Argument analysis: Justices searching for a clear rule to define bankruptcy jurisdiction

The ghost of Justice Byron White was manifest in the courtroom on Wednesday as the Justices heard arguments in Wellness International Network v. Sharif. The case raises a core constitutional question: what limits does the vesting of the judicial power in Article III place on Congresss authority under Article I to adopt uniform rules for bankruptcy? The problem arises because the bankruptcy judges responsible for adjudicating the disputes that arise in the course of a bankruptcy proceeding do not have Article III status. The question, then, is how to decide whether a particular dispute is one that is part of the judicial power (which has to be given to an Article III judge) or part of the bankruptcy power (within the authority of the Article I bankruptcy judge).

This is the third time in four years the Court has faced that question, and I think most informed observers would agree that the Courts previous pronouncements have shed more darkness than light on how courts should address that problem. What was most startling refreshingly so about the Wednesday argument was the pervasive concern about practicality something that has been lacking from the Courts decisions in this area since Justice Whites dissenting opinion thirty years ago in Northern Pipeline Construction v. Marathon Pipe Line.

The dispute here is a perfect one for illustrating the difficulty of the Courts existing doctrine. Petitioner Wellness, a creditor in the bankruptcy of respondent Sharif, filed a motion arguing that Sharif should be denied his discharge. Wellness pointed out that several million dollars worth of assets previously listed on a loan application by Sharif were mysteriously absent from the estate. So Wellness wanted the bankruptcy court to rule that the assets in fact belonged to Sharif, which would both justify denial of a discharge and make the disputed assets available to pay the debt owed to Wellness.

The question before the Court is whether the bankruptcy court had the power to adjudicate that proceeding that is, to decide whether those assets belonged to the estate or instead to a trust that Sharif now claims has owned them for years. The subsidiary question which arises if the court did not have jurisdiction is whether Sharifs participation in the litigation amounts to an implied waiver of his objection.

The problem at the heart of the case is that the reasoning from the Courts recent cases is so opaque that it provides no substantial guidance. It would be the exercise of a morning for any law clerk in the building to write an opinion announcing that either result was compelled by prior cases. One opinion would say that the question whether property is within the estate is at the heart of the bankruptcy process and thus readily within the power of the bankruptcy judge. The other would say that an action bringing the assets into the estate amounts to augmentation, and thus falls outside the power under the Courts opaque 2012 decision in Stern v. Marshall.

Two lines of questioning dominated the argument. The first came from Justice Sonia Sotomayor, who started from the premise that the augmentation argument the doctrinal basis of Stern is really difficult to apply in a case like this. Plainly motivated to identify a more predictable rule of decision, she proposed a specific rule: If you physically possess it at the time you declare bankruptcy or you have legal title to it then its not a Stern claim [and thus is within the bankruptcy courts authority]. She pressed counsel on both sides, presenting each with this same rule. Whenever they tried to take her back to statements in prior cases, she would respond (again and again) with something like: Well, tell me why my rule is not simpler?

The second prominent line of questioning came from Justice Stephen Breyer. He also had a practical concern, but he was more worried about the efficacy of the bankruptcy system than he was about simplifying the doctrine that guides the lower courts. For him the overriding problem in the case which seems to compel a vote to reverse (upholding the bankruptcy courts power) is the crippling effect on the system of affirmance: Now, if we . . . side with you on that one, what happens to the constitutional grant to Congress to make uniform laws of bankruptcy? I imagine it would still exist, but I cant imagine in what form. When Jonathan Hacker (representing Sharif) persisted, Breyer retorted:

Then . . . where are we with bankruptcy courts, when you have taken from them the power to litigate what I would think is the most fundamental thing imaginable: How much money does the debtor have? The constitutional question is the deepest to me: we have a constitutional provision specifically giving to Congress the authority to create a uniform system of bankruptcy courts, which have served our economy well, I think. Thats what I read.

The Justices spent much less time on the consent question. On that point, the strongest view came from Chief Justice John Roberts. Just as in last years argument in Executive Benefits Insurance Agency v. Arkison, he was deeply skeptical about the propriety of waivers of the structural protections of Article III. He was particularly unimpressed by the idea that the review of bankruptcy court decisions by district courts solves any constitutional defect in the bankruptcy judges appointment. As he put it, a rule allowing broad bankruptcy court authority takes out of the Federal courts our constitutional birthright to decide cases and controversies under Article III.

The closest thing to discord among the Justices came from a frank inquiry about whether the Court needed to reach both of the questions presented. The discourse started with a question by Justice Antonin Scalia. Apparently convinced (like Justice Breyer) of the bankruptcy courts authority, he addressed Catherine Steege, counsel for Wellness: We dont have to reach both of these questions if we find one of them in your favor, do we?

When she agreed that the Court need reach only one of them, Justice Scalia proceeded to ask her which one is the better one? Which is the prettier question or the one that you think has more real world effect? Ordinarily, you dont expect Justice Scalia to be asking anybodys opinion about a question like that, much less counsel for one of the parties!

For his part, Justice Breyer seemed to think it important to decide both questions, but was less sure about whether there was a precedent for that. Remarkably, he asked Curtis Gannon, arguing on behalf of the federal government as an amicus in support of Wellness, to go back to your experience in your office to find a precedent for reaching both questions. Justice Scalia broke in: Perhaps [weve done it before]. Perhaps we made other mistakes as well. But Justice Breyer held his ground: I dont know anything in the Constitution or in any precedent of this Court that prohibits it. So I think saying it is a mistake does not necessarily make it one.

As I noted above, the Courts earlier opinions tell you little or nothing about how this case will come out. To be sure, the Justices who spoke most firmly (Justices Sotomayor, Breyer, and Scalia) seemed driven to support the bankruptcy courts authority, albeit for different reasons. But most of the Justices said little of substance at the argument, so its not at all obvious how the case will come out. All I can say is that everybody interested in the bankruptcy system is hoping for something a lot more definitive than what the Court has offered on this topic recently. For now, the decisions sadly remain, as the late Chief Justice William Rehnquist said a generation ago, landmarks on a judicial darkling plain where ignorant armies have clashed by night.