The Fourth Circuit ruled that bankruptcy courts “can constitutionally adjudicate cases that would be moot if heard in an Article III court.” More generally, the appeals court said that bankruptcy courts “are essentially unencumbered by Article III’s case-or-controversy requirement.” The extraordinary statements by the appeals court may or may not be dicta.
The September 14 decision by Circuit Judge Julius N. Richardson could be read to mean that the judicial power of bankruptcy and magistrate judges extends beyond constraints in the constitution limiting federal courts to the adjudication of “cases” or “controversies.” If followed elsewhere, the decision also means that decisions by bankruptcy courts in some circumstances may be unreviewable on appeal.
In a footnote, Judge Richardson suggested that the delegation of bankruptcy powers to non-Article III courts may in itself be unconstitutional. If it were so, the same would be true of magistrate judges.
Following discussion of the opinion, we offer commentary by Kenneth N. Klee and Richard B. Levin, both of whom believe the decision was wrongly decided.
The Dischargeability Complaint
A husband and wife hired a contractor to renovate their home. Dissatisfied with results of the work, the couple learned that the contractor was not licensed. They sued in a Superior Court in Washington, D.C., to recover almost $60,000 they had paid the contractor.
While the suit was pending, the contractor filed a chapter 7 petition in Alexandria, Va. The couple filed a proof of claim for the $60,000 and, separately, a two-count complaint. One count sought a declaration regarding the validity of the alleged $60,000 debt, and the second sought a declaration that the debt was nondischargeable.
Without ruling on the validity of the debt, the bankruptcy court held that the debt was dischargeable and dismissed the count on dischargeability. The count regarding validity of the debt remained for later adjudication, meaning that the ruling on dischargeability was not a final order subject to appeal.
Judge Richardson said that the debtor and the couple wanted appellate courts to rule on dischargeability “before deciding whether they should expend the resources to litigate the [validity of the] debt.”
“So,” Judge Richardson said, they “struck a deal” where the couple voluntarily dismissed the count regarding validity of the debt without prejudice, aiming to create a final, appealable order regarding dischargeability. On appeal, the district court upheld the bankruptcy court on dischargeability. The couple appealed to the Fourth Circuit.
Manufactured Finality
Judge Richardson cited Fourth Circuit authority for the proposition that “parties cannot collude to create finality after the fact through a voluntary dismissal without prejudice.” Waugh Chapel S. v. United Food and Com. Workers Union Local 47, 728 F.3d 354, 359 (4th Cir. 2013). He then proceeded to analyze whether the order was indeed final and said that the “appropriate procedural unit for determining finality here is the adversary proceeding.”
Judge Richardson said that the “bankruptcy court’s order [before dismissal of the count on validity of the debt] was thus not final when entered” because “an order dismissing only one claim in a multi-claim adversary proceeding does not amount to a final order.”
Quoting the Fourth Circuit, Judge Richardson said that the parties “cannot ‘use voluntary dismissals as a subterfuge to manufacture jurisdiction for reviewing otherwise non-appealable, interlocutory orders.’” Waugh, supra, 728 F.3d at 359.
If the circuit were to allow an appeal on dischargeability, Judge Richardson said “there would be nothing to stop them from reinstating — and then separately appealing — [the count regarding validity of the claim] down the line.” He therefore held that “the voluntary dismissal did not make the bankruptcy court’s earlier, partial dismissal final,” because the count related to validity of the debt “was still very much alive.”
The Adversary Proceeding Wasn’t Moot
The couple characterized the complaint as seeking authority to pursue collection of the debt outside of bankruptcy. Once the bankruptcy court decided that the debt was dischargeable even if valid, the couple contended that the count in the adversary proceeding regarding validity of the debt became moot because they could not win “any effectual relief” to pursue the debt outside of bankruptcy. Mootness of the validity count, according to the couple, meant that the order on the remaining count about dischargeability was final.
Evidently, Judge Richardson believes there’s no such thing as mootness in bankruptcy court.
“Mootness is an Article III doctrine, and bankruptcy courts are not Article III courts,” Judge Richardson said. Because bankruptcy courts are not Article III courts, he cited Stern v. Marshall for the idea that “they do not wield the United States’s judicial Power.” Therefore, he said, bankruptcy courts “can constitutionally adjudicate cases that would be moot if heard in an Article III court.”
While a bankruptcy case must satisfy Article III standards when referred by district courts to bankruptcy courts, Judge Richardson said that Article III must again be satisfied when the case returns to district court. However, “that limit on the district court’s authority does not constrain the bankruptcy court. Once a case is validly referred to the bankruptcy court, the Constitution does not require it be an Article III case or controversy for the bankruptcy court to act.” [Emphasis added.]
Having ruled that Article III does not constrain bankruptcy courts, Judge Richardson next considered whether statutes preclude bankruptcy courts from deciding matters that are moot.
Judge Richardson cited Section 157(b)(1) for saying that bankruptcy courts may hear and determine “all” bankruptcy cases and “all” core proceedings, “[n]ot just those that could be fully adjudicated in district court.”
Article III constraints, such as mootness, “do not apply to [bankruptcy courts] as a matter of constitutional law,” Judge Richardson said. “They only apply,” he said, “if Congress said so in a statute.” Finding no statute, he held that the “bankruptcy court could still adjudicate it.”
Judge Richardson held that voluntary dismissal of count for validity of the debt “did not create a final order under § 158(a)” because dismissal was without prejudice, making the claim “legally viable.” He vacated and remanded the order of the district court, because it had “reviewed a non-final order.”
In the last paragraph of his decision, Judge Richardson said that bankruptcy courts “are essentially unencumbered by Article III’s case-or-controversy requirement.”
Commentary
The opinion presents essentially two holdings: (1) Parties may not manufacture finality, and (2) Article I tribunals are not encumbered by the limitations on justiciability imposed by Article III.
The first holding is a reiteration of Waugh. Notably, however, the Fourth Circuit in Waugh cited the black letter law but proceeded to follow the Eighth Circuit which held that the appeals court could “deem ambiguous voluntary dismissal . . . to be with prejudice” and consider the merits of the appeal. Waugh, supra., 728 F.3d at 359.
The second holding has broad implications. If adopted in other circuits, bankruptcy courts could rule on disputes that have become moot, and the rulings would be immune from appellate review. Question: Would rulings of the sort be entitled to res judicata or collateral estoppel effect in state or federal courts?
The second holding would also seem to mean that bankruptcy court may issue advisory opinions.
To this writer, it’s a close call on whether the second holding is dicta.
Although not constrained by the Constitution to avoid ruling on moot questions or advisory opinions, may bankruptcy courts in the Fourth Circuit nonetheless abstain?
In the Fourth Circuit, magistrate judges similarly would not be constrained by Article III justiciability standards. One assumes that magistrate and bankruptcy judges would both abstain from exercising jurisdiction beyond the limits of Article III, if authorized to do so.
Constitutionality of the Bankruptcy System
After ruling that bankruptcy courts may constitutionally adjudicate cases that would be moot in Article III courts, Judge Richardson wrote a footnote saying:
The harder question may be whether [bankruptcy courts] can constitutionally adjudicate cases that are within the judicial power and so could be heard in Article III courts.
To the writer, the quotation seems to suggest that the reference of bankruptcy power to bankruptcy courts may be unconstitutional. However, Judge Richardson said in the footnote that “we need not dive into this question.”
Scholarly Commentary
Kenneth N. Klee provided ABI with the following commentary:
Because the bankruptcy court is not actually a court at all but is a unit of the United States District Court, it is inconceivable to me that the jurisdiction of a non-tenured judge could be greater than that of a tenured judge.
The jurisdiction is derivative. That’s what the concept of withdrawal of the reference is all about. I understand that to a small, uninformed mind, one could reason that the constraints of Article III don’t apply to a non-Article III judge, but the notion that by referring matters to non-tenured judges, you can expand jurisdiction is somewhat absurd. Even more so in the criminal context with magistrate judges.
Richard B. Levin provided ABI with the following commentary:
In my view, the dischargeability determination mooted [the count regarding validity of the debt], even though it did not moot the proof of claim. The proof of claim seeks to share in the estate; the adverse party is the trustee, not the debtor.
[The count on validity of the debt] seeks to collect from the post-discharge debtor, which becomes a moot case once the debt is declared dischargeable. But the [proof of claim] is still live, unless perhaps it’s a no-asset case, but that does not affect the mootness (or not) of the count I claim against the debtor [seeking a declaration regarding validity of the debt].
Therefore, the dismissal of [the count regarding validity of the debt] rendered the order final, as in the Affinity Living Group case the court cites, and the district court and the court of appeals should have had jurisdiction over that final order.
The only way the Article III courts did not have finality jurisdiction was if the case was not moot in the bankruptcy court or, as the court of appeals puts it, if the bankruptcy court could still adjudicate the case even though it became moot. (Of course, why would anyone want to adjudicate a moot case? That was the parties’ point in their stipulation.)
Therefore, the Article III language in the court of appeals opinion is not dicta; it is holding. It was necessary to the decision, which makes it even more troubling than if it were dicta. In short, I think the court did not really understand the court and jurisdictional system that Congress set up after Marathon.
Another troubling part of this decision, even though not so troubling as the Article III point, which would give the bankruptcy courts unreviewable authority over a whole range of moot and advisory issues, is that the decision effectively requires parties to keep fighting over something that doesn’t matter so they can appeal something that does matter.
Messrs. Klee and Levin were counsel for committees in the House and Senate and were among the principal draftsmen of the Bankruptcy Code and the Bankruptcy Reform Act of 1978. Mr. Klee is partner emeritus at KTBS Law LLP in Los Angeles, and Mr. Levin is a partner with Jenner & Block LLP in New York City.
Further Commentary
This writer believes that the Fourth Circuit may have reached the right result for the wrong reason.
Was it a subterfuge to dismiss the count in the complaint on validity of the debt while leaving proof of claim alive in the claims register? Doesn’t survival of the proof of claim mean that the creditors had not in reality dismissed the count based on the alleged debt?
This writer submits that the appeal court could have and perhaps should have ruled that survival of the proof of claim in itself kept disposition of the adversary proceeding from becoming a final order. Focusing on the implications arising from the proof of claim would have obviated the need to discuss the bankruptcy court’s lack of constraints under Article III.
This writer hopes that someone files a petition for rehearing en banc, permitting scholars to submit amicus briefs regarding Article III constraints on bankruptcy and magistrate judges.
The Fourth Circuit ruled that bankruptcy courts “can constitutionally adjudicate cases that would be moot if heard in an Article III court.” More generally, the appeals court said that bankruptcy courts “are essentially unencumbered by Article III’s case-or-controversy requirement.” The extraordinary statements by the appeals court may or may not be dicta.
The September 14 decision by Circuit Judge Julius N. Richardson could be read to mean that the judicial power of bankruptcy and magistrate judges extends beyond constraints in the constitution limiting federal courts to the adjudication of “cases” or “controversies.” If followed elsewhere, the decision also means that decisions by bankruptcy courts in some circumstances may be unreviewable on appeal.
In a footnote, Judge Richardson suggested that the delegation of bankruptcy powers to non-Article III courts may in itself be unconstitutional. If it were so, the same would be true of magistrate judges.