Arnold Print Works, Inc., In re

• Decision Date: 30 March 1987
• Docket Number: No. 86-1626,86-1626
• Citation: 815 F.2d 165
• Parties: 16 Collier Bankr.Cas.2d 944, Bankr. L. Rep. P 71,772 In re ARNOLD PRINT WORKS, INC., Debtor. ARNOLD PRINT WORKS, INC., Appellant, v. Joseph APKIN, et al., Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 165

815 F.2d 165

16 Collier Bankr.Cas.2d 944, Bankr. L. Rep. P 71,772

In re ARNOLD PRINT WORKS, INC., Debtor.

ARNOLD PRINT WORKS, INC., Appellant, v. Joseph APKIN, et al., Appellees.

No. 86-1626.

United States Court of Appeals, First Circuit.

Argued Dec. 4, 1986.

Decided March 30, 1987.

Philip J. Hendel with whom Joseph H. Reinhardt and Hendel, Collins, Stocks & Newton, P.C., Springfield, Mass., were on brief, for appellant.

Robert C. Ware with whom Timothy J. Morey and Freedman, DeRosa & Rondeau, North Adams, Mass., were on brief, for appellees.

Alan L. Braunstein, Joseph Braunstein and Riemer & Braunstein, Boston, Mass., on brief, for Commercial Law League of America, amicus curiae.

Before BOWNES, BREYER and TORRUELLA, Circuit Judges.

BREYER, Circuit Judge.

Assume that B, a bankrupt company in the midst of federal bankruptcy proceedings, brings an ordinary state law contract claim against D, a private party, seeking money that D allegedly owed B before B went bankrupt. In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), the Supreme Court held that federal bankruptcy judges lacked the constitutional power to adjudicate this controversy because they "do not enjoy the protections constitutionally afforded to Art. III judges." Id. at 60, 102 S.Ct. at 2866. This appeal raises a related question under Article III. It asks whether a federal bankruptcy court that is statutorily authorized to hear and determine "core" bankruptcy proceedings, 28 U.S.C. Sec. 157(b) (1982 ed., Supp. III), may adjudicate a state law claim arising from a contract that 1) was made after B went bankrupt and 2) was made as part of B's efforts to liquidate estate assets. In our view, the matter of

                timing and the relation to judicial administration of the bankrupt's estate make a critical constitutional difference between Marathon and the present case.    Marathon notwithstanding, the bankrupt company's legal action to collect a "post-petition" debt, brought as part of efforts to liquidate the estate, is a "core" proceeding that the bankruptcy court has the constitutional power to decide
                

I

Marathon. To understand the legal issue in this case, one must begin with Marathon, the case in which the Supreme Court held unconstitutional 28 U.S.C. Sec. 1471 (1976 ed., Supp. IV), a key jurisdictional provision of the Bankruptcy Act of 1978. The specific issue in that case was whether the bankruptcy court possessed the constitutional power to adjudicate a bankrupt's state law contract claim--a claim that arose before the filing of the bankruptcy petition. A plurality of four justices reasoned that bankruptcy courts are not Article III courts because their judges do not have life tenure or protection against salary diminution. It then reviewed the three "exception[s] from the general prescription of Art. III"--exceptions that, historically speaking, have been limited to congressional creation of "territorial courts," "courts-martial," and "legislative courts and administrative agencies" that "adjudicate cases involving 'public rights.' " Marathon, 458 U.S. at 64-67, 102 S.Ct. at 2867-69. "Public rights" were characterized as those that "arise 'between the government and others,' " as contrasted with private rights, which involve " 'the liability of one individual to another under the law as defined.' " Id. at 69-70, 102 S.Ct. at 2870-71 (quoting Ex parte Bakelite Corp., 279 U.S. 438, 451, 49 S.Ct. 411, 413, 73 L.Ed. 789 (1929) and Crowell v. Benson, 285 U.S. 22, 51, 52 S.Ct. 285, 292, 76 L.Ed. 598 (1932)). The plurality conceded that Congress might grant to non-Article III courts the power to find facts in cases involving certain private rights, namely congressionally created private rights. See id. at 80, 102 S.Ct. at 2876 ("[W]hen Congress creates a substantive federal right, it possesses substantial discretion to prescribe the manner in which that right may be adjudicated--including the assignment to an adjunct of some functions historically performed by judges."). But, the plurality said, the right contested in Marathon was neither a "public right" nor a "congressionally created right," so Congress could not delegate the power to adjudicate that right to a bankruptcy court that lacked the attributes prescribed in Article III. Two justices agreed with the plurality's result, but on the narrower ground that the issues in the lawsuit arose "entirely under state law," and that no case had "gone so far" as to permit a non-Article III court to adjudicate a claim like Northern's. Id. at 90-91, 102 S.Ct. at 2881-82, (Rehnquist, J., concurring in the judgment).

The Supreme Court has since adopted a view of Marathon that resembles that of the concurring justices. In Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 105 S.Ct. 3325, 3334, 87 L.Ed.2d 409 (1985), the Court characterized Marathon as a case in which it "was unable to agree on the precise scope and nature of Article III's limitations." It added:

The court's holding in [Marathon ] establishes only that Congress may not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to ordinary appellate review.

Id. 105 S.Ct. at 3334-35. This narrow view of the decision was reaffirmed last year. See Commodity Futures Trading Commission v. Schor, --- U.S. ----, 106 S.Ct. 3245, 3251, 92 L.Ed.2d 675 (1986).

The Bankruptcy Amendments and Federal Judgeship Act of 1984. After the Marathon decision, Congress amended the Bankruptcy Act of 1978 in an effort to cure the constitutional defect in its jurisdictional provision. The new jurisdictional provisions distinguish between "core" bankruptcy proceedings and those that are merely "related to" title 11 cases. See Appendix. Upon referral from the district court, the Non-core proceedings, those that the statute calls "related to" bankruptcy cases, concern aspects of the bankruptcy case that Marathon barred non-Article III judges from determining on their own. The sponsors of the 1984 Amendments that later became Sec. 157 referred to this category of proceedings as "Marathon-type suits," by which they meant claims "concerned only with State law issues that did not arise in the core bankruptcy function of adjusting debtor-creditor rights." 130 Cong.Rec. H1848 (daily ed. March 21, 1984) (statement of Representative Kindness). In non-core proceedings, unless the parties consent to the bankruptcy court's jurisdiction, the bankruptcy judge has the power only to "submit proposed findings of fact and conclusions of law to the district court," and the parties are entitled to de novo review of any matter to which they "timely and specifically" object. 28 U.S.C. Sec. 157(c)(1). Moreover, the bankruptcy court may (and sometimes must) abstain from hearing non-core matters, leaving the parties to sue in state court. See 28 U.S.C. Sec. 1334(c) (1982 ed., Supp. III).

bankruptcy judge has full statutory authority to "hear and determine ... all core proceedings...." 28 U.S.C. Sec. 157(b)(1). Representative Kastenmeier, one of the new law's co-sponsors, explained that core proceedings are "integral to the core bankruptcy function of restructuring debtor-creditor rights," 130 Cong. Rec. E1109 (daily ed. March 20, 1984), and that they include "all necessary aspects of a bankruptcy case," id. at E1108. The new law sets forth a nonexhaustive list of "core proceedings," including such obvious matters as "allowance[s] or disallowance[s] of claims," 28 U.S.C. Sec. 157(b)(2)(B), as well as matters more relevant to this case, namely: "matters concerning the administration of the estate" and "other proceedings affecting the liquidation of the assets of the estate," 28 U.S.C. Sec. 157(b)(2)(A), (O).

In the view of Sec. 157's sponsors, the distinction between core and non-core proceedings cured the constitutional defect in Sec. 1471. Bankruptcy judges would "decide all core bankruptcy proceedings, subject only to traditional appellate review," 130 Cong.Rec. E1108 (daily ed. March 20, 1984) (prepared statement of Representative Kastenmeier), as Marathon permitted. See Marathon, 458 U.S. at 71, 102 S.Ct. at 2871. Article III courts would retain ultimate control over "Marathon-type suits." The new structure would make it possible to the extent constitutionally permissible to hear matters relating to a single bankruptcy in a single forum. See 130 Cong.Rec. E1108 (daily ed. March 20, 1984) (prepared statement of Representative Kastenmeier).

The Present Litigation. The appellant in this case, Arnold Print Works, Inc. (Arnold), filed a petition in bankruptcy in 1981. It continued to manage its property under the provisions of the Bankruptcy Act as a "debtor-in-possession." 11 U.S.C. Sec. 1107 (1982). As part of an effort to liquidate its assets, it sold printing rollers to George Apkin and Sons (Apkin), the appellee. Apkin, believing that Arnold had misrepresented the quality of the rollers, refused to pay about $9000 of the $20,000 purchase price. In April 1985, Arnold sued Apkin in the federal bankruptcy court for the $9000. Apkin told the court that Arnold was in the wrong forum because Arnold's claim was basically a state law contract claim, which made the proceeding non-core. Apkin also pointed to the new Act's abstention provisions, asking the court to abstain pursuant to 28 U.S.C. Sec. 1334(c)(1), and thereby to force Arnold to sue in state court, where Apkin could insist on a jury trial.

The bankruptcy court discussed legal reasons for considering the proceeding to be core, but held that district court precedent required that it find the proceeding non-core. See In re Arnold Print Works, Inc., 54 B.R. 562, 569 (Bankr.D.Mass.1985) (citing Mohawk Industries, Inc. v. Robinson Industries, Inc., 46 B.R. 464, 466 (D.Mass.1985)). It chose not to...