Not since Northern Pipelineii has the U.S. Supreme Court rendered an opinion that could have such lasting consequences on the way attorneys practice bankruptcy law. In short, the Stern v. Marshall opinion reinforced the notion that Bankruptcy Judges are not Article III judges and thus, must be constrained accordingly.
As the reader will likely note, bankruptcy judges are a device of Congressional creation, rather than one under Article III which are chosen by the President. For instance (and as noted by Justice Roberts), bankruptcy judges have fourteen (14) year terms, whereas an Article III judge has life tenure; the salary of a bankruptcy judge may be reduced mid-term; and, bankruptcy judges can be removed by judicial council. All of which stand in stark contrast to the Constitutional protections afforded Article III judges.
While the facts of the case are both winding and a bit unsettling, the legal issue before the U.S. Supreme Court was fairly simple: Did the Bankruptcy Court have the authority to render a final judgment on a counterclaim filed by the debtor against a creditor, who had filed a claim against the estate? Simply stated, the answer was yes‟, pursuant to 28 U.S.C. §157, which grants bankruptcy judges the power to enter judgments in core proceedings arising under title 11, or arising in a case under title 11. Essentially, the U.S. Supreme Court stated that Congress had clearly granted this power since counterclaims by the estate against persons filing claims against the estate are specifically enumerated as one example of a core proceeding‟. See 28 U.S. C. §157(b)(2)(C).
Why, then, is this case so important? Simple: though Congress granted this statutory authority to bankruptcy judges in 28 U.S.C. §157 (b)(2)(C), was it Constitutional? The answer was NO: the Supreme Court failed to find any basis for the bankruptcy judge to enter a final judgment on a counterclaim such as the one present. Rather, that authority was exclusively reserved for Article III judges as granted in the U.S. Constitution. At one point, Justice Roberts notes,
What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime. If such an exercise of judicial power may nonetheless be taken from the Article III Judiciary simply by deeming it part of some amorphous public right, then Article III would be transformed from the guardian of individual liberty and separation of powers we have long recognized into mere wishful thinking.
Justice Roberts specifically noted that he felt the opinion was narrow: we agree with the United States that the question presented here is a narrow one.iii Obviously, until the Supreme Court states otherwise, all remaining „core proceedings‟ in 11 U.S.C. §157(b) are fair game for a final judgment by the bankruptcy judge. Even with Justice Roberts cautionary remark, however, any bankruptcy practitioner must recognize that the Stern opinion may have broader implications. At the very least, it will force attorneys to re-evaluate whether a proceeding is indeed core: one arising under or in a case under Title 11 OR one that is simply related to‟ the bankruptcy case and thus, would traditionally be reserved for the State or Federal District Courts. I think the reader could quickly recognize examples of a bankruptcy judge rendering a final judgment on a matter that is clearly a devise of bankruptcy law and thus, core proceeding: confirming a Ch. 11 Plan, equitable subordination of a claim, or preferential transfers: all of these are unique to bankruptcy law.
The harder question stemming from Stern concerns the delicate balance between the areas of law that can be invoked and decided by both the bankruptcy judge and the other judicial bodies; the question of when „core‟ isn‟t really core. Stern tells us that standalone counterclaims filed against creditors cannot be decided by a bankruptcy judge, despite §157(b)(2)(C). But what else?
The difficulty is the unknown. At the very least, the Stern decision will force each bankruptcy practitioner to ask themselves whether the issue in front of them is proper for the bankruptcy judge to decide or whether another forum is more appropriate. This cautionary stance will cause the attorneys to wince at the notion that judicial economy will be thrown out the window. As Justice Roberts noted, however, It goes without saying that the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone, will not save it if it is contrary to the Constitution. . . . We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.
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Tags: Marshall, Stern V
Posted July 26, 2011 by Imogen Lay under Credit Report