Harbour, In re

• Decision Date: 02 March 1988
• Docket Number: No. 85-2311,85-2311
• Citation: 17 Bankr.Ct.Dec. 369,840 F.2d 1165
• Parties: , 18 Collier Bankr.Cas.2d 627, 17 Bankr.Ct.Dec. 369, Bankr. L. Rep. P 72,208 In re Billy H. HARBOUR, Debtor. Donald W. HUFFMAN, Trustee and Bluefield Holding Company, Plaintiffs-Appellees, v. Diana M. PERKINSON and Frank N. Perkinson, Jr., t/a Perkinson & Perkinson, a Partnership, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1165

840 F.2d 1165

56 USLW 2527, 18 Collier Bankr.Cas.2d 627,

17 Bankr.Ct.Dec. 369,

Bankr. L. Rep. P 72,208

In re Billy H. HARBOUR, Debtor Donald W. HUFFMAN, Trustee and Bluefield Holding Company Plaintiffs-Appellees, v. Diana M. PERKINSON and Frank N. Perkinson, Jr., t/a Perkinson & Perkinson, a Partnership, Defendants-Appellants.

No. 85-2311.

United States Court of Appeals Fourth Circuit.

Argued May 6, 1986.

Decided March 2, 1988.

John H. Kennett, Roanoke, Va., for defendant-appellant Frank N. perkinson, jr.

Arthur P. Strickland; Strickland & Rogers, on brief, for defendant-appellant Diana M. Perkinson.

Donald W. Huffman (Bird, Kinder & Huffman, Roanoke, Va., on brief), for plaintiffs-appellees.

Before WIDENER, SPROUSE and CHAPMAN, Circuit Judges.

SPROUSE, Circuit Judge:

Diana M. Perkinson and her husband, Frank N. Perkinson, Jr., appeal from the district court's order denying their demand for a jury trial in this action against them by Donald W. Huffman, trustee in bankruptcy for the estate of Billy H. Harbour, and Bluefield Holding Company (hereafter Huffman or the trustee). The trustee seeks to recover funds that he alleges Diana Perkinson received from Harbour in transactions voidable as fraudulent transfers and illegal preferences under federal bankruptcy laws, and as voluntary conveyances voidable under Virginia state law. 11 U.S.C. Secs. 543, 547, 548; Va.Code Sec. 55-81.

Harbour's creditors placed him in involuntary bankruptcy on February 11, 1982. ¹ Harbour remained as the debtor in possession during the Chapter 11 proceedings until the court appointed Huffman trustee on February 8, 1983. On October 21, 1984, Huffman as trustee initiated this action to recover payments Harbour made to Diana Perkinson allegedly as legal fees. The trustee asserts Diana Perkinson received payments totalling $125,713.49 either within one year prior to Harbour being placed in bankruptcy or while he remained as debtor in possession. ² Diana Perkinson had represented Harbour and Bluefield Holding Company, a company wholly owned by Harbour, and had served as Secretary and registered agent of the company. Frank Perkinson was joined as a co-defendant in the trustee's action because he and his wife practiced law as a partnership, and she had deposited the disputed funds into their joint account.

The district court denied the Perkinsons' motion for a jury trial but certified its order for interlocutory appeal. 28 U.S.C. Sec. 1292(b). We granted the Perkinsons' petition for interlocutory appeal. The merits of the trustee's attempt to avoid the transfers and obtain the funds, of course, have not been determined. The issues on appeal involve the jurisdiction of the bankruptcy court and whether the Perkinsons are constitutionally or statutorily entitled to a jury trial to determine the parties' respective rights under 11 U.S.C. Secs. 543, 547, and 548 and Va.Code Sec. 55-81.

The Perkinsons first assert, in effect, that the funds Mrs. Perkinson received from Harbour were for fees earned under Virginia law so that the federal bankruptcy court has no jurisdiction to entertain the trustee's action, Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). They also assert that both the seventh amendment to the United States Constitution and the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (hereafter the 1984 Bankruptcy Act or the 1984 Act) grant them a right to a trial by jury. ³ We hold that the bankruptcy court has jurisdiction over these actions and that neither the seventh amendment nor the 1984 Act require a jury trial. We discuss seriatim the jurisdiction issue, the seventh amendment question and whether, apart from the constitutional requirements, the 1984 Act entitles the Perkinsons to a jury trial in the trustee's action against them.

I.

The Perkinsons advance three related arguments in support of their contention that the bankruptcy court has no jurisdiction over the trustee's actions. First, they assert that under Northern Pipeline a non-Article III bankruptcy judge has no jurisdiction over the trustee's avoidance action based on alleged fraudulent or preferential transfers because the actions involve only rights created by the substantive law of Virginia. They assert that any action involving the sums paid to Mrs. Perkinson is not a "case under Title 11," did not "arise under Title 11;" nor did the issues "arise in a case under Title 11." 28 U.S.C. Sec. 1334. ⁴ They argue instead that, at most, the issues in this case only "relate to a case under Title 11" and possess the same characteristics as Northern Pipeline's suit against Marathon Pipe Line, which could not be tried by a bankruptcy judge. Second, they argue that if Congress intended to include actions to litigate rights created by state substantive law as "core" proceedings, section 157(b) of the 1984 Act violates the principles of Northern Pipeline. ⁵ Third, the Perkinsons stress that Harbour transferred some of the property more than a year prior to the filing of the bankruptcy petition and, as to those transfers, the Virginia avoidance law, and not the federal bankruptcy law, provides the essential procedural mechanism under which the trustee can proceed. ⁶ Assuming these factual contentions are correct, we think neither of these classes of transfers are within the proscription of the Supreme Court's holding in Northern Pipeline.

Initially, the Perkinsons maintain that their right to legal fees was created by the substantive law of Virginia, so the trustee's attack of that right can only be determined in a state forum or by an Article III judge. They urge that the trustee's action is similar to Northern Pipeline's action against Marathon, which the Supreme Court reviewed in Northern Pipeline. The trustee, on the other hand, insists that his action is a "core" proceeding "arising in a case under title 11" that, under Northern Pipeline, can be determined by a bankruptcy judge.

In Northern Pipeline, the Supreme Court held that a jurisdictional provision of the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, violated the separation of powers doctrine by conferring Article III judicial power on non-Article III bankruptcy judges with respect to proceedings that included those only "related to cases under Title 11." The Court found no constitutional objections to the congressional exercise of its Article I Sec. 8 bankruptcy powers in assigning jurisdiction over traditional bankruptcy matters to bankruptcy courts. Although not so stated by the Court, those proceedings presumably were matters "arising under title 11, or arising in ... a case under title 11." 28 U.S.C. Sec. 1334 (replacing 28 U.S.C. Sec. 1471); see 1 Collier on Bankruptcy p 3.01[c][ii]-[iv] (15th ed. 1987) (hereafter Collier). It held, however, that a contract action based on state law must be resolved in a state court or by an Article III judge. See Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 105 S.Ct. 3325, 3334-35, 87 L.Ed.2d 409 (1985).

Our first task is to identify the jurisdictional restrictions applied to bankruptcy courts in Northern Pipeline and to determine if the trustee's action against the Perkinsons comes within them. In the aftermath of Northern Pipeline, the limitations encompassed in the phrase "related to cases under title 11" are not entirely clear. It generally has been held, however, that the Northern Pipeline restriction is limited to actions by the bankrupt or his trustee over the disposition of state-created substantive rights. ⁷

As Justice Rehnquist said in his concurring opinion to Northern Pipeline:

[T]he lawsuit in which Marathon was named defendant seeks damages for breach of contract, misrepresentation, and other counts which are the stuff of the traditional actions at common law.... There is apparently no federal rule of decision provided for any of the issues in the lawsuit; the claims of Northern arise entirely under state law.

458 U.S. at 90, 102 S.Ct. at 2881 (Rehnquist, J., concurring).

In his dissent, Chief Justice Burger added:

[T]he Court's holding is limited to the proposition ... that a "traditional" state common-law action, not made subject to a federal rule of decision, and related only peripherally to an adjudication of bankruptcy under federal law, must, absent the consent of the litigants, be heard by an "Art. III court" if it is to be heard by any court or agency of the United States.

Id. at 92, 102 S.Ct. at 2882 (Burger, C.J., dissenting).

If there was any question that these statements reflect the limits of Northern Pipeline 's holding, it was dispelled by the Court's decision in Thomas v. Union Carbide Agriculture Products Co., 105 S.Ct. at 3334-35, in which the Court noted:

[Our] holding in [Northern Pipeline ] 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. (Citations omitted).

Here, Harbour, the bankrupt, transferred a large amount of money to Mrs. Perkinson. The dispute between the trustee and Mrs. Perkinson over the right to this money does not depend upon the substantive law of Virginia, rather it is governed by federal bankruptcy laws. It is a dispute involving the restructuring of debtor-creditor relations. As the Northern Pipeline plurality opinion noted:

the restructuring of debtor-creditor relations, which is at the core of the federal bankruptcy power, must be distinguished from the adjudication of state-created private rights, such as the right to recover contract damages that is at issue in this case.

458 U.S. at 71, 102 S.Ct. at 2871.

In this case, the transfers that were made within a year prior to the filing of Harbour's bankruptcy petition ⁸...