Bankruptcy Courts' Authority Under § 505

• Publication year: 2018

Bankruptcy Courts' Authority under § 505

David W. Patton

BANKRUPTCY COURTS' AUTHORITY UNDER § 505

Abstract

"[T]he court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax . . . ."¹ Surprisingly, this provision does not refer to the jurisdiction of tax courts. Instead, 11 U.S.C. § 505 describes the vast statutory authority of bankruptcy courts to determine tax liabilities.

Apart from three narrow exceptions contained within the provision, bankruptcy courts' authority under § 505 is essentially limitless² The broad language of § 505 extends bankruptcy courts' authority far beyond the context of bankruptcy, and courts have acknowledged that the plain meaning of the statute effectively creates a second tax court system³ Interpreting § 505 in this manner raises constitutionality and federalism concerns and is ostensibly impractical. For these reasons, courts have taken three general approaches to define the extent of bankruptcy courts' authority under § 505.

This Comment evaluates these three approaches and examines other limitations and mechanisms that courts have utilized to restrict bankruptcy courts' authority to adjudicate § 505 proceedings. It concludes that the "arising under" approach is the ideal solution to § 505 because it emphasizes practicality while adhering to statutory canons and the goals of bankruptcy.

Introduction

The open-ended language of the United States Bankruptcy Code (the Code) grants bankruptcy courts broad authority to enter final judgments on a variety of issues. This broad authority is inconsistent with the narrower scope of authority bestowed on bankruptcy courts by the Constitution and other statutes.⁴ Over the years, the Supreme Court has attempted to reconcile the problems that have arisen from these conflicting allocations of authority.⁵ Although the Court's decisions aimed to clarify the true authority of bankruptcy courts, many issues remain. Evidence of this persisting incompatibility is exemplified in the

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controversy surrounding bankruptcy courts' authority to make § 505 determinations.

Section 505 of the Code states that bankruptcy courts "may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction."⁶ Except for three narrow exceptions listed in § 505,⁷ the plain language of this provision grants bankruptcy courts broad authority to make tax liability determinations.⁸ The broad nature of § 505 creates significant overlap with the powers delegated to tax courts and enables bankruptcy courts to make determinations on matters well beyond the scope of bankruptcy.⁹ In an effort to remedy this predicament, courts have taken several different approaches to limit the authority of bankruptcy courts under § 505.

This Comment analyzes the various approaches courts have applied to determine the extent of bankruptcy courts' authority to make § 505 determinations. It then concludes that the most viable approach is to treat § 505 proceedings as core proceedings "arising under" Title 11.

Part A briefly describes the legislative and judicial history relating to the general controversy surrounding bankruptcy courts' authority. Part B describes the three general approaches courts have applied to delineate the authority of bankruptcy courts under § 505. Part C analyzes these approaches, and Part D concludes that applying the "arising under" approach to § 505 proceedings yields the most desirable outcomes.

A. Background on the Authority of Bankruptcy Courts

Prior to 1978, bankruptcy courts operated under a system where "referees" presided over bankruptcy proceedings and orders could be appealed to the federal district court.¹⁰ Under the Bankruptcy Reform Act of 1978 (the Act), Congress established bankruptcy courts as "court[s] of record" and as adjuncts

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to their corresponding federal district courts.¹¹ The Act stated that bankruptcy judges were to be appointed by the President with consent of the Senate for fourteen-year terms.¹² It established that bankruptcy judges could be removed by the "judicial council of the circuit" but "only for incompetency, misconduct, neglect of duty or physical or mental disability."¹³ Additionally, the Act stated that "the salaries of the bankruptcy judges are set by statute and are subject to adjustment under the Federal Salary Act."¹⁴ Finally, it expanded the authority of bankruptcy courts to "all 'civil proceedings arising under title 11 [the bankruptcy title] or arising in or related to cases under title 11.'"¹⁵ Thus, the Act granted bankruptcy judges the type of broad authority that was generally reserved for Article III judges.¹⁶ However, in contrast to Article III judges, bankruptcy judges did not receive the same benefits such as lifetime appointment and the protection against salary decrease.¹⁷

The Supreme Court was forced to address this disparity in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., in 1982.¹⁸ In Northern Pipeline, the Court was asked to determine "whether the assignment by Congress to bankruptcy judges of the jurisdiction granted in 28 U.S.C. § 1471 (1976 ed., Supp.IV) by § 241(a) of the Bankruptcy Act of 1978 violates Art. III of the Constitution."¹⁹ In a plurality opinion written by Justice Brennan, the Court noted the importance that the Constitution places on maintaining separation of powers between the three branches of government.²⁰ The plurality explained that the benefits afforded to judges under Article III, including life tenure and protection against diminution of salary, facilitate the Constitution's separation of powers doctrine by reducing the legislative and executive branches' influence over the judicial branch.²¹ As a result, the plurality concluded:

28 U.S.C. § 1471 (1976 ed., Supp.IV), as added by § 241(a) of the Bankruptcy Act of 1978, has impermissibly removed most, if not all,

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of "the essential attributes of the judicial power" from the Art. III district court, and has vested those attributes in a non-Art. III adjunct. Such a grant of jurisdiction cannot be sustained as an exercise of Congress' power to create adjuncts to Art. III courts.²²

1. Current Applicable Statutes

Two years later, in response to the concerns identified by the Supreme Court in Northern Pipeline,²³ Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA).²⁴ BAFJA created significant changes regarding the jurisdiction and judicial power of bankruptcy courts.²⁵ As a result, the jurisdiction of bankruptcy courts is currently defined in three key provisions of title 28: §§ 151, 1334, and 157.²⁶

Section 151 provides:

In each judicial district, the bankruptcy judges in regular active service shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding . . . .²⁷

This provision establishes bankruptcy judges as adjuncts to the district court with judicial authority over the matters referred to them by the district court under chapter 6 of title 28.²⁸

Section 1334 grants and defines federal district courts' jurisdiction over title 11 cases and proceedings and has two notable implications.²⁹ First, it creates three classifications of civil proceedings associated with title 11. Second, it describes circumstances involving state law where the district court should abstain.³⁰

Section 1334(a) states that "[e]xcept as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all

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cases under title 11."³¹ In contrast, subsection (b) grants district courts "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11" aside from the exceptions provided in subsection (e)(2).³² The language of subsection (b) identifies three types of proceedings: "arising under title 11," "arising in [a case under title 11]," and "related to [a] case[] under title 11." ³³ As demonstrated in the following passages, these three categories have provided courts with an organizational structure for determining the extent of bankruptcy judges' authority.

Section 157 allows district courts to refer title 11 proceedings and cases to bankruptcy judges.³⁴ Thus, this provision confers upon bankruptcy judges the authority described in § 151.³⁵ The language of § 157 permits district courts to exercise their discretion on whether to refer proceedings and cases to bankruptcy judges.³⁶ Congress gave district courts this discretion in an attempt to remedy the constitutional concerns addressed in Northern Pipeline.³⁷ Nevertheless, constitutional issues persisted.³⁸

Section 157 is significant because it explicitly addresses the authority of bankruptcy judges under the three categories of proceedings described in § 1334.³⁹ Section 157(b)(1) provides that "[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 . . . and may enter appropriate orders and judgments . . . ."⁴⁰ This subsection grants bankruptcy judges clear authority to enter final judgments in core proceedings arising under Title 11 or arising in a case under Title 11.⁴¹ Section 157 fails to provide an exact definition of core proceedings; however, § 157(b)(2) gives sixteen examples of core proceedings and notes that this list is not exhaustive.⁴²

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Next, § 157 addresses the third category of proceedings described in § 1334, proceedings related to a case under title 11.⁴³ Section 157(c)(1) states that "[a] bankruptcy...