In re Franklin Computer Corp.

• Decision Date: 26 June 1985
• Docket Number: Adv. No. 84-0938G.,Bankruptcy No. 84-02016G
• Parties: In re FRANKLIN COMPUTER CORPORATION (Jointly administered with Franklin Technologies, Inc.), Debtor. FRANKLIN COMPUTER CORPORATION, Plaintiff, v. HARRY STRAUSS & SONS, INC.,[1] Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

50 B.R. 620 (1985)

In re FRANKLIN COMPUTER CORPORATION (Jointly administered with Franklin Technologies, Inc.), Debtor FRANKLIN COMPUTER CORPORATION, Plaintiff, v. HARRY STRAUSS & SONS, INC.,¹ Defendant.

Bankruptcy No. 84-02016G, Adv. No. 84-0938G.

United States Bankruptcy Court, E.D. Pennsylvania.

June 26, 1985.

Marvin Krasny, Adelman, Lavine, Krasny, Gold & Levin, Philadelphia, Pa., for debtor/plaintiff, Franklin Computer Corp.

Douglas J. Smillie, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for the defendant, Harry Strauss & Sons.

Michael A. Bloom, Philadelphia, Pa., for Creditors' Committee.

OPINION

EMIL F. GOLDHABER, Chief Judge:

The threshold issue in the matter at hand, arising under a defendant's motion for abstention or, alternatively, for a change of venue, is whether a debtor's complaint to recover an account receivable is a core proceeding under 28 U.S.C. § 157(b). For the reasons espoused below, we conclude that the action is a core proceeding and we will deny the defendant's motion for abstention or a change of venue.

We outline the facts of this controversy as follows:² The debtor filed a petition for reorganization under chapter 11 of the Bankruptcy Code ("the Code") approximately one year ago. At some undisclosed time prior to the filing of the instant complaint, the defendant, Harry Strauss & Sons ("Strauss"), ordered merchandise worth $15,524.39 from the debtor. It is disputed whether Strauss undertook acts sufficient to effect "acceptance" of the goods under applicable commercial law and render it liable for payment.

The debtor filed the instant complaint to collect the $15,524.39 account receivable which is allegedly due from Strauss. Strauss filed a timely answer to the complaint and later filed the motion at issue for abstention or, in the alternative, for a transfer of venue to the bankruptcy court for the District of New Jersey. The parties have agreed to resolution of the motion without our convening an evidentiary hearing and without the submission of a stipulation of facts. We consequently have few undisputed facts on which to base our ruling. Nonetheless, we find that the debtor's principal place of business is in Pennsauken, New Jersey, which lies less than 10 miles from the court house in which the instant action is pending and that the underlying dispute is an action for collection of an account receivable which will be resolved under principles of state law, probably those of New Jersey.

As stated above, the threshold issue is whether a debtor's action in the bankruptcy court to collect an account receivable is a core proceeding, thus giving that court the power to enter a final order disposing of the matter. A resolution of this question requires a review of the history of the jurisdiction of the bankruptcy court on these matters since the passage of the Bankruptcy Reform Act of 1978 ("the 1978 Act").

With the passage of the 1978 Act, Congress vested the district courts with "original and exclusive jurisdiction of all cases under title 11." 28 U.S.C. § 1471 (repealed) (emphasis added). The district court also had "original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11". § 1471(b) (repealed) (emphasis added). The "bankruptcy court for the district in which a case under title 11 was commenced exercised all of the jurisdiction conferred by § 1471 on the district courts." § 1471(c) (repealed). Thus, all jurisdiction under these provisions was effectively lodged in the bankruptcy court. The legislative history of the 1978 Act summarized the scope of the power available to the bankruptcy judge under that Act:

§ 1471. Jurisdiction.

Subsection (a) of this section gives the proposed bankruptcy courts original and exclusive jurisdiction of all cases under title 11. The jurisdiction granted under this provision is of the whole bankruptcy case. Subsection (b) governs jurisdiction of proceedings in the case. This subsection dictates that all bankruptcy cases are commenced in the United States bankruptcy courts.

Subsection (b) is a significant change from current law. It grants the bankruptcy court original (trial), but not exclusive, jurisdiction of all civil proceedings arising under title 11 or arising under or related to cases under title 11. This is the broadest grant of jurisdiction to dispose of proceedings that arise in bankruptcy cases or under the bankruptcy code. Actions that formerly had to be tried in State court or in Federal district court, at great cost and delay to the estate, may now be tried in the bankruptcy courts. The idea of possession or consent as the sole bases for jurisdiction is eliminated. The bankruptcy court is given in personam jurisdiction as well as in rem jurisdiction to handle everything that arises in a bankruptcy case.

The jurisdiction granted is of all proceedings arising under title 11 or arising under or related to a case under title 11. The bill uses the term "proceeding" instead of the current "matters and proceedings" found in the Bankruptcy Act and Rules. The change is intended to conform the terminology of title 28, under which anything that occurs within a case is a proceeding. Thus, proceeding here is used in its broadest sense, and would encompass what are now called contested matters, adversary proceedings, and plenary actions under the current bankruptcy law. It also includes any disputes related to administrative matters in a bankruptcy case.

The use of the term "proceeding," though, is not intended to confine the bankruptcy case. Very often, issues will arise after the case is closed, such as over the validity of a purported reaffirmation agreement, proposed 11 U.S.C. 524(b), the existence of prohibited post-bankruptcy discrimination, proposed 11 U.S.C. 525, the validity of securities issued under a reorganization plan, and so on. The bankruptcy courts will be able to hear these proceedings because they arise under title 11.

The phrase "arising under" has a well defined and broad meaning in the jurisdictional context. By a grant of jurisdiction over all proceedings arising under title 11, the bankruptcy courts will be able to hear any matter under which a claim is made under a provision of title 11. For example, a claim of exemptions under 11 U.S.C. 522 would be cognizable by the bankruptcy court, as would a claim of discrimination in violation of 11 U.S.C. 525. Any action by the trustee under an avoiding power would be a proceeding arising under title 11, because the trustee would be claiming based on a right given by one of the sections in sub-chapter III of chapter 5 of title 11. Many of these claims would also be claims arising under or related to a case under title 11. Indeed, because title 11, the bankruptcy code, only applies once a bankruptcy case is commenced, any proceeding arising under title 11 will be in some way "related to" a case under title 11. In sum, the combination of the three bases for jurisdiction, "arising under title 11," "arising under a case under title 11," and "related to a case under title 11," will leave no doubt as to the scope of the bankruptcy court\'s jurisdiction over disputes.

H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 445-46 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 6400-01.

Prior to the passage of the 1978 Act, Congress voiced concern that the breadth of the jurisdiction accorded the bankruptcy court under proposed § 1471 would run afoul of constitutional prohibitions. Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 61 n. 12, 102 S.Ct. 2858, 2866 n. 12, 73 L.Ed.2d 598 (1982). Congressional anxiety over the matter was ultimately justified by the Supreme Court's decision in Marathon. In that case a debtor that filed for reorganization commenced suit in bankruptcy court against a defendant "for alleged breaches of contract and warranty, as well as for alleged misrepresentation, coercion, and duress." Marathon, 458 U.S. at 56, 102 S.Ct. at 2863. The bankruptcy court denied the defendant's motion to dismiss but the district court reversed. On appeal the Supreme Court held that the bankruptcy court could not constitutionally adjudicate the debtor's state law claims because the jurisdiction given to the bankruptcy courts under § 1471 was too broad since the bankruptcy judges, being Article I³ judges, lack the protections of life tenure and unreducable compensation which guarantees inhere to the offices of Article III judges. The Supreme Court held that § 1471 "has impermissibly removed most, if not all, of `the essential attributes of judicial power' from the Art. III district court, and has vested those attributes in a non-Art. III adjunct." Marathon, 458 U.S. at 87, 102 S.Ct. at 2880. The decision was predicated on the doctrine of separation of powers among the three branches of the federal government. The Supreme Court feared that the Article I bankruptcy judges, having been given virtually co-extensive jurisdiction with the district courts in all matters related to a pending bankruptcy case, would be subject to excessive political pressure from the legislative and executive branches of government, to the derogation of the Article III judges, since bankruptcy judges do not have the tenure and salary guarantees of Article III judges. Marathon, 458 U.S. at 83, 102 S.Ct. at 2877. Marathon did not hold that Article I bankruptcy judges could not constitutionally adjudicate state law claims although the question of the resolution of state created rights in bankruptcy court presented the Supreme Court with the factual vehicle for declaring the unconstitutionality of § 1471 in Marathon. "It is clear that under the actual holding in Marathon, the constitutional ability of an adjunct court to determine state law issues is to be determined by the nature and extent of control by Article III courts and whether there is a nexus between the proceeding involving a state...