In re Omega Equipment Corp.

• Decision Date: 19 July 1985
• Docket Number: Civ. A. No. 84-2241,84-2398.
• Citation: 51 BR 569
• Parties: In re OMEGA EQUIPMENT CORP., t/a Omega, Debtor. OMEGA EQUIPMENT CORP., Plaintiff, v. JOHN C. LOUIS CO., INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

51 B.R. 569 (1985)

In re OMEGA EQUIPMENT CORP., t/a Omega, Debtor OMEGA EQUIPMENT CORP., Plaintiff, v. JOHN C. LOUIS CO., INC., et al., Defendants.

Civ. A. Nos. 84-2241, 84-2398.

United States District Court, District of Columbia.

July 19, 1985.

Francis P. Dicello, Washington, D.C., for plaintiff.

Arthur L. Rhoads, Jr., Baltimore, Md., Jacob A. Stein, Washington, D.C., James E. Young, Cleveland, Ohio, for defendants.

MEMORANDUM AND ORDER

JACKSON, District Judge.

These consolidated bankruptcy appeals present the question whether a United States bankruptcy court, established by Congress under Art. I of the Constitution, possesses the power of judicial contempt as among those inherent in its general powers conferred by 11 U.S.C. § 105.¹ The Court concludes that, as is the case with U.S. magistrates and other non-Art. III adjudicative officers, bankruptcy judges at present cannot be, and have not been, endowed with contempt power, but rather, in matters of contempt are limited to the submission of proposed findings of fact and conclusions of law to the parent federal district court, with a final adjudication of contempt to emanate, if at all, from the district judge following de novo review.

I.

Appellant Gradall Company ("Gradall") is an Ohio corporation which manufactures and sells construction excavation equipment through regional distributors, of whom appellant John C. Louis Company, Inc. ("Louis") services the Washington, D.C.-Baltimore, Maryland, metropolitan area. Appellee Omega Equipment Corporation ("Omega") is a Washington area lessor of construction equipment which, in October, 1983, filed a Chapter 11 petition in the U.S. Bankruptcy Court for the District of Columbia and is currently operating its business as a debtor-in-possession. Louis, a creditor of Omega, was named to an Unsecured Creditors' Committee (the "Committee") of 20 of Omega's largest creditors, and, while serving on the Committee, began negotiating for the sale of Gradall equipment to several Omega employees who had, in the meantime, formed a corporation known as Gradall Specialists, Inc. ("GSI") to compete with Omega. Learning of the impending defection, Omega applied to the bankruptcy court for preliminary relief.

The bankruptcy court found Louis in breach of its fiduciary duty to its fellow unsecured creditors and, on March 26, 1984, having earlier entered a temporary restraining order, preliminarily enjoined Louis, its agents, and all others "in active concert or participation" having notice thereof, from "financing, cosigning, or guaranteeing debt" of, and from leasing or selling equipment to, or "otherwise assisting" either GSI or Omega's former employees who had formed it "in any fashion" in connection with their efforts to form a business competitive with Omega.

Thereafter, on or about the first of May, 1984, Gradall apparently sold the equipment which had been the subject of Louis' sales negotiations to GSI directly, by-passing Louis altogether (although with its knowledge and acquiescense). In the two weeks following, Omega filed first an "application," and then a "supplemental complaint," praying that Louis, its president, GSI and its principals, and Gradall be adjudged in contempt for their concerted violation of the bankruptcy court's preliminary injunction, and that the transaction be ordered rescinded and damages awarded.

On June 18, 1984, having denied defendants' motions to dismiss,² the bankruptcy court took evidence from which it found, by its Order of June 22, 1984, that Gradall, Louis, and Louis' president Wilmer S. Davison, having actual notice of the injunction, deliberately sought to, and did, evade its effect by engaging in the direct sale of construction equipment to GSI, and adjudged them in civil contempt. Motions for leave to take interlocutory appeals ensued, and were allowed by the district court on December 4, 1984, following a remand to the bankruptcy court to make a determination of appropriate relief.³

Appellants present three principal questions on appeal: whether the bankruptcy court erred in denying appellants' motions to dismiss for lack of subject matter jurisdiction; whether the bankruptcy court erred by issuing its own order adjudicating contempt in a "related" proceeding in which it was obliged to submit a proposed order for entry by this Court; and whether the bankruptcy court erred in its factual determination that appellants violated its injunction. Because the Court concludes that the bankruptcy court was not empowered to enter the contempt judgment, and that it must hear the matter de novo, it does not reach the latter issue.⁴

II.

On the basis of a review of the history of the bankruptcy system and the extent to which bankruptcy jurisdiction has, over the years, been exercised to greater or lesser degree by district judges themselves, at least one federal district court has held, in the wake of the Supreme Court's decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), that any attempt to grant civil contempt power to post-1978 bankruptcy judges would be unconstitutional. See In Re: Cox Cotton Co., 24 B.R. 930, 939 ff. (E.D.Ark.1982), vacated sub nom. Lindsey v. Ipock, 732 F.2d 619 (8th Cir.), cert. denied sub nom. Cryts v. French, ___ U.S. ___, 105 S.Ct. 247, 83 L.Ed.2d 185 (1984).⁵ On the other hand, at least one U.S. bankruptcy court has rejected Cox Cotton's analysis in holding that it possessed the contempt power to enforce the automatic stay provision of the Bankruptcy Act, 11 U.S.C. § 362, against a member of the court-appointed reorganization committee who continued to prosecute an individual claim against the debtor. In re: Johns-Manville Corp., 26 B.R. 919, 923-24 (1983). The 1984 Amendments which the Marathon decision precipitated do not expressly purport to extend to or withhold the power of contempt from bankruptcy courts, however, and even if they did, the question remains open as to whether, assuming it has ever been intended that the bankruptcy courts, as they are constituted by the Bankruptcy Act of 1978, exercise the power, they can constitutionally be enabled to do so as long as they remain non-Art. III courts.

It seems apparent that it is not so much the nature of a particular power as it is the extent to which it has remained subject to the dominion of an Art. III court that has been the constitutional parameter of congressional bestowals of judge-like powers upon non-Art. III tribunals. As Justice Brennan, writing for the plurality in Marathon, 458 U.S. at 78-84, 102 S.Ct. at 2875-78, observed, Congress properly can confer, and in a host of contexts has conferred upon all manner of "legislative" courts and agencies, the power to ascertain facts which will determine matters of congressionally-created rights. See also Crowell v. Benson, 285 U.S. 22, 52 S.Ct. 285, 76 L.Ed. 598 (1932). The Supreme Court has also sanctioned the use of "adjunct fact-finders" in the adjudication of issues of even constitutional proportions. See, e.g., United States v. Raddatz, 447 U.S. 667, 100 S.Ct. 2406, 65 L.Ed.2d 424, reh'g denied, 448 U.S. 916, 101 S.Ct. 36, 65 L.Ed.2d 1179 (1980). The saving consideration in each instance has been the retention of "`the essential attributes of the judicial power'" in an Art. III court, Marathon, supra, 458 U.S. at 77, 102 S.Ct. at 2874, quoting Crowell v. Benson, 285 U.S. at 51, 52 S.Ct. at 292, and, in particular, the power of enforcement. See Thomas v. Union Carbide Agricultural Products Co., ___ U.S. ___, ___ - ___, 105 S.Ct. 3325, 3337-40, 87 L.Ed.2d 409 (1985); see also Pacemaker Diagnostic Clinic of America, Inc. v. Instromedix, Inc., 725 F.2d 537, 544-46 (9th Cir.) (en banc), cert. denied, ___ U.S. ___, 105 S.Ct. 100, 83 L.Ed.2d 45 (1984).

The several circuits' decisions which have upheld consensual reference of civil cases to magistrates pursuant to 28 U.S.C. § 636(c), a provision of the Federal Magistrate Act of 1979, are immediately instructive for purposes of this case.⁶ In each the court determined that the Magistrate Act had retained the "essential attributes" of the judicial power in Art. III tribunals and had thus escaped constitutional infirmity. Critical to the decision of at least three of these courts has been the reservation of the power of judicial contempt in the district court. As explained by the Seventh Circuit,

A clear line of demarcation between the power of an Art. III judge and that of a magistrate may be found in the allocation of the contempt power, because, under no aspect of the Magistrate Act, can a magistrate punish for contempt. 28 U.S.C. § 636(e). According to section 636(e), if an individual commits an act constituting contempt of court, the magistrate must certify the facts of the incident to a district judge. The judge, after holding a hearing and evaluating the allegedly contemptuous conduct, may determine the nature and severity of appropriate punishment, if indicated. ... The power to punish for contempt of court is the means by which many court judgments ... are enforced. ... It remains the primary means of enforcing many court judgments, particularly injunctions. The vesting of this power exclusively in the hands of Article III judicial officers would seem, for present purposes at least, to provide an adequate distinction between such judges and non-Article III officers.

Geras v. LaFayette Display Fixtures, Inc., 742 F.2d 1037, 1044 (7th Cir.1984). See also Pacemaker, 725 F.2d at 545; Collins v. Foreman, 729 F.2d 108, 116-17 (2d Cir.), cert. denied, ___ U.S. ___, 105 S.Ct. 218, 83 L.Ed.2d 148 (1984).

The conclusion of the bankruptcy court in In Re: Johns-Manville Corp., 26 B.R. 919 (Bankr.S.D.N.Y.1983) that it was, consistent with the Constitution, empowered to punish for civil contempt is dubious. Its decision was based on 28 U.S.C. § 1481, which, at the time, provided that "a bankruptcy court shall have the powers of ...