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Eric Rasmusen's Thoughts on Stern v. Marshall

posted by Bob Lawless

Eric Rasmusen of Indiana University and I were having a back channel communication on the U.S. Supreme Court's holding Stern v. Marshall (see here for a summary). Eric made a very interesting observation about the intellectual move the Supreme Court made and how it relates to ideas of judicial deference to agency expertise. Eric was kind enough to give me permission to share his thoughts with the Credit Slips audience.

by Eric Rasmusen

I’m currently writing on the Intermountain tax case, where the issue is whether after the IRS loses  in  a unanimous en banc Tax Court decision about statutory interpretation, the IRS can then write a regulation asserting its favored interpretation and use that regulation plus Chevron deference to win on appeal to a District Court. The DC Circuit said the IRS can; other circuits vary in their decisions. Brand-X also is an opinion with a similarly expansive view of ; there, the Supreme Court implies that its own precedents can be overruled by executive interpretations that are not arbitrary and capricious.

Stern v. Marshall makes for an interesting comparison. There, the Supreme Court ruled that a Bankruptcy Court’s findings on points of state law, at least (it was a narrow holding) cannot be final judgments. In addition, it is well-established that Bankruptcy Courts’ (and District Courts’ and Circuit Courts’ too, right?) findings on questions of law are reviewed de novo.

In other words: we can trust those guys in ATF and the FBI to be restrained and intelligent, and we can trust the guys in the IRS to be restrained in their claims for executive authority, but when it comes to the appellate-appointed bankruptcy judges--- reckless, emotionally involved,  power-mad, and pea-brained--- watch out!

All this is weird. An economist like me can’t understand why it is that courts feel they can decide policy issues such as whether homosexuality and abortion should be legal, and operational issues such as the fine details of police search procedure, when the judges say that are neither qualified nor empowered to interpret the words of statutes. If the court is objective  and wise enough to be able to decide when human life begins, surely it can figure out what “omits from gross income” means. What else are appellate judges good at, if not figuring out the meaning of words?

As I replied to Eric, a bankruptcy judge might complain Stern v. Marshall makes them no better than an administrative functionary, but that would be wrong. An administrative functionary has more power. There are many things that Stern v. Marshall implies that an administartive functionary can do--think "public rights"--that a bankruptcy judge cannot. Thank you, Eric, for letting me share your thoughts.


The description of Stern is wrong. It does not hold "that a Bankruptcy Court’s findings on points of state law ... cannot be final judgments." Findings on the allowance of claims, on the priority of liens, etc. are all state law issues and on those the judge's rulings are final. It is only when the estate seeks an affirmative recovery, beond disallowance of a claim, from someone and does so under state common law principles, that the Court said the bankruptcy judge cannot bind the parties without consent.

I also note that all of Prof Rasmusen's counter-examples are federal agencies applying federal law, while Stern is about an Article I function applying state law, so there is a federalism component that never comes into play in his counter-examples yet obviously informs the Northern Pipeline-Stern approach.

it is safe to say an economist would not have designed the federalist system. It is inherently inefficient and does nothing to enhance distributive equity, so it is wrong economically. But it fragments the coercive power of government, and thus is wise from the standpoint of the political theory behind a democratic republic.

I've been thinking about this since it came up on the Bankr-L listserv. I think the two areas of law are different in nature and involve different principles, warranting different treatment by the Court.

With administrative law, you have a delegation of legislative function (issuing regulations) from Congress to the Executive, the two political branches. Whatever legislative outcome is reached, whether by the delegator or delegatee, the judiciary should defer to that outcome. Note that the judiciary still retains the power to enter whatever final judgment is necessary, and thus retains the last say on how the legislative outcome applies in a dispute between parties.

With bankruptcy courts, the legislature is appropriating a judicial function -- the power to enter final orders and judgments. The judiciary clearly wants to defend against this, recognizing only a few narrow areas (that is, "public rights") where Congress can do so.

Looked at this way, it's not about the relative quality of administrative functionaries and bankruptcy judges. It's just a simple constitutional thing.

If the Bk Court rendered a final decision based on now infirm core jurisdiction, can that decision be set aside under Rule 60 now? If an action is currently pending in Bankruptcy Court and the other party mistakenly admitted core jurisdiction, can they go back and change their mind? Can they file an untimely jury demand and move to withdraw the reference? No should be the answer but now we have to take a closer look at core issue.. Exemptions come to mind; Fraudulent Transfers..preference actions..We need look a bit more closer now to see if its a purely code created right; if it exists outside of BK; and does it have a collective aspect..

(1) MT is right that the holding is even narrower than said: the bankruptcy judge can enter final judgement using state law, just not on counterclaims.

Question: do the final judgements on these other state law claims foreclose parallel actions by state courts, or do the state courts lack jurisdiction anyway?

(2) The Supreme Court majority (unlike Scalia's concurrence) tries to make federalism important here, but I don't see how that can really succeed. They still allow a federal District Court to decide state tort law claims in diversity suits. So why is it worse to have a Bankruptcy judge decide state tort law claims than to have him decide federal law claims?

Jeff Paulsen said, "Whatever legislative outcome is reached, whether by the delegator or delegatee, the judiciary should defer to that outcome. Note that the judiciary still retains the power to enter whatever final judgment is necessary, and thus retains the last say."

This sounds like Queen Elizabeth's last say on the UK budget. She indeed can refuse to sign it, but she never does. Self-imposed abdication of power has the same effect as de jure abdication. To do a Reductio, suppose the Supreme Court strengthened Chevron by saying,"In any case to which the US is a party, the US should win. Follow due process, lower courts, and hear all the evidence, but in the end make the US win all criminal and civil cases." The judiciary still has the final say, but that's unimportant.

A few thoughts...

If an Article I bankruptcy judge lacks the constitutional authority to exercise the "judicial Power of the United States", i.e., enter final judgment on state common law claims, does that necessarily mean by implication that an Article III district judge can?

If so, what is the Article III basis for subject matter jurisdiction over purely state-derived causes of action (assuming no diversity of litigants or another enumerated Article III basis)?

If the state claims are merely "related to" a bankruptcy case, does that satisfy Article III as one of a "Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made"?

In this respect, is the Fourth Circuit's definition of "related to" bankruptcy jurisdiction in Pacor uncontitutionally broad?

Does Stern v Marshall limit the jurisdiction of the bankruptcy court to issue anti-successor liability injunctions in a non-plan sale order without the buyer making significant contribution toward adequate protection of claims purported to be stripped off the assets sold?

How can the bankruptcy court enjoin a state court successor liability complaint it does not have jurisdiction to hear?

Does the bankruptcy court violate the federal anti-injunction act when issuing such an injunction?

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