The legal authority of the Virgin Islands Bankruptcy Court was challenged during oral arguments before the Third Circuit on Tuesday. The challenge has the potential to undo the bankruptcy court’s rulings. The appellants, who are attorneys seeking to overturn a sanctions order in a bankruptcy case, argue that the system’s structure 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. Instead, they must first be heard by the US District Court for the Virgin Islands, which is an Article IV court.
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 questioned Abood on why the argument wasn’t forfeited, stating that the sanctions order was in 2010, and it was never raised in the motion to reconsider. Abood responded, stating, “I never had to look at the structural integrity of the Virgin Islands court system.”
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.”
Stassen with Fox Rothschild LLP, counsel for the Chapter 7 trustee, said the appellants waived the issue in response to Krause’s questioning. Additionally, Stassen said the Third Circuit’s ability to review the bankruptcy rulings after the district court has done so is sufficient.
The appellants argued that the decisions of Article I bankruptcy judges must be directly supervised by Article III judges to meet constitutional constraints. They also stated that the stacking of judicially created VIBC under the VIDC is nowhere authorized by the Constitution or the statutes of the United States.
The case is In re Jeffrey Prosser, 3d Cir., No. 22-3456, oral argument 12/12/23.