U.S. Supreme Court

Chemerinsky: Bankruptcy case tops a busy January session

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Erwin Chemerinsky.

The Supreme Court’s January argument calendar has a number of high profile cases. On Monday, Jan. 13, the court will hear oral arguments in NLRB v. Noel Canning on the ability of the president to make recess appointments to federal agencies. The case poses constitutional questions that never have been before the court, though its long-term significance is greatly lessened by the Senate’s elimination of the filibuster, which will make recess appointments much less important.

On Wednesday, Jan. 15, the court will hear McCullen v. Coakley, which concerns the constitutionality of a Massachusetts law creating a 35-foot buffer zone around reproductive health care facilities. The court last confronted the issue in 2000 in Hill v. Colorado, when it upheld a state law creating a 15-foot buffer zone around health care facilities. The court’s decision was 6-3, with Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas dissenting. One of the questions before the court is whether Hill v. Colorado should be overruled, and the answer will depend on whether Chief Justice John G. Roberts Jr. and Justice Samuel A. Alito Jr. will join these dissenters to create a majority to do so.

But from a practical perspective, the case that may be of greatest significance–and potentially of enormous importance to litigation in the federal courts–is one that likely will get little media attention. Executive Benefits Insurance Agency v. Arkison, which will be argued on Tuesday, Jan. 14, focuses on whether bankruptcy judges can decide a matter outside of their authority with consent of the parties. If the court holds that they cannot do so, it will affect not only bankruptcy court litigation, but the power of magistrate judges and even arbiters.

In Stern v. Marshall, the Supreme Court ruled in 2011 that bankruptcy courts cannot constitutionally issue a final judgment over state law claims. The case received attention because it involved Anna Nicole Smith, who married a very rich man in Texas, J. Howard Marshall. Although Marshall had given many gifts to Smith, his will left her nothing.

Smith, referred to in this litigation as Vicki Lynn Marshall, filed for bankruptcy. J. Howard Marshall’s son, Pierce Marshall, filed a proof of claim in her bankruptcy proceeding. Pierce contended that Vicki had defamed him in asserting that Pierce had exercised undue influence over his father to deny her an inheritance. Vicki counter-claimed against Pierce asserting that he had tortiously interfered with her recovery under the estate.

The bankruptcy court ruled in favor of Vicki on her counter-claim and awarded her $449 million in compensatory damages and $25 million in punitive damages. The federal district court affirmed the ruling, but reduced her recovery to $88 million, evenly divided between compensatory and punitive damages.

In between the ruling by the bankruptcy court and that of the district court, a probate court in Texas decided entirely in favor of Pierce. There thus was an issue of preclusion. If the bankruptcy court had the authority to issue a final judgment, then the Texas probate court’s ruling was precluded and Vicki-or more precisely her estate, since she is no longer alive-wins. But if the bankruptcy court lacked the authority to issue a final judgment, then Pierce-or more precisely his estate, since he is no longer alive-wins.

The Supreme Court ruled 5-4 in favor of Pierce. Chief Justice Roberts wrote the opinion for the court and held that it violated separation of powers for Congress to allow non-Article III bankruptcy judges, who lack life tenure and protection of their salary, the ability to issue a final judgment over state law claims. The court declared: “Article III could neither serve its purpose in the system of checks and balances nor preserve the integrity of judicial decision making if the other branches of the [f]ederal [g]overnment could confer the [g]overnment’s judicial power on entities outside Article III.” The court rejected Justice Stephen G. Breyer’s claim in dissent that this would create a practical nightmare for the federal district courts.

The significance of Stern v. Marshall turns on whether consent can cure the problem. In the vast majority of instances, the parties will consent to allow the bankruptcy court to issue a final judgment. But if consent is not sufficient, then the implications are enormous. A significant percentage of bankruptcy cases have state law claims and other matters where bankruptcy courts will not be able to issue final judgments. The bankruptcy courts instead will have to make reports and recommendations to the district court. As Justice Breyer feared, cases will ping-pong back and forth between the bankruptcy courts and the district courts.

The workload increase for already overtaxed federal district courts will be great. As Justice Breyer pointed out, “[T]he volume of bankruptcy cases is staggering, involving almost 1.6 million filings last year, compared to a federal district court docket of around 260,000 civil cases and 78,000 criminal cases.”

If bankruptcy courts cannot issue final judgments on state law claims with the consent of the parties, then district courts will need to do so. No longer will the Bankruptcy Appellate Panels be able to decide such matters.

The implications for the federal judicial system go far beyond that. Federal magistrate judges issue final judgments in civil cases, including holding jury trials, with the consent of the parties. Magistrate judges, like bankruptcy judges, are non-Article III judges who sit for fixed terms. If consent is not sufficient, no longer could they decide state law matters. The workload increase for federal district courts will be significant.

There is no clear answer to whether consent is sufficient to allow a bankruptcy court to issue a final judgment over state law claims. On the one hand, it is possible to draw a distinction between subject matter jurisdiction, which cannot be gained by consent, and the authority to issue a final judgment, which arguably can be gained by consent. Arbiters, who are not Article III judges, have this authority all the time.

On the other hand, both limits on subject matter jurisdiction and limits on the authority to issue a final judgment are based on Article III of the Constitution. Both are structural constitutional limits and structural limits cannot be overcome by consent.

Not surprisingly, there is a split among the federal courts of appeals as to whether a bankruptcy court can issue a final judgment with consent of the parties. The 9th U.S. Circuit Court of Appeals in this case held that bankruptcy courts can issue final judgments with consent and that even implied consent is sufficient. But the 5th, 6th, and 7th Circuits have come to the opposite conclusion.

If the Supreme Court agrees with the 9th Circuit, the problems created by Stern v. Marshall will be largely solved. But if the court takes the position of the 5th, 6th, and 7th Circuits, there will be a huge effect for bankruptcy judges, magistrate judges, and federal district court judges and those who litigated before them.

Erwin Chemerinsky, Dean and Distinguished Professor of Law, and Raymond Pryke Professor of First Amendment Law at the University of California, Irvine School of Law, is one of the nation’s top experts in constitutional law, federal practice, civil rights and civil liberties, and appellate litigation. He is the author of seven books, the latest being The Conservative Assault on the Constitution (Simon & Schuster, 2010). His casebook, Constitutional Law, is one of the most widely read law textbooks in the country. Chemerinsky has also written nearly 200 law review articles in journals such as the Harvard Law Review, Michigan Law Review, Northwestern Law Review, University of Pennsylvania Law Review, Stanford Law Review and Yale Law Journal. He frequently argues appellate cases, including matters before the U.S. Supreme Court and the U.S. Court of Appeal, and regularly serves as a commentator on legal issues for national and local media. He holds a J.D. from Harvard Law School and a B.S. from Northwestern University.

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