Restructuring the Bankruptcy System: A Strategic Response to Stern v. Marshall

Abstract

The Supreme Court’s ruling in Stern v. Marshall has signaled a need to alter the bankruptcy courts' jurisdictional structure. In Stern, the Supreme Court ruled that bankruptcy judges, who lack the life tenure and salary protection of Article III, cannot issue final rulings in bankruptcy proceedings previously believed to be within their core jurisdiction. In response to the constitutional challenge raised by Stern, and in recognition that bankruptcy court’s jurisdictional limits represent a long-standing problem, many argue for a long-term solution: the restructuring of the system to create specialized Article III bankruptcy courts.

This paper evaluates this proposal in light of classic principles of system restructuring, namely, that any proposed restructure should stem from the underlying goals or strategy for that system. The creation of a specialized Article III bankruptcy court is consistent with the view of bankruptcy as a method of distribution, but not with bankruptcy as a procedural mechanism to deal with collective default. In recognition of this tension, the paper promotes an alternative solution to the Stern problem, one that harmonizes other strategic approaches and promotes uniformity in bankruptcy. This solution would replace bankruptcy courts with an administrative agency subject to the review of non-specialized district courts.