Courting Equity in Bankruptcy.

AuthorMarkell, Bruce A.
  1. INTRODUCTION II. COURTS A. Statutory Powers of Courts 1. District Courts and Bankruptcy 2. District Courts and Referral of Delegated Jurisdiction 3. Bankruptcy Courts as "Courts" B. "Inherent" Powers of Courts 1. Inherent Powers of District Courts 2. Inherent Powers of Bankruptcy Judges a) Section 105 and Contempt b) Scary Issues C. Summary of the Powers of a Bankruptcy Judge III. EQUITY A. Equity's Doctrines and Remedies B. Equity's Moral Readings 1. General Congressional Directives for Bankruptcy Courts to "Do Equity" 2. Extraordinary Grants of Powers to "'Do Equity" a) Section 510(c) and Equitable Subordination b) Section 552(b) and the ""Equities of the Case" c) Section 502(j) and the "Equities of the Case" C. Equity's Exceptions to General Rules 1. Discretion and Equity 2. Discretion Limited by the Source of Jurisdiction: The Boundaries Set by the Code 3. The Range of Permissible Discretion and Equity a) Obvious Uses of Equity to Create Exceptions: Correcting Court-Induced Errors b) Tolerable Uses of Equity to Create Exceptions: Fashioning Better Remedies for Existing Rights c) Debatable Uses of Equity to Create Exceptions: New Rights IV. CONCLUSION I. INTRODUCTION

    Are bankruptcy courts properly called courts of equity? Various justices of the Supreme Court seem to assume so, (1) but other judges and academics have asked this question in many different ways, with many different answers. (2) The point of this article is to question whether the question is well formed. That is, can it be answered without first knowing or agreeing on what a "court" is or what "equity" means? I think not. This article thus attempts to explore these protean concepts to achieve a better understanding of what is asked by the opening question.

    Start first with bankruptcy. Congress vested bankruptcy jurisdiction in Article III district courts. (3) As "inferior courts" established by acts of Congress, district courts have the "judicial Power" as provided for in the Constitution. (4) This "power" includes equity powers. (5) It thus follows that, unless Congress removes or limits that power when conferring jurisdiction over statutory bankruptcy cases, district courts are courts of equity when it comes to the Code. (6) But that is trivial. District courts are courts of equity with respect to any federal statute that they apply. (7)

    I will have more to say on what it means to be a court of equity with respect to a statutory area later, but for now, the focus is on whether the congressional permission for Article III courts to delegate bankruptcy matters to non-Article III bankruptcy judges alters the analysis. Put another way, a threshold question is whether Article III courts may designate bankruptcy judges as units of the district court and delegate to bankruptcy judges such equitable powers and discretion as may be necessary and appropriate for them to administer the bankruptcy laws to the same extent as the district courts. (8) Or, is such delegation unnecessary if a collection of bankruptcy judges is a legitimate court (9) that is automatically imbued with certain equitable powers and discretion, bounded by statute?

  2. COURTS

    To call a body a "court" is to infuse that body with a collection of powers that cohere with the usage of the word "court" in legal parlance. (10) Among these powers are the powers to compel testimony and to render independently enforceable decrees. Adding "of equity" to "court" generally is understood to imbue a court with different and somewhat more expansive powers than a "court of law" or a "statutory court." I explore this distinction below.

    For purposes of this article, I assume that the phrase "court of equity" has two discrete components: one describes a "court," and the second is that the "court," so described, exercises powers of "equity." I explore these concepts separately.

    1. STATUTORY POWERS OF COURTS

      Courts have assumed that the bankruptcy power did not exist at common law and that bankruptcy remedies were creatures of statute. (11) Partial recognition of this status lies in the Constitution's allocation of the bankruptcy power to the legislature (12) and the power over common law and equity matters to the courts. (13)

      The current system creates statutory bankruptcy rights and then vests the power to administer those rights in the existing Article III court system. (14) This vesting, however, comes with an option: Article III district courts can delegate all bankruptcy functions and duties to a separate system of bankruptcy judges. (15) Examining such delegation informs whether bankruptcy courts may exercise powers of a court of equity.

      1. District Courts and Bankruptcy

        Congress created an entire title of the United States Code to address bankruptcy. That title, title 11, is mostly freestanding and agnostic as to who or what body administers it. The directive designating who exercises the Code's power is found in title 28 of the United States Code, which concerns the judiciary. In title 28, Congress gave original and exclusive jurisdiction over bankruptcy cases to "the district courts." (16) The same section also grants to "the district courts" original but not exclusive jurisdiction over civil proceedings arising in, arising under, or related to cases under title ll. (17)

        A "district court" is comprised of all of the district judges appointed to a particular district. (18) A "district judge" is someone nominated by the president and confirmed by the Senate for a particular judicial district (19) and who serves for life or during good behavior, whichever ends first. (20) A "district judge," as a congressionally established "inferior court" of the United States, is invested with the "judicial Power" of the United States. (21)

        District courts undoubtedly are "courts." That means, for my purposes, that they have whatever jurisdiction Congress gives to them (in the case of bankruptcy, whatever jurisdiction flows from [section] 1334), plus whatever jurisdiction is inherent in their status as "courts."

        Accordingly, Congress created a bankruptcy statute using its powers under the Constitution's bankruptcy clause and then vested jurisdiction over that statute in the district courts, which have the full "judicial Power [over] all Cases, in Law and Equity." (22) Because district courts are possessed of the "judicial Power," they possess the full power of equity with respect to matters, including bankruptcy, that come before them.

      2. District Courts and Referral of Delegated Jurisdiction

        By contrast, the same analysis does not apply to bankruptcy judges. The source of jurisdiction for bankruptcy judges is [section] 157(a) of title 28. It permits, but does not require, district courts to refer "to the bankruptcy judges for the district"--not the bankruptcy court for the district (23)--all bankruptcy cases and "any or all proceedings arising under title 11 or arising in or related to a case under title ll." (24) According to the statute, the judges receiving this referral "shall constitute a unit of the district court to be known as the bankruptcy court for that district." (25) The bankruptcy court thus receives, through the order of referral, all powers to decide bankruptcy cases and proceedings, in accordance with the statute and with local district court rules.

        Thus, unless the equitable power is reserved in the district court's referral or withheld or withdrawn by the Constitution, a statute, or a court rule, the bankruptcy court presumptively receives all equitable powers over cases and proceedings referred as were possessed by the district court that referred them. As stated in [section] 152(b), "Bankruptcy judges shall serve as judicial officers of the United States district court established under Article III of the Constitution."

        The text of [section] 157(a) leaves little doubt that Congress permitted district courts to delegate their entire bankruptcy jurisdiction and power to bankruptcy judges. Much doubt, however, exists about whether that delegation is permitted by the Constitution. Bankruptcy judges are not appointed under Article III and, thus, do not have the full "judicial Power" granted to district court judges under section 2 of Article III of the Constitution. Cases from Northern Pipeline (26) to Stern (27) to Wellness International (28) demonstrate the struggle over exactly what types of cases require decision by a judge holding the "judicial Power" and what cases can be referred to, and decided by, judges who do not wield that "judicial Power."

        That debate has consumed much paper and ink (and electrons), and I do not wish to wade into it here. Congress unquestionably could create a court with jurisdiction over traditional equitable matters and choose not to give the judges of that court all of the protections of Article III. (29) Indeed, Congress created a bankruptcy statute using its powers under the Constitution's bankruptcy clause and then vested jurisdiction over that statute in the district courts, which have the full "judicial Power [over] all Cases, in Law and Equity." District courts possess equitable powers and have initial bankruptcy jurisdiction. These courts may, but are not compelled to, refer this power to the bankruptcy judges in their districts.

      3. Bankruptcy Courts as "Courts"

        Under the delegation permitted by [section] 157(a), bankruptcy judges can make final decisions on matters of statutory bankruptcy law (at least to the extent that the provision does not usurp or overlap a cognate common law or constitutional doctrine). (30) That is the essence of [section] 157(b)'s grant of the power to bankruptcy judges to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." (31) This power is supplemented by [section] 151:

        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...

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