Banca Rotta: A Brief History of Bankruptcy Part Three

Banca Rotta: A Brief History of Bankruptcy Part Three

The Bankruptcy Act of 1984 (actually called the Bankruptcy Amendments and Federal Judgeship Act of 1984) created a new bankruptcy court system and added to the total number of district court and appellate judges; it changed/amended Code sections on consumer credit, it clarified bankruptcy rules for grain storage facilities and created a procedure for rejecting collective bargaining agreements in reorganization cases.

Eventually in this period the Chapter 12 was created – a type of bankruptcy aimed specifically at farmers and fishermen.

The primary reason for passage of the 1984 Act was to quell a constitutional problem of the 1978 Act, which was ruled on by the US Supreme Court in the case Northern Pipeline Construction Company v. Marathon Pipe Line Company, 458 US 50 (1982).  I’ll short-hand it to the Marathon case.

The Marathon case boiled down to the rights of the three branches of government: executive, legislative and judicial. Each branch jealously guards its territory and fights any encroachment. The Bankruptcy Act of 1978 was considered an encroachment into the Judicial branch by the Legislative.

The Court held that the rights Northern claimed against Marathon were created by contract and were thus created and ruled by state law. This means it’s rights were NOT created (and thus ruled) by the US Congress of the Legislative Branch. Under the 1978 Act, the Bankruptcy Courts were given the ability to hear and rule on (in legalese, they were given jurisdiction over…) all civil proceedings that involved a bankruptcy case.

Remember that Bankruptcy was created by Article I of the Constitution, but the Judicial Branch’s powers and abilities was created by Article III. 

The Marathon Court ruled that although Congress does have the power to give authority to non-Article III judges (or magistrates or tribunals), it can only do so if the rights were created by federal statutes and laws (for example, the Tax Court system).

Here the Bankruptcy judges’ powers were encroaching on the power of their Article III brethren.

The Court gave Congress time to fix the problem and they did so with the Bankruptcy Amendments and Federal Judgeship Act of 1984.

The 1984 Act gave jurisdiction in bankruptcy cases to the District Courts and lowered or narrowed the authority of bankruptcy judges to that of adjuncts of the District Courts. Bankruptcy judges could issue orders/judgments only in cases under the Bankruptcy Code (Title 11), which are called "core proceedings" or cases directly involving bankruptcy issues. For "non-core" proceedings – or cases merely "related to" bankruptcy law – the bankruptcy courts would have to submit and propose their findings of fact and conclusions of law up to the district court, which would then issue any final order after their own review of the case.

To date the last major overhaul of the Bankruptcy Code was the Orwellianly-named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This Act constituted a major change in the bankruptcy procedure: it instituted a maximum income limit in filing a Chapter 7 and detailed a mathematical system for determining the monthly payment in a Chapter 13 reorganization for those above the limit.

It also determined a test as to whether the amount and interest of a Creditor’s claim could be manipulated or changed (called a “cram down”) in a Chapter 13 reorganization.

Credit Counseling & Debtor Education classes were required of every Chapter 13 and non-corporate Chapter 7 Debtor. A new industry of financial education was thus created.

Incidentally, the title of this blog series? The word “Bankruptcy” comes from the Italian banca rotta meaning “broken bank”. Although it is likely apocryphal, a money changer would bust up or break apart the bench on which he did business to show his insolvency.

Copyright 2016 Michael Curry