Thursday, October 18, 2012

Bankruptcy Judges

I'd like to share a paper that I wrote earlier this year for ABI's student writing competition.  It's about the lack of life tenure for Bankruptcy Judges.

Thirty Years Later: Revisiting Marathon and the Case for Allowing Bankruptcy Judges Life Tenure
John P. Morgan
Catholic University of America School of Law
Washington, D.C.

            On June 28, 1982, a divided United States Supreme Court decided the case of Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,[1] immediately sending Bankruptcy Judges throughout the country into a panic over the future of their jobs.  The Marathon Court’s holding that the Bankruptcy Courts could not constitutionally be vested with the powers they received under the 1978 Bankruptcy Act because they were not Article III judges limited the power of bankruptcy judges, such that they could hear only “core proceedings” under the bankruptcy code resulted in a period of uncertainty over a number of issues including the jurisdiction of bankruptcy judges to hear cases and the ability of bankruptcy judges to preside over jury trials, some of which still have not received definitive answers to this day.
            The concern of this paper, however, is the lack of Article III status for bankruptcy judges, which would result in those judges having life tenure, along with other benefits such as protection against salary reduction.  This paper argues that an overreaching opinion in the Marathon case, combined with political pressures bestowed upon Congress, has wrongfully deprived bankruptcy judges from reaching the status of Article III judges.  This result is unfortunate, given that giving bankruptcy judges Article III protection would be both more efficient for bankruptcy litigants, and more equitable for the bankruptcy judges themselves.  On the thirtieth anniversary of the Marathon case, it is worthwhile to take another look at its decision, as the lasting impact of its holding continues to affect the authority and power of bankruptcy judges today.
The Marathon Case

            1978 marked significant changes in the law of Bankruptcy with Congress’ passage of the
Bankruptcy Reform Act.[2]  This changed the prior system of Bankruptcy Jurisdiction that had previously existed in the United States, under which bankruptcy referees were entrusted with powers such as adjudicating legal disputes and confirming the appointment of a trustee.[3]  The new 1978 system, while declining to extend Article III status to bankruptcy judges,[4] established a system of expanded jurisdiction for bankruptcy jurisdiction where the bankruptcy courts were “adjuncts” to the district courts, and additionally gave the judges extended protections, including 14-year appointments by the President,[5] restrictions on removal under which the judges could be removed only for “incompetency, misconduct, neglect of duty, or physical or mental disability,”[6] and a salary, subject to adjustment under the Federal Salary Act of 1967.[7]  Additionally, under the 1978 Act bankruptcy judges had the broad powers “to hear and adjudicate all claims arising in or relating to bankruptcy cases.”[8]
            These circumstances led to the issue in the Marathon case.  Northern Pipeline Construction Co. was a Chapter 11 debtor in the United States Bankruptcy Court for the District of Minnesota, and subsequently brought suit in that same court for breach of contract and breach of warranty against Marathon Pipe Line Co.[9]  In response, Marathon moved to dismiss the suit, arguing that the 1978 Bankruptcy Act conferred unconstitutional authority to bankruptcy judges which are reserved to Article III courts.[10]  The court denied this motion,[11] and the case was eventually appealed to the Supreme Court.
            The Court held that the Bankruptcy Act of 1978 “carries the possibility of such an unwarranted encroachment” upon Article III’s principle of separation of powers, since a non-Article III “adjunct” such as the bankruptcy court cannot infringe upon the cases and controversies reserved to Article III courts.[12]  Additionally, the Court found that the jurisdiction given to bankruptcy judges under the 1978 Act infringed upon rights created by state law in breach of contract and misrepresentation.[13]  In short, the Court held that § 1471 of the 1978 Act, which granted broad jurisdiction to bankruptcy judges, “impermissibly removed most, if not all, of ‘the essential attributes of the judicial power’ from the Art. III district court, and has vested those attributes in a non-Art. III adjunct,”[14] and was accordingly struck down as unconstitutional.
            Having decided that the jurisdiction granted to bankruptcy judges under the Act was unconstitutional, the Court next considered whether the holding “should be applied retroactively to the effective date of the Act.”[15]  The Court declined to apply it retroactively, reasoning that such application would incur hardship, and instead chose to have its holding take effect on October 4, 1982, in order to give Congress an opportunity to “to reconstitute the bankruptcy courts or to adopt other valid means of adjudication, without impairing the interim administration of the bankruptcy laws.”[16]  The result of this was an Emergency Model Local Rule taking effect for the next two years until Congress passed the Bankruptcy Amendments and Federal Judgeship Act (BAFJA) in 1984.[17]
            Although Marathon holds that the system as established by Congress was unconstitutional, the Court nevertheless holds in dicta that it cannot “discern any persuasive reason, in logic, history, or the Constitution, why the bankruptcy courts here established lie beyond the reach of Art. III.”[18]  Thus, had Congress decided to go all the way with the protections afforded to bankruptcy judges and extended Article III  status to them, the Marathon  Court strongly suggests that such a decision would have been constitutionally valid.  Although “the functions of the adjunct must be limited in such a way that ‘the essential attributes’ of judicial power are retained in the Art. III court,”[19] that is not to say that the bankruptcy court itself could not be one of those Article III courts.
            The main problem with the holding in Marathon is perhaps best explained by the dissent written by Justices White, joined by Chief Justice Burger and Justice Powell.  Justice White dissented from the plurality’s opinion on the basis that, among other reasons, “there is no basis for doing more than declaring the section unconstitutional as applied to the claim against Marathon, leaving the section otherwise intact.”[20]  Essentially, White’s charge is that the plurality failed to exercise constitutional restraint in rendering their opinion. 
Beyond that, however, Justice White gave reasons for which he felt that the new system established by Congress in 1978 was not a significant departure from the bankruptcy procedure previously in place: he noted that bankruptcy referees could “adjudicate counterclaims against a creditor who files his claim against the estate,”[21] and that “under both the old and new Acts, initial determinations of state-law questions were to be made by non-Art. III judges, subject to review by Art. III judges,”[22] concluding that “there is very little reason to strike down § 1471 on its face on the ground that it extends, in a comparatively minimal way, the referee’s authority to deal with state-law questions.”[23]  In sum, then, Justice White believed that the Court’s plurality answered a question they were not called on to ask in Marathon, and further failed to see the Bankruptcy Act of 1978 in its accurate historical context.
In subsequent years, the Court itself has narrowed the initially-broad holding of Marathon,[24] giving further weight of authority to these dissenting opinions.  Perhaps, then, Marathon represents the high watermark of the Court’s willingness to remove jurisdiction from bankruptcy judges, and Justice White’s dissenting opinion is more accurate of the way in which the Court would adjudicate an issue such as the one in Marathon today: with a greater degree of judicial restraint.
Political Pressure

Justice White wrote in his Marathon dissent that “[b]ankruptcy matters are, for the most part, private adjudications of little political significance.”[25]  Unfortunately, Congress did not feel the same way.  Due to the fears that the current Republican Congress would have over the bankruptcy judges that President Obama would likely appoint to the courts, many of the political reasons that existed nearly thirty years ago to stop bankruptcy judges from receiving Article III status likely continue to exist today. 
In 1978, Congress did discuss and consider giving bankruptcy judges life tenure, consistent with the privileges associated with Article III judges.  In fact, the bill that passed through the House of Representatives would have given bankruptcy judges life tenure.[26]  The Senate, however, did not accept this provision, and instead gave them a fixed term of fourteen years.[27]  The Senate apparently declined to give life tenure to bankruptcy judges, at least in part, due to then-Chief Justice Burger’s urging them not to, on the thought that an overload of Article III judges would diminish the prestige of the courts,[28] which is interesting givien the lengthy dissent he joined in Marathon, as well as the short dissent he wrote on his own.[29] 
While such concerns comprise the official explanation as to why Congress declined to extend Article III status to bankruptcy judges, there is a plausible argument to be made that the refusal was made more as a result of political concerns.  Specifically, one suggestion is that “expansion of the federal judiciary occurs during political alignment because expansion offers the controlling party an opportunity to appoint judges who share its political views and to dilute the influence of the sitting judges who do not.”[30]  While a response to this argument is that it is unlikely that Congress is overly concerned over the political stances of bankruptcy judges,[31] it is worth noting that if bankruptcy judges were appointed Article III judges, they would once again have the broad grant of jurisdiction which they enjoyed pre-Marathon, and would also be appointed by the President for life terms to adjudicate such broad claims.  Having so many hundreds of judges appointed by a single President at one point in time would be a frightening proposition for any Congress in opposition to the sitting President’s political party.
In addition to refusing to give bankruptcy judges Article III status in the original Bankruptcy Act of 1978, Congress once again decided not to make bankruptcy judges Article III judges when it had another chance to in 1984.  At this point, it passed the Bankruptcy Amendments and Federal Judgeship Act (BAFJA) of 1984, the time at which the Emergency Model Local Rule expired.[32]  As a result of BAFJA, although bankruptcy judges are still appointed for fourteen-year terms, they are now appointed by the United States Courts of Appeals, rather than the President.[33]  Rather than allowing bankruptcy judges Article III status under the Constitution, Congress decided to term bankruptcy judges as non-Article III “units” of the district court.[34]  Under the 1984 system, when district courts received bankruptcy cases, they would refer the cases to their adjuncts in the local bankruptcy court.  Additionally, BAFJA kept the bankruptcy court’s broad jurisdiction of matters “related to” a bankruptcy case, although the bankruptcy judge’s adjudication of a matter related to, but not a “core proceeding,” has limited precedential value in the federal court system.[35]  Interestingly, although it took only four years for the constitutionality of the Bankruptcy Reform Act of 1978 to reach the United States Supreme Court, the constitutionality of the BAFJA still has not reached the high court to this day, twenty-eight years later.
Should Bankruptcy Judges Have Life Tenure?
Giving Article III status to bankruptcy courts would be both practical and efficient.  A cogent explanation for the reasons why bankruptcy judges should be reclassified under Article III can be found in a 1997 report by the National Bankruptcy Review Commission.[36]  Two of the main purposes for which the report advocates are to make the system “more efficient and [to] reduce its costs.”[37]  The current jumbled system for bankruptcy adjudication has several characteristics which are well-described as inefficient, such as the determinations which must be made about whether a case is a “core” or “noncore” proceeding, and the referral from the district court to the bankruptcy courts in appropriate cases. Recharacterizing bankruptcy courts as Article III courts would allow such proceedings to move directly to the bankruptcy courts, rather than having to be referred by the district courts, since, as Article III courts themselves, they would not need to be put through that filter, nor would they have to spend time determining which cases are and are not core proceedings. The substantial costs and labors of these processes would also be eliminated, a characteristic the system should strive for in a less-than-ideal economy where bankruptcy filings are relatively common.  That time and expense would better be served by solving the merits of bankruptcy cases, but, unfortunately, Congress has yet to give any signs that it is considering such a move.
The Federal Constitutional specifically mentions that the Congress has the power to “establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.”[38]  Bankruptcy law, thus, is an enumerated power of federal law, meant to be uniform throughout the country, which the states may not legislate upon.  With that being the case, it makes more sense for these judges of federal law to have the same benefits as do the district court judges, for whom the bankruptcy judges serve as adjuncts.
Further, among the Article I courts, bankruptcy courts are geographically unique.  Other Article I courts are largely territorial.  Several of them, including the United States Court of Federal Claims,[39] and the United States Tax Court,[40] are located in Washington, D.C. exclusively, and adjudicate matters of federal law.  Other Article I legislative courts have been created for federal territories to adjudicate matters that would otherwise take place in state courts, including the courts in Guam, the Northern Mariana Islands, the Virgin Islands, and the District of Columbia.[41]  Thus, bankruptcy courts are unusual in their geographic disbursement throughout the country; although federal magistrates, too, fall under the category of Article I judges,[42]  they do not fuse together to form their own court.  For this reason, with their condition of being dispersed throughout the United States as a “unit” to each of the district courts, the federal courts that are, at least geographically speaking, the most similar to the bankruptcy courts, it would be equitable to give these bankruptcy judges the same status and benefits for their counterparts in the district courts.
One argument against giving bankruptcy judges Article III status is to preserve the prestige of the Article III federal courts.  Essentially, the thought is that in order to maintain esteem on the federal bench, the raw number of judges who hold the distinction of Article III judges should be kept low, in order to keep the positions competitive, attracting the best candidates.[43]  This argument fails for a number of reasons.  First, it presumes that bankruptcy judges, individuals who also hear claims under federal law, are for some reason inferior to United States district court judges.  Constitutionally speaking, both the district courts and the bankruptcy courts are “inferior” courts to the Supreme Court;[44] there is no reason to believe that the bankruptcy courts are similarly inferior to the district courts.  Rather, many current bankruptcy judges (as well as litigants) would likely find offense to such a notion, considering the frequency of bankruptcy claims, as well as the fact that bankruptcy law is also federal law.
Another argument put forward against giving bankruptcy judges Article III status is that their position does not require it in order to achieve judicial independence.[45]  The thought is that since bankruptcy judges are appointed by other federal judges, as opposed to the President, the appointments and reappointments of judges to the bankruptcy courts are less likely to be made with political considerations, and, instead, are more likely to result in judges who are appointed because of their higher qualifications.[46]  There is, however, a valid counterargument to these points.  Rather, judges who are in the position of being appointed for a certain period of time, and then have the possibility of later being reappointed, are more likely to act in a partisan manner which would more safely assure their reappointments.  Although the appellate judges who choose such appointments concededly may be less likely to let such political factors influence their decisions than the President or the electorate,[47] this by no means establishes that the bankruptcy judges will not act in ways simply to enhance their chances of being reappointed by the appellate judges, even if they are mistaken in their beliefs.

While Marathon is clear that bankruptcy judges may not adjudicate certain issues because they lack Article III status, the solution to this problem is relatively simple: Congress should use its constitutional authority to make bankruptcy courts “inferior Courts” under Article III of the Constitution.  Although bankruptcy judges in the United States enjoy a position in the federal court system that is structurally more similar to the U.S. District Court than any other, bankruptcy judges have been denied life tenure and other benefits seemingly for political, rather than legal, reasons.  Although Congress declined to extend Article III status to bankruptcy judges in either 1978 or 1984, the current Congress should nonetheless retreat from its prior choice and extend the protections to bankruptcy judges.  Though the bankruptcy courts are currently characterized as “units” of the District Courts, this is not to imply that they are inferior to their counterparts.  To the contrary, the fact that they are so-called “units” of the District Court, as well as the fact that the bankruptcy judges are appointed by Article III judges themselves in the Federal Court of Appeals judges, shows that the position of the bankruptcy courts is more analogous to Article III courts than to Article I courts, with the obvious exception to that being the lack of Article III protections for bankruptcy judges.  Unfortunately, due to the overbreadth of the plurality opinion in Marathon, as well as the political fear of the President’s choosing bankruptcy judges who fail to satisfy Congress, bankruptcy judges are unlikely to be granted Article III protection at any time in the near future, despite the efficiency and equitable results which would occur if Congress decided to do so.  
In the end, the issue is not whether bankruptcy judges may become Article III judges; the Supreme Court has said relatively clearly than they can.  However, it appears that the Supreme Court’s decision in Marathon is that Congress should pick one: bankruptcy judges fall under the category of either Article I judges or Article III judges, and some sort of hybrid status between the two, such as that found in the Bankruptcy Reform Act of 1978, is unconstitutional.  Regardless of whether or not the Supreme Court was right to answer the questions that it did with the facts before it in Marathon, it has left Congress to decide what to make of the bankruptcy judges. Unfortunately, based on its declining to give Article III status in both 1978 and 1984, and with no indications of a change in stance, the current, relatively inefficient system appears to be in place for the foreseeable future.

[1] 458 U.S. 50 (1982).  The Court failed to reach a majority opinion, and instead issued a plurality opinion authored by Justice Brennan, joined by Justices Marshall, Blackmun, and Stevens.
[2] Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1978) (repealed 1984).
[3] Troy A. McKenzie, Judicial Independence, Autonomy, and the Bankruptcy Courts, 62 Stan. L. Rev. 747, 758 (2010).
[4] Charles J. Tabb & Ralph Brubaker, Bankruptcy Law Principles, Policies, and Practice 757 (3rd ed. 2010).
[5] Erwin Chemerinsky, Federal Jurisdiction 244 (4th ed. 2003).  .

[6] Id.  This standard is much narrower than Article III’s allowing judges to stay in offices “during good Behavior.” See U.S. Const. art. III, § 1.
[7] Id.
[8] Charles S. Custer, Bankruptcy Judges: Article III Beckons, 16 Pac. L.J. 957, 957 (1985).
[9] Marathon, 458 U.S. at 56.
[10] Id. at 56-57.
[11] Id.
[12] Id. at 84.
[13] Id.
[14] Id. at 87.
[15] Marathon, 458 U.S. at 87.
[16] Id. at 88.
[17] Tabb & Brubaker, supra note 4, at 758.
[18] Marathon, 458 U.S. at 76.
[19] Id. at 81.
[20] Id. at 95. (White, J., dissenting).
[21] Id. at 99.
[22] Id. at 100.
[23] Id.
[24] Susan Block-Leib, The Costs of a Non-Article III Bankruptcy Court System, 72 Am. Bankr. L. J. 529, 530 (1998).  For a case that gives an example of this, see generally Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568 (1985).
[25] Marathon, 458 U.S. at 116.
[26] Chemerinsky, supra note 5, at 244.
[27] Id.
[28] Id.
[29] This divergence can best be reconciled as positing that while Chief Justice Burger did not believe that bankruptcy judges need Article III status, they could adjudicate with the same authority while remaining Article I judges.  
[30] Eric A. Posner, The Political Economy of the Bankruptcy Reform Act of 1978, 96 Mich. L. Rev. 47, 87 (1997).
[31] Id.  This is the position that the author of the referenced Article, Professor Posner, takes.
[32] Tabb & Brubaker, supra note 4, at 758.
[33] Chemerinsky, supra note 5, at 249.
[34] Tabb & Brubaker, supra note 4, at 758-759.
[35] Tabb & Brubaker, supra note 4, at 759.  Such decisions are restricted to submissions of proposed findings of fact and conclusions of law, unless the parties consent otherwise.  Similarly, this standard of both parties consenting to it is the standard used for determining whether bankruptcy judges can hear jury trials, along with the additional requirement that the bankruptcy judge has been “specially designated” by the district judge.  See 11 U.S.C.A. 157(e).
[36] National Bankruptcy Commission, Bankruptcy: The Next Twenty Years (1997). 
[37] Id.  See Section: Preface.
[38] U.S. Const. art. I, § 8.
[39] United States Court of Federal Claims, (last visited Mar. 1, 2012).
[40] United States Tax Court, (last visited Mar. 1, 2012).
[41] Chemerinsky, supra note 5, at 29.
[42] Id. at 30.
[43] For a fuller discussion of this argument, see Anthony Michael Sabino, Jury Trials, Bankruptcy Judges, and Article III: The Constitutional Crisis of the Bankruptcy Court, 21 Seton Hall L. Rev. 258, 330-331 (1990).  This article also discusses how at that time, twenty-two years ago, it was all the more important for bankruptcy judges to have Article III status because of the economy at the time, and that more entities would be seeking protection under the bankruptcy laws as a result.  This point is even more exacerbated today with the dramatic increase in the number of bankruptcy filings since that point in time.
[44] U.S. Const. art. III, § 1, supra note 6.              
[45] For a complete discussion of this argument, see generally Thomas A. Plank, Why Bankruptcy Judges Need Not and Should Not be Article III Judges, 72 Am. Bankr. L.J. 567 (1998).
[46] Id. at 623-624.
[47] Id. at 622-623.