoint and remove both groups, that both groups are adjuncts of the district court judges, and that bankruptcy courts hear matters solely on a district court’s reference, which can be withdrawn sua sponte or at the request of a party.

The Court did not mention that the district court’s “reference” in the bankruptcy context is not at all like the process for referring issues to magistrates. Reference in the bankruptcy context is entirely pro forma, occurs automatically and without exception in all courts throughout the nation, and (absent a specific contrary order) carries all aspects of the proceeding with it. Nor did the Court mention that consent of the parties is, at least in the statutory scheme, wholly irrelevant to bankruptcy court authority. To be sure, the Court correctly stated that the district court can withdraw the reference on the request of a party, but that doesn’t mean much when you notice that the district court also has the authority to ignore the party’s request. Such a request has no more structural significance than any other concern that might motivate a district court, acting of its own unreviewable volition, to withdraw the case from the bankruptcy court.

Scholars and jurists will debate the analytical significance of the opinions here for years. For my part, writing without an opportunity for sustained reflection, I would identify two points that seem to signal a shift from the analysis in the earlier cases in this line of decisions. The first is the Court’s sympathetic characterization of the Bankruptcy Code’s jurisdictional provisions. Referring to provisions that have been held thrice to extend beyond permissible Article III requirements, the Court described the authority as “limited to a narrow class of common law claims as an incident to the bankruptcy courts’ primary, and unchallenged, adjudicative function.” That snippet reads like a piece of advice to the lower courts, suggesting that they should think twice before concluding that cases which fall within the statutory grant of authority fall outside the constitutionally permissible range of bankruptcy judge authority.

The second point, more likely to be grist for the theoretical mill of scholarly inquiry, is the elevation of separation-of-powers considerations in the Article III analysis. Here, the Court thought it important that the bankruptcy court arrangement has no potential to “aggrandize” Congress or “humble the Judiciary. . . . So long as [the bankruptcy] judges area subject to control by the Article III courts, their work poses no threat to the separation of powers.” That point was made at length in Justice Byron White’s dissent in Marathon Pipe Line and in Justice Stephen Breyer’s dissent in Stern, but it has not previously played any substantial role in the Court’s evaluation of the Bankruptcy Code’s jurisdictional provisions.

Perhaps the most surprising thing about the analysis summarized above is the (relative) consensus. Six Justices (all but Chief Justice John Roberts and Justices Antonin Scalia and Clarence Thomas) agreed with the discussion summarized above. This includes all four of the dissenters from Stern, but also Justices Anthony Kennedy and Samuel Alito, who joined the Court’s opinion in that case. Of the six, five joined the opinion in its entirety and Justice Alito disagreed only with the Court’s discussion of the applicable standard of consent: the Court held that consent could be implied, but he thought the Court could avoid that question by holding that it was waived.

The dissenting opinions also offer considerable food for thought. The Chief Justice (the author of the majority opinion in Stern) filed an opinion oddly characterized as a dissent, but in fact agreeing with the judgment of the Court reversing the court of appeals. In his view, the claim in this case was not a Stern claim at all, so the Court should have disposed of the case on that basis and avoided the discussion of consent (with which he vigorously disagreed). At first reading, the opinion of the Chief Justice seems to offer a strained and narrow reading of his Stern opinion, presumably out of an effort to persuade his colleagues to avoid the consent question (a question on which he plainly was in the minority). The Chief Justice acknowledges that the claim at issue here (the debtor’s previous conveyance of assets into a trust was ineffective because the trust was the debtor’s alter ego) was quite similar to the claim considered in Granfinanciera (the debtor’s previous conveyance of assets defrauded the debtor’s creditors). But he nevertheless contended that his own opinion in Stern did not bar bankruptcy adjudication of the claim at issue here. It is at least possible that the Chief Justice originally drafted this opinion hoping it would be an opinion for the Court, but if so most of his colleagues obviously thought the consent issue a simpler one on which to rest the decision.

Justice Scalia joined all of the Chief Justice’s “dissent” and Justice Thomas joined the analysis of Stern. Justice Thomas, though, filed a separate dissent on the consent question. Because he joined the Stern analysis, he agreed with the Court’s disposition of the case. Still, he went on to offer a lengthy formalistic analysis that would limit any activity by non-Article III courts to matters involving the territories (like the District of Columbia), the armed forces, or “public rights.” Justice Thomas’s reasoning was eerily similar to the analysis Justice Brennan offered in his opinions for the Granfinanciera majority and the Marathon Pipe Line plurality, and the even narrower reasoning suggested by Justice Scalia in his Granfinanciera concurrence; Justice Thomas goes so far as to include four favorable citations to Scalia’s older opinion. Among the puzzles this case offers future analysts is the question why Justice Scalia chose not to join an opinion apparently intended to adhere to his previously expressed views. A related point (for which I thank Gil Seinfeld) is the odd confluence of views between Justice Brennan in the days of Marathon Pipe Line and Roberts, Scalia, and Thomas in the present era.

I should at once apologize for an unusually long post and for failing to discuss (or even recognize) many of the aspects of the opinions certain to be found important in the years to come. Perhaps I have offered a flavor of this particular step in the Court’s continuously meandering activity in this area.

Recommended Citation: Ronald Mann, Opinion analysis: Justices reaffirm authority of bankruptcy judges based on parties’ consent, SCOTUSblog (May. 27, 2015, 2:27 PM),