In re Southern Indus. Banking Corp.

• Decision Date: 26 September 1986
• Docket Number: Bankruptcy No. 3-83-00372.
• Citation: 66 BR 349
• Parties: In re SOUTHERN INDUSTRIAL BANKING CORPORATION, d/b/a Daveco, Debtor. Thomas E. DuVOISIN, Liquidating Trustee, Plaintiff, v. Hugh G. ANDERSON and Hazel Anderson, et al., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

66 B.R. 349 (1986)

In re SOUTHERN INDUSTRIAL BANKING CORPORATION, d/b/a Daveco, Debtor Thomas E. DuVOISIN, Liquidating Trustee, Plaintiff, v. Hugh G. ANDERSON and Hazel Anderson, et al., Defendants.

Bankruptcy No. 3-83-00372.

United States Bankruptcy Court, E.D. Tennessee.

September 26, 1986.

COPYRIGHT MATERIAL OMITTED

MEMORANDUM ON THE LIQUIDATING TRUSTEE'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT

CLIVE W. BARE, Bankruptcy Judge.

Plaintiff in these consolidated preference actions, 11 U.S.C.A. § 547 (West 1979), is the liquidating trustee of a trust established under the modified plan of reorganization confirmed by the court in the Southern Industrial Banking Corporation (SIBC) case. Defendants, former holders of investment certificates sold by SIBC, received full or partial payment on their investment certificates within the 90-day period preceding the filing of the SIBC bankruptcy petition. Plaintiff seeks partial summary judgment on twelve different issues, including the authority of this court to decide these preference actions. 28 U.S.C.A. § 157(a) and (b) (West Supp.1986).¹

I

On March 10, 1983, SIBC filed its chapter 11 petition. SIBC operated as a debtor in possession only until April 18, 1983, when this court ordered the appointment of a trustee due to the gross mismanagement of the affairs of SIBC. 11 U.S.C.A. § 1104(a)(1) (West 1979). On April 19, 1983, the court appointed Irwin Deutscher as trustee. On November 28, 1983, the court confirmed a modified plan of reorganization (proposed by trustee Deutscher) conditioned upon the occurrence of certain contingencies. Those contingencies were either satisfied or waived, and the court entered an order of confirmation effective January 20, 1984.

Pursuant to Order No. 92, entered January 20, 1984, the court appointed plaintiff Thomas E. DuVoisin as the liquidating trustee of the Creditors' Liquidation Trust created under the SIBC plan for reorganization. Claims based on preferential transfers are assets of the Creditors' Liquidation Trust. In accordance with his duties as liquidating trustee, between May 21, 1984, and April 19, 1985, plaintiff filed more than nine hundred (900) adversary proceedings seeking to recover alleged preferences from SIBC investors who cashed their investment certificates, both prior to and upon maturity, within the 90-day period preceding the filing of the SIBC bankruptcy petition. On May 23, 1985, pursuant to Bankruptcy Rule 7042, the court consolidated these adversary proceedings.

II SIBC's Eligibility as a Debtor Under Title 11

On September 23, 1985, upon the motion of certain defendants, the district court withdrew the reference to this court of the consolidated preference actions. 28 U.S.C.A. § 157(d) (West Supp.1986). In the district court the defendants² argued that SIBC was not eligible to be a debtor in bankruptcy because it was a "bank" or "industrial bank" or "similar institution." 11 U.S.C.A. § 109 (West 1979 & Supp. 1986).³ Disagreeing, the district court concluded SIBC was not a "bank" within the scope of § 109(b)(2) and that under either the state classification test or the independent classification test SIBC was eligible to be a debtor in bankruptcy. DuVoisin v. Anderson (In re Southern Industrial Banking Corp.), 59 B.R. 978, 986 (E.D. Tenn.1986).⁴ Further, the district court re-referred the consolidated preference actions to this court for resolution of the remaining issues.

III Constitutional Challenges to the Authority of the Bankruptcy Court

Defendants assert two arguments challenging the authority of this court to adjudicate these preference actions. First, defendants contend this court lacks subject matter jurisdiction because it is not an Article III court. Secondly, defendants maintain subject matter jurisdiction is lacking because the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (1984), effected unconstitutional legislative appointments of bankruptcy judges in violation of U.S. Const. art. II, § 2, cl. 2.⁵

Former section 1471 of title 28 of the United States Code, a provision of the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, § 241(a), 92 Stat. 2668 (1978), enacted in part:

Jurisdiction

(a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.

(b) Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11.

(c) The bankruptcy court for the district in which a case under title 11 is commenced shall exercise all of the jurisdiction conferred by this section on the district courts.

When sued in bankruptcy court for alleged breaches of contract and warranty, misrepresentation and coercion, by a chapter 11 debtor, Marathon Pipe Line Co. sought dismissal on the basis that former § 1471 unconstitutionally conferred Article III judicial power upon the nation's bankruptcy judges.⁶ Agreeing with Marathon's argument, a plurality of the Supreme Court concluded:

The "adjunct" bankruptcy courts created by the Act exercise jurisdiction behind the facade of a grant to the district courts....

We conclude that 28 U.S.C. § 1471 ... has impermissibly removed most, if not all, of "the essential attributes of the 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.

Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 86-87, 102 S.Ct. 2858, 2879-2880, 73 L.Ed.2d 598 (1982).

Dissenting, Justice White maintained that a distinction the plurality sought to make in Northern Pipeline between claims based on state law and those derived from federal law disregarded the real character of bankruptcy proceedings.

In the ordinary bankruptcy proceeding the great bulk of creditor claims are claims that have accrued under state law prior to bankruptcy — claims for goods sold, wages, rent, utilities, and the like.... The existence and validity of such claims recurringly depend on state law. Hence, the bankruptcy judge is constantly enmeshed in state-law issues.

Northern Pipeline, 458 U.S. at 96-97, 102 S.Ct. at 2884 (White, J., dissenting).

Discussing the jurisdiction exercised by bankruptcy referees and judges prior to the 1978 Reform Act, the dissenting opinion recites:

Furthermore, I take it that the Court does not condemn as inconsistent with Art. III the assignment of these functions—i.e., those within the summary jurisdiction of the old bankruptcy courts — to a non-Art. III judge, since, as the plurality says, they lie at the core of the federal bankruptcy power. Ante, 458 U.S. at 71 102 S.Ct. at 2871. They also happen to be functions that have been performed by referees or bankruptcy judges for a very long time and without constitutional objection. Indeed, we approved the authority of the referee to allow or disallow claims in Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966). There, the referee held that a creditor had received a preference and that his claim could therefore not be allowed. We agreed that the referee had the authority not only to adjudicate the existence of the preference, but also to order that the preference be disgorged.

Northern Pipeline, 458 U.S. at 99, 102 S.Ct. at 2886 (White, J., dissenting).

The Court determined that its decision invalidating the grant of jurisdiction to the bankruptcy courts should apply prospectively only. Further, the Court stayed, and subsequently extended the stay of, its decision to "afford Congress an opportunity to reconstitute the bankruptcy courts or to adopt other valid means of adjudication, without impairing the interim administration of the bankruptcy laws." Northern Pipeline, 458 U.S. at 88, 102 S.Ct. at 2880. In December 1982, after Congress failed to act prior to the Supreme Court's extended deadline for the stay of its decision, the Judicial Councils for the various circuits directed the district courts to adopt a model emergency rule.⁷

In a challenge to the constitutionality of the interim emergency rule, the Sixth Circuit found that the powers reserved by the district courts under the emergency rule — authority to revoke referral to the bankruptcy judge; authority to hold a hearing and receive evidence; and the choice to accept, reject, or modify the judgment of the bankruptcy judge after de novo review — "satisfy the Supreme Court's concern that Art. III courts adjudicate bankruptcy cases." White Motor Corp. v. Citibank, N.A., 704 F.2d 254, 263 (6th Cir.1983).⁸ The Sixth Circuit determined that the interim emergency rule did not conflict with either the holding in Northern Pipeline or Article III.

The interim rule does not violate the Constitution because the district courts retain primary jurisdiction over all bankruptcy proceedings. The bankruptcy courts have only derivative jurisdiction. They do not operate under an exclusive grant of jurisdiction as in § 1471(c) but rather derive their jurisdiction from the district courts as under the Chandler Act. The district courts retain control and primary responsibility for the conduct of bankruptcy proceedings. The interim rule implants sufficient mechanisms in the existing system to ensure that bankruptcy cases are resolved through a constitutionally valid process.

White Motor Corp., 704 F.2d at 263.

Administration of the national bankruptcy laws continued pursuant to the interim emergency rule until enactment of The Bankruptcy Amendments and Federal Judgeship Act of 1984. Pursuant to this Act, original and exclusive jurisdiction of all cases under title 11 of the United States Code lies in the district courts. 28...