Last week’s Supreme Court arguments on bankruptcy jurisdiction in Wellness Int’l Network Ltd. v. Sharif, No. 13-935 (S.Ct.), are enough to strike fear into the heart of any bankruptcy buff. What emerges from the transcript of the oral arguments is, in a word, confusion. This bodes ill for an early resolution of the upheaval created by the Supreme Court’s decision in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594 (2011), limiting the power of bankruptcy judges to decide certain matters that arise in bankruptcy proceedings. While it is foolhardy to predict the Court’s ruling based on questions asked in oral argument, the arguments raised a few interesting points.
Everything Old is New Again.
The most frightening point was Justice Sotomayor’s suggestion of a “simpler” jurisdictional rule that would give the bankruptcy judges power to decide questions involving property if the debtor “possess[es] it physically, or [has] legal title to it.” While we have been inching closer and closer to the old Bankruptcy Act’s distinction between summary and plenary jurisdiction as we adjust to the line of Supreme Court cases that have limited the expansive jurisdiction granted in the 1978 Bankruptcy Code, it would be a shame to return to something like Sotomayor’s proposed test. (Basically, the summary/plenary distinction turned on whether the property was in the actual or constructive possession of the court.) As the jurisdictional case law that developed under the Bankruptcy Act attests, the “simplicity” of such a test is largely illusory. Justice Sotomayor was not content to let her suggestion drop, and returned to it numerous times during the argument. In addition, much of the discussion with other Justices also involved the old summary/plenary distinction.
Can I Get a Vote Please?
Losers don’t count, so one should discount the views expressed by the four Justices who dissented in Stern. What is needed in order for Wellness to affirm that bankruptcy judges possess at least somepower to issue final judgments is for one of the five Justices in the majority to switch sides. Unfortunately most of the questioning came from the dissenting Justices and none of the questions from Chief Justice Roberts, or Justices Alito, Kennedy, and Scalia (Justice Thomas sticking to his “no questions” tradition) hinted at their views of the extent to which Article III of the Constitution might permit non-Article III bankruptcy judges to yield Article III power. Here, it is important to note that, as Justice Scalia pointed out in his concurrence in Stern, the Supreme Court has never upheld the exercise of any jurisdiction by bankruptcy judges.
Two for the Price of One!
The Justices were very interested in which of the two questions for which certiorari was granted was more important to decide: (1) whether Article III permits a bankruptcy judge to determine whether disputed property is property of the estate, or (2) whether consent cures the Article III problem. Interestingly, Justice Breyer suggested that the Court might deviate from its usual procedure and decide both questions even though an answer to only one might be sufficient. Justice Scalia, of course, seemed to strongly disagree with that approach.
Where Does it All End?
The arguments moved into some very interesting discussions about the impact of a ruling inWellness on both the magistrate system and arbitration. Questioning by some of the Justices suggested that a ruling against consent jurisdiction in Wellness would also invalidate the consent jurisdiction exercised by federal magistrate judges. More interesting was the discussion of arbitration, with Justices Kagan, Scalia, and Sotomayor all asking questions suggesting that federal court enforcement of arbitration awards raised greater Article III problems than the exercise of power by bankruptcy judges.