Releasing the Albatross

The Sixth Circuit's Decision

Until the Federated decision, there had been little attention given to constitutional authority of the bankruptcy court to issue such injunctions of state court proceedings. Initially, the Sixth Circuit noted that “there is no doubt that [section 105] gives bankruptcy courts jurisdiction” to stay state court litigation to effectuate a mandatory ADR procedure. (Indeed, since pre-confirmation, the automatic stay provided by Bankruptcy Code section 362 applies to stay state court tort claim actions against the debtor, and post-petition the discharge injunction provided by Bankruptcy Code section 524 stays such proceedings, it is difficult to think of a more clearer application of the bankruptcy court's section 105 powers, which provides that the bankruptcy court “may issue any order process or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. ' 105(a).) Thus, the only question for determination was whether the bankruptcy court has the constitutional jurisdiction to issue such a stay. Under the oft-cited Supreme Court decision in Northern Pipeline, Article I bankruptcy courts do not have the constitutional authority to act with the full judicial power of an Article III court, and thus cannot issue final orders or judgments in matters only “related to” a Title 11 case. See Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). This is because the bankruptcy court's powers emanate from a congressional grant of authority, and thus their powers are limited solely to the terms of that grant. Accordingly, the constitutional question presented in Federated was the power of the bankruptcy court to stay a state court action for personal injury, a cause of action existing independent of Congress' grant of power to the bankruptcy courts under Title 11.

The Federated court applied the factors enumerated in Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 851 (1986) in making its determination that the bankruptcy court could constitutionally stay state court personal injury actions. Initially, because the federal district courts maintain oversight of the bankruptcy courts, the “bankruptcy court's power to stay other litigation leaves the essential attributes of the nation's 'judicial Power,' U.S. Const. art. III, ' 1, safely in the Article III courts.” Federated at 835. Secondly, since the stay of state court actions merely affects the timing of the case rather than resolving that litigation, the “power to impose a stay is thus far from the 'ultimate decision-making authority'” that must remain with Article III courts. Id. at 836. Lastly, the Sixth Circuit looked to the origin and import of the affected right, and found that the restrictions placed upon claimants were minimal, and for an important and legitimate purpose. The bankruptcy court's authority to impose a stay “protects the bankruptcy court's ability to efficiently administer the estate and further protects other creditors' ability to satisfy their claims.” Id. Based upon the application of these factors, the Federated court concluded that “the power to stay other pending litigation involving the debtors or the estate is within the bankruptcy court's constitutional jurisdiction.” Id.

Conclusion

The Federated decision is good news for debtors seeking to establish ADR procedures for the resolution of hundreds, if not potentially thousands, of disputed claims in a timely and efficient manner. At a minimum, mandatory non-binding ADR can provide an opportunity for a streamlined and economical resolution of complex claims, like tort injuries. But without the stay of state court tort litigation pending ADR, debtors could find themselves in a morass of legal and factual disputes in a variety of different forums. The Sixth Circuit's decision has confirmed the bankruptcy court's constitutional authority to require claimants to participate in mandatory ADR as a predicate to litigating their claims, thereby providing a real alternative for claims resolution.

Part Two of a Two-Part Article

Last month, we discussed the fact that Chapter 11 cases can last for months or years after plan confirmation solely as a result of unresolved disputed claims. To address the speedy resolution of such claims, debtors have increasingly turned to mandatory “alternative dispute resolution” (ADR). We discussed the utilization of voluntary ADR by bankruptcy courts, and the implementation of ADR procedures. This month, we discuss The Sixth Circuit's Decision in Spierer v. Federated Department Stores, et al. (In re Federated Department Stores), 328 F. 3d 829 (6th Cir. 2003) (hereinafter, “Federated“), wherein the Sixth Circuit affirmed the power of the bankruptcy courts to implement mandatory ADR procedures

As we discussed, the authority of the bankruptcy court to enjoin a state court action emanates from section 105 of the Bankruptcy Code, together with the automatic stay of section 362 and/or the discharge injunction of section 524. Section 105 provides the bankruptcy courts with the power to issue “any order … necessary or appropriate” to carry out the provisions of the Bankruptcy code). Section 362 provides for, inter alia, an automatic stay of actions against the debtor arising from prepetition claims that lasts from the filing of a Chapter 11 case until confirmation, while section 524 (a) provides that a discharge in bankruptcy serves as an injunction against such actions after confirmation.

The Sixth Circuit's Decision

Until the Federated decision, there had been little attention given to constitutional authority of the bankruptcy court to issue such injunctions of state court proceedings. Initially, the Sixth Circuit noted that “there is no doubt that [section 105] gives bankruptcy courts jurisdiction” to stay state court litigation to effectuate a mandatory ADR procedure. (Indeed, since pre-confirmation, the automatic stay provided by Bankruptcy Code section 362 applies to stay state court tort claim actions against the debtor, and post-petition the discharge injunction provided by Bankruptcy Code section 524 stays such proceedings, it is difficult to think of a more clearer application of the bankruptcy court's section 105 powers, which provides that the bankruptcy court “may issue any order process or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. ' 105(a).) Thus, the only question for determination was whether the bankruptcy court has the constitutional jurisdiction to issue such a stay. Under the oft-cited Supreme Court decision in Northern Pipeline, Article I bankruptcy courts do not have the constitutional authority to act with the full judicial power of an Article III court, and thus cannot issue final orders or judgments in matters only “related to” a Title 11 case. See Northern Pipeline Construction Co. v. Marathon Pipe Line Co. , 458 U.S. 50 (1982). This is because the bankruptcy court's powers emanate from a congressional grant of authority, and thus their powers are limited solely to the terms of that grant. Accordingly, the constitutional question presented in Federated was the power of the bankruptcy court to stay a state court action for personal injury, a cause of action existing independent of Congress' grant of power to the bankruptcy courts under Title 11.

The Federated court applied the factors enumerated in Commodity Futures Trading Commission v. Schor , 478 U.S. 833, 851 (1986) in making its determination that the bankruptcy court could constitutionally stay state court personal injury actions. Initially, because the federal district courts maintain oversight of the bankruptcy courts, the “bankruptcy court's power to stay other litigation leaves the essential attributes of the nation's 'judicial Power,' U.S. Const. art. III, ' 1, safely in the Article III courts.” Federated at 835. Secondly, since the stay of state court actions merely affects the timing of the case rather than resolving that litigation, the “power to impose a stay is thus far from the 'ultimate decision-making authority'” that must remain with Article III courts. Id. at 836. Lastly, the Sixth Circuit looked to the origin and import of the affected right, and found that the restrictions placed upon claimants were minimal, and for an important and legitimate purpose. The bankruptcy court's authority to impose a stay “protects the bankruptcy court's ability to efficiently administer the estate and further protects other creditors' ability to satisfy their claims.” Id. Based upon the application of these factors, the Federated court concluded that “the power to stay other pending litigation involving the debtors or the estate is within the bankruptcy court's constitutional jurisdiction.” Id.

Conclusion

The Federated decision is good news for debtors seeking to establish ADR procedures for the resolution of hundreds, if not potentially thousands, of disputed claims in a timely and efficient manner. At a minimum, mandatory non-binding ADR can provide an opportunity for a streamlined and economical resolution of complex claims, like tort injuries. But without the stay of state court tort litigation pending ADR, debtors could find themselves in a morass of legal and factual disputes in a variety of different forums. The Sixth Circuit's decision has confirmed the bankruptcy court's constitutional authority to require claimants to participate in mandatory ADR as a predicate to litigating their claims, thereby providing a real alternative for claims resolution.