The Equitable Powers of the Bankruptcy Court.

• Author: Hamer, Michelle M.
• Position: Symposium on Equity in the Bankruptcy Court

"But Tour Honor, this is a bankruptcy court--a court of Equity--surely, you can grant the requested relief under your equitable powers."

Words to this effect are often spoken in bankruptcy courts across the country. They are grounded in traditional notions of equitable relief and the historical characterization of bankruptcy courts as "courts of equity." But do they still ring true today? This question arises because of what some comentators suggest is a continuing contraction of the bankruptcy courts' equitable powers. (1) These commentators point to recent U.S. Supreme Court decisions, such as Law v. Siegel to support their thesis. (2) In Siegel, the Supreme Court explained, in the context of discussing a bankruptcy court's authority to impose sanctions under [section] 105 or its inherent powers, that "whatever ... sanctions a bankruptcy court may impose on a dishonest debtor, it may not contravene express provisions of the Bankruptcy Code ...," (3)

The appropriate scope of the bankruptcy courts' equitable powers is not a new question. Rather, it dates back to the inception of the Union (4) and how the U.S. Constitution allocates jurisdiction to federal courts (5) and power to Congress "[t]o establish ... uniform Laws on the subject of Bankruptcies throughout the United States ...," (6) It generally flows from the powers vested in the English Court of Chancery, the notion that the law does not always provide an adequate or sufficiently determinant remedy, and the polices underlying federal bankruptcy law. (7) Nonetheless, the precise parameters of the bankruptcy courts' equitable powers have evolved over time.

The scope of the bankruptcy courts' equitable powers also is not a settled question. Commentators have long debated the existence and extent of those powers. (8) They also debate what it means for a court to do "equity" and how those notions relate to a court's inherent and statutory powers. Some even suggest that a bankruptcy court is not a court of equity at all. (9)

This preface does not attempt to answer these ever prevalent and important questions. Rather, it provides a brief overview of the origins and evolution of the bankruptcy courts' equitable powers. This overview likewise does not explore all potential nuances, critiques, or alternative perspectives, as that task falls to the exceptionally talented academics participating in the Symposium. Instead, this preface merely strives to set the table for the Symposium and a more forward-looking conversation.

The academic papers that follow (and that are described at the end of this preface) critically analyze the bankruptcy courts' equitable powers, namely what they are and what, perhaps, they should be. Regardless of existing critiques and questions concerning "bankruptcy courts as courts of equity," courts and parties frequently invoke, and rely upon, the bankruptcy courts' equitable powers. The appropriate scope of the bankruptcy courts' equitable powers thus remains an important issue that affects not only how bankruptcy judges perform their jobs on a daily basis, but also how debtors' and creditors' rights are resolved in bankruptcy cases.

1. THE ORIGINS OF COURTS OF EQUITY

   An appropriate starting point for evaluating the equitable powers of the bankruptcy courts is the English Court of Chancery. (10) The development of the English Court of Chancery was in many ways a response to the perceived rigidness of the common law, which arguably was too inflexible to accommodate the particular facts and circumstances of any given case. (11) Parties who were unhappy with an application of the common law in England would request relief from the King based on the equities of the matter. (12) As this practice became more commonplace, the role of the King's chanceries expanded, and eventually England established a formal Court of Chancery. (13)

   Chancellors in the English system initially wielded wide discretion, basically providing a remedy whenever a Chancellor personally found an injustice. They addressed a variety of matters, from trusts and uses and agency law to fraud and other claims, defenses, and remedies not available under the common law. (14) Over time, the English Court of Chancery evolved, and certain parameters emerged. For example, its jurisdiction was limited to those instances in which no adequate remedy existed under the common law; Chancellors increasingly published their decisions to establish precedent; and Chancery practice generally became more standardized. (15) Even with these refinements, however, not everyone supported the Court of Chancery, (16) skeptical of the broad discretion and jurisdiction purportedly vested in Chancellors.

   Such was the state of affairs at the time of the adoption of the Articles of Confederation and the early formation of the judicial branch in the United States. The colonies were divided in their approaches to courts of equity and equitable powers more generally. (17) The Articles of Confederation did not mention "equity," and it was only added to the U.S. Constitution late in the drafting process. (18) That revision resulted in the final language of [section] 2 of Article III of the Constitution, which provides, "The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority ...," (19) "The Federalist Papers defended Article III's jurisdictional grant over cases in equity by explaining that federal courts need the power to fairly adjudicate cases otherwise within their jurisdiction that involve 'ingredients of fraud, accident, trust, or hardship.'" (20)

   The scope of federal courts' equity jurisdiction, though grounded in the Constitution, was initially unsettled given the interplay of federal and state law, particularly in diversity cases. The Supreme Court consistently described the equitable powers of the federal courts as akin to those vested in the English Court of Chancery and upheld a wide array of lower court decisions based in equity. (21) That approach did not change entirely, but it was refined in the context of federal diversity cases following the Supreme Court's decision in Erie R. Co. v. Tompkins. (22) The decision did not, however, otherwise limit the general equitable powers of the federal courts.

2. THE ORIGINS OF BANKRUPTCY COURTS AS COURTS OF EQUITY

   The genesis of bankruptcy courts' equitable powers is arguably more nuanced than that of Article III courts. The structure of bankruptcy courts as Article I courts that operate as a unit of Article III district courts creates a hybrid platform from which to analyze bankruptcy courts' equitable powers (23) Some commentators argue that the structure of the bankruptcy court limits its equitable powers, though that same structure may support both the general equitable powers vested in federal courts and those granted by the Bankruptcy Code.

   Any analysis of a bankruptcy court's equitable powers should consider the policies and language of Articles I and III of the Constitution, the concept of equity in federal courts, and the Bankruptcy Code. (24) Moreover, Congress did not craft the Bankruptcy Code on a clean slate, but against the backdrop of the Bankruptcy Act of 1898 and the exercise of equitable power in insolvency cases prior to that time. (25)

   Before considering the language of the Bankruptcy Code, it is helpful to reflect on the traditional jurisdiction of courts of equity. As noted, courts of equity generally focus on situations in which the remedy at law is inadequate or indeterminate. (26) As Justice Story concisely explained, "[p]erhaps the most general if not the most precise description of a Court of Equity, in the English and American sense, is that it has jurisdiction in cases of rights, recognized and protected by the municipal jurisprudence, where a plain, adequate, and complete remedy cannot be had in the Courts of Common Law." (27)

   Courts in the United States historically have viewed situations in which a debtor's assets are insufficient to satisfy her obligations to creditors as in' stances in which equity may assist. (28) If a debtor cannot pay an obligation and an award of damages would prove futile, equitable principles may fill the void. Indeed, the premise of enjoining creditors' actions to promote a fair and equitable distribution of the debtor's assets is aligned with remedies commonly granted by courts of equity. (29) Congress was aware of the various uses of equity in the context of resolving debtor-creditor relationships when it enacted early bankruptcy legislation, including the Bankruptcy Act of 1898. (30)

   Under the Bankruptcy Act of 1898, Congress recognized the role of equity in bankruptcy cases. Specifically, [section] 2(a)(15) of the Act permitted courts to:

   Make such orders, issue such process, and enter such judgments, in addition to these specifically provided for, as may be necessary for the enforcement of the provisions of this Act: Provided, however, That an injunction to restrain a court may be issued by the judge only. (31) Although limited in scope, (32) [section] 2(a)(15) drew upon traditional notions of equity. As explained by the Supreme Court:

   By section 2 of the Bankruptcy Act ..., courts of bankruptcy are invested 'with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings.' They are essentially courts of equity, and their proceedings inherently proceedings in equity.... Their adjudications and orders constitute in all essential particulars decrees in equity.... The power to issue an in' junction when necessary to prevent the defeat or impairment of its jurisdiction is, therefore, inherent in a court of bankruptcy, as it is in a duly established court of equity. (33) Section 105(a) of the...