From Stem to Stern: navigating bankruptcy practice after Stern V. Marshall.

AuthorWright, Michelle
PositionCOMMENT
  1. INTRODUCTION

    Bankruptcy law has come a long way since its earliest iteration. No longer does it sanction selling debtors into slavery, physically giving creditors a pound of flesh of the debtor, (1) or treating bankrupt citizens like criminals. (2) While bankruptcy law is more civilized now, it is far from settled or stable. (3) In fact, since its inception in 1800, American bankruptcy law has undergone major changes about every forty years. (4)

    These changes stem from Congress and the Supreme Court of the United States' struggle to balance the Constitution's demand for impartial Article III judges and the efficiency and expertise of specialized Article I bankruptcy courts. Under the United States Constitution, Article III judges are granted life tenure and salary protection in order to insure they are fair and impartial. (5) However, Article I bankruptcy judges do not have these tenure and salary protections. Instead, they are appointed for fourteen-year terms. (6) One method of reconciling the need for Article I expertise and Article III protections has been through the public rights exception to adjudication by Article III courts. The public rights exception is the idea that there are matters involving public rights that Congress may assign to legislative courts for adjudication. (7) However, the Supreme Court's public rights exception jurisprudence has varied in definition and application. (8)

    Another method of balancing these concerns grants the bankruptcy court "summary jurisdiction," which is jurisdiction over the property of the estate, (9) while "plenary jurisdiction" over individual parties is reserved for Article III courts. (10) Further, by continually changing the bankruptcy statutes, Congress has experimented with making the bankruptcy courts "adjuncts" of the district courts, so they are under the control of Article III judges." (11) Finally, Congress tried to solve the problem of Article I courts deciding Article III cases by defining claims as "core" or "non-core" to limit bankruptcy authority. (12) Core claims are matters stemming directly from the bankruptcy case or Title 11, the part of the United States Code that governs bankruptcy. (13)

    Understanding this turbulent history of bankruptcy law is essential to understanding the future of the bankruptcy system. The Supreme Court of the United States' latest word on bankruptcy courts' authority, Stern v. Marshall, discusses the public rights exception, the summary-plenary divide, and bankruptcy courts as adjuncts of Article III courts. (14) The case ultimately finds Congress' definition of "core" bankruptcy matters unconstitutional. (15)

    In order to provide a foundation for understanding the Court's reasoning in Stern, Part II of this Comment briefly covers the history of bankruptcy in America. Section III explains how the Supreme Court of the United States' holding in Stern v. Marshall (16) has affected bankruptcy courts' disposition of state law claims. Scholars' interpretations of Stern range from understanding it as a narrow holding that will change little in bankruptcy, (17) to questioning whether it foreshadows the Court holding the entire bankruptcy system is unconstitutional in a future case. (18) Given the breadth of opinions that the decision supports, it is predictable that Stern has been interpreted differently by district and bankruptcy courts across the country. In order to aid practitioners, Part IV explains how bankruptcy courts are determining whether matters are core or non-core, when courts are finding consent, how courts are resolving state law claims, and rationalizing these decisions in light of Stem, and the historical background of bankruptcy law. Finally, in furtherance of the goal of helping practitioners navigate post-Stern waters, Part V concludes this Comment by summarizing jurisdictional splits between courts on these critical issues and the relevant historical arguments.

  2. HISTORY OF BANKRUPTCY LAW

    To fully understand the current bankruptcy system and the Court's reasoning in Stem, a practitioner must first understand the history of the bankruptcy system and how it has changed over the centuries. This Comment starts at the beginning of American bankruptcy history, and documents the major statutory changes to bankruptcy law and corresponding Supreme Court cases.

    1. Origins of American Bankruptcy Law

      A brief introduction to the English system of bankruptcy is important because American bankruptcy courts developed from the English system, (19) and English history explains why the American founders created protections for Article III judges. Understanding the reasoning behind Article III protections illuminates the problems with adjudication by legislative Article I bankruptcy courts that lack these protections.

      In the English bankruptcy system, commissioners could make judgments about creditors' claims, but they only had jurisdiction over the property in the debtor's estate, not property in the hands of third parties. (20) Therefore, the only way the trustee could make claims on property in the hands of third parties was to make a formal complaint in a court of law or equity. (21) Jurisdiction over property is the basis of "summary jurisdiction" and was adopted by the original American bankruptcy courts. (22) Further, these English bankruptcy commissioners were supervised by the Lord Chancellor in Equity, who could be petitioned for review of the commissioners' determinations, similar to how modern district courts may be petitioned to review bankruptcy court determinations. (23)

      The current controversy regarding the independence of judges also has roots in the English bankruptcy system. The injustices of the English kings who "made [j]udges dependent on [the king's] [w]ill alone, for the tenure of their offices, and [in] the amount and payment of their salaries," (24) led to the framers' creation of position and salary protections for judges in Article III of the Constitution in order to maintain an independent judiciary. (25) Bankruptcy judges do not enjoy these protections because they are not part of the Article III judiciary. (26)

    2. The Bankruptcy Act of 1800

      After the Constitution federalized the bankruptcy system, Congress passed the first national bankruptcy law. (27) The Bankruptcy Act of 1800 (Act of 1800) was spurred by the economic panic of 1797, which increased the number of debtors in America. (28) While the Act of 1800 incorporated some facets of the English bankruptcy system, there were differences.

      The Act of 1800 was similar to the English system because the Act of 1800 allowed court officials to seize assets of a debtor and decide claims of creditors. (29) Further, while later changes to the American Bankruptcy Code abolished strict summary jurisdiction for bankruptcy courts, the bankruptcy courts established in 1800 were based on summary jurisdiction like their English predecessors. (30) "Summary jurisdiction" is jurisdiction over the property of the estate, (31) while "plenary jurisdiction" is jurisdiction over individual parties. (32) The Act of 1800 also allowed for parties to petition for review of the commissioners' decisions by federal district courts. (33) The authority of federal district review is still alive and well today. (34)

      However, Americans were already starting to diverge from the English system; fraudulent bankruptcy was no longer punishable by death, (35) and the Act of 1800 exempted certain property from creditors and discharged some debts. (36) While revolutionary, the Act of 1800 was repealed in only three years; creditors objected that wealthy speculators were getting discharged too often, leaving creditors with no repayment, and agriculturists complained that merchants were favored as creditors. (37) And so began the shifting landscape of bankruptcy in America.

    3. The Bankruptcy Act of 1841

      After a period of time without a federal bankruptcy system, Congress again realized the importance of debtor relief and passed a new act. (38) The Bankruptcy Act of 1841 (Act of 1841) allowed voluntary bankruptcy for the first time, a change that has withstood the test of time. (39) Also, bankruptcy assignees replaced commissioners in adjudicating bankruptcy claims. (40) However, these bankruptcy assignees were not given Article III judicial protections; this problem remains the crux of bankruptcy courts' jurisdictional problems today.

      The Act of 1841 also marks a period of waxing bankruptcy power. Justice Story broadly interpreted the Act of 1841 and stated that Congress had the power to enact broad authority to give bankruptcy courts enough jurisdiction to "begin, continue, and end, all such proceedings as might be necessary and proper ... to accomplish the entire settlement and final distribution of the bankrupt's estate." (41) Further, Justice Story declared bankruptcy jurisdiction exclusively federal and found in equity. (42) By granting bankruptcy law exclusive federal jurisdiction, Justice Story hoped to produce uniform bankruptcy laws. (43)

      This broader definition of bankruptcy jurisdiction continued in the Supreme Court's decision in Ex Parte Christy, (44) where Justice Story interpreted the Act of 1841 as giving district courts jurisdiction over "all matters and proceedings in bankruptcy," including a list of enumerated cases where jurisdiction would be found, and jurisdiction in all cases and controversies in bankruptcy arising between creditors and the estate. (45) This decision extended bankruptcy jurisdiction to allow procedures to recover assets for the estate instead of just having jurisdiction over the assets already in the estate. This extension is now a part of our modern bankruptcy system. (46)

      Justice Story's interpretations of the Act of 1841 broadened the jurisdiction of bankruptcy courts and clarified the district court's jurisdiction over bankruptcy matters. Even today, district courts have jurisdiction over all bankruptcy matters, (47) and...

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