Tuesday, January 8, 2019

Does Bankruptcy Law Treat Injury Rights More Seriously than Workers’ Compensation and Tort Law?

The major issue in judicial review of workers’ compensation and tort reform laws is the level of “scrutiny” judges are to apply when considering constitutional challenges to the statutes. Generally, a challenger has the heavy burden of demonstrating that a law is “irrational” before it will be set aside or modified by a court. There are very few laws—even laws that are fundamentally unfair, lopsided, or just plain mean—that can be affirmatively shown to be “irrational.” As it is often articulated in the equal protection context (due process analyses are very similar in most states), a state law must be upheld if it is rationally related to any legitimate interest of the state. Additionally, the legitimate interest of the state need not be one that actually motivated legislators to enact the legislation. It is enough if the interest is now advanced and that it is “conceivable.”  If attorneys for the state fail to advance a conceivable interest, appellate court judges often seem willing to help them. The bottom lines is that, in the hierarchy of rights, injury rights (whether workers’ compensation or tort) are not deemed sufficiently important to warrant heightened judicial scrutiny of legislative acts impinging them.

But if state law tort rights are so unimportant, why are Article I federal bankruptcy judges without authority to hear them? In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., a 1982 case in which a company petitioning for reorganization made a claim against another company for breaches of contract and warranty—purely state law claims—the U.S. Supreme Court, in an opinion authored by Justice Brennan, held that the conferral of jurisdiction upon Article I (of the U.S. constitution) judges to hear state law claims involving traditional actions at common law such as existed at the time of the drafting of the Constitution was unconstitutional. Quoting much earlier law, the Court reaffirmed the principle that, Congress cannot “withdraw from [Art. III] judicial cognizance any matter which, from its nature, is the subject of a suit at the common law. . .” Because the judge in Northern Pipeline was, therefore, effectively not constitutionally authorized to hear such state law claims, the Court not only reversed and remanded the case, but scuttled the entire bankruptcy system, requiring convoluted and heroic measures to temporarily resuscitate and place on life support the entire system, the nature of which are beyond the scope of this post.

In Stern v. Marshall, the Court held that a counterclaim of tortious interference with a gift, although made during a bankruptcy proceeding and statutorily deemed a “core proceeding,” was a state common law claim that did not fall under certain exceptions justifying exercise of federal jurisdiction. Stern was a notorious (and highly entertaining) case involving the struggles of the late Anna Nicole Smith with the son of 90+ year old decedent, J. Howard Marshall. Smith alleged J. Howard orally promised her half of his estate, which primarily consisted of a 16% interest in Koch Industries, then worth $1.6 billion. Son disagreed. Arguments were advanced in both state probate and federal bankruptcy courts (naturally, the courts disagreed). Without wading into arcane questions about the history of the “tortious interference with a gift” cause of action, it is enough to say that Stern (2011) underscores the general “traditional common law actions” rationale of Northern Pipeline (1982). How do tort claims get caught up in bankruptcy law? By arguably becoming part of the bankruptcy estate. Their validity and valuation are often placed at issue in determining what “property” the bankruptcy trustee acquires and how the property will be distributed to unsecured creditors. 

I am struck by the facility with which the Supreme Court deemed adjudication of common law (including) tort rights to implicate separation of power issues in bankruptcy law. Tort claims, after all, intersect with bankruptcy cases only occasionally. Is it really such a big deal that an Article I bankruptcy judge may occasionally adjudicate a common law tort right? The Court, in an opinion authored by Chief Justice Roberts, said “yes”:

A statute . . . may no more lawfully chip away at the authority of the Judicial Branch than it may eliminate it entirely. “Slight encroachments create new boundaries from which legions of power can seek new territory to capture.” . . . Although “[i]t may be that it is the obnoxious thing in its mildest and least repulsive form,” we cannot overlook the intrusion: “illegitimate and unconstitutional practices get their first footing in that way, namely, by silent approaches and slight deviations from legal modes of procedure.” . . . We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush . . . Article III of the Constitution provides that the judicial power of the United States may be vested only in courts whose judges enjoy the protections set forth in that Article. We conclude today that Congress, in one isolated respect, exceeded that limitation in the Bankruptcy Act of 1984.

I am not, of course, contending that workers’ compensation cases may not lawfully be heard by state administrative law judges whose decisions are ultimately subject to judicial review. The bankruptcy cases under discussion are about the limits of legislative power in restricting judicial review. The Supreme Court has said that Congress may not authorize in bankruptcy (except in some cautiously limited instances) Article I judges to hear tort law claims (ultimately deciding them if the cases are not appealed). Tort law is sufficiently important to require its adjudication by Article III federal judges holding their offices for life during good behavior and receiving for their services compensation that shall not be diminished during their tenure. The purpose of these protections is to diminish the potential for the executive and legislative branches interfering with traditional rights. How, then, may tort law (and derivatively workers’ compensation law) simultaneously be sufficiently unimportant to allow state legislatures to chip away at injury remedies policed only by under-protective rational basis review?  I suppose the answer will be said to hinge on principles of federalism. But I find that answer unsatisfying. I wish that state judiciaries would uphold values concerning state common law rights (or rights flowing from these rights) with the same level of vigor.

Michael C. Duff



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