In re Production Steel, Inc., 3-84-1079.

Decision Date17 April 1985
Docket NumberNo. 3-84-1079.,3-84-1079.
Citation48 BR 841
CourtU.S. District Court — Middle District of Tennessee

John Chambers, Margaret Huff, Nashville, Tenn., for plaintiff.

C. Kninian Cosner, Sam J. McAllester, Nashville, Tenn., Edith G. Haver and Henry G. Whitton, Law Dept., Bethlehem Steel Corp., Bethlehem, Pa., for defendant.

Joe B. Brown, U.S. Atty., Nashville, Tenn., Paul Blankenstein, Washington, D.C., for intervenor United States.

Steven R. Ross, Gen. Counsel, Washington, D.C., for intervenors House Speaker and Bipartisan Leadership Group.

Lawrence J. Kaiser, Kronish, Lieb, Shainswit, Weiner & Hellman, New York City, for intervenor Bankruptcy Judges.

Michael Davidson, Asst. Legal Counsel, Morgan J. Frankel, Asst. Legal Counsel, Washington, D.C., for intervenor U.S. Senate.


JOHN T. NIXON, District Judge.

Production Steel, Inc., as debtor-in-possession, has brought a preference action in bankruptcy court against Bethlehem Steel Corporation ("Bethlehem") seeking to recover $620,056.79 allegedly paid to Bethlehem during the ninety days prior to the filing of the Chapter 11 petition by Production Steel. On October 5, 1984, this Court granted the motion of Production Steel and Bethlehem for a partial withdrawal of reference of this action in order to rule on the constitutionality of Sections 104(a), 106(a), and 121(e) of the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("1984 Act"). Bethlehem challenges the constitutionality of all three sections. The United States (hereinafter referred to as "Justice Department") has intervened to support the constitutionality of Section 104(a) and to challenge the constitutionality of Sections 106(a) and 121(e). The United States Senate and the Speaker and Bipartisan Leadership Group of the United States House of Representatives have intervened in support of the constitutionality of Sections 106(a) and 121(e). Bankruptcy Judges Lundin, McFeeley, Norton, Paine, Robinson, and Votolato have intervened in support of the constitutionality of Sections 106(a) and 121(e). This cause came on for hearing on January 24, 1985. For the reasons discussed below, it is the judgment of the Court that Sections 104(a), 106(a), and 121(e) are constitutional.1

The part of Section 104(a) that is in dispute will be codified as 11 U.S.C. §§ 157, 158.2 The relevant portions of those sections permit the district court to refer any or all cases arising under Title 11 to the district's bankruptcy judges. 28 U.S.C. § 157(a). Section 157 authorizes the bankruptcy judges in "core" bankruptcy cases to enter orders and judgments subject to the review of the district courts. 28 U.S.C. §§ 157(b)(1), 158. The basis of one of the two constitutional challenges in this action is the standard of review that is applicable in core cases that have been appealed to district court.

For the purposes of judicial review, Section 157 divides cases heard by bankruptcy judges into core and noncore cases. A nonexhaustive list of core proceedings is listed in Section 157(b)(2).3 The bankruptcy judges are responsible for determining whether a proceeding should be considered as core or noncore. 28 U.S.C. § 157(b)(3). In core proceedings, the bankruptcy court enters final judgments, orders, and decrees which are subject to appeal to the district court. 28 U.S.C. § 158(a).

The bankruptcy court may not enter final judgments, orders, or decrees in noncore proceedings. 28 U.S.C. § 157(c)(1). Instead, the bankruptcy court submits findings of fact and conclusions of law to the district court, which are then subject to de novo review. Id. Section 157(d) provides that any reference to the bankruptcy court may be withdrawn by the district court in whole or in part "for cause shown."4

Bethlehem's contention is that because the bankruptcy court may enter final judgment in core proceedings, such as this preference action, that aspect of the 1984 Act is unconstitutional. In order to understand Bethlehem's position fully, it is necessary to discuss the two roles of the bankruptcy court. In noncore matters, the bankruptcy court acts as an adjunct to the district court, in a fashion similar to that of a magistrate or a special master. In noncore matters, the bankruptcy court may not enter final judgments without the consent of the parties, and its findings of fact and conclusions of law made in noncore matters are subject to de novo review by the district court. This aspect of the bankruptcy court's role is thus identical to the magistrate's role approved by the Supreme Court in United States v. Raddatz, 447 U.S. 667, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980).5 In contrast to the bankruptcy court's authority in noncore cases, the bankruptcy court may enter final judgments in so-called core cases, which are appealable to the district court. The standard for appeal of core matters to the district court is the same as in other civil matters appealed from the district court to the circuit courts of appeal. 28 U.S.C. § 158(c).

This dual approach to matters considered by the bankruptcy court was Congress' reaction to the Supreme Court's plurality decision in Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). Marathon was a contract and tort action brought in bankruptcy court by a debtor who had filed a petition in bankruptcy under Chapter 11. The defendant, Marathon Pipe Line Co., challenged the constitutionality of the bankruptcy judge's authority under the Bankruptcy Act of 1978 ("1978 Act"). In finding that the 1978 Act unconstitutionally conferred Article III judicial power upon judges who lacked life tenure and protection against salary reduction, the plurality was primarily concerned with the impact of the 1978 Act upon the ability of the judiciary in our system of checks and balances to remain independent of the other branches of government. Id. at 57-60, 102 S.Ct. at 2864-2866. The Court specifically rejected the argument that pursuant to any of its Article I powers, Congress was free to create non-Article III adjudicatory tribunals. Id. at 73, 102 S.Ct. at 2872. The Court discussed this situation in the context of the so-called public rights doctrine. The Court stated that the public rights doctrine includes matters that "could be conclusively determined by the Executive and Legislative branches." Id. at 68, 102 S.Ct. at 2870. Although the Court refused to make a definitive distinction between public and private rights, it held that as a minimum public rights involved matters between the government and others. Id. at 69, 102 S.Ct. at 2870 (quoting Ex Parte Bakelite Corp., 279 U.S. 438, 451, 49 S.Ct. 411, 413, 73 L.Ed. 789 (1929)).

Although acknowledging that Article III courts are not required for all federal adjudications, the Court was unwilling to permit Congress to establish legislative courts,6 thus bypassing Article III, unless there was a "limiting principle." Id. at 73. In the context of the facts of Marathon, the Supreme Court indicated that permitting non-Article III judges to decide all cases, including those which merely related to bankruptcy proceedings, demonstrated no limiting principle.

The substantive legal rights at issue in the present action cannot be deemed "public rights." Appellants argue that a discharge in bankruptcy is indeed a "public right," similar to such congressionally created benefits as "radio station licenses, pilot licenses, or certificates for common carriers" granted by administrative agencies. But 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. The former may well be a "public right," but the latter obviously is not.

Id. 458 U.S. at 71, 102 S.Ct. at 2871 (citation omitted). The Court concluded that "Art. sic III bars Congress from establishing legislative courts to exercise jurisdiction over all matters related to those arising under the bankruptcy laws." Id. at 76, 102 S.Ct. at 2874.

The Court in Marathon also rejected the argument that the bankruptcy courts under the 1978 Act should be viewed as mere adjuncts of the district courts. Id. at 86-87, 102 S.Ct. at 2879-2880. The Court recognized that if Congress has created a substantial 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." Id. But the Court held that the use of adjuncts in fact-finding and adjudicative roles was permissible only as long as the courts are able to maintain "sufficient control" over those adjuncts. Id. at 78-79, 102 S.Ct. at 2875-2876. Therefore, in order to pass constitutional muster, the adjuncts' functions must be restricted in such a way as to retain "the essential attributes" of judicial power in an Article III court. Id. at 81, 102 S.Ct. at 2876.

The 1984 Act clearly demonstrates Congress' attempt to cure the constitutional infirmities discussed in Marathon. Specifically, the Act provides for de novo review for issues, such as those arising in Marathon, which are not at the core of the federal bankruptcy power. In the same legislation Congress, apparently relying on the language in Marathon that matters at the core of the federal bankruptcy power "may well be a `public right'", Id. at 71, 102 S.Ct. at 2871, conferred on the bankruptcy courts authority to make final judgments in core cases. The Congress also took precautions to assure that the authority of the bankruptcy courts would be properly limited so that the Article III courts would retain the essential attributes of judicial power. In particular, all bankruptcy jurisdiction is conferred upon the...

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