In re Seven Springs Apartments, Phase II
| Decision Date | 15 November 1983 |
| Docket Number | Bankruptcy No. 81-01382A.,Civ. A. No. C 83-1660A |
| Citation | 34 BR 987 |
| Parties | In re SEVEN SPRINGS APARTMENTS, PHASE II, Debtor. SEVEN SPRINGS APARTMENTS, PHASE II, Appellant, v. CALMARK ASSETS, et al., Appellees. |
| Court | U.S. District Court — Northern District of Georgia |
Edward J. Hardin, Joyce Bihary and Janice E. Garlitz, Atlanta, Ga., for appellant.
Margaret H. Murphy, Atlanta, Ga., for appellee Calmark Asset Management, Inc.
J. Timothy White, Atlanta, Ga., for appellee I.J. Enterprises, Inc.
In this bankruptcy appeal the debtor challenges the bankruptcy court's conclusion that neither the bankruptcy court nor the federal district court has subject matter jurisdiction over bankruptcy cases in the wake of the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). See In re Seven Springs Apartments, Phase II, 33 B.R. 458 (1983) (Norton, J.). The issues on appeal are (1) whether the federal district court has subject matter jurisdiction over bankruptcy cases and (2) whether the Local Rule adopted by this en banc district court is a constitutionally permissible means of delegating initial bankruptcy duties from the district court to the bankruptcy court.
The debtor, Seven Springs Apartments, Phase II, is a California partnership composed of Seven Springs Phase II Associates (a California limited partnership); Clinton E. and Gloria L. Cooper, and Pacific Plaza Equities ("PPE") (a California corporation). The debtor was formed on September 16, 1980, for the purpose of acquiring Phase II of a garden apartment complex known as Seven Springs Apartments.
PPE was the former owner of both Phase I and Phase II. On September 24, 1980, PPE conveyed Phase II to the debtor, and on or about that same date PPE conveyed Phase I to a different group of investors, referred to as the "Pacific Pipe Group." As an element of the dual conveyances to the debtor and the Pacific Pipe Group, the debtor and the Pacific Pipe Group signed on September 24, 1980, a wrap-around promissory note (the "PPE Note") in the original principal amount of $11,000,000. The PPE Note provided for payment on February 15, 1981, of $1,150,000 to the holder of another instrument, the so-called "Plaza Wrap Note"1 On February 15, 1980, pursuant to an extension arrangement, PPE effected on behalf of the debtor and Pacific Pipe a payment in the amount of $142,792.15, which was applied to principal and interest. However, the payment of the balance was not made, and on March 31, 1981, the debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code.
In addition to the PPE and Plaza Wrap Notes, Phase I and Phase II are subject to at least three additional mortgages which encumber both phases as a single parcel of property.2 With the sole exception of the Plaza Wrap Note, all of these mortgages and debts are currently being serviced.
As a result of the default on the promissory note and the debtor's petition in bankruptcy, a plethora of litigation erupted. In an effort to resolve this litigation a settlement was negotiated, and on July 7, 1982, its terms were announced to the bankruptcy court. To implement the settlement the debtor filed a Revised Plan of Reorganization on July 23, 1982. The settlement and the Debtor's Reorganization Plan provided that PPE would cure all defaults and bring current all payments on the underlying debt of Phases I and II by making cash payments of $1,150,000. With the consent of the Pacific Pipe Group, both phases of the property were then to be sold to The Considine Co. ("Considine") for a total purchase price of $15,000,000.
On August 24, 1982, the debtor and Considine entered into an Agreement for Sale. The Agreement was transmitted to secured creditors on August 25, 1982, and submitted to the bankruptcy court for approval on September 8, 1982. Considine insisted in the Agreement for Sale that all indebtedness which matured before November 30, 1989, have its due date extended to November 30, 1989. This provision affected two of the notes: the Plaza Wrap Note held by I.J. Enterprises and the Prior Note held by Calmark.3 I.J. Enterprises had conditionally consented to the extension, provided the transaction was finalized before November 30, 1982. Calmark never consented to this provision and claimed that a due-on-sale clause in its note entitled it to accelerate the entire amount of its indebtedness upon the proposed sale of the property to Considine.4
A confirmation hearing on the debtor's Revised Plan and Application for Approval of the Agreement for Sale was held on September 20-21, 1982. On December 24, 1982, over three months after the confirmation hearing, the bankruptcy court had not yet ruled on the debtor's plan, and the Supreme Court's stay of its mandate in Northern Pipeline had expired.5 On June 13, 1983, almost nine months after the confirmation hearing, the bankruptcy court confirmed the debtor's plan and acknowledged that it had intended to confirm the plan in November of 1982, but was unable to do so because of the "press of business."
The very next day, on June 14, 1983, the bankruptcy court entered an order revoking the Order of Confirmation. In its June 14 opinion the bankruptcy court concluded that Northern Pipeline precluded both a bankruptcy and a federal district court from confirming a Chapter 11 reorganization plan which affected the state law contract and property rights of the debtor and its creditors. The bankruptcy court also found the Local Rule invalid and held that it did not give the bankruptcy court legal or constitutional authority to enter an Order of Confirmation.
The bankruptcy court predicated its conclusion that no federal court had jurisdiction over bankruptcy matters on the premise that Northern Pipeline invalidated all of section 241(a) of the Bankruptcy Reform Act of 1978 ("Reform Act"). Pub.L. 95-598, 92 Stat. 2549 (1978) (codified at 28 U.S.C. §§ 1471-1482 (Supp. III 1979)).6 This court rejects the bankruptcy court's premise, and for the reasons stated below concludes that Northern Pipeline struck down the jurisdictional provisions relating only to the bankruptcy courts, and did not invalidate the separate, primary jurisdictional grant to the federal district courts.
Both legally and factually Northern Pipeline involved only the jurisdiction of the bankruptcy courts. The question framed by the Northern Pipeline plurality was whether "the assignment by Congress to bankruptcy judges of the jurisdiction granted in § 241(a) of the Bankruptcy Act of 1978 . . . violated Art. III of the Constitution." 102 S.Ct. at 2862. (emphasis added). After analyzing whether the Reform Act impermissibly vested the bankruptcy courts with the essential attributes of Article III power, the Court concluded "that the broad grant of jurisdiction to the bankruptcy courts contained in § 241(a) is unconstitutional. . . ." Id. 102 S.Ct. at 2880.
Stated simply, Northern Pipeline invalidated only the jurisdiction relating to the bankruptcy court. The Court undoubtedly recognized the two-tiered bankruptcy system existing under the Reform Act, id. 102 S.Ct. at 2862 n. 3, yet, it neither expressly nor implicitly invalidated the jurisdictional grant to the district courts in bankruptcy matters. This is understandable, since the constitutionally offensive provision in the Reform Act was the delegation of Article III powers to non-Article III judges. The Court recognized that "Art. III bars Congress from establishing legislative courts to exercise jurisdiction over all matters related to those arising under the bankruptcy laws." Id. 102 S.Ct. at 2874. Federal district courts are not the "legislative courts" referred to in the Northern Pipeline decision, and since they are Article III courts, the constitutional evil present in the delegation of Article III powers to bankruptcy courts is simply absent.
The conclusion by the bankruptcy court that footnote 40 in the plurality opinion invalidated all of section 1471 is erroneous.7 Footnote 40 merely stated that the single statutory grant of jurisdiction to the bankruptcy courts was not divisible. In other words, under section 1471(c), bankruptcy court jurisdiction over traditional bankruptcy claims could not be severed from similar jurisdiction over nontraditional, state-law claims. Footnote 40 did not state that the concurrent jurisdiction between federal district and bankruptcy courts could not be discerned or severed. See White Motor Corp. v. Citibank, N.A. 704 F.2d 254, 259-60 (6th Cir.1983); In re Color Craft Press, Ltd., 27 B.R. 962, 964 (D.C.D.Utah 1983) (en banc).
This interpretation is further supported by Justice Rehnquist's concurrence in which he was joined by Justice O'Connor. Justice Rehnquist would hold only that portion of the Reform Act unconstitutional which enabled a bankruptcy court to entertain and decide a nontraditional, state law claim. Id. 102 S.Ct. at 2882. (Rehnquist, J. concurring). But Justice Rehnquist agreed that "this limited grant of authority is not readily severable from the remaining grant of authority to Bankruptcy Courts under § 241(a). . . ." Id. (). This concurrence emphasizes that it is the grant of jurisdiction to the bankruptcy courts in section 1471(c) which is unconstitutional, not the district courts' bankruptcy jurisdiction under section 1471(a) and (b).
Several other courts have reached this same conclusion. To date, every United States Court of Appeals confronted with the issue has unanimously concluded that Northern Pipeline invalidated the jurisdictional grant to the bankruptcy courts embodied in section 1471(c), and did not affect the jurisdictional grant in sections 1471(a) and (b). See Coastal Steel Corp. v....
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