Christmas in July: Will Bankruptcy Lawyers Find a Lump of Coal in Their Stockings?

As spring rolls into summer, bankruptcy lawyers await the Supreme Court's decision in Executive Benefits Insurance Agency v. Arkinson.  With the Supreme Court's term ending June 30, 2014, some wonder if the Court will, in fact, declare bankruptcy courts unconstitutional.  While we are dreading the delivery of this potential lump of coal in our Christmas in July stocking, we here at KRCL will provide our readers with some brief background to this most anticipated of decisions from the Supreme Court while we wait.

The saga begins with the Supreme Court decision on the scope bankruptcy court authority issued three years ago, Stern v. Marshall, 131 S.Ct. 2594 (2011).  Stripped (excuse the pun) of its infamous association with Anna Nicole Smith (http://en.wikipedia.org/wiki/Anna_Nicole_Smith), a 5-4 Court determined that despite the statutory authority of the bankruptcy court to make a final decision in a "core" matter,  a bankruptcy judge could not enter judgment on a tort claim asserted by debtor against a putative creditor because Article III of the Constitution prohibited Congress from conferring such authority on non-Article III decision makers.

In brief, Article III requires Congress, when creating lower courts, to provide that judges for such courts have, among other protections, a life time term (subject to removal by impeachment) and no reduction in compensation during such term.  In Stern, the Court found Article III's appointment provisions to be structurally essential to the separation of powers between the judicial and legislative branches of government.

While Judge Roberts stated the Stern opinion was a narrow one, the case has spun off a mini-industry in litigating the contours of the decision through the lower courts.  As the Fifth Circuit has noted:  "Although the [Supreme] Court stated that its decision was “narrow,” [citation omitted], its reasoning was sweeping." In re Frazin, 732 F.3d 313 (5th Cir. 2013), cert. denied, 134 S.Ct. 1770, (Mar 31, 2014) (NO. 13-1003)

In Executive Benefits, the stated issue before the Supreme Court is whether a challenge to authority of the bankruptcy court based on the reasoning of Stern can be forfeited or waived.  However, the Fifth Circuit has noted that Stern's implications are much broader than the bankruptcy system.  See, e.g. Technical Automation Services Corporation v. Liberty Surplus Insurance Corp., 673 F.3d 399, 407 (5th Cir. 2012) (despite similarities between magistrate and bankruptcy statues, Stern did not directly overrule 5^th Circuit decision upholding constitutionality of magistrate) ; In re BP RE, L.P., 735 F.3d 279 (5th Cir. 2013), reh’g en banc denied, 744 F.3d 1371 (5^th Cir. 2014) (dissent noting incongruity between upholding magistrate statue but not bankruptcy statute).  The very issue of whether the sweeping reasoning of Stern requires the Court to confront whether District Courts can constitutionally delegate authority to non-Article III appointed officer, including Federal magistrates, was debated at length during January's oral arguments in Executive Benefits.  See http://www.supremecourt.gov/oral_arguments/argument_transcripts/12-1200_3f14.pdf   pp19:6-pp23:10.

Will the Supreme Court be able to avoid declaring the bankruptcy system unconstitutional, and thereby raising more questions about the magistrate system, while at the same time protecting the Constitutional structure that compelled its decision in Stern?  Stay tuned.

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