2 The Bankruptcy System

Transcription

1 2 The Bankruptcy System 2.01 THE BANKRUPTCY COURT 2.01(a) Introduction The bankruptcy court system enacted by the Bankruptcy Amendments and Federal Judgeship Act of 1984 ( BAFJA ), Pub. L. No , 98 Stat. 333, is a mixture of compromises and a product of its tortuous history. Before 1978, bankruptcy courts were staffed by referees, renamed bankruptcy judges by the 1973 Bankruptcy Rules, who were appointed by the district courts for 6-year terms. Although the powers and jurisdiction of bankruptcy judges had grown over the 80-year history from their establishment under the Bankruptcy Act of 1898, their jurisdiction continued to be limited by outmoded concepts of possession of property of the estate and consent to jurisdiction by the adverse party, and their powers and status were limited by their roles as subordinate functionaries of the district courts. The 1978 Bankruptcy Reform Act attempted to upgrade the jurisdiction, powers, and status of bankruptcy judges. It did not, however, adopt the approach of the original House Bill, H.R. 8200, which would have established Article III bankruptcy courts 1 with judges who enjoyed the full powers of a federal court of original jurisdiction. Nevertheless, the 1978 Act went a long way toward achieving the goal of improving the bankruptcy system. It created bankruptcy courts, nominally referred to as adjuncts of the district courts but in fact virtually independent of them.the concept of adjunct was never defined or explained, but in form the Act conferred the bankruptcy jurisdiction in the first instance on the district courts, former 28 U.S.C. 1471(a), (b), 1 Article III of the Constitution vests the judicial Power of the United States in courts whose judges are appointed to serve during good behavior, sometimes referred to as life tenure, and are to be protected against salary reduction. Since the 1978 Act provided 14-year terms rather than life tenure for the bankruptcy judges, they were not Article III judges. 27

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3 2.01(a) The Bankruptcy System 29 and then provided that all this jurisdiction shall be exercised by the bankruptcy courts. Former section 1471(c). The judges were to be appointed by the President, by and with the advice and consent of the Senate, to serve for 14-year terms and were given broad powers. The former limitations on the jurisdiction of the bankruptcy judges were mostly eliminated. Bankruptcy judges were able to hear all Title 11 cases and all proceedings arising under title 11 or arising in or related to cases under title 11. Former 28 U.S.C. 1471(b). The bankruptcy judges had plenary powers, except that they could not punish a criminal contempt not committed in the presence of the court and could not enjoin another court. The bankruptcy courts could hold jury trials and could issue final judgments, including in personam judgments, in any proceeding within their jurisdiction. To give Congress time to determine the number of new judges that would be required and the President and Senate the opportunity to complete the appointments process, a five-year transition period was to precede implementation of the new court system. In the meantime, former bankruptcy judges were continued in office for the transition period and were immediately given the broad jurisdiction and powers of the new court. The system appeared to be working very well until it encountered an obstacle that was not altogether unexpected. In the legislative debates leading to the enactment of the 1978 Act, the House Judiciary Committee had argued, and the House of Representatives had apparently agreed, that the broad new powers and jurisdiction given to the bankruptcy courts could be exercised only by judges who enjoyed Article III protections. Although the Senate acknowledged that the broader powers and jurisdiction were critical to improving the bankruptcy system, it could not be persuaded of the need to provide Article III protections for the judges who exercised those powers. As a result, the 1978 legislation compromised the system and created non-article III courts. Thus the issue of the constitutional propriety of the 1978 court system was framed. As noted in Chapter 1, the Supreme Court in June 1982 rendered its decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which invalidated the entire grant of jurisdiction to the bankruptcy courts.the Court s decision did not produce a majority opinion, and therein lay much of the uncertainty concerning its effect. Mr. Justice Brennan, writing for a plurality of four Justices, ruled broadly that the creation of non- Article III bankruptcy courts to handle the wide range of matters comprehended by the jurisdictional provisions of the 1978 Bankruptcy Reform Act could not come within any of the previously permitted exceptions, including the public rights exception, to the requirement that the federal judiciary be

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5 2.01(a) The Bankruptcy System 31 tenured during good Behaviour under Article III, section 1, of the Constitution. Because, under the statutory scheme, the bankruptcy courts were quite independent of the Article III district courts, the so-called adjunct relationship between them did not overcome the constitutional defect. Mr. Justice Brennan then concluded that the jurisdictional grant was not severable, or more properly, not divisible, since Congress intended a unified system of bankruptcy jurisdiction. Consequently, even though the plurality opinion recognized that certain aspects of the bankruptcy jurisdiction might constitutionally be exercised by nontenured judges, it invalidated the entire grant of jurisdiction to the non-article III bankruptcy courts, not merely the portion that was beyond the capability of nontenured judges. Mr. Justice Rehnquist, writing for himself and Mme. Justice O Connor, concurred on the narrower ground that the trial of the Marathon contract dispute action, brought by the debtor in possession against a defendant who had no other connection with the bankruptcy case, was the kind of traditional common law suit that, in the federal judiciary, could be brought only in an Article III court with tenured judges. While limiting his concurrence to the specific kind of lawsuit involved in Marathon, he agreed with the plurality that Congress intended the jurisdictional grant to be nonseverable and therefore concurred in the judgment invalidating the grant in its entirety. Three dissenting Justices, namely, the Chief Justice and Justices White and Powell, would have upheld the constitutionality of the jurisdictional grant. But in a somewhat unusual action, the Chief Justice wrote an additional separate dissent, attempting to suggest the narrow limits of the Marathon holding and what Congress could do to overcome the problem. He suggested that Congress provide for a rerouting of traditional common law matters to the federal district courts, leaving everything else within the jurisdiction of the bankruptcy courts. Mr. Justice Brennan s opinion took sharp issue with the Chief Justice s characterization of the plurality s position and with his suggestion concerning congressional reformulation of the bankruptcy court s jurisdiction, but Mr. Justice Rehnquist s opinion did not. Thus any broad effect of the case is uncertain at best. Technically, however, the Chief Justice seems correct in his view that the holding is limited to the precise kind of lawsuit involved in the Marathon case. 2 Moreover, his suggestion for refor- 2 In the subsequent decision in Thomas v. Union Carbide Agr. Prods. Co., 473 U.S. 568, 584 (1985), five Justices joined an opinion that emphasized this narrow limitation: The Court s holding in that [Marathon] case establishes only that Congress may not vest in a non-article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review.