SEC v. Jarkesy, 144 S. Ct. 2117, 219 L. Ed. 2d 650 (June 27, 2024)
SEC v. Jarkesy, 144 S. Ct. 2117, 219 L. Ed. 2d 650 (June 27, 2024): This 6/27/24 US Supreme Court case is NOT a bankruptcy case, but it clarifies several previous US Supreme Court decisions that are bankruptcy decisions, including previous US Supreme Court Granfinanciera case on when is there a right to jury trial, and including previous US Supreme Court cases on bankruptcy court’s jurisdiction/lack of jurisdiction, ie Northern Pipeline, and Stern v Marshall.
Jaresky is important because Jarekesy makes clear there is NO right to a jury trial in the claims-allowance process in bankruptcy.
However, Jaresky does reconfirm that a defendant in a fraudulent transfer suit brought under 11 USC 548 (the bankruptcy code section governing the bankruptcy trustee/bankruptcy estate suing non-debtor parties to recover alleged fraudulent transfers that the non-debtor parties received, from the non-debtors) is entitled to a jury trial in district court. That is what the earlier US Supreme Court Granfinanciera decision ruled.
Some commentators also read Jarkesy as confirming that a bankruptcy court may impose sanctions for violations of the discharge injunction and the automatic stay as long as the sanctions are civil, not criminal.
Here is the context in which Jarkesy arose: In the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, Congress for the first time gave the Securities and Exchange Commission the power in administrative proceedings before an administrative law judge (ALJ) to impose penalties for violations of securities law.
Invoking Dodd Frank and proceeding before an ALJ, the SEC imposed a $300,000 civil penalty and other sanctions on an individual for violations of antifraud provisions of securities laws. The Fifth Circuit reversed in a divided opinion, invoking Granfinanciera, S. A. v. Nordberg, 492 U. S. 33 (1989). Because the enforcement action was not conducted in federal district court, the appeals court found a violation of Seventh Amendment jury trial rights.
The Supreme Court granted certiorari and affirmed on June 27 in a 6/3 opinion by Chief Justice John G. Roberts, Jr. Justice Sonia Sotomayor penned a dissent joined by Justices Elena Kagan and Ketanji Brown Jackson. Justice Neil M. Gorsuch wrote a concurring opinion joined by Justice Clarence Thomas. The three opinions totaled 98 pages.
Granfinanciera Clarified
For the majority, the Chief Justice ruled that the so-called public rights exception to the Seventh Amendment did not apply for reasons explicated in Granfinanciera. But first, he explained why there were Seventh Amendment rights.
Citing Granfinanciera, the Chief Justice said that the “Seventh Amendment extends to a particular statutory claim if the claim is ‘legal in nature.’” Furthermore, it is “immaterial” whether the claim is statutory.
Because some claims are both equitable and legal in nature, the Chief Justice said that “the remedy is all but dispositive.” Given that the SEC’s civil penalties were to punish and deter, not compensate, he concluded that the remedy was at common law and conferred jury trial rights.
Even though jury trial rights were in play, the government argued that the public rights exception applied and deprived the offender of Seventh Amendment rights.
Citing Granfinancera, Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U. S. 50 (1982), and Stern v. Marshall, 564 U. S. 462 (2011), the Chief Justice said that the Court has “repeatedly explained that matters concerning private rights may not be removed from Article III courts.” He went on to say that “the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory” if the “suit is in the nature of an action at common law.”
In an understatement reflecting the Court’s conflicting jurisprudence, the Chief Justice conceded that the “Court ‘has not “definitively explained” the distinction between public and private rights,’ and we do not claim to do so today.”
Granfinanciera held the key to the decision because it was a case in which Congress purported to take away jury trial rights by installing a claim for fraudulent transfer in Article I bankruptcy courts even though “fraudulent conveyance [actions] were well known at common law,” the Chief Justice said. Digging deeper into Granfinanciera, he said that fraudulent transfer actions, unlike the claims-allowance process, “were not ‘closely intertwined’ with the bankruptcy process.”
Saying that “Granfinanciera effectively decides this case,” the Chief Justice affirmed the Fifth Circuit because a “defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.”
The Jarkesy opinion says that the bankruptcy claims-allowance process implicates public rights because the rights and recoveries of other creditors are affected by the outcome of claim objections. Jarkesy eliminates any arguments that might remain about the right to a jury in deciding the validity or amount of claims.
The Court’s discussion of Granfinanciera also eliminates any idea that fraudulent transfer suits could be litigated to finality in bankruptcy court if the defendant has neither filed a claim nor waived an objection to the jurisdiction and power of the bankruptcy court.
When it comes to the right to a jury trial for violations of the automatic stay or the discharge injunction, the implications of Jarkesy are more opaque. In Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), the Court held unanimously that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” However, Taggart does not deal with jury trial rights.
Citing Tull v. United States, 481 U. S. 412, 422 (1987), the Chief Justice indicated in Jarkesy that public rights are implicated when the relief is “solely to ‘restore the status quo.’” By that token, civil sanctions for violations of discharge or the automatic stay seem to involve the restoration of the status quo, disabling a violator from claiming the right to a jury trial.
Some might argue that the invocation of public rights should not apply to the imposition of punitive damages under Section 362(k) for the willful violation of a stay protecting an individual debtor. This writer believes that the more draconian sanctions in Section 362(k) were imposed by Congress to ward off creditors’ temptations to pursue individuals who, given their bankrupt status, lack the wherewithal to act against violators.
Whatever the sanctions may be for violation of the automatic stay, they are “closely intertwined” with the bankruptcy process because the automatic stay and discharge are the principal remedies afforded debtors under the Bankruptcy Code. Being “closely intertwined” with the enforcement of debtors’ remedies, sanctions seem to this writer to fall within the public rights exception.