Fifth Circuit: District Court Improperly Referred Bankruptcy Appeal To Magistrate Judge For Final Determination

• Published date: 30 September 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Jane Rue Wittstein and Mark Douglas

Federal district courts, with the consent of the parties, are authorized by statute to refer "civil matter[s]" to magistrate judges for the purpose of conducting all proceedings and entering a judgment in the litigation. In the case of an appeal to a district court from a bankruptcy court, however, this statutory authority arguably conflicts with another statutory provision dictating that appeals from a bankruptcy court order or judgment be heard by a "district court" or a "bankruptcy appellate panel." This apparent conflict was recently addressed by the U.S. Court of the Appeals for the Fifth Circuit in In re South Central Houston Action Council, 38 F.4th 471 (5th Cir. 2022). The Fifth Circuit vacated a magistrate judge's ruling on appeal from a bankruptcy court judgment, ruling that the district court improperly referred the appeal to the magistrate judge for a final disposition, rather than a recommendation subject to review and adoption by the district court.

Bankruptcy Court Jurisdiction

Article III, Section 1 of the U.S. Constitution provides that "[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish." It further states that such judges "shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office."

The exercise of the "judicial Power of the United States" is vested in judges appointed pursuant to Article III of the Constitution, i.e., Article III judges. Bankruptcy judges, however, are not Article III judges. They do not have life tenure'bankruptcy judges are appointed for a 14-year term (subject to reappointment) by the circuit courts of appeals under 28 U.S.C. ' 152'and their salaries are subject to diminution. Bankruptcy judges are technically authorized under Article I, which governs the legislative branch and authorizes the establishment of a uniform system of federal bankruptcy laws. U.S. Const. Art. I ' 8 cl. 4. Under principles of separation of powers, bankruptcy judges cannot exercise the judicial power reserved for Article III judges.

In Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), the U.S. Supreme Court struck down the Bankruptcy Act of 1978 because it conferred Article III judicial power upon bankruptcy judges who lacked life tenure and protection against salary diminution. Two years later, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 to fix the Marathon issue. The 1984 jurisdictional scheme for bankruptcy courts continues in force today.

That scheme vests bankruptcy jurisdiction in the first instance in the U.S. federal district courts.

Federal district courts have "original and exclusive jurisdiction" of all "cases" under the Bankruptcy Code. 28 U.S.C. ' 1334(a). District courts also have "original but not exclusive jurisdiction of all civil proceedings arising under" the Bankruptcy Code, "or arising in or related to cases under" the Bankruptcy Code. 28 U.S.C. ' 1334(b).

District courts may and routinely do, however, refer these cases and proceedings by standing orders of reference to the bankruptcy courts in their districts, which are constituted as "units" of the district courts. 28 U.S.C. ' 151 and 157(a). That reference may be withdrawn by...