Stern v. Marshall Changes the Landscape of Bankruptcy Court Jurisdiction

JurisdictionUnited States,Federal
CitationVol. 26 No. 2 Pg. 34
Pages34
Publication year2013
Utah Bar Journal
Volume 26.

Vol. 26, No. 2. 34. Stern v. Marshall Changes the Landscape of Bankruptcy Court Jurisdiction

Utah Bar Journal
Volume 26 No. 2
Mar/Apr 2013

Stern v. Marshall Changes the Landscape of Bankruptcy Court Jurisdiction

by David E. Leta(fn1)

"There is no liberty if the power of judging be not separated from the legislative and executive powers."

Charles de Montesquieu, The Spirit of Laws 181

INTRODUCTION

The constitutional limit of a bankruptcy court's power is of critical importance to our system of solving financial problems in a just and speedy fashion. At the end of its 2010-2011 term, the Supreme Court of the United States called into question this constitutional power. Since then, courts across the country have been struggling to understand when a bankruptcy court may enter a final judgment, and when it may not do so.

BACKGROUND

Article III of the Constitution secures the independence of the judiciary. The autonomy of the judiciary would be compromised if the other branches of government could assign the "Government's 'judicial Power' on entities outside Article III." See Stern v. Marshall, 131 S.Ct. 2594, 2609 (2011). Thus, Congress cannot "withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty." Murray's Lessee v. Hoboken Land and Improvement Co., 59 U.S. 272, 284 (1855).

Bankruptcy judges are not Article III judges. They are appointed for 14-year terms and can be removed at any time by circuit judicial councils. See 28 U.S.C. § 152(a)(1) (2006). The salaries of bankruptcy court judges are subject to adjustment under the Federal Salary Act. See id. § 153(a). Thus, bankruptcy judges have less authority than Article III judges. How much less has proved difficult to answer.

This jurisdictional complexity derives from the English bankruptcy model which bifurcated jurisdiction over bankrupt estates into "summary" and "plenary" proceedings. Administration of a bankrupt's estate was accorded in rem jurisdiction. This jurisdiction, also known as a "summary proceeding," was limited to a debtor's property that actually found its way into the hands of the commissioners and the estate's representatives. See Ralph Brubaker, Article Ill's Bleak House (Part I): The Statutory Limits of Bankruptcy Judges' Core Jurisdiction, 31 No. 8 Bankr. l. Letter 1 (Aug. 2011). Bankruptcy commissioners, however, could not handle disputes regarding what property belonged to the bankrupt's estate. Such actions were known as "plenary proceedings." Plenary actions had to be brought before a superior court.

Congress adopted the English bankruptcy model in the Bankruptcy Acts of 1800 and 1898. Non-Article III bankruptcy commissioners, designated as "referees," were charged with adjudicating all summary proceedings. See Elizabeth Warren and Jay Lawrence Westbrook, The Law of Debtor and Creditor 800 (6th ed. 2009) (noting that bankruptcy referees came to be called judges in 1973). In determining the extent of a referee's authority, the Supreme Court routinely invoked the plenary/ summary distinction. See, e.g., Katchen v. Landy, 382 U.S. 323 (1966); Schoenthal v. Irving Trust Co., 287 U.S. 92 (1932).

When Congress reformed the bankruptcy laws in 1978, it expanded the scope of bankruptcy court jurisdiction to include any proceeding "related to" the bankruptcy case. In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), this broad grant of authority was declared unconstitutional by the Supreme Court as a violation of Article III of the Constitution. See id. at 52-53. The Court, however, recognized that Congress could constitutionally assign some matters to bankruptcy judges, but such matters must involve "public rights." See id. at 67-68. Although the Court could not agree on the scope of the public rights exception to Article III, it concluded that the exception did not encompass the state law claim at issue in Northern Pipeline. See id. at 69-72 ("The distinction between public rights and private rights has not been definitively explained in our precedents. Nor is it necessary to do so in the present cases, for it suffices to observe that...

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