Bankruptcy

Constitutionality of Proposed Resolution Authority?

By Adam Levitin

The Dodd financial services reform bill, S. 3217 would give "original and exclusive jurisdiction" over liquidation petitions for failed systemically important financial firms to a panel of three Delaware bankruptcy judges appointed by a the Chief Bankruptcy Judge for the District of Delaware.  This panel is supposed to adjudicate whether a "a covered financial company is in default or in danger of default."  If so, then the FDIC takes over. 

This arrangement strikes me as having (at least) two potential Constitutional problems.  First, it vests original jurisdiction in the bankruptcy court (or really a special subset of the bankruptcy court), a non-Article III tribunal, which is adjudicating eligibility for a federal liquidation.  Recall that in Northern Pipeline v. Marathon Pipe Line,  Justice Brennan's plurality decision prohibited non-Article III tribunals from adjudicating non-federal rights.  While the technical adjudication by the special panel is of a threshold question for an FDIC takeover, it is ultimately determining what will be the system that handles private state law contractual rights.  Original jurisdiction over that question might bring this into the ambit of Marathon's prohibition. 

Second, there is only limited appellate review (by the Circuit Court or the Supreme Court).  Review is limited to whether the determination of the Secretary that a covered financial company is in default or in danger of default is supported by substantial evidence.  At least one reading of the proposed language is that there is not even a right of appeal to challenge the jurisdiction of the court (such as whether a firm is a covered financial company).  I think this creates a Constitutional problem itself; a non-Article III tribunal cannot have the final word on questions of federal jurisdiction (although we'll see how that plays out in the arbitration context in the Rent-a-Center case). 

There might also be a synergy between these problems that makes two separately acceptable flaws combine into a Constitutional problem. 

Full post as published by Credit Slips on April 23, 2010 (boomark / email).