The Judicial Power of the Bankruptcy Court

• Publication year: 2014
• Citation: Vol. 18 No. 11

The Judicial Power of the Bankruptcy Court

by Carol K. Muranaka

On Friday, July 11, 2014, the Hawaii Bankruptcy Bar Association sponsored a brown bag presentation featuring United States Bankruptcy Judge Robert J. Faris who spoke about Executive Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165 (2014) and the judicial power of the bankruptcy courts.¹

Background

The judicial power of the United States is vested in the judicial branch with judges who have life tenure. Article II, Section 1 of the United States Constitution provides, in relevant part:

The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.

"The questions of how much power should be given to bankruptcy judges has been a quandary for the Supreme Court," said Judge Faris. "The Supreme Court has been grappling with this issue for 200 years."

In 1978, under the Bankruptcy Code of 1978, a United States bankruptcy court was established in each judicial district as an adjunct to the district court of such district. The bankruptcy judges are appointed to fourteen-year terms, subject to removal by the judicial council of the circuit in which they serve. Basically, the Code allowed the bankruptcy judges to deal with anything in the bankruptcy case.

The United States Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), limited this power. Northern Pipeline filed a suit against Marathon Pipe Line in bankruptcy court seeking damages for an alleged breach of contract and warranty, as well as for misrepresentation, coercion, and duress. Marathon contended that the Bankruptcy Act was unconstitutional in allowing the bankruptcy judges to decide such matters. The Bankruptcy Court denied the motion to dismiss; the district court granted the motion, and the Supreme Court affirmed the judgment.)

The Supreme Court's plurality opinion stated in Marathon:

In sum, our 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.

It is undisputed that the bankruptcy judges whose offices were created by the Bankruptcy Act of 1978 do not enjoy the protections constitutionally afforded to Art. III judges. The bankruptcy judges do not serve for life subject to their continued "good Behaviour." Rather, they are appointed for 14-year terms, and can be removed by the judicial council of the circuit in which they serve on grounds of "incompetency, misconduct, neglect of duty, or physical or mental disability." Second, the salaries of the bankruptcy judges are not immune from diminution by Congress. . . . In short, there is no doubt that the bankruptcy judges created by the Act are not Art. III judges.

Id. at 60-61.

Current statutes

Congress responded in 1984 with 28 U.S.C. § 1334, under which the bankruptcy courts are currently operating. The statute provides:

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.
(b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.

The federal statutes make clear that the bankruptcy court is tied to the district court. Section 151 of Title 28 U.S.C. provides that "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."²28 U.S.C. § 152 provides that bankruptcy judges "shall serve as judicial officers of the United States district court."³28 U.S.C. § 153(a) ties the bankruptcy judge's salary to that of the district court judge's salary.⁴

The district court judges are in control and can refer the cases to the bankruptcy judges, but they have the authority to take such cases back.⁵

Stern v. Marshall and questions

Twenty-nine years later, in Stern v. Marshall, 131 S.Ct. 2594 (2011), the Supreme Court answered the question whether a bankruptcy court judge who does not have the tenure and salary protections of an Article III judge (district court judge) has the authority under 28 U.S.C. § 157 and...