Jennifer M. D'angelo, if You Can't Beat Them, Join Them: Inclusive Joinder and the Filtering of Article Iii Status Into the Bankruptcy Courts

• Publication year: 2011

COMMENTS

IF YOU CAN'T BEAT THEM, JOIN THEM: INCLUSIVE JOINDER AND THE FILTERING OF ARTICLE III STATUS INTO THE BANKRUPTCY COURTS

INTRODUCTION

Rife with scandal and soaking in publicity, recent mega-bankruptcy filings, such as Enron, WorldCom, and Adelphia, have drowned the bankruptcy courts in floods of hearings involving countless claims and parties. Not only are these filings some of the largest in corporate history,¹they also share a common denominator of corporate fraud. Enron's decision to keep some of its debt off the books and misstate its earnings catapulted the company into bankruptcy.²WorldCom's attempt to hide losses by improperly accounting for

$3.9 billion in operating expenses led to its financial demise.³Adelphia found its way to the bankruptcy court's door after it discovered the Rigas family⁴had misappropriated corporate funds via self-dealing. These mega-bankruptcy filings involving corporate fraud open an enormous umbrella under which a plethora of other litigation matters, or non-core proceedings, can be heard.⁵

Through broad interpretation of the joinder rules, especially intervention, the federal courts have widened the umbrella and enabled multiple parties to bring their non-core claims, especially those associated with executive fraud, into bankruptcy proceedings.⁶The Second Circuit has recognized the resulting dilemma,⁷identifying umbrella bankruptcy litigation as cases triggered by a bankruptcy petition "often covering numerous actions that are related only by the debtor's status as a litigant and that often involve decisions that will be unreviewable if appellate jurisdiction exists only at the conclusion of the bankruptcy proceeding."⁸

Although the primary function of a bankruptcy court is to hear core bankruptcy matters,⁹inclusive intervention allows the court to entertain additional non-core matters simply because a corporation has filed for bankruptcy. The essential problem with additional non-core matters is that it is not often an easy feat to separate the core bankruptcy issues from the non-core issues. The blurred and amorphous line that separates core bankruptcy issues from non-core issues has been criticized by scholars on countless occasions,¹⁰and rightly so, for the constitutional stakes are high.¹¹Unless the district courts are diligent in reviewing their respective bankruptcy courts' recommendations regarding non-core matters, the federal court system treads too close to replicating the same constitutional violation¹²the U.S. Supreme Court identified in Northern Pipeline Construction Co. v. Marathon Pipe Line Co.¹³over twenty years ago.

The first two parts of this Comment address the background necessary to understand how inclusive intervention allows bankruptcy courts to assume Article III status.¹⁴Part I discusses the U.S. Supreme Court's decision in Marathon and the legislation passed in response to that decision. Part II examines the requirements necessary to intervene in a bankruptcy case under Rule 24 of the Federal Rules of Civil Procedure ("FRCP")¹⁵and Sec. 1109(b) of the U.S. Bankruptcy Code ("Code").¹⁶Furthermore, Part II describes a split among the U.S. Courts of Appeals regarding the interpretation of both provisions. Part III analyzes this circuit split and discusses the potential effects of inclusively interpreting intervention, specifically the increase in non-core proceedings a bankruptcy court hears. It also discusses the dynamic between the district court and the bankruptcy court regarding non-core proceedings and investigates the possibility of rubber-stamping non-core proceeding recommendations. Finally, Part IV addresses possible solutions to the circuit split and the increased need for discipline among the bankruptcy and district court judges sitting within the Second and Third Circuits in avoiding Article III violations.

I. THE STRIPPING OF ARTICLE III DETERMINATIONS FROM THE BANKRUPTCY

COURT

A. The Supreme Court's Holding in Marathon and the Emergency Rule

Before the Supreme Court's holding in Marathon, bankruptcy courts, by virtue of the Bankruptcy Act of 1978,¹⁷shared with the district courts some of the authority to determine issues without enjoying the same Article III status as district court judges. The Act gave the bankruptcy courts the power to hear matters relating to the Code.¹⁸It did not, however, grant the judges the same benefits as those enjoyed by other federal judges, namely life tenure and secure salary.¹⁹Essentially, bankruptcy courts were not Article III courts but did everything an Article III court does. The Act removed the judicial power from the Article III district court and placed that power in a non-Article III adjunct.²⁰Because Congress, in creating the Act, overstepped its limited power to establish adjuncts to Article III courts, the Supreme Court declared this system unconstitutional in Marathon.²¹

The facts of this monumental case are simple. After Northern Pipeline filed for chapter 11 reorganization, it filed an ancillary suit against Marathon Pipe Line.²²Northern Pipeline claimed Marathon Pipe Line breached a contract and a warranty and sought damages for those breaches, as well as for misrepresentation, coercion, and duress.²³Marathon Pipe Line then sought to have the suit dismissed "on the ground that the Act unconstitutionally conferred [Article] III judicial power upon judges who lacked life tenure and protection against salary diminution."²⁴The Supreme Court, therefore, had to determine whether the jurisdiction granted to the bankruptcy court under 28

U.S.C. Sec. 1471 of the Act violated Article III of the U.S. Constitution.²⁵

Ultimately, the Court held the liberal grant of jurisdiction to the lower bankruptcy courts exceeded Article III²⁶and "[t]he judicial power of the United States must be exercised by judges who have the attributes of life tenure and protection against salary diminution specified by [Article] III."²⁷

In reaching its conclusion, the Court first discussed the procedural changes

Congress made to the Act.²⁸The Act eliminated the referee system²⁹and established bankruptcy courts as adjuncts to the district courts.³⁰The jurisdiction created under the Act was much broader than under the referee system,³¹and the jurisdictional grant empowered the bankruptcy courts to "entertain a wide variety of cases involving claims that may affect the property of the estate once a petition has been filed under Title 11" of the U.S. Code.³²

The Court next turned to the importance of the separation of powers and the guarantee of judicial impartiality provided by Article III of the Constitution,³³which clearly states that judges who enjoy life tenure and are safe from a diminution in salary exercise the judicial powers of the United States.³⁴After discussing how these benefits maintain the proper checks and balances,³⁵the Court firmly announced, "[o]ur Constitution unambiguously enunciates a fundamental principle-that the 'judicial Power of the United States' must be reposed in an independent Judiciary. It commands that the independence of the Judiciary be jealously guarded, and it provides clear institutional protections for that independence."³⁶The Court then explained the Act did not confer those fundamentally important benefits on the bankruptcy courts.³⁷

Although Article III does not protect bankruptcy courts, the Court identified three situations in which Article III does not bar the creation of legislative courts by Congress.³⁸While Congress may have certain "exceptional" powers in these situations, the Court held "the authority of

Congress [is] subject to the general prescriptions of [Article] III" when it is not granted an exceptional power.³⁹It found no such exceptional grant of power to

Congress regarding the creation of the bankruptcy courts⁴⁰and plainly stated, in three sentences, that which would send the procedural framework of bankruptcy law into a whirlwind of change and controversy.

[Article] III bars Congress from establishing legislative courts to exercise jurisdiction over all matters related to those arising under the bankruptcy laws. The establishment of such courts does not fall within any of the historically recognized situations in which the general principle of independent adjudication commanded by [Article] III does not apply. Nor can we discern any persuasive reason, in logic, history, or the Constitution, why the bankruptcy courts here established lie beyond the reach of [Article] III.⁴¹

The Court concluded the broad grant of jurisdiction laid out in section 1471 of the Act was unconstitutional and could not "be sustained as an exercise of Congress' power to create adjuncts to [Article] III courts"⁴²because it had "impermissibly removed most, if not all, of 'the essential attributes of the judicial power' from the [Article] III district court, and ha[d] vested those attributes in a non-[Article] III adjunct."⁴³

To remedy this unconstitutional predicament, the Supreme Court gave Congress⁴⁴ninety days to amend the rule.⁴⁵Unfortunately, Congress did nothing; and the Court extended the stay again until December 24, 1982.⁴⁶

When Congress still did not respond, the federal courts were forced to find a temporary solution in what has been coined the "Emergency Rule," a model rule proposed by the Judicial Conference and adopted as a local rule by all district courts.⁴⁷Because the Emergency Rule permitted bankruptcy jurisdiction to lie in the district courts⁴⁸and allowed untenured judges to hear virtually all bankruptcy proceedings,⁴⁹bankruptcy scholars believed the Emergency Rule to be invalid.⁵⁰Although many condemned the Emergency Rule, the circuit courts never invalidated it.⁵¹Furthermore, the Supreme Court repeatedly refused to grant certiorari to hear challenges to the validity of the Emergency Rule.⁵²

For the following two years under the aptly named Emergency Rule, bankruptcy judges functioned as Article I judges.⁵³The Emergency Rule sought to remedy the unconstitutionality of the...