The Connection Between Individual Liberty and Article III Courts

On January 14, the Supreme Court heard oral arguments on an issue that may seem somewhat dry and technical to the average person, whether parties to a bankruptcy case can consent to have a Bankruptcy Judge enter a final order resolving their claims in a bankruptcy case. Contrary to the seemingly narrow and special nature of the issue, however, the outcome of the case could have profound implications for individual rights and the administration of justice in the federal courts.

Executive Benefits Insurance Agency v. Arkison is a follow-on to the Supreme Court’s Earth-shaking case a few years ago involving issues that arose in the soap opera saga of the late Vicki Lynn Marshall—better know to supermarket tabloid aficionados as Anna Nicole Smith. In the case of Stern v. Marshall, the Supreme Court held that for certain issues that might be relevant to a bankruptcy case but for which the resolution does not bear an integral connection to the bankruptcy case, where a party does not consent to having the claim administered by a bankruptcy judge the non-consenting party is entitled to have its claim heard by a federal district judge, rather than a bankruptcy judge.

As a result, the Court held that even though the bankruptcy judge had the statutory authority to issue a final judgment on the issues at stake in Stern, the statute was unconstitutional to the extent that it gave the power to bankruptcy judges. (I have followed the case since Marcus Cole and I analyzed Stern prior to the Supreme Court’s ruling in our article “Anna Nicole Smith Goes Shopping: The New Forum Shopping Problem in Bankruptcy” which was later published in the Utah Law Review—to this day that remains the only law review article that I have written in which I cite People magazine in a footnote).

EBIA raises the immediately obvious question: what happens if parties, otherwise entitled to having their claim heard by a federal district judge, consent to having their case heard by and a final judgment rendered by a bankruptcy judge rather than a district judge? Resolving that issue requires a deep dive into the nature and purposes of the federal judiciary.

The Article III Judiciary

But first some background. Federal district judges are conventionally referred to as “Article III” status because they hold the powers, protections, and prerogatives granted to the federal judiciary under Article III. In particular, they hold the power to resolve all cases properly under their jurisdiction and to resolve and render final judgments. A judge appointed under Article III is subject to nomination by the President and confirmation by the advice and consent of the Senate. Once confirmed, Article III judges hold their office for “good behavior” and can be removed only through impeachment. Moreover, in order to further strengthen the independence of the federal judiciary, a properly-appointed judge cannot have his compensation reduced while sitting as a judge.

Bankruptcy judges, by contrast, lack both the powers and protections of federal district judges. Bankruptcy judges serve a term of 14 years and lack constitutional protections on removal from office or reduction in compensation. The powers of bankruptcy judges are created by statute, not the Constitution, and are limited to matters relevant to a bankruptcy proceeding. Bankruptcy judges are appointed by a panel of Federal Circuit court judges, not by Presidential nomination subject to Senate confirmation. Significantly, federal magistrate judges are functionally similar to bankruptcy judges, with the exception that magistrate judges are appointed by federal District judges instead of Circuit court judges.

Magistrate judges have come to take on an important supplementary role in the federal judicial system, resolving many disputes arising in civil and criminal law cases with powers delegated by the District court, including deciding routine motions and even empaneling juries. Bankruptcy and magistrate judges are often referred to as “Article I” judges because their offices are created by Congress and the conditions of their employment and terms of office are established by Congress instead of the Constitution.

This distinction between Article I and Article III judges was crucial to Stern. For certain matters that might be linked to a bankruptcy case, where a party does not consent to having a bankruptcy court hear the case, he is entitled to have the case heard by an Article III judge. In Stern, for example, the bankruptcy estate of Vicki Marshall complained that the relative of the late billionaire oilman J. Howard Marshall had violated Texas state law by engaging in “tortuous interference” with her right to inherit her “share” of Howard’s estate upon death. Although the claim was related to the bankruptcy case, the court held that because Marshall’s son Pierce did not consent to the bankruptcy court’s resolution of the case, only a federal District judge could enter a final order on the claim.

The current structure of the bankruptcy courts arose as a compromise following the Supreme Court’s 1982 decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co. In that case, Northern Pipeline filed a chapter 11 bankruptcy petition and as part of the case filed suit against Marathon Pipe Line for breach of contract and warranty. Marathon objected and sought to dismiss the case on the ground that the claim could only be decided by an Article III judge. A plurality opinion of the Supreme Court agreed with Marathon and said that Marathon was entitled to have its case heard by an Article III judge.

Northern Pipeline threatened to obliterate the entire structure of the federal bankruptcy court system that had just been created by the 1978 Bankruptcy Code. Congress cobbled together a compromise in response to Northern Pipeline that rested on a novel distinction between so-called “core” and “non-core” claims, a terminology drawn from the Northern Pipeline decision. Under the compromise, bankruptcy judges could hear and enter a final order on all “core” bankruptcy matters, but with respect to “non-core” matters, it could only issue “proposed findings of fact and conclusions of law” that would be reviewed by a subsequent district judge de novo. With respect to core matters—those matters at the “core” of the bankruptcy process—the bankruptcy judge was entitled to issue a final judgment, reviewable by the district court only on a deferential standard of review.

Over the next several decades, several intervening cases further muddied the waters, including adjudications by administrative agencies and other non-Article III bodies. Stern, however, upset this whole area by essentially identifying a third category of cases: those matters that are core but unconstitutional, to go along with the traditional core and non-core categories. In that category are cases that Bankruptcy Code identifies as core (and thus empowers bankruptcy judges to enter final judgments) but for which it would be unconstitutional to permit the bankruptcy judge to do so.

Consenting to an Article I Bankruptcy Judge

EBIA raises the issue left unresolved by Stern, which is what if a party does consent to having an Article I bankruptcy judge render a final judgment in the case? At first glance, one might think that this is not problematic—after all, parties have been consenting for years to allowing bankruptcy judges and magistrate judges resolve their cases. But to resolve this question, however, requires determining the nature of the federal judiciary and the nature of the judicial power.

In particular, EBIA requires the Supreme Court to determine whether the limits on Article I judges laid out in Stern are jurisdictional in nature or a matter of individual rights. In turn, this initial determination is necessary because if Stern’s limit is jurisdictional, then this would mean that an Article I judge would lack the power to be able to exercise the judicial power of the United States, meaning that it could not enter a final judgment. On the other hand, if it is an individual right, then it is waiveable at the consent the party that holds the right. So, for example, under the Sixth Amendment every individuals has a right to a jury trial in a criminal case and a jury trial in a civil case under the terms of the Seventh Amendment. But, of course, individuals are permitted to waive their right to a jury trial if they so choose.

EBIA deals with the following facts. Nicholas Paleveda and his wife Marjorie Ewing operated several companies, including the Bellingham Insurance Agency. Simplifying the facts substantially, essentially when Bellingham went bankrupt, it transferred the right to payment of certain commissions from Bellingham to a new entity created by Paleveda and friend called the Executive Benefits Insurance Agency, Inc. Once Bellingham filed bankruptcy, Peter Arkison was appointed trustee of EBIA’s bankruptcy estate and sought to recover the money transferred from Belligham to EBIA for the benefit of its creditors. The bankruptcy court heard the matter and entered a final judgment ordering the payment of $373,291.28 to Belligham’s bankruptcy estate. EBIA appealed to the federal district court, which upheld the ruling.

EBIA then appealed to the Ninth Circuit and for the first time raised a new argument, objecting to the bankruptcy judge’s entry of final judgment on the fraudulent conveyance claims. On the narrow point, the Ninth Circuit held that the objection came too late in the litigation process, thus EBIA would be deemed to have impliedly consented to the jurisdiction of the bankruptcy court to hear the case. For purposes of this essay I will assume that the Ninth Circuit was correct and that EBIA consented.

For the key issue in the case is not whether EBIA actually consented, but whether it actually matters that EBIA consented. EBIA says it does not—in short, EBIA says that even if it consented, it doesn’t matter because EBIA could not consent to allow the bankruptcy judge to enter a final judgment in the case. As the 9th Circuit noted, the argument was that Stern’s limits on bankruptcy courts are jurisdictional, and thus consent is irrelevant. To put it another way, federal district courts can hear certain cases only if they are so authorized under the law—two parties cannot consent to create a “case,” for example, where there is actually no dispute between them. Similarly, EBIA argues, if the right to have a dispute heard by an Article III judge is jurisdictional in nature, then only an Article III judge can enter a final judgment, not an Article I judge.

The authority to enter a final judgment is jurisdictional in nature and so two parties cannot agree to allow non-Article III judges to exercise the judicial power of the United States, even if they agreed to do so. So, for example, if John and Sally have a dispute they obviously cannot get together and agree to simply call Charles a federal judge and allow Charles to exercise the judicial power of the United States. Is a bankruptcy judge or a magistrate judge comparable to Charles, or is it permissible to consent to their authority to enter a final judgment? (There are also some other arguments in the alternative, but the issue of consent to a final judgment by the bankruptcy judge is the most important and most interesting).

So what about consent in the nature of EBIA? I believe that a proper understanding of the nature and purposes of the judicial power, as articulated in Stern, indicates that parties should be permitted to consent to adjudication by a bankruptcy judge or magistrate judge. In other words, the right of a party to have his case heard by an Article III judge is not jurisdictional, but in the nature of an individual right. As such, a party can waive that right.

Individual Liberty, Separation of Powers, and Article III

The Supreme Court has made clear that although the nature of Article III under the Constitution is structural, constitutional structure is not fundamentally an end in itself but is a means to the end of protecting individual liberty. So, for example, the Court wrote in the case of Schor v. CFTC, “Article III, § 1’s guarantee of an independent and impartial adjudication by the federal judicial of matters within the judicial power of the United States… serves to protect primarily personal rather than structure interests.” In Stern, the Court quoted its 2011 opinion in Bond v. United States, saying “Separation-of-powers principles are intended, in part, to protect each branch of government from incursion by the others. Yet the dynamic between and among the branches is not the only object of the Constitution’s concern. The structural principles secured by the separation of powers protect the individual as well.”

To the extent that the first purpose of adherence to the separation of powers is to safeguard individual liberty, permitting parties to consent to resolution of their case by a non-Article III judge is perfectly consistent with the primary purpose of the structural Constitution generally and the judicial power specifically, just as permitting parties to consent to adjudication by an arbitrator advances that goal. Moreover, from the perspective of preserving of individual liberty, there is an obvious and fundamental distinction between a case in which parties consent to the exercise of jurisdiction by a bankruptcy court and one in which the court reaches out and involuntarily subjects a party to is processes, which is why Supreme Court cases have repeatedly and consistently invoked the importance of consent by the parties in its caselaw in this area.

For example, Chief Justice Roberts notes that one of the factors in CFTC v. Schor that supported the decision to uphold the adjudication of the claim in that case was that the parties agreed to have their dispute resolved by the agency. As Roberts wrote in Stern (slip op. p. 27), “And in contrast to the objecting party in Schor, Pierce did not truly consent to resolution of Vickie’s claim in the bankruptcy court proceeding. He had nowhere else to go if he wished to recover from Vickie’s estate.”

In Stern, the court amplified the principle that the primary purpose of constitutional structure is as a means to the protection of individual liberty, rather than as an end in itself. Most notably, the Court relies heavily and repeatedly on the case of Granfinanciera v. Nordberg, a case in which a party subjected to a fraudulent transfer action in bankruptcy court demanded a right to a jury trial under the 7th Amendment, rather than being forced to accept adjudication by a bankruptcy judge. In Granfinanciera, the Supreme Court held that a nonconsenting party subjected to a fraudulent conveyance action in bankruptcy could demand its right to a jury trial conducted by an Article III judge. As an individual right, however, it is also implied that a party can waive the right to a jury trial, just as with other individual rights.

Granfinanciera’s distinction makes perfect sense from the perspective of preserving individual liberty: that a party has an individual right to a jury trial but that right can be waived. But the right to a jury trial is not an end in itself, it is a means to the end of preserving a fair trial. But it is a far different story in situations in which the court is reaching out to grab the nonconsenting party and subjecting it to the jurisdiction of the court. In such situations, the nonconsenting party has a strong interest in preservation of the right to a jury trial. In fact, Stern expressly relies on Granfinanciera as a direct precedent for Stern, saying that “Congress could not constitutionally assign resolution of the fraudulent conveyance action to a non-Article III court.” By relying on Granfinanciera—a case unquestionably about individual rights—the Court has strongly indicated that the right to an Article III adjudication is also grounded in individual rights, not the powers of the court.

The Limits to Consent

Stern and prior cases, however, identifies limits to the primacy of individual liberty, and impliedly the right to waive one’s right to an Article III resolution, in its discussion of constitutional structure (such as the nature of the judicial power under Article III). In the first instance, Congress might establish a new set of courts and provide them with exclusive jurisdiction to hear certain claims, effectively end-running the federal courts, stripping the courts of some of their powers. Or, second, if another branch is directly impinging on the powers and responsibilities of the courts, for example, an administrative agency claiming exclusive authority to resolve certain claims.

In Stern, Chief Justice Roberts noted that it may be especially necessary for the Court to protect structure as an end it itself (notwithstanding individual consent or waiver) in situations in which the self-interest of the parties is not naturally aligned with the incentive to protect structural interests (such as the protection of the judiciary branch’s powers from invasion by the legislative or executive branches).

Do either of these situations apply here, such that this is a scenario in which individual liberties are not implicated but for which the court might nevertheless prohibit waiver of the right to an Article III court?

This is essentially the argument raised by those who claim that consent is invalid. For example, in addressing a similar challenge to magistrate judges in the 1980s, writing in dissent in Geras v. Lafaette Display Fixtures, Inc., 742 F.2d 1037 (7th Cir. 1984), Judge Richard Posner argued that the exercise of the judicial power is intrinsic to the Article III judiciary and simply is not delegable—if the action in question walks and quacks like judicial power, then it is judicial power and can be exercised only by a judge and cannot be delegated, even if the parties and the judges themselves agree to allow it. So, for example, Posner argues, courts can employ law clerks, but a judge cannot allow his law clerks to decide cases or enter final judgments, even if both parties agree to pretend like the law clerk is a judge.

Although Article III, section 1 does not say in so many words that the judicial power of the United States shall be exercised by judges rather than by bailiffs, criers, and other court employees, the implication is unmistakable. The judges can have assistants who are not themselves judges, but cannot just hand over their authority to those assistants. If they do, the assistants become judges–judges whose conditions of employment violate Article III. A district judge cannot tell his law clerk, “You try this case–I am busy with other matters–and render judgment, and the losing party can if he wants appeal to the court of appeals.” The judge cannot do this even if the parties consent, and even though the statute authorizing federal district judges to appoint law clerks (28 U.S.C. Sec. 752) does not specify the duties of law clerks. In my example the law clerk is acting as a judge, though not called a judge; and the authors of Article III could not have intended to guarantee federal judges life tenure and assured compensation only if they were called “judges.”

As such, he argues, any delegation of the judicial power is a reduction in the judiciary’s powers. As noted, Posner’s views at the time were written in dissent and no circuit court was willing to invalidate the federal magistrate’s statute.

But Posner’s view was indirectly challenged at the time by Anthony Kennedy, then a judge on the 9th Circuit. Writing for an en banc court of the 9th Circuit in Pacemaker Diagnostic Clinic of America v. Instromedix, Inc., 725 F.2d 875 (9th Cir., 1984 (en banc), Kennedy noted that while the judiciary might appear to be delegating its powers by permitting magistrates to decide parties’ cases—with the parties’ consent—the judiciary wasn’t delegating those powers to either of the other two branches of government, nor were they in any way infringing upon the judicial power. Instead, when it comes to magistrate judges (and implicitly bankruptcy judges), district court judges are simply delegating internally to the judicial branch, a power expressly permitted by Article II, section 2 of the Constitution, which provides that “the Congress may by law vest the appointment of such inferior officers, as they think proper, in the President alone, in the Courts of law, or in the Heads of Departments.”

Anticipating the analytical structure later articulated in Stern, then-Judge Kennedy observed that the separation of powers has “two components”: first, as a means to preserve individual rights and second to protect each branch from incursions by the other branches that would undermine the ability of each branch to carry out its responsibilities under the Constitution. As he puts it (p. 537): “One axis reaches to the person affected by government action and encompasses his or her relation to a constitutional branch; the other axis runs from each governmental branch to the others to insure separation and independence in the constitutional structure.”

As to the first “component,” Kennedy observes unambiguously that this treats the right to a federal adjudication by an Article III judge as a “personal right, subject to exceptions in certain classes of cases, to demand Article III adjudication of a civil suit.” (p. 541). In turn, as a personal right, this means that the parties can waive the right by consenting to have their case adjudicated by a non-Article III judge, so long as the second component of the separation of powers is not violated. As Kennedy wrote, “A mandatory provision for trial of an unrestricted class of civil cases by a magistrate and not by Article III judges would violate the constitutional rights of the litigants. Nevertheless, as this aspect of the separation of powers doctrine embodied in Article III is personal to the parties, it may be waived.” (p. 542 (emphasis added)). Moreover, Kennedy emphasized that despite the splintered nature of the opinions in the Supreme Court’s recently decided Northern Pipeline case, the plurality, concurring, and dissenting opinions all implicitly recognized that the absence of the litigants’ consent in the case was a significant factor in its unconstitutionality.

With respect to the second component, Kennedy did not find the structure of magistrate judges to run afoul of fundamental separation of powers concerns by permitting Congress or the President to impinge on the independence and efficacy of the judicial branch. As Kennedy notes, “The standard for determining whether there is an improper interference with or delegation of the independent power of a branch is whether the alteration prevents or substantially impairs performance by the branch of its essential role in the Constitutional system.” If so, then the statute should be invalidated even if the private parties waive the objection.

With respect to magistrate judges, however, the delegation is by Article III judges to other officials appointed by and controlled by the judiciary branch. Thus, it does not reflect an effort by the other branches to exercise control over the judicial function. Given that, delegation of responsibilities by Article III judges to non-Article III judges such as magistrate judges is not a situation in which structure should be invoked as an end in itself to protect the judiciary. Because the other branches are not enlarging their powers at the expense of the judiciary or stripping the judiciary of powers it otherwise would hold, the structural separation of powers concerns are attenuated. In addition, because the judicial branch selects and establishes the fitness of magistrate judges they are not “made directly dependent upon loyalty to officers” of the legislative or executive branches.

I have discussed the reasoning of then-Judge Kennedy’s opinion in Pacemaker Diagnostics in detail for several reasons. First, the structure of the opinion mirrors the “two component” analysis offered by Chief Justice Roberts in Stern and suggests how the Court might weigh those factors. Second, while it is always dangerous to try to read judicial tea leaves, the similarity in the facts between Executive Benefits Insurance and Pacemaker Diagnostic Clinics provides strong evidence of where Justice Kennedy will likely come down. In particular, Justice Kennedy’s willingness to sign on to the majority opinion in Stern strongly suggests that he did not believe Stern to have vitiated the ability of parties to waive their right to adjudication by an Article III judge.

As a matter of pure judicial head-counting, in Stern all four liberal Justices signed on to Justice Breyer’s dissenting opinion, arguing that the bankruptcy court’s power to adjudicate claims was valid, even absent consent by the parties. (Although the dissent in Stern disagreed with the majority opinion by concluding that Pierce Marshall had consented to the jurisdiction of the bankruptcy court, this was just one of several factors that Justice Breyer relied upon). When combined with Justice Kennedy’s previously-expressed views, this suggests that even if the four conservative justices believe consent to be inadequate to permit a case to be heard by a bankruptcy judge there is likely five strong votes for that result. On the other hand, judging from the questioning at oral argument, Chief Justice Roberts seemed to be most skeptical about the ability of parties to consent to non-Article III adjudication, despite his authorship of Stern.

Finally, one question left unresolved by Stern is the fundamental Constitutional basis for the structure of the Bankruptcy Court system itself, a question raised provocatively by Justice Scalia in his opinion. In Northern Pipeline the Court plurality held that the powers of the Bankruptcy Court derived from the “public rights” doctrine, holding that Congress could create courts such as bankruptcy courts to hear public rights cases (those claims created by statute essentially) but not private rights, such as those arising under state common law. Scalia argued in Stern—correctly in my view—that the proceedings in bankruptcy courts were not public rights at all but really multi-party private rights litigation and invited a future challenge to establish the foundation of bankruptcy court jurisdiction on a firmer constitutional basis. Judging from the questioning at oral argument, however, it appears that the Court is unlikely to take up that issue. For those interested in a detailed analysis of the question I strongly recommend this excellent article by Professor Ralph Brubaker, which also contains an excellent discussion of the importance of the Granfinanciera precedent in Stern and what that implies for EBIA.