Sorry for the lack of recent posts. Final exams took considerable time away from me. I'll try to be better in the future.
I thought that I should briefly write about something important in the world of bankruptcy that has recently come to my attention. A new study, discussed on a recent ABI podcast, reveals new data about the dischargeability of student loans. Specifically, when debtors attempt to discharge their student loans, they are successful approximately 40% of the time. This is in sharp contrast to we often hear in the media, that student loans are "nearly impossible," or sometimes even that they absolutely cannot be discharged. It seems as though such media reports have produced a deterrent effect on debtors from even attempting to discharge their student loans. For more details, I highly recommend listening to the podcast: http://news.abi.org/podcasts/125-study-on-student-loan-discharges-and-the-undue-hardship-standard
J.P. Morgan's Bankruptcy Blog
Wednesday, January 23, 2013
Thursday, December 27, 2012
Types of Bankruptcy
Below is a guest post offering a concise description of the four main types of bankruptcy:
Know
more about the 4 different types of bankruptcy
Bankruptcy is essentially a legal proceeding which involves
either a person or business that isn’t able to repay outstanding debts. It
offers an individual or business the opportunity to start afresh with debts
being forgiven. It also offers the creditors some chance to obtain a certain
measure of repayment based on the available assets. Theoretically speaking,
bankruptcy is supposed to benefit the overall economy as well.
The
different types of bankruptcy
The bankruptcy filings in the United States essentially falls
under 4 categories. Read on
to find out more.
1.
Chapter
7: This chapter essentially deals with a bankruptcy proceeding
wherein a company stops all operations and generally goes completely out of
business. There’s a trustee appointed for liquidating or selling off the
company’s assets or in the case of an individual, his or her assets, and the
money generated from this sale is used to pay off debts. As for the payments,
then those investors who’ve taken the least risk are paid off first. This is
one such phenomenon which is known as “absolute priority”.
2.
Chapter
11: This is a form of bankruptcy that essentially involves
reorganizing a debtor’s business affairs plus assets. This particular
bankruptcy is generally filed by corporations that mostly require time for
reshuffling their debts. This is perhaps the most complex of all bankruptcy
cases as well as the most expensive one. Experts are of the opinion that this
particular case should only be considered after a lot of careful analysis and
exploration of all other possible alternatives.
3.
Chapter
12: This particular chapter deals particularly with family farms
or fisheries. This US bankruptcy proceeding endows the farm or fishery owner
the ability to restructure his or her finances and debts while still being able
to keep the farm or fishery. In this proceeding, the farm or fishery owner has
to work with a bankruptcy trustee and his or her creditors to formulate a
payment plan that’ll meet his or her own financial obligations.
4.
Chapter
13: This chapter deals with a US bankruptcy proceeding wherein the
debtor takes on a reorganization of his or her finances under the supervision
and the approval of the courts. The debtor also needs to submit a plan which he
or she must compulsorily follow through. This would essentially involve a pay
back plan wherein the debtor has to pay back his or her creditors the outstanding
debt within a time span of 3 to 5 years. If required, then this can use cent
per cent of the debtor’s income.
If you’re considering filing bankruptcy, then it always helps
to gather knowledge about the entire process. This always gives you an easy start
which is more than welcome.
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.
15morgan@cardinalmail.cua.edu
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.
Conclusion
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.
[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).
[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.
[8]
Charles S.
Custer, Bankruptcy Judges: Article III
Beckons, 16 Pac. L.J. 957, 957
(1985).
[11]
Id.
[13]
Id.
[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).
[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).
[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). http://govinfo.library.unt.edu/nbrc/report/01title.html.
[38]
U.S. Const. art. I, § 8.
[39]
United States Court of Federal Claims, http://www.uscfc.uscourts.gov/
(last visited Mar. 1, 2012).
[40]
United States Tax Court, http://www.ustaxcourt.gov/taxpayer_info_start.htm
(last visited Mar. 1, 2012).
[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.
[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).
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