Virgin Islands Bankruptcy Court Authority Gets 3rd Circuit Look

The Third Circuit in oral arguments Tuesday seemed skeptical of a challenge to the legal authority of the Virgin Islands Bankruptcy Court, an argument that has the potential to undo the bankruptcy court’s rulings.

The appellants—attorneys who seek to upend a sanctions order in a bankruptcy case—assert that the structure of the system is unconstitutional because the bankruptcy judges are transferred from other judicial districts and their orders aren’t subject to direct review by an Article III court, but must first be heard by the US District Court for the Virgin Islands, which is an Article IV court.

Pro se counsel for the appellants, attorney Norman A. Abood of Toledo, Ohio, cited the US Supreme Court’s 2003 ruling in Nguyen v. US, invalidating an appellate decision in a criminal case because one of the three panel members sat on the US District Court for the Northern Mariana Islands, which is an Article IV territorial court, rather than an Article III court.

Judge Cherl Ann Krause asked Abood why the argument isn’t forfeited. “The sanction order was in 2010, but you never raised it in the motion to reconsider,” Krause said. “That case was decided in 2003. You had 12 years to raise it. Why didn’t you?”

“I never had to look at the structural integrity of the Virgin Islands court system,” Abood responded. “We should have known,” he said.

Turning to the merits of the argument, Judge Thomas M. Hardiman asked why review of the bankruptcy court’s ruling by the Virgin Islands District Court before the Third Circuit review “deprives litigators of the review of an Article III court.”

Abood responded that the judges on the Virgin Islands District Court, as an Article IV court, are “subject to having their salary revoked,” and that the Third Circuit’s power “is diminished by inserting the district court in between.”

Hardiman asked why the court shouldn’t “stand by” its ruling in In re Jaritz Industries, a 1998 case upholding the authority of the Third Circuit to transfer bankruptcy judges temporarily to the Virgin Islands. Abood responded that Nguyen constitutes an “intervening Supreme Court opinion.”

In response to Krause’s questioning, Stassen with Fox Rothschild LLP, counsel for the Chapter 7 trustee, said the appellants waived the issue.

In addition, Stassen said, the Third Circuit’s ability to review the bankruptcy rulings after the district court has done so is sufficient.

If the US Court of Appeals for the Third Circuit were to rule in the appellants’ favor, Stassen said, every Virgin Islands bankruptcy case “would be void ab initio.”

Article III of the US Constitution established the federal judiciary, and gave Congress the power to create “such inferior Courts as the Congress may from time to time ordain and establish.” Under 28 U.S.C. Chapter 5, Congress established the federal judicial districts, which didn’t include the Virgin Islands. The US bankruptcy courts were legislatively created under Article I of the United States Constitution.

In 1936, Congress passed the Organic Act of 1936, which was signed into law by President Franklin D. Roosevelt that year, creating the District Court of the Virgin Islands under the territorial clause of Article IV of the Constitution.

The Virgin Islands district has no permanent bankruptcy judges. Bankruptcy judges from the Third Judicial Circuit are therefore temporarily assigned to hear bankruptcy matters in the District of the Virgin Islands.

In their Third Circuit brief filed April 24, the appellants said the US Supreme Court “has made clear that to meet constitutional constraints, the decisions of Article I bankruptcy judges must be directly supervised by Article III judges.”

“This stacking of judicially created VIBC [Virgin Islands Bankruptcy Court], an Article I court, under the VIDC [Virgin Islands District Court], a legislatively created Article IV court, is nowhere authorized by the Constitution or the statutes of the United States.”

Judge Marjorie O. Rendell was also on the panel.

Attorneys Lawrence H. Schoenbach of New York, N.Y., and Robert F. Craig of Omaha, Neb., are also appellants and pro se counsel of record.

The case is In re Jeffrey Prosser, 3d Cir., No. 22-3456, oral argument 12/12/23.