In my last post, I wondered whether the Court’s decision in Stern v. Marshall (pdf) (WL) would be a bombshell or a dud.  It certainly was no dud.  And after reading the 5-4 opinion, I’d say that it’s a bombshell in several respects, both from a bankruptcy and constitutional perspective.  Here’s four reasons why:

  • First, Justice Roberts’ masterfully written majority opinion (joined by Justices Scalia, Kennedy, Scalia, Thomas, and Alito) declared Pierce Marshall’s estate the final victor and blew poor Anna Nicole Smith’s estate completely out of the water.  The fact that this litigation is finally over is itself cause for celebration everywhere, except among Anna Nicole’s heirs.
  • Second, bankruptcy courts will no longer be able to enter final judgments "on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime … [and] is not resolved in the process of ruling on a creditor’s proof of claim."  (Op. at 29, 38.)  This holding will likely be applauded―at least in part―by Bankruptcy Court judges, who already are severely overworked by a bloated chapter 7 and 13 individual debtor docket.  (One Chicago judge recently commented at the end of a day’s hearing that he was retiring to his chambers to review the 546 motions in individual chapter 7 and 13 cases set for status the next day.)  Being a nearly zero-sum game, however, District Court judges are equally likely to be distraught by the prospect of now having to hear innumerable counterclaims (and corresponding creditor claims that should accompany them as a matter of judicial economy) commenced by zealous debtors and trustees (who themselves can’t relish the prospect of losing their perceived "home-court" advantage).  Expect to see a flurry of motions filed in the coming days, weeks, months, and years attempting to establish (perhaps through a game of judicial "hot potato") the appropriate timing, protocol, and venue for these newly minted "non-core" proceedings.
  • Third, as WilmerHale’s Craig Goldblatt (who was on the merits brief for Pierce’s estate) noted to me, the Court’s opinion at pages 33-34 makes pretty clear that Section 157(b)(2)(H)―which provides that fraudulent conveyance actions are "core proceedings"―is also unconstitutional.  ("We see no reason to treat Vickie’s counterclaim any differently from the fraudulent conveyance action in Granfinanciera.")  This will mandate a sea-change in current litigation practice along the lines discussed above, though I expect many Bankruptcy Judges will long for the "good old days" when they could enter final judgments in these more interesting proceedings.
  • Fourth, Chief Justice Roberts assembled a majority that firmly rejected the creeping erosion of Article III judicial power advocated by the dissent and reflected in Thomas v. Union Carbide Agr. Prods. Co., 473 U.S. 568 (1985) and Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833 (1986).  In fact, it was the Court’s factor-based rulings in Thomas and Schor that led Professor Erwin Chemerinsky in 1991 to argue that if Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) had been decided 10 years later, the case would have been decided differently and the authority of Bankruptcy Court judges to enter final judgments would not have been limited to just "core" matters.  Professor Chemerinsky wrote:

The test used in Schor cannot sustain the result in Northern Pipeline.  In fact, the test seems identical to the approach urged by Justice White in [the Northern Pipeline] dissent.  The Court in Schor said that in evaluating Article I courts it looks to fairness to the litigants and the degree of intrusion into separation of powers.  However, there were no allegations before the Court in Northern Pipeline that bankruptcy courts under the 1978 amendments were unfair to litigants.  Nor was there any indication that Congress used Article I bankruptcy courts to gain any institutional advantage at the expense of the judiciary.  In short, in assessing the effects of Article I bankruptcy courts, “the magnitude of any intrusion on the Judicial Branch can only be termed de minimis.”

Therefore, if Northern Pipeline were decided today, there is every reason to believe that it would be resolved differently.  The approach endorsed in Schor indicates a strong likelihood that Justice White’s opinion might attract a majority of the Court.  Additionally, it should be noted that the Court’s composition has changed substantially since Northern Pipeline, and even since Schor. It is unclear how Justices Scalia, Kennedy, and Souter will vote on these questions. 

Chemerinsky, Ending The Marathon: It Is Time to Overrule Northern Pipeline, 65 Am. Bankr. L. J. 311, 320 (1991).

Well, we now know that Justices Scalia and Kennedy would have supported an impassioned defense―like that delivered in Justice Roberts’ majority opinion―against incremental encroachments of Article III judicial power and the view that Thomas and Schor are "controlling precedent" that require a "pragmatic … examination of relevant factors [in determining] whether [congressional] delegation [of adjudicatory authority to a non-Article III judge] constitutes a significant encroachment by the Legislative or Executive Branches … upon the realm of authority that Article III reserves for exercise by the Judicial Branch…."  (Dissent at 9.)  Expounding on this position, Justice Roberts wrote:

What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court 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….

We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a “narrow” one.  Brief for the United States as Amicus Curiae 23.  If our decision today does not change all that much, then why the fuss?  Is there really a threat to the separation of powers where Congress has conferred the judicial power outside Article III only over certain counterclaims in bankruptcy?  The short but emphatic answer is yes.  A statute may no more lawfully chip away at the authority of the Judicial Branch than it may eliminate it entirely. “Slight encroachments create new boundaries from which legions of power can seek new territory to capture.”  Reid v. Covert, 354 U.S. 1, 39 (1957) (plurality opinion).  Although “[i]t may be that it is the obnoxious thing in its mildest and least repulsive form,” we cannot overlook the intrusion: “illegitimate and unconstitutional practices get their first footing in that way, namely, by silent approaches and slight deviations from legal modes of procedure.”  Boyd v. United States, 116 U.S. 616 (1886).  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.

(Op. at 29, 37-38.)

Much more will be written and discussed regarding the meaning, implications, and fallout of the Court’s decision, but hopefully this provides some early grist for the mill.

For good summaries of the decision itself, read Steve Sather’s Texas Bankruptcy Lawyers’ Blog and Lyle Dennison’s write-up on SCOTUSblog.

Thanks for reading!

© Steve Jakubowski 2011