In re South Portland Shipyard and Marine Railways

• Decision Date: 14 September 1983
• Docket Number: Civ. No. 83-0240 P.
• Citation: 32 BR 1012
• Parties: In re SOUTH PORTLAND SHIPYARD AND MARINE RAILWAYS CORP., and Railway Marine Corporation, Debtors.
• Court: U.S. District Court — District of Maine

32 B.R. 1012 (1983)

In re SOUTH PORTLAND SHIPYARD AND MARINE RAILWAYS CORP. and Railway Marine Corporation, Debtors.

Civ. No. 83-0240 P.

United States District Court, D. Maine.

September 14, 1983.

Robert Checkoway, Preti, Flaherty & Beliveau, Portland, Me., for debtors.

George Marcus, Portland, Me., for NETS.

Daniel Amory, Portland, Me., for Peter Drivas.

P. Benjamin Zuckerman, Verrill & Dana, Portland, Me., for Maine State Bar Assoc.

Gerald F. Petruccelli, Esq., Portland, Me., for Northern Nat'l Bank.

Gregory A. Tselikis, Bernstein, Shur, Sawyer & Nelson, Portland, Me., for the Creditor's Committee.

Peter Greenleaf, Asst. U.S. Trustee, Portland, Me., for U.S. Trustee.

OPINION & ORDER

CARTER, District Judge.

In November, 1982, both debtors in this proceeding filed petitions under Chapter 11 of Title 11 of the United States Code. On January 21, 1983, Near East Technological Services, Inc. (NETS) filed a proof of equity interest in each case, claiming to own 100% of the equity interest of each debtor corporation. Shortly thereafter, NETS filed a request for allowance of its proofs of equity interest under 11 U.S.C.A. §§ 506(b) and 502 (1979). The debtors both filed objections to NETS' proofs of equity interest. In addition, on March 1, the president of both debtor corporations, Peter Drivas, moved to dismiss NETS' requests for allowance of its proofs of equity interest on the grounds, inter alia, that the Bankruptcy Court lacked jurisdiction over the subject matter.

The Bankruptcy Court, 31 B.R. 770, held a joint hearing on Drivas' motions to dismiss and granted the motions by order dated June 29, 1983. Finding 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) controlling, the Bankruptcy Judge interpreted that case to find that neither the Bankruptcy Court nor the District Court had jurisdiction to hear the instant case under 28 U.S.C.A. § 1471 (Supp. 1983), the jurisdictional section of the Bankruptcy Reform Act. The Court also rejected the argument that the District Court retained jurisdiction to hear bankruptcy cases under either 28 U.S.C.A. § 1331 or § 1334 (1976). Finally, the Court determined that even if the District Court did have jurisdiction, the Bankruptcy Court still could not hear this case because Local Rule 41, which provides for the automatic reference to the bankruptcy judges of cases that would have been heard by them under Section 1471, is invalid. The rule's invalidity, according to the court below, stems both from the lack of authority for its promulgation and from its overbroad delegation of the District Court's authority in light of Northern Pipeline and F.R.Civ.P. 53.

Recognizing the importance of the jurisdictional question, the Bankruptcy Judge certified his order for immediate review by this Court.¹ NETS filed an appeal of the order as well. Because of the pendency of the certification of the appealed order, the Court has stayed the running of the usual appellate procedures. Having merged these review proceedings, this Court held a hearing at which the parties and several amici curiae argued the issue of jurisdiction.²

I. THE EFFECT OF THE HOLDING IN NORTHERN PIPELINE

Although the exact meaning of the Supreme Court's decision in Northern Pipeline has been the topic of much debate, there is no doubt that the Supreme Court struck down the Bankruptcy Reform Act's grant of jurisdiction to the Bankruptcy Courts. 458 U.S. at 85, 102 S.Ct. at 2879. Beginning at this point, the Bankruptcy Judge below correctly determined that he could hear the instant case only if there remains some jurisdiction in the District Court over bankruptcy matters and, further, if Local Rule 41 of the United States District Court validly empowers the Bankruptcy Court to exercise the District Court's jurisdiction.

A careful reading of the Northern Pipeline opinion under sound principles of case analysis yields the ineluctible conclusion that the Bankruptcy Reform Act's grant of jurisdiction to the District Courts in 28 U.S.C. § 1471(a) and (b) was left intact by the Supreme Court. A court, even the Supreme Court, may decide only the case before it, and the only challenge before the Court in Northern Pipeline was that to the jurisdiction of the Bankruptcy Court. No challenge to the jurisdiction of the District Court was raised because Northern Pipeline involved Marathon's motion to dismiss a state law contract claim brought in the Bankruptcy Court.

That the opinion deals only with the jurisdiction of the Bankruptcy Court is plainly demonstrated throughout. See White Motor Corp. v. Citibank, N.A., 704 F.2d 254 (6th Cir.1983); Braniff Airways, Inc. v. Civil Aeronautics Board, 27 B.R. 231 (N.D.Tex. 1983), aff'd 700 F.2d 214, 215 (5th Cir.1983), cert. denied, ___ U.S. ___, 103 S.Ct. 2122, 77 L.Ed.2d 1302 (1983). Justice Brennan broadly characterized the issue in the case as "whether the assignment by Congress to bankruptcy judges of the jurisdiction granted in § 241(a) of the Bankruptcy Act of 1978, 28 U.S.C. § 1471 (1976 ed., Supp. III) violates Article III of the Constitution." 458 U.S. at 52, 102 S.Ct. at 2862 (emphasis added). Although Justice Rehnquist objected to the breadth of that characterization in his concurring opinion, he, too, found the Bankruptcy Act's infirmity to lie in that part which "enables a Bankruptcy Court to entertain and decide Northern's lawsuit over Marathon's objection." Id. at 91, 102 S.Ct. at 2882 (Rehnquist, J. concurring) (emphasis added). Moreover, the sections of the plurality opinion that the Court signals as its holding deal specifically with the Bankruptcy Court's exercise of jurisdiction. For example, the Court holds that the Bankruptcy Act does not establish a constitutionally permissible adjunct scheme of adjudication because the Act carries the possibility of an unwarranted encroachment upon the judicial power of the United States, the exercise of which our Constitution reserves to Art. III courts. Id. at 77, 102 S.Ct. at 2874-75. Since the District Courts are Art. III courts, the Supreme Court is obviously not concerned with their exercise of Art. III power. The patent focus of the decision is the exercise of judicial power by the Bankruptcy Courts. This conclusion is further reinforced by the plurality's own gloss on the meaning of its decision in which it "concluded that the broad grant of jurisdiction to the bankruptcy courts contained in § 241(a) is unconstitutional." Id. at 87, 102 S.Ct. at 2880 (emphasis added).

Plainly, therefore, Northern Pipeline does not address the issue of the District Court's jurisdiction to hear bankruptcy cases. Some bankruptcy courts, like the one below, have mistakenly strained to find that the Supreme Court in Northern Pipeline also struck down the grants of jurisdiction to the District Courts contained in 28 U.S.C. in § 1471(a) and (b). See, e.g., In re Seven Springs Apartments, 33 B.R. 458, 10 B.C.D. 634 (Bkrtcy.N.D.Ga.1983); In re Conley, 26 B.R. 885 (Bkrtcy.M.D.Tenn. 1983); Winters National Bank & Trust v. Schear Group, 25 B.R. 463, 469 (Bkrtcy.S.D. Ohio 1982). For the most part, these courts base their analysis on congressional intent to eliminate a bifurcated system of bankruptcy jurisdiction by placing all bankruptcy jurisdiction in a single forum, the Bankruptcy Court. The jurisdictional grants to the District Courts in § 1471(a) and (b) are viewed as non-grants, mere legitimating devices which are inseverable from § 1471(c)'s grant to the Bankruptcy Courts of the exercise of "all of the jurisdiction conferred by this section on the district court." 28 U.S.C. § 1471(c).³ Without doubt Congress did intend to eliminate the bifurcated system of bankruptcy jurisdiction with the enactment of Section 1471(c). Congress' far more fundamental intent, however, was to establish a functioning bankruptcy system. A determination that jurisdiction exists in the District Court is essential if that purpose is to be attained.

The Bankruptcy Courts have tried to place the Supreme Court's imprimatur on their conclusion that Section 1471(a) and (b) must fall with Section 1471(c) by pointing to Justice Brennan's reference to "the facade of a grant to the district courts," Northern Pipeline, 458 U.S. at 86, 102 S.Ct. at 2879, and to Justice Rehnquist's agreement with the plurality that "this grant of authority is not readily severable from the remaining grant of authority to Bankruptcy Courts under § 241(a)." Id. at 91, 102 S.Ct. at 2882 (Rehnquist, J. concurring). A study of the words of Justices Brennan and Rehnquist in their proper context reveals that the § 1471(a) and (b) grants of bankruptcy jurisdiction to the District Courts retain vitality. In assessing the grant of bankruptcy jurisdiction to the Bankruptcy Courts behind the facade of a grant to the District Courts, Justice Brennan states that:

§ 241(a) of the Bankruptcy Act of 1978 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. Such a grant of jurisdiction cannot be sustained as an exercise of Congress\' power to create adjuncts to Art. III courts.

Id. at 87, 102 S.Ct. at 2879-80. The Court's conclusion that "the broad grant of jurisdiction to the bankruptcy courts" is unconstitutional indicates that it is subsection 1471(c) which has impermissibly turned subsections (a) and (b) into a facade. It is that subsection of the statute alone which must fall. As the Court suggested in Braniff Airways, Inc. v. Civil Aeronautics Board, for the judicial power to have been "impermissibly removed" from the District Courts by subsection (c), it must have first been vested in those courts in subsections (a) and (b). 27 B.R. 231. Nowhere does the Supreme Court express disapproval of the grant of jurisdiction to the District Courts.

It is also plain that...