In re Outlet Dept. Stores, Inc.

Decision Date19 February 1988
Docket NumberBankruptcy No. 82 B 10153 (TLB),Adv. No. 85-5120A.
Citation82 BR 694
PartiesIn re OUTLET DEPARTMENT STORES, INC., d/b/a the Edward Malley Company, Debtor. Miriam TEITELBAUM, Trustee, v. CHOQUETTE & CO., INC., Defendant.
CourtU.S. Bankruptcy Court — Southern District of New York

Edward & Angell, New York City, by Thomas E. Pitts, Jr., for Choquette & Co., Inc.

Jules Teitelbaum, P.C., New York City, by Gary Ginsburg, for Trustee of Outlet Dept. Stores, Inc.


TINA L. BROZMAN, Bankruptcy Judge.

Contesting both subject matter and personal jurisdiction, Choquette & Company, Inc. (Choquette), the defendant, seeks dismissal of this adversary proceeding for the recovery of a preference.


Outlet Department Stores, Inc. (the Debtor) operated department stores in Rhode Island, Massachusetts and Connecticut. It purchased merchandise from Choquette from time to time. During July through September, 1981 Choquette made seven shipments to the Debtor's warehouse in Rhode Island. The Debtor paid for these shipments by checks drawn in September and October, 1981. As a result, Choquette is not a creditor of this estate.

Choquette is a Rhode Island corporation which is a distributor of consumer products and electronic equipment. It conducts business in several New England states, but not New York. Choquette contends that it is not qualified to do business as a foreign corporation in New York and that its only connection with New York is an isolated sale of a color television in November 1984 and occasional accommodation sales.

On January 25, 1982 the Debtor filed a petition in this court under chapter 11 of the Bankruptcy Code (the Code). The case was converted to chapter 7 on January 31, 1983, and a trustee (Trustee) was appointed. On February 11, 1985 the Trustee commenced this adversary proceeding as provided in Fed.R.Bankr.P. 7004(b)(3) and (d) by mailing a summons and complaint to Choquette in Rhode Island. The complaint alleges that the payment received by Choquette in December 1981 was a preferential transfer pursuant to section 547 of the Code and therefore subject to avoidance. Choquette filed an answer denying subject matter and personal jurisdiction. It also made a demand for trial by jury. Subsequently, Choquette moved to dismiss on the same grounds. Choquette questions the constitutionality, as applied to these facts, of the jurisdictional scheme adopted by Congress in Title I of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, 98th Cong., 2d Sess. (1984) (the Reform Act) in light of the holding of the Supreme Court in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In addition, Choquette urges that Bankruptcy Rule 7004(d), which permits nationwide service of process, is constitutionally infirm and invalid because its promulgation exceeds the Supreme Court's authority under the Bankruptcy Enabling Act of 1978 (the Bankruptcy Enabling Act), 28 U.S.C. § 2075. In accordance with 28 U.S.C. § 2403(a), we notified the Attorney General of the United States of the pendency of the claims of unconstitutionality; he declined to intervene.


Chapter 6 of title 28 of the United States Code governs the designation and jurisdiction of the bankruptcy judges. Original jurisdiction of all bankruptcy cases and proceedings is vested in the district courts pursuant to 28 U.S.C. § 1334. The district court may then refer to the bankruptcy judges for its district any or all cases or proceedings under title 11 or arising in or related to a case under title 11. 28 U.S.C. § 157(a). As the statute is drawn, bankruptcy judges may hear and enter final orders and judgments in all cases arising under title 11 and in all core proceedings. An appeal from an order or judgment entered in either a case arising under title 11 or a core proceeding is taken only to the district court and "in the same manner as appeals in civil proceedings generally are taken to the court of appeals from the district courts . . ." 28 U.S.C. § 158(c). Related, non-core proceedings may also be referred to the bankruptcy judge, but not for final disposition unless the parties expressly consent; rather, the bankruptcy judge submits proposed findings of fact and conclusions of law to the district court. 28 U.S.C. § 157(c)(1) and (c)(2). The district court may then review de novo any matter timely objected to, together with the proposed findings and conclusions, and enter final judgment.

Congress did not attempt to define "core proceedings" but provided a nonexclusive list of matters within its embrace. 28 U.S.C. § 157(b)(2). Specifically included are "(F) proceedings to determine, avoid, or recover preferences." Choquette contends that regardless of whether a cause of action is stated in federal law, if the defendant objects to a non-Article III tribunal the court must determine whether the nature of the claim requires adjudication by an Article III judge. It must ascertain whether in fact the cause of action arises under federal law or instead is borrowed from common or other state law. Further, it must determine whether a "private right" is being asserted. See Thomas v. Union Carbide Agric. Products Co., 473 U.S. 568, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985). If the "federal" claim derives from state or common law or if the right asserted is a private one, Choquette contends that adjudication by a non-Article III tribunal (here the bankruptcy court) is unconstitutional. Choquette relies upon three Supreme Court decisions for this proposition. Northern Pipeline Constr. Co., Inc. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982); Thomas v. Union Carbide Agric. Products Co., supra, 473 U.S. 568, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985); and Commodity Futures Trading Commission v. Schor, 478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986).

The Ninth Circuit has recently reviewed and upheld the constitutionality of the bankruptcy court's jurisdiction to finally determine a state law fraudulent transfer action "borrowed" by the bankruptcy trustee pursuant to 11 U.S.C. § 544. Duck v. Munn (In re Mankin) 823 F.2d 1296 (9th Cir.1987), petition for cert. filed Oct. 26, 1987. Although Mankin is at first blush distinguishable because decided with reference to section 544 of the Code (which expressly permits the avoidance of transfers avoidable under state law), we find the court's analysis applies with even greater force to a preference action, which is based on federal statutory law. In upholding the district court's reversal of the bankruptcy judge's dismissal of the complaint, the circuit court distinguished Marathon, a breach of contract and warranty action, from a fraudulent transfer action, noting that the Marathon -type action was not inherently connected with the bankruptcy case, as was the avoidance action. The court explained that the trustee was acting pursuant to his responsibilities under the federal bankruptcy law on behalf of the creditors to facilitate the restructuring of the debtor-creditor relationship.

The Mankin court also analyzed the public rights doctrine as construed by the Supreme Court in Marathon, supra, 458 U.S. at 67-68, 102 S.Ct. at 2869-70; Union Carbide, supra, 473 U.S. at 586, 598, 105 S.Ct. at 3336, 3342 (1985) and Commodity Futures Trading Comm'n v. Schor, supra, 106 S.Ct. at 3258, 3259. It concluded that the doctrine basically embodies the historical underpinnings of the scope of proceedings which must be determined by an Article III tribunal. Because historically adjudication of core bankruptcy proceedings requires less Article III supervision, and Congress has elected to denominate certain proceedings as core, the circuit court determined that deference should be paid to Congress' choice.

Finally, the court reviewed the relation between a claim that arises under state law and one which arises under federal law but invokes a state-created right. It determined that "the crucial consideration is not which sovereign created the right, but rather whether Congress utilized the right for federal purposes." The purpose in creating the right in issue was to effectuate federal policy, the restructuring of debtor-creditor relations. Thus, adjudication by a non-Article III tribunal did not run afoul of the constitution.

We agree with the analysis in Mankin, which dictates the same result here. Further, the arguments Choquette now raises were advanced and rejected in Associated Grocers of Nebraska Cooperative, Inc. v. American Home Products Corp. (In re Associated Grocers of Nebraska Cooperative, Inc.), 62 B.R. 439 (D.Neb.1986). We cannot explain any better or more eloquently than did Judge Beam there the reasons why final adjudication of a preference action by a bankruptcy judge does not run afoul of Article III.

We agree with Choquette that, absent the defendant's consent to jurisdiction, Schor mandates that we ascertain whether the nature of the claim is such that only an Article III tribunal has the power to determine it. See Murray's Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272 (1856); Marathon, supra, 458 U.S. at 90, 102 S.Ct. at 2881; Union Carbide, supra, 105 S.Ct. at 3336. The required analysis has already been applied to the adjudication by bankruptcy judges of core proceedings, including preference actions in particular, and been found to pass constitutional muster. Mankin, supra, 823 F.2d 1296; Sommers v. Burton (In re Conard Corp.), 806 F.2d 610 (5th Cir.1986); DuVoisin v. Anderson (In re Southern Industries Banking Corp.), 66 B.R. 349 (Bankr.E.D. Tenn.1986) (decided subsequent to Schor, holding the statute conferring jurisdiction on bankruptcy judges to determine preference actions is constitutional in the wake of Marathon, Union Carbide, and Schor); Associated Grocers, supra, 62 B.R. 439. As those courts have concluded, a preference action arises under federal...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT