Resisting the Expansion of Bankruptcy Court Power Under Section 105 of the Bankruptcy Code: The All Writs Act and an Admonition from Chief Justice Marshall

Abstract

This article is divided into three main parts. In the first part, the article criticizes the expansive use of section 105 of the Bankruptcy Code by bankruptcy courts, and argues that this is an inappropriate extension of bankruptcy court power. It begins with a history of section 105 and argues that the drafter intended section 105 to be of limited scope. The drafter assumed that bankruptcy courts would rely on the All Writs Act, upon which the language of section 105 is based. This part then examines a number of typical scenarios in which courts have over reached in application of section 105. These include substantive consolidation of chapter 11 cases, partial discharge of student loans, non debtor protection (temporary and permanent stays for individuals who have not themselves filed bankruptcy petitions), and first day orders. The article describes the conflict among the courts in different jurisdictions when addressing each of these scenarios. The article also draws upon the scholarship of Judge Marcia Krieger and Professors David Epstein and Steve Nickels. These scholars argue, respectively, that bankruptcy courts are not the general “courts of equity” they are typically assumed to be in case opinions applying section 105, and that broad application of section 105 constitutes an unconstitutional breach of the separation of powers. The second part of the article delves more intensely into a discussion of the All Writs Act. The article suggests that the drafter intended second 105 to be a gap filler provision to permit limited bankruptcy court powers not otherwise conferred by the All Writs Act. The article argues that BAFJA (1984) essentially raised the importance of section 105 and peeled away the All Writs Act from the domain of bankruptcy courts. Nevertheless, the language and purpose of section 105 are based on the All Writs Act. The All Writs Act should therefore form a theoretical limit on bankruptcy court power, and bankruptcy courts should look to the development of All Writs Act cases to discern the correct application of their own powers. The article therefore looks for scenarios analogous to substantive consolidation of cases and third party protection in bankruptcy in the case law of the All Writs Act. In doing so, the article argues that bankruptcy courts have gone too far and acted too broadly. Actions taken by federal courts under All Writs Act are always tightly connected to a preexisting federal scheme and even then employed only in “extraordinary circumstances.” Courts further state that the All Writs Act may not be employed to defeat express legislation. The article argues that broad bankruptcy court application of section 105 often extends beyond this rubric. In the third and final part, the article compares the language and purpose of the Necessary and Proper Clause of the U.S. Constitution to section 105 of the Code. Although clearly not directly applicable for the purposes of rendering case opinions, the article argues that this is a useful exercise nonetheless. The Necessary and Proper clause reads in the conjunctive (“necessary and proper”), where section 105 does not (necessary or appropriate). But the article points out that constitutional law case opinions in fact treat the “and” as an “or,” and that this difference is not one of real consequence. The article draws on Justice Marshall's opinion in M'Culloch v. Maryland, and jurisprudence that followed this case. Justice Marshall did read the Necessary and Proper clause broadly, a view that has been criticized much of late by some constitutional law scholars. Yet even Justice Marshall interpreted the limiting phrase (“proper for carrying into Execution the Foregoing Powers”) as a cap on the reach of the Necessary and Proper clause. In other words, in no event should the clause be used to back door some congressional action otherwise denied congress elsewhere in the Constitution. Similarly, the Supreme Court opined in Ahlers that to the extent bankruptcy courts retain equitable powers under section 105, these powers must be limited to “the confines of the Bankruptcy Code.” Therefore, section 105 does not permit bankruptcy courts to take actions elsewhere denied them in the Code. Unfortunately, this seems to be a statement often observed in the breach. The article concludes by arguing that the real problem involving section 105 does not result from bankruptcy judges' “ambition or collective judicial ego.” It states that “bankruptcy courts are keenly focused on appropriate objectives.” According to the article, the problem instead stems from “the failure of the Code to address fact patterns that emerge regularly and demand resolution.”

Keywords: bankruptcy, substantive, consolidation, partial, discharge, student loan, non debtor protection, first day order, first, section 105, equity, power, all writs, writs, necessary or appropriate, Necessary and Proper, constitution, Marshall, M'Culloch, doctrine of necessity, necessity