I was lucky enough to sit down recently with the Honourable Timothy A. Barnes of the United States Bankruptcy Court for the Northern District of Illinois to discuss the constitutional authority of federal bankruptcy courts. We met to make a short video about this issue for the Oyez Project and ISCOTUS, two terrific, related initiatives at Chicago-Kent that keep track of the workings and deliberations of the US Supreme Court.
On January 14th, 2014 the Supreme Court will hear oral argument in Executive Benefits Insurance Agency vs. Peter Arkison, The Trustee of the Bankruptcy Estate of Bellingham Insurance Agency. This case comes to the Supreme Court on appeal from the 9th Circuit and is the latest in a long running saga of cases that are concerned with the scope of the constitutional authority of federal bankruptcy courts to make final adjudications in claims that arise, or that may need resolving, during the currency of a bankruptcy case.
To those of us who have some experience of bankruptcy law and the bankruptcy system, Bellingham appears at first sight to be a very unremarkable case. It involved what to bankruptcy lawyers is nothing more than a garden variety claim by a bankruptcy trustee to claw back assets that a debtor had transferred to a third party for less than their fair market value prior to filing bankruptcy. We call this kind of claim a fraudulent conveyance or fraudulent transfer claim and the basic policy behind it is to try to prevent debtors from sheltering valuable assets that would otherwise be available in bankruptcy to provide creditors with a payout.
The root of the problem in Bellingham lies in Articles 1 and 3 of the Constitution. Article 3, section 1 of the Constitution vests the judicial power of the United States in federal judges who, in order to protect their independence of the executive branch, are given life tenure and guaranteed salaries. However, bankruptcy courts derive their constitutional authority not from Article 3, but from Article 1. And Article 1 permits Congress to constitute inferior tribunals staffed by judges who do not have the same security of tenure and salary protections as Article 3 judges.
In the wake of a Supreme Court ruling in a case called Marathon decided in the early 1980s, Congress enacted an elaborate statutory framework in Title 28 of the US Code, which establishes that in each federal judicial district, the Article 1 bankruptcy court is a unit of the Article 3 federal district court. Under this framework, the district court refers bankruptcy cases to the bankruptcy court, and the bankruptcy court can hear and determine cases under the federal Bankruptcy Code, and all proceedings within bankruptcy cases that Title 28 designates as ‘core proceedings’.
Fraudulent conveyance claims are ‘core proceedings’ and so there is no doubt that bankruptcy courts have authority from Congress under Title 28 to hear and determine exactly the kind of claim that the bankruptcy court had entered judgment on in the Bellingham case. However, in the light of a 5-4 decision in a case called Stern v. Marshall handed down by the Supreme Court in 2011, the 9th Circuit in Bellingham felt compelled to conclude that the bankruptcy court’s statutory power to determine fraudulent conveyance claims was unconstitutional because it is a power that should be exercised only by an Article 3 court.
Even so, the 9th Circuit still ruled in favour of the bankruptcy trustee because it said that it is permissible for litigants to consent to having the bankruptcy court decide their case and thereby waive their constitutional right to Article 3 adjudication. And, on the facts, the 9th Circuit concluded that this is what the defendant in Bellingham had done.
The main issue that the Supreme Court has to decide therefore is whether a litigant can consent to the adjudication of a fraudulent conveyance action by a bankruptcy court and, in so doing, conclusively waive his or her right to have the matter determined by an Article 3 court.
The uncertainty surrounding the constitutional authority of bankruptcy courts is severely affecting the efficiency and effectiveness of the bankruptcy system to the detriment of its stakeholders. The hope is that the Supreme Court will take the opportunity afforded by Bellingham to assuage this uncertainty.
As you might imagine, it is difficult to cover issues of this complexity and significance in a six-minute video. You can view our attempt here: