Wednesday, June 29 2022

There is a new US Circuit Court opinion on a person’s right to a jury trial, when the Securities and Exchange Commission sues you before one of its administrative judges.

And guess what:

  • the legal authority most cited in that opinion is [ . . . drumroll . . . ] a US Supreme Court bankruptcy opinion: Big finance c. Nordberg, 492 US 33 (1989); Y
  • the Jarkesy v. SEC opinion specifically names big financial no less than 39 times.

Why?

Why would a bankruptcy opinion be the primary authority for an administrative agency matter?

This is why:

  • when the Supreme Court of the United States addresses for the first time (in 1982) the constitutionality of the judicial authority of bankruptcy judges, under the Bankruptcy Code, it applies a legal theory called the doctrine of public rights (Fn. 1); but
  • thus, the public rights doctrine had been applied exclusively to federal administrative agencies, both to justify and to limit the judicial authority of their administrative judges.

duplicating

In 1989, the US Supreme Court redoubled its efforts, in big financialby applying the public rights doctrine to the jury trial rights of private defendants in bankruptcy court.

Again . . . the Supreme Court applies a bankruptcy doctrine that is designed specifically for actions by federal agencies against private persons.

Problem: the government as a party

In an action within a federal agency, the federal government is almost always a party:

  • the agency is suing a private party to enforce its own regulations; Y
  • the lawsuit is before the agency’s own administrative judge.

It’s okay to have such a lawsuit (says the US Supreme Court) when the agency is enforcing public rights. But it is not okay to do such a thing, when private rights are involved, that violates Article III of the United States Constitution.

—A problem in bankruptcy

One problem with applying the public rights doctrine to bankruptcy disputes is this: the federal government is rarely a party.

In bankruptcy litigation:

  • the debtors are not the federal government;
  • the trustees are not the federal government;
  • most creditors are not the federal government; Y
  • American trustees are part of the federal government. . . but they are not a primary contestant in most bankruptcy contexts.

—Justice Scalia

Justice Scalia emphasizes this problem of government as a party, for the doctrine of public rights in bankruptcy. He does so in concurring or dissenting opinions, beginning with big financial:

  • referring to the “longstanding principle that the public rights doctrine requires, at a minimum, that the United States be a party to the adjudication” (492 US at 70).

bankruptcy entry

The public rights doctrine enters the field of bankruptcy through the plurality opinion of 1982 (by only four judges). Had he received one more vote, that opinion and its public rights doctrine would have declared the entire Bankruptcy Code unconstitutional. [See fn. 1]

The effect of the public rights doctrine (from that view forward) is to substantially limit the authority of bankruptcy judges.

an alternate view

let’s go back to the Northern Pipeline opinion (watch fn 1) and analyze an alternative opinion, presented by three dissenting judges.

This dissenting opinion rejects the public rights doctrine.

It also constitutionally declares its own the new bankruptcy courts (established by the Bankruptcy Code). That is because:

  • the Bankruptcy Code makes extensive provisions for appellate review of bankruptcy court decisions by Article III courts;
  • no one seriously argues that Congress intended, in enacting the Bankruptcy Code, to aggrandize itself over the other branches of government or to undermine the authority of the constitutional courts generally; Y
  • a specialized court is needed to handle bankruptcy cases—that’s because the pressures on the old bankruptcy system from tremendous increases in bankruptcy cases are clearly an issue for Congress to address (458 U.S. at 116 -17).

-Imagine

Imagine what life in bankruptcy would have been like under the alternative view:

  • the jurisprudential nightmare created by the doctrine of public rights would have been avoided; Y
  • our life in the world of bankruptcy would have been much better and more logical, practical, efficient and predictable.

-Reality

Instead, what we got is a lack of clarity, as explained by a concurring opinion in International Welfare against Sharif:

  • “Our cases examining the constitutionality of the statutes that empower the bankruptcy courts have not considered the source of Congress’s authority to establish them”; but
  • “the obvious textual basis is the fourth clause of Article I, §8, which empowers Congress to ‘establish . . . Uniform Bankruptcy Laws throughout the United States.’”

Reasons for such lack of clarity include:

  • the public rights doctrine has no legitimate place in bankruptcy;
  • the imposition of that doctrine on bankruptcy law by the Supreme Court of the United States has created confusion and uncertainty; Y
  • No one can articulate a rationale for what authority bankruptcy courts and their judges actually have.

conclusion

The new Jarkesy v. SEC The opinion, which involves administrative actions by the Securities and Exchange Commission, is a fresh new reminder of the public rights nightmare imposed by the US Supreme Court on the world of bankruptcy, almost accidentally.

Here’s looking forward to the alternate analysis featured in the Northern Pipeline Dissent had prevailed!

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