By: Donald L Swanson
Provisions of the Bankruptcy Code and the Federal Arbitration Act can collide. How those collisions are to be sorted out remains an open question.
The U.S. Supreme Court recently issued an opinion on remedies for a violation of the U.S. Constitution’s uniformity requirement for bankruptcy laws[Fn. 1]; and
- a few weeks earlier, the U.S. Supreme Court issued an opinion on an arbitration subject under the Federal Arbitration Act.[Fn. 2]
Lots of lower courts have struggled with conflicts between competing requirements of the Bankruptcy Code and of the Federal Arbitration Act, but the U.S. Supreme Court has yet to address any such conflicts issue; and
- the Supreme Court’s silence appears to be a good thing for bankruptcy law, because the U.S. Supreme Court almost always rules in favor of the Federal Arbitration Act in other contexts.
Constitutional Requirement–Uniformity
Here’s something I don’t understand:
- of all the lower court opinions addressing conflicts between the Bankruptcy Code and the Federal Arbitration Act, I have yet to see one focusing on the U.S. Constitution’s uniformity requirement for bankruptcy laws[Fn. 3].
The uniformity argument is simple. It goes like this:
- the standard for judicial review of an arbitration award, under the Federal Arbitration Act, is nothing more than a rubber stamp[Fn. 4];
- so, when an arbitration award applies bankruptcy law, there is no way to assure on judicial review that the bankruptcy law is being applied in a uniform manner; and
- on bankruptcy issues, therefore, the Constitution’s uniformity requirement favors bankruptcy courts with normal standards of review all the way to the Supreme Court, over arbitration and its rubber stamp review.
That’s it. That’s the argument. Instead of uniformity, arbitrations involving bankruptcy laws give us nonconformity!
U.S. Supreme Court Precedent
One hundred eighty years ago, Justice John Catron explained how a lack-of-judicial-review violates uniformity, under the Bankruptcy Act of 1841, like this[Fn. 5]:
- The 1841 act is administered by more than thirty judges, acting separately;
- A debtor may not appeal to the circuit court (save in the single case of a refusal to finally discharge the bankrupt from his debts), and no debtor appeal is allowed to the Supreme Court;
- A creditor may not appeal anything in any bankruptcy case, either from the district court to the circuit court or to the Supreme Court;
- It follows that the Supreme Court has no power to make uniform the conflicting constructions of the bankruptcy law;
- “No law that Congress ever passed has in it to a greater degree the elements of various construction and confusion than the bankrupt law of 1841”—thirty judges act separately, and all are exempt from the revising power of the Supreme Court, which exists to produce “uniformity of decision and construction”; and
- “Instead of providing a uniform system of bankruptcy, the 1841 bankruptcy act has become, by the conflicting constructions put upon it, little more uniform than the conflicting state insolvent laws.”
Conclusion
Here’s hoping the Constitution’s uniformity requirement for bankruptcy laws makes its way into opinions on conflicts between the Bankruptcy Code and the Federal Arbitration Act.
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Footnote 1. Article I, Section 8, Clause 4 of the U.S. Constitution provides: “The Congress shall have power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States”(emphasis added). That opinion is U.S. Trustee v. John Q. Hammons, Case No. 22-1238 (decided June 14, 2024).
Footnote 2. That opinion is Coinbase, Inc. v. Suski, Case No. 23-3 (decided May 23, 2024), and its essential holding is this: “Where parties have agreed to two contracts—one sending arbitrability disputes to arbitration, and the other either explicitly or implicitly sending arbitrability disputes to the courts—a court must decide which contract governs” (Syllabus).
Footnote 3. It’s entirely possible that many such opinions exist and that I simply haven’t seen them—or don’t remember seeing them. If so . . . my apologies in advance!
Footnote 4. 9 U.S.C. § 10(a), for example, provides: “In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
Footnote 5. Justice Catron’s argument is presented in Nelson v. Carland, 42 U.S. 265 (1843).
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