In potential practical significance, no case on the U.S. Supreme Court’s docket in October Term 2013 is more important than Executive Benefits Insurance Agency v. Arkison. The question before the Supreme Court is whether a bankruptcy court can issue a final judgment in a matter outside of its authority — with consent of the parties.
The effects of this decision are potentially enormous for civil litigation in federal district courts.
Two years ago in Stern v. Marshall, the Supreme Court ruled that bankruptcy courts cannot constitutionally issue a final judgment over state law claims. The case received attention because it involved celebrity Anna Nicole Smith, who married a very rich man in Texas, J. Howard Marshall. Although Marshall had lavished gifts on Smith, his will left her nothing.
Smith, referred to in this litigation as Vicki Lynn Marshall, filed for bankruptcy. Marshall’s son, Pierce Marshall, filed a claim in her bankruptcy proceeding and contended that Vicki had defamed him in asserting that Pierce had exercised undue influence over his father to deny her an inheritance. Vicki counterclaimed against Pierce, asserting that he had tortiously interfered with her recovery under the estate.
The bankruptcy court ruled in favor of Vicki on her counterclaim and awarded her $449 million in compensatory damages and $25 million in punitive damages. The federal district court affirmed the ruling in favor of Vicki, but reduced her recovery to $88 million, evenly divided between compensatory and punitive damages.
In between the ruling by the bankruptcy court and that of the district court, a probate court in Texas decided entirely in favor of Pierce. Thus, there was what is known as an issue of preclusion. If the bankruptcy court had the authority to issue a final judgment, then the Texas probate court’s ruling was precluded and Vicki — or more precisely her estate since she is no longer alive — wins. But if the bankruptcy court lacked authority to issue a final judgment, then Pierce — or more precisely his estate since he is no longer alive — wins.
The Supreme Court ruled, 5-4, in favor of Pierce. Chief Justice John Roberts wrote the opinion for the court and held that it violated separation of powers for Congress to allow non-Article III bankruptcy judges — those who lack life tenure and the protection of their salary given to the judiciary by Article III of the U.S. Constitution — the ability to issue a final judgment over state law claims. The court rejected Justice Stephen Breyer’s argument in the dissent that the result would create a practical nightmare for the federal district courts.
Immediately after Stern v. Marshall was decided, I said that the significance of the case would turn on whether consent can cure the problem. In the vast majority of instances, the parties will consent to allow the bankruptcy court to issue a final judgment. But if consent is not sufficient, then the implications are enormous. A significant percentage of bankruptcy cases have state law claims and other matters in which the bankruptcy court will have to make reports and recommendations to the district court. As Breyer feared, cases will ping-pong back and forth between the bankruptcy courts and the district courts.
The workload increase for already overtaxed federal district courts will be great. As Breyer pointed out, “[T]he volume of bankruptcy cases is staggering, involving almost 1.6 million filings last year, compared to a federal district court docket of around 260,000 civil cases and 78,000 criminal cases.”
POTENTIAL WORKLOAD INCREASE
But the implications for the federal judicial system go far beyond that. Federal magistrate judges issue final judgments in civil cases, including holding jury trials, with the consent of the parties. Magistrate judges, like bankruptcy judges, are non-Article III judges who sit for fixed terms. If consent is not sufficient, no longer could they decide state law matters. The workload increase for federal district courts would be dramatic. There is no clear answer to whether consent is sufficient to allow a bankruptcy court to issue a final judgment over state law claims.
On the one hand, it is possible to draw a distinction between subject-matter jurisdiction, which cannot be gained by consent, and the authority to issue a final judgment, which arguably can be gained by consent. Arbiters, who are not Article III judges, have this authority all the time.
On the other hand, both limits on subject-matter jurisdiction and limits on the authority to issue a final judgment are based on Article III of the Constitution. Both are structural constitutional limits and structural limits cannot be overcome by consent.
Not surprisingly, there is a split among the federal courts of appeals as to whether a bankruptcy court can issue a final judgment with consent of the parties. Appeals courts in the Fifth Circuit, the Sixth Circuit and the Seventh Circuit have said that consent is not sufficient to cure a Stern v. Marshall problem. The Ninth Circuit, though, came to the opposite conclusion and held that even implied consent is sufficient.
A case about bankruptcy court jurisdiction will not make headlines, but for federal judges and lawyers who practice in those courts, no case will be more closely watched than Executive Benefits v. Arkison. It likely will be argued in January 2014 and decided in the spring.
Erwin Chemerinsky is dean and Raymond Pryke Professor of First Amendment Law at University of California, Irvine School of Law.