A Constitutional Tango of Judicial Interpretation: the Instability of Bankruptcy Court Authority Under Article Iii

• Jurisdiction: United States,Federal
• Publication year: 2018
• Citation: Vol. 34 No. 2

A Constitutional Tango of Judicial Interpretation: The Instability of Bankruptcy Court Authority under Article III

Kevin H. Kim

A CONSTITUTIONAL TANGO OF JUDICIAL INTERPRETATION: THE INSTABILITY OF BANKRUPTCY COURT AUTHORITY UNDER ARTICLE III

Abstract

Despite historical and modern developments, the heart of bankruptcy law centers around providing fresh starts to those who find themselves in severe financial distress. Congress created bankruptcy courts to help efficiently and effectively facilitate this goal. However, the complexity of debtor-creditor relationships necessitates that most bankruptcy proceedings hear a variety of claims, some of which may not arise out of the bankruptcy itself but are still required for bankruptcy resolution. Consequently, the authority of bankruptcy courts to hear all relevant claims is an essential component of bankruptcy relief.

Article III of the United States Constitution states that judicial authority is vested in judges with life tenure and protected salaries. Based on opposing interpretations, a bankruptcy court may or may not be authorized to hear certain ancillary common law claims in a proceeding. A strict construction of Article III suggests that bankruptcy courts lack the necessary safeguards to exercise judicial authority. In contrast, a broad construction of Article III suggests that bankruptcy courts may exercise limited judicial authority in light of the practical benefits and minimal dangers. These two opposing canons of construction have shaped a volatile history of bankruptcy law.

This Comment explores the dynamic relationship between non-Article III bankruptcy courts and Article III judicial authority, and how this unstable relationship affects the facilitation of bankruptcy goals. This Comment suggests a balanced four-factor approach to when the Court inevitably redraws the constitutional lines of bankruptcy court authority. Lending sufficient weight to each factor will increase the likelihood that bankruptcy procedures properly adapt to rapid societal growth within a constitutional framework, while providing more predictability in bankruptcy law development.

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Introduction

Financial struggle has been prevalent throughout history, and it has almost become a normal phase of life in today's market.¹ The real danger arises when those who find themselves in poor economic situations cannot prevent their struggles from escalating into severe financial distress.² Anticipating this ubiquitous problem centuries ago, the Framers of the United States Constitution decided it was necessary "to establish . . . uniform laws on the subject of bankruptcies throughout the United States."³ As such, Congress was constitutionally authorized to create federal bankruptcy laws providing debtors with the opportunity to "start afresh."⁴ The United States Supreme Court illustrated that the goal of bankruptcy was to "give to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future efforts, unhampered by the pressure and discouragement of preexisting debt."⁵ To promote these ends, Congress ultimately created bankruptcy courts to support the federal district courts in efficiently adjudicating bankruptcy claims.⁶

Due to the complex nature of debtor-creditor relationships, the efficient facilitation of bankruptcy proceedings rests considerably on a bankruptcy court's authority to hear a comprehensive range of claims.⁷ This broad authority is essential because bankruptcy proceedings seldom consist solely of one bankruptcy issue.⁸ Rather, these proceedings often include numerous claims that do not arise from the bankruptcy itself, but are still vital to the resolution of bankruptcy disputes.⁹ For example, a claim over an alleged breach of contracts is governed by state law, but must be resolved to determine the appropriate sum of valid claims against a debtor.¹⁰ Congress recognized and addressed this necessity through the Bankruptcy Act of 1978, which empowered bankruptcy courts with the statutory authority to render final judgments on claims that were not primary bankruptcy issues.¹¹

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While bankruptcy courts had clear statutory authority, questions regarding whether bankruptcy courts had the necessary constitutional authority developed over time.¹² The central constitutional concern was that a bankruptcy court's ability to hear ancillary, non-bankruptcy claims challenged the structural separation of powers.¹³ The United States Constitution creates a government framework that ensures a system of checks and balances—a structure intended to prevent a concentration of power by dividing the government into three distinct branches with separate and independent authority.¹⁴ Though the intent was to avoid conflicts, the separation of powers generated frequent and fierce arguments regarding the corresponding boundaries of legislative and judicial authority.¹⁵

Bankruptcy court authority is one of the many casualties of this ongoing separation of powers debate, "a constitutionally required game of jurisdictional ping-pong between courts . . . ."¹⁶ Over the last century, Supreme Court precedent has largely fluctuated between two opposing interpretations of a bankruptcy judge's authority to render final decisions in cases and controversies not arising from the bankruptcy itself.¹⁷

On one side, a strict construction¹⁸ of the Constitution suggests that it is unconstitutional for Congress to confer judicial authority on non-Article III bankruptcy judges because they do not comply with the structural safeguards of Article III.¹⁹ On the other side, a broad construction²⁰ suggests that it is constitutional for Congress to confer judicial authority because, in light of the complex realities of bankruptcy law, the practical benefits considerably

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outweigh the minimal dangers.²¹ Today, the exact scope of bankruptcy court authority still remains an important point of contention.²²

The lack of clarity in the scope of bankruptcy court authority creates residual uncertainty for bankruptcy procedures.²³ This ambiguity is a significant problem because the fundamental purpose of bankruptcy proceedings is the quick and efficient facilitation of debtor relief and creditor repayment.²⁴ Focus on promptness and efficiency is increasingly diverted to ancillary jurisdictional arguments, which instead lead to "inefficiency, increased cost, delay, and needless additional suffering among those faced with bankruptcy."²⁵

In response to this developing concern, the United States Supreme Court provided some procedural clarity in 2015 through Wellness International Network Limited v. Sharif, which held that bankruptcy courts had the authority to render final judgments on related non-bankruptcy claims with the consent of the parties to the case.²⁶ The Wellness dissent, however, characterizes the Court's decision as an "impermissible [threat to] the institutional integrity of the Judicial Branch,"²⁷ cautioning that an "individual may not consent away the institutional interest protected by the separation of powers."²⁸ Thus, the constitutional boundaries of bankruptcy court authority remain blurred.

If history is any indication of the future, the outlook of bankruptcy court authority will be subject to perpetual fluctuation.²⁹ It was only a few years ago when bankruptcy court authority was thoroughly limited by strict, formalistic interpretation.³⁰ Subsequent narrow holdings have sidestepped certain procedural hurdles in bankruptcy proceedings, but the most important constitutional question regarding the scope of bankruptcy court authority still remains largely unanswered, or at least full of ambiguity. When dealing with a time-sensitive issue such as bankruptcy, procedural efficiency is paramount to those who are in financial distress and eagerly awaiting resolution.

This Comment explores the dynamic relationship between non-Article III bankruptcy courts and Article III judicial authority, and how this unstable

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relationship affects the facilitation of bankruptcy law. First, this Comment examines the historical development of bankruptcy law and how the United States Supreme Court has shaped bankruptcy precedent through its shifting interpretations of Article III. Next, this Comment addresses the developing concerns resulting from both the strict and broad construction of Article III authority as it relates to bankruptcy courts. Finally, this Comment suggests that when the Court, again, inevitably addresses the constitutional concerns of bankruptcy court authority, the Court should lend sufficient weight to the following four factors: (1) the current threat of encroachment, and the amount of protection necessary to prevent it; (2) the practical effects on bankruptcy proceedings, and the benefits of preserving bankruptcy law; (3) the residual consequences to existing non-Article III tribunals; and (4) the current trend and disposition of bankruptcy authority. This balanced four-factor approach can increase the likelihood that bankruptcy procedures adapt to rapid societal growth within a constitutional framework, while providing more predictability in bankruptcy law development.

I. Background

From colonial state law debtor-creditor proceedings, to federal bankruptcy laws, to recent amendments of the Federal Bankruptcy Rules of Procedure, the only consistency in the scope of bankruptcy authority has been its inconsistency. Examining the evolution of debtor-creditor relations throughout the history of the United States provides a basic foundation for understanding how strict and broad construction have shaped bankruptcy law.

A. The Establishment of Federal Bankruptcy Laws: Finding the Proper Balance between Debtors, Creditors, and Courts

Until almost the twentieth century, there was no reliable federal regulation of bankruptcy.³¹ Before federal laws, the states were independently responsible for adjudicating bankruptcy claims but often suffered from...