Bankruptcy clause of the US Constitution: on the move!

Congress shall have the power to . . . implement . . . Uniform Bankruptcy Laws Across the United States.”

– Bankruptcy clause of the United States Constitution (art. 1, sect. 8, cl. 4).

An Old Series of Defeats—Article III

We all know the difficulties of bankruptcy, in the Supreme Court of the United States, when the bankruptcy clause of the American Constitution is opposed to the provisions of Article III of the Constitution on the “judicial power”: the bankruptcy clause lose (see, for example, Northern Pipeline in 1982Granfinanciera in 1989, and Stern vs. Marshall in 2011).

But even this series of losses is starting to turn in the right direction (in 2014 and 2015) with:

  • Benefits vs. Arkison in 2014 (the opinion of a bankruptcy court is legitimized by article III of a court de novo appellate review); and
  • Wellness International v Sharif in 2015 (bankruptcy courts can decide Back disputes by consent of the parties).

A three-game winning streak against other clauses

Last week, the United States Supreme Court issued its Siegel versus Fitzgerald opinion (summarized below) in which the bankruptcy clause prevails – for the third consecutive time – when opposed to clauses of the United States Constitution other than Article III.

The following is a summary of how, in each of these three cases, the bankruptcy clause prevails.

Association of Railway Trade Union Officials. against Gibbons, 455 US 457 (1982), involves a railroad going out of business due to a railroad strike and then going bankrupt. During the bankruptcy, Congress enacts a law requiring the debtor to pay $75 million to its employees as administrative expenses – Congress does this, apparently, under the Commerce Clause of the Constitution.

In response, the Supreme Court declared the law unconstitutional because it violated the uniformity requirement of the bankruptcy clause:

  • Congress cannot circumvent the uniformity requirement of the Bankruptcy Clause by enacting legislation under the Commerce Clause of the Constitution; and
  • The law in question is enacted under the bankruptcy clause because:
    • The bankruptcy clause contemplates an adjustment of a defaulting debtor’s obligations, extends to all cases where the law distributes the debtor’s assets among creditors, and includes the power to breach contractual obligations (which states are prohibited from doing); and
    • The law requires the payment of claims of the debtor’s employees against the debtor’s assets as administrative expenses.

Central Virginia Community College vs. Katz, 546 US 356 (2006), involves a trustee in bankruptcy recovering preferential transfers from a state agency. The agency defends itself by citing sovereign immunity rights established in the Eleventh Amendment to the US Constitution.

The United States Supreme Court rejects the defense of sovereign immunity. Here’s why:

  • the framers of the Constitution, in enacting the bankruptcy clause, understood that the power to enact bankruptcy legislation includes the power to subordinate the sovereignty of the state;
  • by ratifying the bankruptcy clause, States consented to a subordination of their sovereign immunity in bankruptcy proceedings; and
  • Congress may, in enacting bankruptcy laws, (i) treat states in the same manner as other creditors, or (ii) exempt states from the application of such laws – its authority to do so derives from the bankruptcy clause itself and the “repeal” is effected within the plan of the Convention, not by statute.

Siegel versus FitzgeraldU.S. Supreme Court Case No. 21-441 (decided June 6, 2022), examines the constitutionality of the disparate amounts of administrative fees charged to Chapter 11 debtors in 48 states under the US trustee system, compared to Chapter 11 debtors in 2 states under the US trustee system. bankruptcy administrator.

One party argues that the differing fees do NOT constitute substantive bankruptcy law under the Bankruptcy Clause, with its uniformity requirement. Instead, the differing fee is an administrative law passed under the Necessary and Proper Clause of the Constitution, which says:

“Congress will have the power. . . To make all laws which shall be necessary and proper to give effect to the above powers, and all other powers conferred by this Constitution upon the Government of the United States, or upon any department or officer thereof. ” Art. Me, dry. 8, cl. 18.

The United States Supreme Court rejected the necessary and proper clause argument as follows:

  • the language of the “laws on the subject of bankruptcy” of the Constitution, though incapable of definitive definition, includes nothing less than the subject of the relationship between a debtor and the debtor’s creditors;
  • the Bankruptcy Clause grants plenary power to Congress over the whole subject of “bankruptcies” and does not “limit” the scope of Congressional authority;
  • the general powers of the necessary and proper clause must be added to the “specific grant” of the bankruptcy clause of the power to Congress to legislate on the subject of bankruptcies;
  • Congress cannot circumvent the uniformity requirement of the bankruptcy clause by enacting legislation under other grants of authority in the Constitution;
  • all courts that have considered the law in question (even those that have ruled it constitutional) agree that the law in question is subject to the uniformity requirement of the bankruptcy clause; and
  • the law in question affects the “substance of the debtor-creditor relationship” by increasing mandatory fees levied on the debtor’s estate and, therefore, decreasing the funds available to creditors.

Conclusion

The bankruptcy clause of the US Constitution is on a three-fight winning streak in the US Supreme Court, when pitted against other non-Article III clauses of the same Constitution.

And the bankruptcy clause’s previous losing streak (under the provisions of Article III) has taken a positive turn since the last loss in 2011 (Stern vs. Marshall).

In other words, the bankruptcy clause is on the rise!!

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