Restructuring

Contributed by Frank Grese
In this installment of “Throwback Thursday,” we review the Supreme Court’s 1982 Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. decision, 458 U.S. 50, one of the key decisions relied upon by the Court in its recent Stern v. Marshall decision.  In Stern, which we wrote about here and here, the Court held that Congress’s assignment of jurisdiction to federal bankruptcy judges to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor’s proof of claim violated Article III of the Constitution.
Like Stern, Northern Pipeline involved an Article III challenge to a bankruptcy court’s resolution of a debtor’s suit.  The question considered by the Court in this plurality decision issued by Justice Brennan was whether the assignment of jurisdiction by Congress under the Bankruptcy Act of 1978 to bankruptcy judges, who lack lifetime tenure and the salary guarantees of Article III, to decide a state law contract claim against an entity that is not otherwise part of the bankruptcy case was constitutional.  The Court held that such an assignment of jurisdiction to bankruptcy judges unprotected by Article III was unconstitutional.  As discussed below, in so holding, the Court rejected various arguments of the appellants as to why Article III either did not apply or was otherwise satisfied.
In Northern Pipeline, Northern Pipeline Construction Co., a chapter 11 debtor with a case pending before the United States Bankruptcy Court for the District of Minnesota, filed suit in the bankruptcy court against Marathon Pipe Line Co. seeking damages for, among other things, alleged prepetition breaches of contract and warranty.  Marathon, which had not filed a proof of claim or otherwise participated in Northern Pipeline’s bankruptcy case, sought dismissal of the suit on the ground that the 1978 Act unconstitutionally conferred Article III judicial power upon judges who lacked life tenure and protection against salary diminution.  The United States intervened to defend the validity of the statute.  The bankruptcy court denied Marathon’s motion to dismiss, but, on appeal, the District Court for the District of Minnesota granted Marathon’s motion.  The United States and Northern appealed to the Supreme Court.
Article III, § 1, of the Constitution defines the judicial power of the United States and mandates that federal judges “shall hold their Offices during good Behaviour” and “receive for their Services[] a Compensation[] [that] shall not be diminished” during their tenure.  In Northern Pipeline, the Supreme Court first examined the historical significance of Article III, the framers’ intentions in including its prescriptions in the Constitution, and why the life tenure and salary guarantees mandated for Article III judges are both critical to implementing the separation of powers in the United States’ tripartite system of government and necessary to promote an independent judiciary that is free from control by the Executive or Legislative branches of government.
In its analysis, the Court noted that bankruptcy judges clearly are not Article III judges because (i) they do not serve for life subject to their continued “good Behaviour,” as they serve 14-year terms and can be removed by the judicial council of the circuit in which they serve for incompetency, misconduct, neglect of duty, or physical or mental disability, and (ii) the salaries of the bankruptcy judges are not immune from diminution by Congress.
Next, the Court concluded that the 1978 Act’s conferral of broad adjudicative powers upon non-Article III bankruptcy judges did not fit into one of the narrow situations previously recognized by the Court where the creation of non-Article III courts was not barred:  (1) Congress has the power to create “territorial courts” for geographic areas where Congress exercises the general powers of government; (2) Congress and the Executive branch may establish and administer courts martial; and (3) Congress may create courts and administrative agencies to adjudicate cases involving “public rights.”  The Court rejected the appellants’ argument that a discharge in bankruptcy is a “public right” and stated that “the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages that was at issue in [Northern Pipeline].  The former may well be a ‘public right,’ but the latter obviously is not.”
Alternatively, the appellants argued that Congress’s constitutional authority to establish “uniform Laws on the subject of Bankruptcies throughout the United States,” Art. I, § 8, cl. 4, carries with it an inherent power to establish specialized legislative courts capable of adjudicating bankruptcy-related controversies.  The Court did not find this argument persuasive, however, because of its fear that such an exception could encroach upon powers reserved to the Judicial branch given the broad range of questions that can be brought into a bankruptcy court under “related to” jurisdiction.   The Court noted that adopting such an exception would “require that [it] replace the principles delineated in [its] precedents, rooted in history and the Constitution, with a rule of broad legislative discretion that could effectively eviscerate the constitutional guarantee of an independent Judicial Branch of the Federal Government.”
Finally, a majority of the Court rejected appellants’ argument that the bankruptcy court’s exercise of jurisdiction was constitutional because the bankruptcy court was merely an adjunct of the district court and that the delegation of certain adjudicative functions to the bankruptcy court is consistent with the principle that the judicial power of the United States must be vested in Article III courts.  After evaluating applicable precedent, the Court concluded that the bankruptcy courts are exercising powers far greater than those adjuncts approved in such precedent.
In response to Northern Pipeline, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984, which, among other things, established that bankruptcy judges may enter final judgments in “core” proceedings arising under title 11, or arising in a case under title 11, but, absent consent of the parties, may only submit proposed findings of fact and conclusions of law to the district court in so called “non-core” proceedings that are related to a case under title 11.  For over 25 years, those distinctions defined the scope of the bankruptcy court’s authority.  Of course, as we know from Stern, the changes embodied in the 1984 legislation did not resolve all issues regarding a bankruptcy court’s jurisdiction.