Judicial Authority: Bad for Bankruptcy Judges, Great for Arbitrators

Since its decision in Marathon Pipeline, the Supreme Court expressed a continued fear of judicial overreach by the legislative branch through the bankruptcy courts. In the years following that decision, the specter of overreach influenced the Court’s decisions regarding the adjudicatory authority of bankruptcy courts. While the concerns expressed in Marathon Pipeline, and the subsequent cases dealing with bankruptcy jurisdiction, have caused the Court to worry over the delegation of Article III adjudicatory power, that same Court has encouraged a wildly expansive reading of the Federal Arbitration Act (“FAA”). The same fear of an improper delegation of adjudicatory power seems to give the Court no hesitation when dealing with arbitrators. The Supreme Court’s continued limitation of the power of bankruptcy courts seems misplaced when compared to the Court’s increased willingness to allow an expanded delegation of authority to non-Article III adjudicators.

I. Bankruptcy Jurisdiction and the Ever-Present Threat of Judicial Encroachment[1]

A. Marathon Pipeline: Watch out, Congress is out to get you.

In its first jurisdictional case after the Bankruptcy Reform Act of 1978,[2] the Supreme Court, in Northern Pipeline Constr. Co. v. Marathon Pipeline Co., ruled that Congress, through 28 U.S.C. § 1471, impermissibly vests judicial power to non-Article III adjudicators.[3] The opinion begins by highlighting the importance of the Constitutional structure establishing the three separate branches of government and the necessity of an independent Judicial Branch.[4] The decision goes on to emphasize the Court’s fear that Congress would “supplant completely our system of adjudication in independent Article III tribunals and replace it with a system of ‘specialized’ legislative courts.”[5] Raising the specter of judicial overreach, the Court reasons giving the bankruptcy courts a broader jurisdictional reach would “eviscerate the constitutional guarantee of an independent Judicial Branch of the Federal Government.”[6]

In the mind of the Justices, non-Article III courts cannot make determinations and findings of fact without breaching the strict separation of powers.[7] While the later decision of Wellness Int’l Network, Ltd. v. Sharif[8] mitigated some of the damage done by Marathon Pipeline, the Court laid the groundwork for further erosion of the adjudicative power of bankruptcy judges. Surprisingly, d-list celebrity Anna Nicole Smith would provide the catalyst for further limitations on bankruptcy court jurisdiction.

B. Stern: Adding tar to muddy waters.  

The words of Charles Dickens provide both a pithy introduction and grim foreshadowing[9] to the Majority’s opinion in the case of Stern v. Marshall.[10] Initially, the Court’s decision appeared to uphold the adjudicatory powers of bankruptcy courts under 28 U.S.C. § 157. This apparent victory for the bankruptcy courts proved to be ephemeral. While § 157 permitted bankruptcy judges to enter a final judgement on “core proceedings,” the Court held that Article III did not.[11] True to form, the majority warns of the impending threat that the power of the judiciary may be divested by the other branches of government.[12] Using this as a rationale, the Court held that bankruptcy courts cannot be allowed to enter final judgments solely because they were designated as “core” proceedings.[13]

In closing, the majority opinion asked itself if it was worth making a fuss over non-Article III judges entering final judgements on state law claims.[14] The answer was a short but emphatic yes.[15] Evidently, even the slightest intrusion on the powers of the judiciary can open the door to “illegitimate and unconstitutional practices.”[16] These grave concerns appear to be well intentioned, if not a little overstated. But, when compared to the same Court’s line of reasoning in major arbitration cases, this fear of the erosion of judicial integrity rings hollow.

II. Arbitration: Nothing to worry about here . . .

Based on the reasoning of Marathon Pipeline and Stern, the Supreme Court’s attitude towards the adjudication of a claim outside of an Article III court appears to be one prone to fear and heightened scrutiny of even the slightest encroachment on judicial power. Oddly, this same fear does not seem to extend to a body of law that gives authority to arbitrators, who, in some cases, may not even be attorneys. Yet, over the past 30 years, the Supreme Court has consistently upheld and expanded the adjudicatory power of these non-Article III judges.

Justice Kavanaugh’s recent opinion in Henry Schein, Inc., v. Archer and White Sales provides a clear example of the Supreme Court’s carte-blanche grant of judicial power to arbitrators by allowing them to adjudicate issues that may be “wholly groundless.”[17] Prior to this decision, some federal courts ignored unmeritorious arbitrability provisions. On its face, this seems like a reasonable exercise of judicial oversight for meritless disputes. The Supreme Court begged to differ. Justice Kavanaugh held “courts must enforce arbitration contracts according to their terms,” and that parties are allowed to have an arbitrator decide not only the merits, but also the “gateway questions of arbitrability.”[18] Therefore, when parties contract to delegate the issue of arbitrability to an arbitrator, courts have no authority to make that decision, even if the court believes the agreement to be wholly groundless.[19]

Prior decisions further highlight the Supreme Court’s extreme deference to arbitrators.[20] When a contract contains an arbitration clause, there is a presumption of arbitrability; thus, “doubts should be resolved in favor of coverage,”[21] and “courts must allow decisions to go to arbitration, indeed[,] even if [arbitrability] appears to the court to be frivolous.”[22] Essentially, the Court refuses to allow any front-end review of arbitrability even if there is no possible underlying merit to the claim. In Marmet Health Care Ctr., Inc. v. Brown, the Court confirmed the longstanding precedent that FAA arbitration trumps even a state’s public policy considerations. Essentially, lower courts must resolve questions regarding the scope of arbitration agreements in favor of arbitration, even where state law conflicts.[23] In addition to these troubling trends, the Supreme Court has held that arbitration clauses that contractually require individual arbitration can bar a party from accessing a court in its entirety.[24]

III. Shocking Lack of Judicial Oversight in Arbitration

Despite its seemingly overwhelming fear of overreach, the Supreme Court remains reluctant to allow judicial oversight over arbitration provisions, including those that blatantly disregard state and federal precedent. Because the Supreme Court reads the FAA to strictly limit judicial review, lower courts only overturn roughly 10% of arbitration awards.[25] Most efforts by courts to challenge the use of mandatory arbitration have faltered, and congressional attempts to limit the scope of these clauses are, at best, a patchwork of miscellaneous attempts rather than the safety net necessary to ensure proper oversight of an arbitrator’s decisions.[26]

IV. Conclusion

The Supreme Court’s extreme deference to arbitrators is in stark contrast to its trepidation related to the exercise of bankruptcy jurisdiction. In the bankruptcy context, the Court expresses the perpetual fear of congressional overreach and the misappropriation of judicial power. However, the same Court is content to let a non-Article III adjudicator determine the substantive rights and responsibilities of parties that expressed only the smallest degree of consent. Somehow, the signing of a contract with a boiler plate arbitration agreement wipes away any concerns over abuse of judicial power.