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Judicial Independence, Autonomy, and the Bankruptcy Courts | The Legal Workshop

Judicial Independence, Autonomy, and the Bankruptcy Courts

Troy McKenzie - NYU School of Law

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Politicians, policymakers, and academics will occupy the foreseeable future debating the appropriate lessons to draw in the aftermath of the recent economic downturn. But few observers would question one lesson that has already come into sharp focus: bankruptcy courts play a central role in modern American life. The past two years have reinforced the power of bankruptcy judges in increasingly dramatic ways. When a bankruptcy court undertook the difficult task of liquidating the collapsed remnant of Lehman Brothers, it marked the height of the financial crisis. When the federal government decided to overhaul two of the three major domestic automobile manufacturers, it opted to do so through the bankruptcy courts. When members of Congress engage in heated debates about stemming the tide of housing foreclosures, their debates center on proposals to allow bankruptcy judges to restructure loans on primary residences for millions of homeowners who cannot meet the obligations of their current mortgage terms—a change in law with the potential to send a large swath of the residential real estate markets through the bankruptcy courts. The resort to the bankruptcy courts, perhaps a natural expedient in a time of economic distress, has raised few eyebrows.

But how much power can we—and should we—grant to bankruptcy judges? The Constitution would appear to require that all federal judges share twin guarantees—undiminishable salary and secure tenure during good behavior. Bankruptcy judges lack those protections, found in Article III of the Constitution, which are taken as the conventional foundations of an independent federal judiciary. Instead, they serve for a term of fourteen years, and they can be removed from office for cause. How, then, can we entrust them with broad powers to adjudicate important disputes without undermining the core values of the federal judiciary? These questions present more than academic concerns, because an essential premise of Article III holds that its protections—tenure and compensation—will best enable the federal judiciary to resist undue interference by political actors. At a time when highly contentious and politically salient matters have landed on the dockets of the bankruptcy courts, it would seem that the judges now most in need of insulation from political influence lack it. To compound the problem, the conventional justifications for the current status of bankruptcy judges rely on basic assumptions that fit poorly with the realities of the bankruptcy court system.

I

The non-Article III status of bankruptcy judges might not seem remarkable at first blush. For there is a long history of adjudication by non-Article III judges in the federal system. But there is also a long history of concern by the Supreme Court and scholars who study the federal courts that the proliferation of non-Article III adjudicators threatens to erode the independence of the federal courts. For that reason, both the Supreme Court and scholars have attempted to police the boundary between the exercise of the “judicial Power of the United States”1 reserved for the Article III courts and the appropriate resolution of disputes by non-Article III tribunals. Bankruptcy has been central to the story of that attempt at line drawing. Indeed, the Supreme Court acted to limit the power of bankruptcy judges out of concern that they do not enjoy the tenure and compensation protections of Article III in its fractured decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., which went so far as to require Congress to restructure the entire bankruptcy court system.

There are, of course, standard accounts for why Article III does not truly require that every decision maker in the federal system enjoy the Constitution’s twin protections. Longstanding case law has allowed a little play in the joints when structuring the federal courts. The first rationale for departures from Article III—a balancing test adopted by the Supreme Court in a series of landmark cases—assumes that non-Article III adjudication is typically appropriate to resolve disputes in discrete, specialized areas of the law. The essence of the Court’s balancing-test cases turns on the breadth and relative importance of the matter to be adjudicated. Disputes presenting narrow questions with little chance to generate much political heat, the cases suggest, can safely be relegated to non-Article III decisionmakers. The second rationale for departing from Article III’s twin protections, grounded in the Court’s doctrine and advanced most forcefully by scholars of the federal courts, holds that appellate review by Article III courts is really the central requirement for structuring the federal courts. The operative assumption of this theoretically elegant approach to the riddle of Article III, then, is that appellate review by the tenured judiciary will control subordinate non-Article III adjudicators.

II

Although pragmatic balancing and theoretical elegance may justify departures from Article III in other areas, neither rationale cleanly supports the continued practice of non-Article III adjudication in bankruptcy. First, while conventional wisdom holds that bankruptcy is a highly specialized area of the law, thereby justifying adjudication by non-Article III judges, that wisdom is deeply flawed. Bankruptcy may be a specialized process, with its own rhythms differing from litigation in other forums, but the substance of bankruptcy cases is not specialized. Bankruptcy judges hear disputes from across the legal spectrum, confronting matters sounding in contract, tort, property, labor, and almost every other area of civil law. It makes little sense to talk of “specialized” or “technical” bankruptcy adjudication when the matters decided by a typical bankruptcy judge are often indistinguishable from the civil disputes on the docket of a federal district judge. The restructuring of a large enterprise such as General Motors involves extraordinarily far-reaching legal and policy choices affecting, among many others, the capital markets, labor unions, and tort claimants. Bankruptcy judges are often called upon to decide sensitive questions of social and economic policy that garner the attention of the public and political actors. Even outside the “mega cases” such as General Motors, the assumption that bankruptcy is specialized and politically unimportant founders on closer inspection. Given the vast number of disputes that bankruptcy judges resolve every year and the broad subject matter of claims raised by those disputes, the Court’s balancing test fits uneasily with the work of bankruptcy judges.

Second, appellate review by Article III courts does not serve as an effective check on bankruptcy judges. The main problem with a reliance on appellate review to sustain the values of Article III is that bankruptcy judges, perhaps more so than any other non-Article III adjudicators in the federal system, are largely autonomous in their decision making. Bankruptcy cases generate very few appeals. That is due in part to doctrinal limitations on such appeals. The very nature of bankruptcy litigation, moreover, places roadblocks in the way of robust appellate review. A bankruptcy case is largely a space for negotiated resolution of disputes. Concerns about delay and cost are heightened in bankruptcy cases, and those concerns increase the pressure on parties to settle well before a bankruptcy judge’s ruling can be challenged on appeal—and often before a bankruptcy judge has issued any formal ruling at all. The structure of appellate review in bankruptcy cases greatly complicates the generation of binding precedent to guide the resolution of future disputes, because it generally takes an appeal to the district court and then to the court of appeals to do so. Simply restructuring the appellate system, however, would not remove the other barrier to effective appellate review in bankruptcy cases: Article III courts have little appetite for entertaining the appeals that do make it out of the bankruptcy courts, even in the most sensitive cases. To put it bluntly, in bankruptcy, the model of a non-Article III tribunal wholly subordinated to a reviewing Article III court is elegant in theory but unavailing in practice.

III

All of this presents a stark question. Do the inadequacies of the standard justifications for non-Article III adjudication in bankruptcy mean that our current system of bankruptcy courts must be abandoned? The short answer is a qualified “no.”

There is a tentative, and perhaps uneasy, case for non-Article III adjudication in bankruptcy. Despite the unpersuasiveness of the dominant explanations for non-Article III adjudication, there are alternative reasons to believe that the current bankruptcy system provides a sufficient level of the attributes valued in Article III courts—principally, but not only, insulation from political pressures. The chief reason lies in the process of appointment to the bankruptcy courts. Bankruptcy judges are largely appointed from the bankruptcy bar and remain highly responsive to it.  And that is, for the most part, a good thing. The courts of appeals run the appointment process, and they have tended to appoint bankruptcy practitioners through a merit selection system that depends heavily on the input of the bankruptcy bar. For related reasons, few bankruptcy judges expect (or even desire) to move to the Article III bench, which reduces their incentive to please the outside political actors who control promotion to those courts. Moreover, the status and quality of the bankruptcy bar in general, and the bankruptcy courts in particular, have risen in tandem in the last thirty years as bankruptcy has regained its place of prominence in law practice. The reputational interests of bankruptcy judges are therefore inward looking, with the creative handling of complex cases viewed favorably by bankruptcy lawyers.

While there is plausible concern that some bankruptcy judges may be unduly responsive to the desires of the bankruptcy bar, that is a far cry from “capture” by an interest group. The organized bankruptcy bar tends to have significant overlap and cohesiveness in its outlook on the proper operation of the bankruptcy courts. That outlook reflects the long history of the bar’s role in superintending reform in bankruptcy law and the bankruptcy process for much of the last century. Bankruptcy judges are responsive to the bankruptcy bar in much the same way that Article III judges are responsive to the politicians, academics, and commentators who are their “audience.” No class of judges is entirely immune from socio-political influence, nor is it clear that such extreme detachment would be preferable, even if it were possible.

Perhaps the greater lesson to take away from this assessment of the bankruptcy courts is that the usual modes of analysis brought to bear on the structural aspects of the federal courts are insufficiently robust. The leading approaches in the case law and the academic literature have tended towards the abstract and the celestial when the real concerns animating Article III require instead detailed, carefully considered judgments about the operation of the judicial process on the ground. At the same time, an assessment of whether an adjudicatory system has run afoul of Article III must look beyond the judges to the full complement of voices in the judicial process, including the bar and other non-judicial actors who play a role in appointing and interacting with the judiciary. We would do well to insist on approaches to Article III questions that look deeper and broader than our conventional accounts permit.

Acknowledgments:

Copyright © 2010 Stanford Law Review.

Troy A. McKenzie is an Assistant Professor of Law at NYU School of Law.

This Legal Workshop Editorial is based on the following Law Review Article: Troy A. McKenzie, Judicial Independence, Autonomy, and the Bankruptcy Courts, 62 STAN. L. REV. 747 (2010).

  1. U.S. CONST. art. III, § 1.

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