The 9th Circuit Weighs in on Stern v Marshall (In re Bellingham); What Isn't The Public Rights Exception?

The 9th Circuit Weighs In On Stern v. Marshall (In re Bellingham)

What Isn’t The Public Rights Exception?

Since the establishment of the English monarchy, the “law of the land” provides a “public right” to assess and collect property from citizens, without the requirement of prior notice and a hearing.  Due process of law is satisfied by virtue of the “public right” to arbitrarily assess taxes, for example.

Under the “law of the land,” “private rights” were recognized under the English monarchy system, since the Magna Carta of 1215, as a limit to the government’s (the King’s) right to arbitrarily deprive citizens of property without a judgment resulting from prior notice and a hearing.  For a “private right” due process of law requires notice and an hearing before a judgment for money damages resulting from a cause of action for breach of contract or tort, for example.

In essence, this country was founded as the result of the citizens’ frustration with the arbitrary exercise of the “public right” under the English monarchy, “because the King of Great Britain ‘made Judges dependent on his will alone, for the tenure of their offices, and payment of their salaries.’”  Stern v. Marshall at 17-18 citing The Declaration of Independence ¶ 11.

The individual states first adopted the English system’s “law of the land” with the diversity of “public rights” and “private rights” and eventually the United States Constitution did the same and addressed the concern for arbitrary exercise of the “public right” by trifurcation the power of the monarchy using Article I (Legislative), Article II (Executive) and Article III (Judicial).

Article III courts are considered “Constitutional Courts” since their power is derived directly from the separation of powers.  These judges hold life tenure (during good behavior) and their compensation can’t be reduced by Congress or the Executive branch.  Once Congress creates the court and judges are appointed, these judges are safely outside of the influence of the other two branches of our government.  Article III was eventually amended to clarify that these courts can hear disputes between a private citizens and a state, “diversity jurisdiction” (11th Amendment).

Article I courts are considered “Legislative Courts” since their power is derived from the power of Congress to legislate and create tribunals for efficient implementation of regulatory legislation.  Judges appointed to these courts may or may not hold life tenure (during good behavior) and their compensation may be increased or decreased by Congress.  Bankruptcy judges hold 14 year terms, during good behavior.

A significant feature of the separation of powers is that Congress cannot withdraw from Article III courts traditional “private right” matters and assign their final resolution to non-Article III tribunals created and influenced by Congress.  “When a suit is made of ‘the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,’ Northern Pipeline, 458 U.S., at 90 (Rehnquist J., concurring in judgment), and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.”  Stern at 18.

The “public right exception” is better termed an exception to a private right.  The public has a right to a final judgment from a state or a constitutional court for resolution of a private cause of action (traditional common law breach of contract or tort).  Public right exceptions include admiralty law [Crowell v. Benson, 285 U.S. 22 (1932)], when Congress agrees to get sued [Murray’s Lessee v. Hoboken Land & Improvement Co., 18 How. 272 (1856)], and when the Congressionally created cause of action requires resolution of the private right [Commodity Futures Trading Comm’n v. Shor, 478 U.S. 833 (1986)].

A corollary feature of the separation of powers is that the Congress can not assign to Article III courts, matters that do not requiring judicial determination. “We do not consider that Congress can either withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at common law, or in equity, or admiralty, nor, on the other hand, can it bring under the judicial power a matter which, from its nature, is not a subject for judicial determination.”  Murray’s Lessee at page 284 (emphasis added in italics).  Statutory rights created by Congressional legislation, as opposed to the constitutionality of the statutes as written, are properly resolved in legislative courts (created under Article I) and not the subject for Article III courts.

It is ok for Congress to loan out Article III judges to legislative tribunals.  Thomas v. Union Carbide, 473 U.S. 568 (1985).  Bankruptcy courts unconstitutionally sit as Article III judges (subject matter jurisdiction and final orders) pursuant to 11 USC 151 & 157 in certain core matters (causes of action) that are not created exclusively under the bankruptcy code (preferences) nor are necessary to determining the allowance of a creditor's claim to the bankruptcy res (as opposed to recovery from the ultimate res otherwise determined) and also as legislatively created Article I judges (proposing decision to the District Court or finally resolving actions with the parties' consent) for matters related to the Bankruptcy.

The recent Ninth Circuit Court of Appeals opinion In re Bellingham Insurance Agency, Inc. addressed a fraudulent conveyance defendant's appeal of the Bankruptcy Courts entry of final judgment in favor of the bankruptcy Trustee regarding funds transferred from the Debtor to a closely related non-debtor entity, the District Court affirmed.  The defendant’s appeal to the 9th Circuit raised for the first an objection to the Bankruptcy Court’s entry of a final judgment (in a motion to vacate the judgment for lack of subject matter jurisdiction) citing Stern v. Marshall.

In affirming the District Court and therefore the Bankruptcy Court’s entry of a final judgment, the 9th Circuit Court of Appeals held that

Fraudulent conveyance claims are “quintessentially suits at common law” designed to “augment the bankruptcy estate.” Granfinanciera, 492 U.S. at 56.  Thus, Article III bars bankruptcy courts from entering final judgments in such actions brought by a non-creditor absent the parties consent.  But here, the Debtor had consented to the bankruptcy court’s jurisdiction, rendering that court’s entry of summary judgment in favor of the Trustee constitutionally sound.

In re Bellingham Insurance Agency, Inc. (11-35162) at 39.

In other words, the 9th Circuit held that the public rights exception does not include the right of bankruptcy judges to enter final orders in fraudulent conveyances matters where a bankruptcy trustee seeks to recover from a non-creditor of the bankruptcy estate, absent a waiver of the defendant to its right to an Article III judge.  However, bankruptcy judges may hear and enter proposed finding of facts and conclusions of law for de novo review by an Article III (District Court) judge, if the defendant does not waive its right to an Article III judge.

By Peter M. Lively and Ilya B. Volk

Law Office of Peter M. Lively