In re United Sec. & Communications, Inc., Bankruptcy No. 2-85-02269

Decision Date02 December 1988
Docket NumberAdv. No. 2-86-0114.,Bankruptcy No. 2-85-02269
Citation93 BR 945
PartiesIn re UNITED SECURITY & COMMUNICATIONS, INC., Debtor. UNITED SECURITY & COMMUNICATIONS, INC., Plaintiff, v. RITE AID CORPORATION, Defendant.
CourtU.S. Bankruptcy Court — Southern District of Ohio

David M. Whittaker, Mark S. Miller, Luper, Wolinetz, Sheriff & Neidenthal, Columbus, Ohio, for United Sec. & Communications, Inc.

Michael D. Saad, Squire, Sanders & Dempsey, Columbus, Ohio, for Rite Aid Corp.

Charles M. Caldwell, Office of the United States Trustee, Columbus, Ohio, Asst. U.S. Trustee.

OPINION AND ORDER ON MOTION FOR DETERMINATION OF NON-CORE STATUS AND REPORT AND RECOMMENDATION ON MOTION FOR ABSTENTION

R. GUY COLE, Jr., Bankruptcy Judge.

Preliminary Statement

This adversary proceeding is before the Court upon the Motion for Determination of Noncore Status and Abstention filed by Rite Aid Corporation ("Rite Aid"). Rite Aid seeks a determination from this Court that the instant action is a noncore proceeding ("Motion"). Rite Aid further requests that the Court abstain from hearing this adversary proceeding pursuant to 28 U.S.C. § 1334(c)(2) ("Abstention Request"). The plaintiff-debtor, United Security & Communications, Inc. ("United"), has filed a memorandum in opposition to Rite Aid's Motion and Abstention Request, arguing that its action against Rite Aid is a core matter and that it would not be appropriate for the Court to abstain from hearing this adversary proceeding.

The Court's opinion is divided into two sections in order to accommodate the different procedures established for determining core/noncore status and passing upon a request for abstention. Pursuant to 28 U.S.C. § 157(b)(3), the Court must determine whether this adversary proceeding constitutes a core matter or is a proceeding that is otherwise related to a case under title 11. The Court clearly has the power to enter a dispositive order on the issue of whether this proceeding is core or noncore. 28 U.S.C. § 157(b)(3); Central Nat'l. Bank v. Kwak, 49 B.R. 337 (N.D.Ohio 1985); 1 Collier on Bankruptcy ¶ 3.012c at 3-48 to 3-49 (15th ed. 1988) ("Collier"). Hence, Part I of this opinion shall serve as the Court's core/noncore determination, and the Court shall enter a dispositive order on this issue.

The procedure for disposing of Rite Aid's Abstention Request is governed by Bankruptcy Rule ("B.R.") 5011(b), which provides in pertinent part that:

"Unless a district judge orders otherwise, a motion for abstention pursuant to 28 U.S.C. § 1334(c) shall be heard by the bankruptcy judge, who shall file a report and recommendation for disposition of the motion...."

Under B.R. 9033(b), parties are granted ten (10) days to file objections to the bankruptcy judge's report and recommendation regarding abstention. The district court then shall review the report as well as any objections thereto and issue its ruling on the matter. B.R. 5011(b). Accordingly, Part II of this opinion shall constitute the Court's report and recommendation to the district court on Rite Aid's Abstention Request.

I. Opinion and Order on Motion for Determination of Noncore Status
A. Factual Background

The facts pertaining to the jurisdictional issues raised by the Motion are undisputed. United, a Chapter 11 debtor-in-possession, filed an adversary proceeding in this Court seeking the recovery from Rite Aid of approximately $165,000 in money damages, as well as interest, costs and attorney fees. United's complaint alleges that Rite Aid breached various lease agreements which provided for the installation of burglar alarm systems by United in Rite Aid pharmacies in North Carolina, West Virginia, Kentucky and Virginia. According to the plaintiff, Rite Aid has further breached its lease agreements with the plaintiff by failing to pay for damaged and lost burglar alarm systems and equipment provided by United. In addition to raising the instant issue regarding the Court's subject matter jurisdiction, Rite Aid also has filed an answer which generally denies United's allegations as well as a counter-claim which asserts that United has breached the subject leases by failing to maintain the burglar alarm systems in good working order, by misrepresenting the quality of the security equipment and by installing faulty burglar alarms. Rite Aid's counter-claim seeks recovery of $50,000 in damages purportedly incurred due to a disruption in its business occasioned by United's alleged breach of contract.

B. Discussion
1. Introduction

Resolution of the issues raised in the Motion will require this Court to venture into the complex and uncertain area of bankruptcy court jurisdiction. In the wake of the United States Supreme Court's 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") and Congress' subsequent enactment of the Bankruptcy Amendment and Federal Judgeship Act of 1984 ("BAFJA"), a large body of case law addressing the issue of bankruptcy court jurisdiction has arisen. A historical background of the Marathon decision and the legislative response thereto is critical to an understanding of the issues raised herein. Thus, before embarking upon a discussion of the specific issues for decision, a brief review of the Marathon case and BAFJA's jurisdictional provisions shall be undertaken.

2. The Marathon Decision

In an effort to create a more efficient bankruptcy system, Congress enacted the Bankruptcy Reform Act of 1978 ("Reform Act") which conferred pervasive jurisdiction upon the bankruptcy courts. Under the Reform Act, bankruptcy courts were vested with the broad powers of a court of equity, law and admiralty.1 The Reform Act's expansive grant of jurisdiction was intended to enable a bankruptcy court to hear and determine "contract and other disputes between the debtor and other parties that would otherwise have been resolved in a state or federal district court in the absence of bankruptcy, because the dispute became `related to' a bankruptcy case upon the filing of a bankruptcy petition by one of the parties." B. Weintraub & A. Resnick, Bankruptcy Law Manual ¶ 6.02 at 6-5 (1986).

In Marathon, the debtor brought an action in bankruptcy court which sought the recovery of damages for alleged breach of contract and warranty. Arguing that the Reform Act's grant of Article III powers to judges without life tenure and protection against salary diminution was unconstitutional, the defendant sought dismissal of the action. The bankruptcy court denied the request to dismiss. Holding the delegation of authority to the bankruptcy judges under the Reform Act to be unconstitutional, the district court reversed the bankruptcy court. Upon direct appeal to the Supreme Court the district court's decision was affirmed.

Justice Brennan, writing for the plurality, stated that bankruptcy courts are not Article III courts because their judges do not have life tenure or protection against salary diminution. The plurality then reviewed the three "exceptions from the general proscription of Art. III" — exceptions which historically have been limited to the Congressional creation of "territorial courts," "courts-martial" and "legislative courts and administrative agencies" that "adjudicate cases involving `public rights.'" Marathon, 458 U.S. at 64-67, 102 S.Ct. at 2867-69, 73 L.Ed.2d at 610-13. Focusing on the "public rights" exception, the Court held that only controversies concerning "public rights", i.e., rights provided to an individual by Congress pursuant to one of its exceptional powers under the Constitution, may be removed from Article III courts and delegated to non-Article III tribunals. Marathon, 458 U.S. at 69-70, 102 S.Ct. at 2870-71, 73 L.Ed.2d at 614. Implicit in the Court's reasoning is the recognition that the exceptional powers of Congress under the bankruptcy clause may sometimes allow for such delegations of judicial power:

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.

458 U.S. at 71, 102 S.Ct. at 2871, 73 L.Ed.2d at 615. With respect to the controversies involving state-created private rights, such as the contract action in Marathon, Justice Brennan noted:

The claim may be adjudicated in federal court on the basis of its relationship to the petition for reorganization. But this relationship does not transform the state-created right into a matter between the Government and the petitioner for reorganization. Even in the absence of the federal scheme, the plaintiff would be able to proceed against the defendant on the state-law contractual claims.

458 U.S. at 72 n. 26, 102 S.Ct. at 2872 n. 26, 73 L.Ed.2d at 615 n. 26.

The Fifth Circuit in Wood v. Wood (Matter of Wood), 825 F.2d 90, 96 (5th Cir.1987) succinctly summarized the two key points which may be derived from the language quoted above from Justice Brennan's plurality opinion:

First, bankruptcy judges may exercise full judicial power over only those controversies that implicate the peculiar rights and powers of bankruptcy or, in Justice Brennan\'s words, controversies "at the core of the federal bankruptcy power." Second, controversies that do not depend on the bankruptcy laws for their existence—suits that could proceed in another court even in the absence of bankruptcy—are not core proceedings. These points are echoed by Chief Justice Burger in his dissent in which he characterized the plurality opinion as follows:
the Court\'s holding is limited to the proposition ... that a "traditional" state common-law action, not made subject to a federal rule of decision, and related only peripherally to an adjudication of bankruptcy under federal law, must, absent the consent of the
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