As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country.
This is a very involved case that I love sifting through. But it basically boils down to an attorney representing more than one client in a matter and creating a “conflict of interest” – he cannot do one thing for one client that may affect or hurt another.
He also created a constitutional issue in doing so! Who should hear the case? A judge created by Article I of the Constitution or a judge created by Article III of the Constitution?
Read the first part of the Renewable Energy case here. Seriously, you’ll be lost if you do not!
How do these unfortunate but hardly uncommon (and still unproven and only alleged) facts yield a dispute of constitutional magnitude? Summit filed suit in federal court against Mr. Hofmann alleging diversity jurisdiction and the right to have the case resolved in an Article III court. Mr. Hofmann replied that the case belonged in and should be resolved by an Article I bankruptcy court. Ultimately, the district court sided with Mr. Hofmann even as it acknowledged some uncertainty about this much and certified its decision for an immediate appeal.
The Constitution assigns “[t]he judicial Power” to decide cases and controversies to an independent branch of government populated by judges who serve without fixed terms and whose salaries may not be diminished. U.S. Const. art. III, § 1. This constitutional design is all about ensuring “clear heads . . . and honest hearts,” the essential ingredients of “good judges.” 1 Works of James Wilson 363 (J. Andrews ed., 1896) (alteration omitted), quoted in Stern v. Marshall, 131 S. Ct. 2594, 2609 (2011). After all, the framers lived in an age when judges had to curry favor with the crown in order to secure their tenure and salary and their decisions not infrequently followed their interests. Indeed, the framers cited this problem as among the leading reasons for their declaration of independence. The Declaration of Independence ¶ 11; Stern, 131 S. Ct. at 2609.
And later they crafted Article III as the cure for their complaint, promising there that the federal government will never be allowed to take the people’s lives, liberties, or property without a decisionmaker insulated from the pressures other branches may try to bring to bear. Stern, 131 S. Ct. at 2609. To this day, one of the surest proofs any nation enjoys an independent judiciary must be that the government can and does lose in litigation before its “own” courts like anyone else.
Despite the Constitution’s general rule, over time the Supreme Court has recognized three “narrow” situations in which persons otherwise entitled to a federal forum may wind up having their dispute resolved by someone other than an Article III judge. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 64 (1982) (plurality opinion). Cases arising in the territories or the armed forces or those involving “public rights” may be sent to Article I tribunals of Congress’s creation even if decisionmakers there do not enjoy the same insulation and independence as Article III judges. Id. at 63-72. Bankruptcy courts are, of course, legislative creations of just this sort. And because they don’t have a thing to do with the territories or armed forces, the Supreme Court has suggested that their lawful charter depends on and is limited by public rights doctrine.
As developed to date, public rights doctrine has something of “a potluck quality” to it. Waldman v. Stone, 698 F.3d 910, 918 (6th Cir. 2012) (Kethledge, J.). The original idea appears to have been that certain rights belong to individuals inalienably — things like the rights to life, liberty, and property — and they may not be deprived except by an Article III judge. Meanwhile, additional legal interests may be generated by positive law and belong to the people as a civic community and disputes about their scope and application may be resolved through other means, including legislation or executive decision. See Stern, 131 S. Ct. at 2612; Caleb Nelson, Adjudication in the Political Branches, 107 Colum. L. Rev. 559, 566-72 (2007). But the boundary between private and public rights has proven anything but easy to draw and some say it’s become only more misshapen in recent years thanks to seesawing battles between competing structuralist and functionalist schools of thought. Compare, e.g., Northern Pipeline, 458 U.S. 50, and Stern, 131 S. Ct. 2594, with Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833 (1986), and Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015). Indeed, the Court itself has acknwledged, its treatment of the doctrine “has not been entirely consistent.” Stern, 131 S. Ct. at 2611; see also S. Elizabeth Gibson, Jury Trials and Core Proceedings: The Bankruptcy Judge’s Uncertain Authority, 65 Am. Bankr. L.J. 143, 168-175 (1991) (“How a majority of the Court could have embraced these opposing views of article III within the span of less than a decade is difficult to understand,” id. at 174).
Bankruptcy courts bear the misfortune of possessing ideal terrain for testing the limits of public rights doctrine and they have provided the site for many such battles. See Northern Pipeline, 458 U.S. 50; Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989); Stern, 131 S. Ct. 2594. Even today, it’s pretty hard to say what the upshot is. Through it all, the Supreme Court has suggested that certain aspects of the bankruptcy process may implicate public rights and thus lawfully find resolution in Article I courts. See, e.g., Northern Pipeline, 458 U.S. at 71 (plurality opinion); Granfinanciera, 492 U.S. at 56 n.11; Stern, 131 S. Ct. at 2614 n.7. But the Court has also emphasized time and again that not every “proceeding [that] may have some bearing on a bankruptcy case” implicates a public right amenable to resolution in an Article I tribunal. Stern, 131 S. Ct. at 2618.
That much, of course, hardly decides cases. What most everyone wants to know is which aspects of typical bankruptcy proceedings do and don’t implicate public rights. Yet even Stern, perhaps the Court’s most comprehensive tangle with the question, offered no comprehensive rule for application across all cases.
Instead, it invoked a number of different factors to support the result it reached in the particular and rather unusual case at hand. Id. at 2614 (justifying its decision because the case at hand didn’t “fall within any of the varied formulations of the public rights exception in this Court’s cases”); see also id. at 2621 (Scalia, J., concurring) (noting the “surfeit” of factors and formulations offered by the majority); Ralph Brubaker, A “Summary” Statutory and Constitutional Theory of Bankruptcy Judges’ Core Jurisdiction After Stern v. Marshall, 86 Am. Bankr. L.J. 121, 172 (2012).
But along the way Stern did clearly take at least one thing off the table. It held that when a “claim is a state law action . . . and not necessarily resolvable by a ruling on the creditor’s proof of claim in bankruptcy,” it implicates private rights and thus is not amenable to final resolution in bankruptcy court. Stern, 131 S. Ct. at 2611. Indeed, the Court repeated this point — repeatedly. See id. at 2617, 2618, 2620. So whatever else you might say in the midst of this still-very- much-ongoing battle over bankruptcy and public rights doctrine, you can say this much: cases properly in federal court but arising under state law and not necessarily resolvable in the claims allowance process trigger Article III’s protections.
Happily, too, this is all the guidance we need to answer this appeal. While the parties before us agree on little else, they agree that Summit’s claims against Mr. Hofmann and his firm are properly heard in federal court under the federal diversity statute, that they arise under state law, and that none will necessarily be resolved in the process of allowing or disallowing claims against the estate.
Accordingly, we can be sure this is not the sort of case that may be forcibly shipped to an Article I bankruptcy court for final decision. The parties may waive their right to an Article III forum and choose to have their claims resolved in bankruptcy court. Wellness Int’l Network, 135 S. Ct. at 1939. But a district court may not — as the district court did here — send parties entitled to an Article III court to an Article I forum for final decision without their consent.
Mr. Hofmann resists this result by suggesting that Summit’s claims are factually “intertwined” with the bankruptcy proceedings and for this reason belong in bankruptcy court. After all, he says, any harm that happened here happened only because of a conflict of interest arising from his service as a bankruptcy trustee. This much may be true but it equally strikes us as irrelevant.
As we read Stern, it doesn’t leave room for the notion that a claim independently arising under state law and not necessarily resolvable in the claims allowance process — but “factually intertwined” with bankruptcy proceedings — may be sent to bankruptcy court for final resolution without consent. As we see it, the only “intertwining” Stern cares about concerns the law, not the facts. In the process of rejecting the idea that the claim before the Court implicated public rights doctrine, Stern observed (among other things) that the claim was not “intertwined with a federal regulatory program Congress has power to enact” but arose instead under state law. 131 S. Ct. at 2614 (quoting Granfinanciera, 492 U.S. at 54). The Court pointed out that prototypical public rights disputes arise from “federal statutory scheme[s]” while “quintessential” private rights disputes involve common law rights affecting personal life, liberty, or property. Id. at 2614, 2618. In this way, the Court did suggest the source of law generating a claim may inform its categorization as involving a public or private right. But the Court nowhere suggested that any claim “factually intertwined” with bankruptcy may be sent to bankruptcy court for final resolution without consent.
We confess we’re glad of this. Asking what source of law generated the claim at issue may well raise some questions around the edges — like what about claims pursuing fraudulent conveyances, which find a home in a federal statute but surely implicate longstanding common law rights? See Granfinanciera, 492 U.S. at 56. Still, questions like these aren’t a patch on what would be involved if in each case we had to ask whether the plaintiff’s claims are “factually intertwined” with a bankruptcy proceeding. If, as Mr. Hofmann submits, our case is “factually intertwined” enough with bankruptcy to warrant its resolution in bankruptcy court — just because a trustee in the bankruptcy happened to generate a conflict of interest with a client outside the bankruptcy — what wouldn’t be?
What if a trustee and creditor came to blows in the courthouse parking lot over the terms of a proposed reorganization plan? What if a trustee stole from a third person and gave the money to the bankruptcy estate? Couldn’t someone plausibly describe disputes like these as at least as “factually intertwined” with bankruptcy as our own?
The implausibility of Mr. Hofmann’s “factually intertwined” test as a viable interpretation of Stern and its inadvisability as a practical matter are further underscored by this. If we were to adopt his test, you could make a pretty good argument Stern itself would have had to come out the other way. In Stern the debtor brought a tort counterclaim against a creditor in hopes of enlarging the bankruptcy estate and the Supreme Court found the allegation sufficient to trigger the bankruptcy court’s “core” authorities. 131 S. Ct. at 2604. That sounds pretty “factually intertwined.” Yet the Court held the case triggered Article III’s protections. A similar sort of problem may recur with Granfinanciera too. There the debtor allegedly engaged in a fraudulent conveyance to hide assets from the bankruptcy estate. Though the Court decided the case on other grounds (the Seventh Amendment), Stern seemed to suggest that fraudulent conveyance cases involve private rights and thus are of the sort that (absent consent) must be decided in Article III courts. See id. at 2614 n.7 (describing Granfinanciera as teaching that “Congress could not constitutionally assign resolution of the fraudulent conveyance action to a non-Article III court”); see also In re Bellingham Ins. Agency, Inc., 702 F.3d 553, 563 (9th Cir. 2012) aff’d sub nom. Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014). Even though, surely, one could argue fraudulent conveyance claims are usually (always?) “factually intertwined” with the bankruptcy process because they challenge efforts to evade it. That Mr. Hofmann’s proposed test would place us at odds with what the Supreme Court has decided in Stern — and at least suggested about Granfinanciera — does much to make us skittish of following where he would have us go.
Notably, many circuits to come this way before us have read Stern much as we do. In fact, some have even read the decision as claiming a good deal more ground for Article III than we must to resolve this appeal. The Ninth Circuit, for one, has suggested that only the second portion of the Stern test we’ve discussed — whether the matter would necessarily be resolved in the claims allowance process — must be satisfied to trigger Article III’s protections. After all, the Ninth Circuit has noted, Granfinanciera involved a claim at least nominally arising from federal statute (not state law), yet it’s one Stern seemed to suggest belongs on the private side of the rights ledger. In re Bellingham, 702 F.3d at 564. Neither is the Ninth alone in this view. See, e.g., In re Fisher Island Invs., Inc., 778 F.3d 1172, 1192 (11th Cir. 2015) (holding that a bankruptcy court had authority to decide a state law dispute that was necessarily resolved in the claims allowance process); In re Frazin, 732 F.3d 313, 320-24 (5th Cir. 2013) (invoking the claims allowance process to explain why a bankruptcy court could decide certain state law claims but not others); Waldman, 698 F.3d at 921 (finding an Article III problem because “there was never any reason to think that” the debtor’s “disallowance claims would necessarily resolve his affirmative [state law] claims”). To decide the case before us, however, we do not have to travel so far for both of the factors Stern discussed are present here and surely all the circuits to have spoken on the subject would agree their combination is enough (maybe more than enough) to invite Article III’s application.
This opinion is to be continued!
About the blogger:
Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
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Whether you live in Mount Vernon, McLeansboro, Centralia or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!
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