704 F.2d 254 (6th Cir. 1983), 82-3638, White Motor Corp. v. Citibank, N.A.

Docket Nº:82-3638.
Citation:704 F.2d 254
Party Name:WHITE MOTOR CORPORATION, Debtor and Debtor in Possession, Appellant, v. CITIBANK, N.A. and the other bank creditors listed on Exhibit 1, Appellees.
Case Date:April 01, 1983
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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704 F.2d 254 (6th Cir. 1983)

WHITE MOTOR CORPORATION, Debtor and Debtor in Possession, Appellant,


CITIBANK, N.A. and the other bank creditors listed on

Exhibit 1, Appellees.

No. 82-3638.

United States Court of Appeals, Sixth Circuit

April 1, 1983

Argued Feb. 24, 1983.

Joseph Patchan, Baker & Hostetler, Cleveland, Ohio, R. Steven Kestner, Cleveland, Ohio, for Citibank, N.A.

George Wade (argued), David Bleich, Shearman & Sterling, New York City, for appellees.

William H. Baughman, Jr., John C. Parks (argued), Squire, Sanders & Dempsey, Cleveland, Ohio, for appellant.

Before KEITH, MERRITT and KENNEDY, Circuit Judges.

MERRITT, Circuit Judge.

This case raises complex issues concerning the jurisdiction of the district and bankruptcy courts and the appropriate procedures to be followed in bankruptcy matters in light of Northern Pipeline Construction

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Co. v. Marathon Pipe Line Co., --- U.S. ----, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (invalidating the delegation of Article III judicial power to bankruptcy courts contained in section 241(a) of the 1978 Bankruptcy Reform Act). The holding of Northern Pipeline was to be applied prospectively only, and it became effective on December 24, 1982, after the Court's stay expired.

First, we must consider what the Supreme Court intended respecting the jurisdiction of the district and bankruptcy courts when it commanded that Northern Pipeline be applied prospectively only. Do bankruptcy courts have jurisdiction after December 24, 1982, to continue to hear cases which were commenced prior to that date? What limits, if any, does Northern Pipeline place on the powers of district and bankruptcy courts and what is the hierarchical relationship between the courts? In light of the answers to these questions, we must determine whether an order appointing a special master to adjudicate products liability claims in this Chapter 11 case should be reinstated.


White Motor Corporation, a large truck manufacturer, filed a voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code on September 4, 1980. It is a large and complex reorganization case. Included among the many claims against the White Motor estate are approximately 160 separate, unliquidated and contingent product liability claims.

Early in the proceedings the debtor devised a program to facilitate the disposition of these pending products liability cases through the appointment of a special master. The Bankruptcy Court agreed with the debtor that a successful reorganization depended upon prompt resolution of these cases and appointed a special master on April 22, 1981, to conduct evidentiary hearings and ultimately to submit recommendations as to the disposition of the cases to the Bankruptcy Court.

The appellees, Citibank and other bank creditors of White Motor ("the Bank Creditors"), filed an appeal in the District Court on May 1, 1981. Judge Aldrich vacated the Order appointing the Special Master on September 20, 1982. She found that the Bankruptcy Court had no jurisdiction to hear cases after December 24, 1982, in light of the Supreme Court's ruling in Northern Pipeline, supra. In Northern Pipeline, a Chapter 11 debtor as plaintiff brought a non-bankruptcy products liability case in the bankruptcy court under the provisions of the new Act. Holding that the jurisdictional section of the new Act confers Article III jurisdiction on non-Article III bankruptcy courts in such cases, the Supreme Court concluded that it must invalidate the jurisdictional section, Sec. 1471(c). The Court held unconstitutional 28 U.S.C. Sec. 1471(c) conferring direct, nonderivative, bankruptcy jurisdiction on bankruptcy courts. 1

Since the special master would clearly be unable to complete the 160 products liability suits by December 24, 1982, when the stay of the Northern Pipeline decision would expire, the District Court ruled that the appointment of a master to do what the Bankruptcy Court could not do was invalid.

  1. White Motor's Contentions

    White Motor challenges the District Court's ruling, 23 B.R. 276, on several grounds, and the Bank creditors find fault with much of the reasoning employed by the District Court. First, the debtor argues that the appointment order should stand because the Supreme Court specified that

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    its decision in Northern Pipeline should be applied prospectively only. The plurality opinion states that it is "plain that retroactive application would not further the operation of our holding, and would surely visit substantial injustice and hardship upon those litigants who relied upon the Act's vesting of jurisdiction in the bankruptcy courts." Northern Pipeline, supra, 102 S.Ct. at 2880. The concurring justices agree that the decision should not be applied retroactively. Id. 102 S.Ct. at 2882. White Motor interprets this holding to mean that any action, including actions establishing procedures for future adjudication of cases, taken by a Bankruptcy Court prior to the lifting of the stay, should be given full effect. In other words, the appointment order giving the special master adjudication authority should be upheld despite the fact that the special master would be trying the cases after December 24, 1982, because the authority itself was granted prior to the Northern Pipeline decision.

    In the alternative, the debtor contends that the Northern Pipeline ruling does not affect the jurisdiction of Article III judges of the District Court as granted in 28 U.S.C. Secs. 1471(a) and (b) or, alternatively, in 28 U.S.C. Sec. 1334. 2 Their argument here is that the District Court, after the decision in Northern Pipeline, made a constitutionally valid general referral of cases, including the White Motor case, to the Bankruptcy Court. This referral was done under the authority of an "interim rule" adopted by the district court in the Northern District of Ohio, as outlined below.

    Shortly after the Northern Pipeline decision was rendered, the Judicial Conference of the United States requested that William E. Foley, Director of the Administrative Office of the United States Courts, draft an interim rule to be recommended for adoption by the District Courts, a rule which would provide for the continuing operation of the bankruptcy system should Congress fail to act within the stay period. Judicial Conference Resolution (Sept. 23, 1982). This measure was taken to prevent the possible breakdown of existing institutional arrangements for debt collection and debtor protection nationwide.

    Mr. Foley submitted a proposed rule to the Conference, which then circulated it to all of the bankruptcy, district and appeals court judges. Each of the eleven Judicial Councils of the Circuits ordered the district courts to adopt the interim rule with only minor modifications. In particular, the Judicial Council of the Sixth Circuit ordered on December 21, 1982, that each district court adopt the rule which would become effective as of the lifting of the stay on December 24, 1982. The district courts in this Circuit have all adopted the rule proposed by the Administrative Office without any modifications.

    The interim rule essentially contains the institutional pattern for handling bankruptcy matters as it was under the Chandler Act (act of June 22, 1938, ch. 575, 52 Stat. 840, 75th Cong., 3d Sess.) The rule basically revives the old system under which federal district courts referred bankruptcy cases to the bankruptcy courts or referees. The rule provides for the initial adjudication of bankruptcy matters primarily in the bankruptcy courts, with significant involvement by the district courts. The rule provides for the automatic initial referral to the bankruptcy courts of all cases arising under the Bankruptcy Act and all civil proceedings arising in or related to cases brought under 11 U.S.C. Although automatic, the referral may subsequently be withdrawn by the district court for any reason at any time during the proceedings. The bankruptcy courts may issue orders which become effective upon entry in all traditional bankruptcy proceedings. In "related cases," defined in part as "claims brought by the estate against the parties who have not filed claims against the estate" (the Northern Pipeline type case), only the district court may issue a final

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    order unless the parties consent to disposition by the bankruptcy judge. Finally, all orders entered by the bankruptcy judges are subject to de novo review in the district courts. Orders issued in "related" matters must be reviewed by the district court, while orders entered in the standard or traditional proceedings may be reviewed upon the motion of a party or sua sponte by the district court. The full text of the "interim rule" is contained in the appendix to this opinion.

    White Motor contends that the system embodied in the interim rule, which modifies the procedures established by the 1978 Act, gives the Bankruptcy Court jurisdiction to continue to conduct the White Motor reorganization proceedings. Under this jurisdiction, the debtor contends, the bankruptcy judge may appoint a special master to facilitate the reorganization process. Therefore, White Motor petitions this Court to have the order appointing a special master reinstated.

  2. The Creditors' Contentions

    The Bank Creditors basically agree with the debtor that the Bankruptcy Court may continue to operate under the interim rule without violating the principles enunciated by the Supreme Court in Northern Pipeline. The appellees simply maintain that the Bankruptcy Court had no authority to appoint a special master. Thus, they also challenge the reasoning employed by Judge Aldrich to invalidate the appointment Order. The Bank Creditors ask that this Court remand the...

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