Judges React to Fire and Brimstone in Wellness Case

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By Stephanie Cumings

Nov. 20 — Bankruptcy judges are still asking themselves “who are we and what can we do” years after a U.S. Supreme Court decision that called their powers into question, Judge Elizabeth S. Stong of the U.S. Bankruptcy Court for the Eastern District of New York said Nov. 20.

“Imagine if you had to wonder about that every morning on your way to work,” Stong said.

Stong was joined by other bankruptcy judges and practitioners at a panel called “Bankruptcy for Breakfast” at the American Bar Association's Business Law Section Fall Meeting held at in Washington.

The most recent Supreme Court case on this issue included a fiery dissent from Chief Justice John Roberts, and the judges expressed surprise that the Chief Justice sees them as such a threat to the integrity of the judicial system.

Really Unusual Supreme Court Behavior

In 2011, the Supreme Court's decision in Stern v. Marshall, 2011 BL 165774, 131 S. Ct. 2594 (U.S. 2011) called into question whether bankruptcy courts have the constitutional authority to hear so-called “core” claims, which the Bankruptcy Code gives them the explicit authority to adjudicate (23 BBLR 817, 6/30/11). In its last term, the Supreme Court held in Wellness Int'l Network, Ltd. v. Sharif, 2015 BL 164523, 135 S. Ct. 1932 (2015), that parties can consent to having a bankruptcy court hear claims that it might not otherwise have the power to decide.

Danielle Spinelli of WilmerHale, Washington, said that Stern “set the bankruptcy world into a tizzy and no one really understood what its implications were going to be and we've been coping with that ever since then.” Spinelli said the court did something “really, really unusual” in Wellness by skipping over the antecedent issue of whether the claim in the case was a core claim so that it could instead reach the constitutional question, something she said the justices “never, ever do.”

“I think they knew that if they didn't address it in this case, there wasn't another good vehicle coming along any time soon and it really, really needed to be addressed,” Spinelli said.

Practical Impacts

Spinelli said it was worth noting that Justice Sonia Sotomayor, who wrote the majority opinion in Wellness, is the only justice to have served on a district court, and so she has a better understanding of the practical impact of these cases. Judges feared that if the high court didn't find that consent was permissible, it would upset the balance of work between the bankruptcy and district courts and have a devastating impact on the magistrate system.

“What we've seen in these cases is a pendulum swinging back and forth from a highly formalist view to a much more pragmatic view,” Spinelli said. “It's not really a liberal and conservative divide even though it may look that way in the current court.”

Spinelli added that the court justified its ruling in Wellness in part because bankruptcy courts can only hear a “narrow class of common law claims,” an argument she called “dubious.” She said bankruptcy courts can actually end up hearing a very wide variety of claims.

Fall of Western Civilization

Stong said she had never seen a majority and a dissent with such “dramatically different” tones as those in Wellness.

“You read Justice Sotomayor and you sit up straight and feel pretty good about what you're doing and then you read until the end and what Chief Justice Roberts writes and you think ‘Oh my gosh, I didn't realize that my very existence was a threat to the integrity of the third branch,'” Stong said. “It is an extraordinary difference of perspective.”

In his dissent, Roberts criticized the majority for not “resist[ing] encroachment by the [l]egislature,” referring to the Bankruptcy Code allowing consent even when it may not pass constitutional muster.

“Instead it holds that a single federal judge, for reasons adequate to him, may assign away our hard-won constitutional birthright so long as two private parties agree,” Roberts said.

“I didn't realize that every time I do a fraudulent conveyance case that western civilization was about to fall down around our ears,” Judge Frank Bailey of the U.S. Bankruptcy Court for the District of Massachusetts added.

Michael Rubenstein of Liskow & Lewis, Houston, said that throughout the cases on this issue, Roberts has been consistent about his views on this “existential threat to the judiciary,” while other justices have focused on a more practical approach.

Despite the various Supreme Court rulings on this issue, Stong said that as a practical matter, not much has changed about the way bankruptcy courts conduct themselves.

Other Trends

Stong noted that new bankruptcy filings have continued to fall across the country, but that she and her colleagues “don't feel any less busy.” Nevertheless, she said “litigation seems to be up” because cases are more contested and complex. She thought this might in part explain the rise in Supreme Court cases.

“It used to be really unusual if there were one or two bankruptcy cases coming up to the Supreme Court,” Stong said. “Now I think it would be unusual if there weren't three, four, or more.”

Bailey said that the drop in filings serves as a reminder of just “how ridiculous things were in 2009 and 2010” in the wake of the housing collapse. Judge Philip Brandt, a retired bankruptcy judge who was recently re-called to assist the U.S. Bankruptcy Court for the Central District of California with its heavy caseload, added that filings aren't going to stay down forever, and staff cuts at bankruptcy courts that seems reasonable now may hurt the courts in the future.

Stong also noted that the “internationalization” and “cross-border nature” of bankruptcy cases is increasing, and that lawyers may need a “broader range of competencies than in the past.”

The panelists also discussed the fact that some courts have been calling into question the doctrine of equitable mootness, such as the Third Circuit in In re One2One Commc'ns., 2015 BL 232065 (3d Cir. 2015) (27 BBLR 1013, 7/23/15). When a party tries to appeal a Chapter 11 plan confirmation, court's often deny the appeal under equitable mootness, meaning relief can't be granted without upsetting a plan that's already been substantially consummated.

Rubenstein said this debate has been going on “behind the scenes for quite a while” and many think the doctrine is overused.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com