At the end of the term, the Supreme Court decided a nonbankruptcy case that puts to rest several bankruptcy questions arising in the wake of Northern Pipeline, Granfinanciera and Stern v. Marshall.

In this writer’s view, SEC v. Jarkesy, 144 S. Ct. 2117, 219 L. Ed. 2d 650 (June 27, 2024), tells us definitively that a defendant in a fraudulent transfer suit brought under Section 548 is entitled to a jury trial in district court. Of perhaps greater significance, there is no right to a jury trial or final adjudication in district court in claims allowance, even if the creditor were entitled to a jury trial had there been no bankruptcy.

Although fair minds might differ, this writer also reads Jarkesy to mean that the bankruptcy court may impose sanctions for violations of the discharge injunction and the automatic stay as long as the sanctions are civil, not criminal.

Dodd Frank and Jarkesy

In the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, Congress for the first time gave the Securities and Exchange Commission the power in administrative proceedings before an administrative law judge (ALJ) to impose penalties for violations of securities law.

Invoking Dodd Frank and proceeding before an ALJ, the SEC imposed a $300,000 civil penalty and other sanctions on an individual for violations of antifraud provisions of securities laws. The Fifth Circuit reversed in a divided opinion, invoking Granfinanciera, S. A. v. Nordberg, 492 U. S. 33 (1989). Because the enforcement action was not conducted in federal district court, the appeals court found a violation of Seventh Amendment jury trial rights.

The Supreme Court granted certiorari and affirmed on June 27 in a 6/3 opinion by Chief Justice John G. Roberts, Jr. Justice Sonia Sotomayor penned a dissent joined by Justices Elena Kagan and Ketanji Brown Jackson. Justice Neil M. Gorsuch wrote a concurring opinion joined by Justice Clarence Thomas. The three opinions totaled 98 pages.

Granfinanciera Clarified

For the majority, the Chief Justice ruled that the so-called public rights exception to the Seventh Amendment did not apply for reasons explicated in Granfinanciera. But first, he explained why there were Seventh Amendment rights.

Citing Granfinanciera, the Chief Justice said that the “Seventh Amendment extends to a particular statutory claim if the claim is ‘legal in nature.’” Furthermore, it is “immaterial” whether the claim is statutory.

Because some claims are both equitable and legal in nature, the Chief Justice said that “the remedy is all but dispositive.” Given that the SEC’s civil penalties were to punish and deter, not compensate, he concluded that the remedy was at common law and conferred jury trial rights.

Even though jury trial rights were in play, the government argued that the public rights exception applied and deprived the offender of Seventh Amendment rights.

Citing Granfinancera, Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50 (1982), and Stern v. Marshall, 564 U. S. 462 (2011), the Chief Justice said that the Court has “repeatedly explained that matters concerning private rights may not be removed from Article III courts.” He went on to say that “the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory” if the “suit is in the nature of an action at common law.”

In an understatement reflecting the Court’s conflicting jurisprudence, the Chief Justice conceded that the “Court ‘has not “definitively explained” the distinction between public and private rights,’ and we do not claim to do so today.”

Granfinanciera held the key to the decision because it was a case in which Congress purported to take away jury trial rights by installing a claim for fraudulent transfer in Article I bankruptcy courts even though “fraudulent conveyance [actions] were well known at common law,” the Chief Justice said. Digging deeper into Granfinanciera, he said that fraudulent transfer actions, unlike the claims-allowance process, “were not ‘closely intertwined’ with the bankruptcy process.”

Saying that “Granfinanciera effectively decides this case,” the Chief Justice affirmed the Fifth Circuit because a “defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.”

Observations

The opinion of the Court effectively says that the bankruptcy claims-allowance process implicates public rights because the rights and recoveries of other creditors are affected by the outcome of claim objections. Jarkesy eliminates any arguments that might remain about the right to a jury in deciding the validity or amount of claims.

The Court’s discussion of Granfinanciera also eliminates any idea that fraudulent transfer suits could be litigated to finality in bankruptcy court if the defendant has neither filed a claim nor waived an objection to the jurisdiction and power of the bankruptcy court.

When it comes to the right to a jury trial for violations of the automatic stay or the discharge injunction, the implications of Jarkesy are more opaque. In Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), the Court held unanimously that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” However, Taggart does not deal with jury trial rights.

Citing Tull v. United States, 481 U. S. 412, 422 (1987), the Chief Justice indicated in Jarkesy that public rights are implicated when the relief is “solely to ‘restore the status quo.’” By that token, civil sanctions for violations of discharge or the automatic stay seem to involve the restoration of the status quo, disabling a violator from claiming the right to a jury trial.

Some might argue that the invocation of public rights should not apply to the imposition of punitive damages under Section 362(k) for the willful violation of a stay protecting an individual debtor. This writer believes that the more draconian sanctions in Section 362(k) were imposed by Congress to ward off creditors’ temptations to pursue individuals who, given their bankrupt status, lack the wherewithal to act against violators.

Whatever the sanctions may be for violation of the automatic stay, they are “closely intertwined” with the bankruptcy process because the automatic stay and discharge are the principal remedies afforded debtors under the Bankruptcy Code. Being “closely intertwined” with the enforcement of debtors’ remedies, sanctions seem to this writer to fall within the public rights exception.