ArtI.S8.C4.2.5 Constitutional Limits on Bankruptcy Power

Article I, Section 8, Clause 4:

[The Congress shall have Power . . . ] To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States; . . .

In exercising its bankruptcy powers, Congress is subject to certain constitutional limitations.1 Congress may not circumscribe the creditor’s right in property to such an unreasonable extent as to deny him due process of law or effect an unconstitutional taking.2 Congress may impair the obligation of a contract or extend a federal bankruptcy law to contracts already entered into at the time Congress passed the law.3 In 1935, the Court held that, under the Tenth Amendment,4 Congress was unable to subject the fiscal affairs of a political subdivision of a state to a federal bankruptcy court’s control.5 A year later, however, the Court held that Congress may empower federal bankruptcy courts to entertain petitions by taxing agencies or instrumentalities for a composition of their indebtedness when the state has consented to the proceeding and the federal court is not authorized to interfere with the fiscal or governmental affairs of such petitioners.6

The Bankruptcy Clause provides that Congress may enact “uniform” bankruptcy laws.7 However, the Court has explained that the uniformity required is geographic, not personal.8 Thus, Congress may recognize state laws relating to dower, exemptions, the validity of mortgages, priorities of payment, and similar matters, even though such recognition leads to different results from state to state.9 And the Court has declared that the uniformity requirement “does not deny Congress power to take into account differences that exist between different parts of the country, and to fashion legislation to resolve geographically isolated problems.” 10 Thus, in the Regional Rail Reorganization Act Cases, the Court denied a uniformity challenge to a railroad reorganization law that applied to railroads in one particular geographic region, because no other railroads were under reorganization at the time.11 However, in Railway Labor Executives’ Association v. Gibbons,12 the Court held that a railroad reorganization law that applied to only one railroad was unconstitutional where there were other railroads engaged in reorganizations that were not subject to the law.13

Article III of the U.S. Constitution contains relevant limits on Congress’s exercise of the bankruptcy power.14 The Supreme Court has considered Congress’s power to vest the adjudication of claims in non-Article III bankruptcy courts in several decisions.15 In Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,16 the Court invalidated portions of the Bankruptcy Reform Act of 1978 that impermissibly empowered non-Article III bankruptcy courts with “jurisdiction over all ‘civil proceedings arising under [the Bankruptcy Code] or arising in or related to cases under [the Bankruptcy Code],’” such as state law breach of contract claims and other claims unrelated to “the restructuring of debtor-creditor relations.” 17 Later, in Stern v. Marshall,18 the Court held a provision of the Bankruptcy Amendments and Federal Judgeship Act of 198419 unconstitutional for authorizing bankruptcy courts to enter final judgments on certain actions whose existence are not attributable to bankruptcy proceedings—such as tortious interference counterclaims against creditors—but which are merely intended to “augment the bankruptcy estate.” 20 The Court subsequently held that a bankruptcy court may issue proposed findings and conclusions of law, subject to de novo review by the district court, on claims statutorily denominated as within the bounds of bankruptcy courts’ “core” powers but which may only be constitutionally committed to an Article III adjudicator.21 And in 2015, the Court held that a bankruptcy court may resolve such claims if a party consents to the bankruptcy court’s jurisdiction.22

See, e.g., Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 589 (1935) ( “The bankruptcy power, like the other great substantive powers of Congress, is subject to the Fifth Amendment.” ); see also Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 72–73 (1982) (plurality) (explaining that when the requirements of Article III of the Constitution are applicable, Congress’s Article I legislative powers—including the Bankruptcy Clause—are controlled by Article III). back
Louisville Bank v. Radford, 295 U.S. 555, 589, 602 (1935) ; see Wright v. Union Cent. Life Ins. Co., 304 U.S. 502, 518 (1938). back
In re Klein, 42 U.S. (1 How.) 277 (1843); Hanover National Bank v. Moyses, 186 U.S. 181, 188 (1902). For information on the Contract Clause, U.S. Const. art. I, § 10, cl. 1, see ArtI.S10.C1.6.1 Overview of Contract Clause. back
U.S. Const. amend. X. For information on the Tenth Amendment, see Amdt10.1 Overview of Tenth Amendment, Rights Reserved to the States and the People to Amdt10.4.4 Commerce Clause and Tenth Amendment. back
Ashton v. Cameron Cnty. Dist., 298 U.S. 513, 532 (1936). back
United States v. Bekins, 304 U.S. 27, 51–53 (1938) ; see Puerto Rico v. Franklin Cal. Tax-Free Trust, 579 U.S. 115, 122 (2016) ( “Critical to the Court’s constitutional analysis [in Bekins] was that the State had first authorized its instrumentality to seek relief under the federal bankruptcy laws.” ). back
U.S. Const. art. I, § 8, cl. 4 (Congress is empowered “[t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” ) (emphasis added); see Perez v. Campbell, 402 U.S. 637, 656 (1971) (explaining that “to legislate in such a way that a discharge in bankruptcy means one thing in the District of Columbia and something else in the States—depending on state law—[would be to reach] a result explicitly prohibited by the uniformity requirement in the constitutional authorization to Congress to enact bankruptcy legislation” ). back
Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 189 (1902). “Personal uniformity” is the principle—rejected by the Supreme Court— “that the bankruptcy laws should apply identically to individual debtors, regardless of the state or locality in which the debtor resides.” Schultz v. United States, 529 F.3d 343, 350–51 (6th Cir. 2008). back
Stellwagon v. Clum, 245 U.S. 605, 613 (1918) ; Hanover National Bank, 186 U.S. at 190 ; see Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, Va., 300 U.S. 440, 463 n.7 (1937) ( “The problem dealt with may present significant variations in different parts of the country.” ). back
Blanchette v. Connecticut General Ins. Corporations (Railroad Reorganization Act Cases), 419 U.S. 102, 159 (1974). back
Id. at 159–61. back
455 U.S. 457. back
Id. at 470; cf. Warren v. Palmer, 310 U.S. 132, 137 (1940) ( “Railroad reorganization in bankruptcy is a field completely within the ambit of the bankruptcy powers of Congress.” ) back
See U.S. Const. art. III. back
For information on Congress’s power to establish non-Article III courts, see ArtIII.S1.9.1 Overview of Congressional Power to Establish Non-Article III Courts. back
458 U.S. 50 (1982). back
Id. at 59, 71, 87 (plurality) (quoting 28 U.S.C. § 1471(b) (repealed) (emphasis omitted)); see id. at 91–92 (Rehnquist, J. concurring in the judgment). The plurality referred to the alteration of debtor-creditor relationships as “the core of the federal bankruptcy power.” Id. at 71 (plurality). back
564 U.S. 462 (2011). back
Pub. L. 98-353, 98 Stat. 333 (July 10, 1984). back
564 U.S. at 495, 503. back
Exec. Bens. Insurance Agency v. Arkison, 573 U.S. 25, 39–40 (2014); see 28 U.S.C. § 157(b), (c) (distinguishing between “core” and non-core proceedings in relation to the jurisdiction of bankruptcy courts). back
Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665, 686 (2015). The Court held that the required consent need not be expressed, but must be “knowing and voluntary.” Id. at 683, 685. See also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (concerning the Seventh Amendment right to jury trial in fraudulent conveyance action by bankruptcy trustee). (For other decisions concerning the Seventh Amendment and bankruptcy, see Langenkamp v. Culp, 498 U.S. 42 (1990) (per curiam); Katchen v. Landy, 382 U.S. 323 (1966). To read about the right to trial by jury in civil cases guaranteed by the Seventh Amendment, U.S. Const. amend. VII, see Amdt7.2.1 Historical Background of Jury Trials in Civil Cases to Amdt7.2.5 Composition and Functions of a Jury in Civil Cases. back