Matter of Wildman

• Citation: 30 BR 133
• Decision Date: 06 May 1983
• Docket Number: Bankruptcy No. 81 B 5869.
• Parties: In the Matter of Paul C. WILDMAN, et al., Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

30 B.R. 133 (1983)

In the Matter of Paul C. WILDMAN, et al., Debtor.

Bankruptcy No. 81 B 5869.

United States Bankruptcy Court, N.D. Illinois, E.D.

May 6, 1983.

COPYRIGHT MATERIAL OMITTED

James Chatz, Lord, Bissell & Brook, Joel Carlins, Chicago, Ill., for debtor.

Professor Robert E. Ginsberg, trustee.

Melanie Rovner Cohen, Chicago, Ill., for trustee.

Robert Motel, Motel & Kreisman, Chicago, Ill., for limited partners.

Louis W. Levit, Levit & Miller, Chicago, Ill., for Equity Sec. Holders Committee.

MEMORANDUM OPINION

RICHARD L. MERRICK, Bankruptcy Judge.

There presently are pending before this Court fourteen motions to dismiss bankruptcy cases and bankruptcy proceedings on the ground that this Court does not have jurisdiction to act, under the principles enunciated in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), (hereinafter referred to as the Northern Pipeline case.)¹ All of the motions concern the validity of a rule adopted December 20, 1982 by the District Court of the Northern District of Illinois,² pursuant to a directive of the Circuit Council for the Seventh Circuit, issued December 23, 1982, following a memorandum of the Director of the Administrative Office of the United States, dated December 3, 1982, directed to federal judges and clerks and enclosing a model rule and sample order. The variations between the rule adopted in this district, the rules adopted in other districts, and the two model rules distributed by the Administrative Office, respectively September 27, 1982 and December 3, 1982, are not of sufficient importance to the issues to be decided here to justify comparison. Similarly, in decisions of case precedents involving the rule no attempt will be made to distinguish the differences, which are peripheral and do not affect the central core issues.

The captioned proceeding arose in a voluntary Chapter 11 reorganization of an individual who is a general partner in a number of limited partnerships, many of which also have filed voluntary Chapter 11 cases. There is a common trustee at the present time for all of the cases, in spite of a theoretical conflict of interest, because the books and records of all of the debtors are in such a state of disarray that it would have been impossible to determine the debtor-creditor relationships among them until meaningful records had been reconstructed. (It would have been possible to have had 15 trustees from the outset, provided that they all had retained the same accountant and had been willing to have permitted one of their number to be the lead trustee in establishing priorities respecting the order in which administration problems would have been addressed, but the expenses of administration would have been astronomical). The principal asset of each limited partnership is an apartment building located on the Near North Side in Chicago. The principal asset of each general partnership is the general partners' interest in the limited partnerships.

The motion to dismiss on jurisdictional grounds was filed by a committee of the limited partners, which also has objected to the sale of the apartment building, to the payment of accountant's fees, to the payment of attorneys' fees, and to the payment of real estate broker's commissions. Some interim attorneys' fees and accountant's fees have been authorized by the Court to the extent of 50% of the amount requested, with the balance to be considered near the termination of the case. Those motions are being held in abeyance until after the jurisdictional motion to dismiss has been determined.

BACKGROUND

Probably the greatest problem presented to the Anglo-American bankruptcy practice throughout its 440 year history has been the absence of a broad and clearly defined jurisdiction. At the outset the bankruptcy commissioners had jurisdiction only over assets which they could bring into their possession. This broadened to the point where assets in the actual or constructive possession of the bankrupt were deemed to be in custodia legis. As bankruptcy courts, the district courts had only a summary jurisdiction. Innumerable appellate decisions turn on the issue of summary jurisdiction and plenary jurisdiction,³ decisions which had to become final as a preliminary to the problem of administering the bankrupt estate. Delays of several years might take place with the attendant large attorneys' fees over the question of whether a corporate reorganization properly was before a referee in a Chapter XI case or before a district court in a Chapter X case. Frequently the delay in reaching that conclusion caused all hopes for rehabilitation to vanish, and the only question which remained was what court would oversee the liquidation. Much of the ten years preceding the final passage of the Bankruptcy Reform Act of 1978⁴ was devoted to hearings on the issue of court structure and jurisdiction.

During the middle 1970's as bankruptcy reform was being considered in Congress, one of the principal improvements sought was to eliminate the delays and expense which were the inevitable consequence of a divided jurisdiction over both bankruptcy cases and proceedings arising in or related to bankruptcy cases. There was a considerable concern that giving broad authority to Article I judges might create a constitutional problem, and H.R. 8200, which is the skeleton of both the Bankruptcy Code and the bankruptcy amendments to the Judicial Code, provided for an Article III bankruptcy court. The Senate Bill (S. 2266) provided for an Article I bankruptcy court, but in the Conference Committee at the end of the 95th Congress both houses agreed to an Article III court. The House approved the conference report, and it was on the consent calendar of the Senate when the Chief Justice called several Senators on the telephone, including Senator Strom Thurmond of South Carolina. That conversation has not been published, but as a consequence of it, Senator Thurmond placed a hold on the bill which was not released until § 1471 was modified to provide for a two-tiered court structure in which the district court had original and exclusive jurisdiction over all bankruptcy cases (§ 1471(a)) and also original but not exclusive jurisdiction over all proceedings arising in or related to bankruptcy cases (§ 1471(b)).⁵ The jurisdiction granted to the district courts was to be exercised by the bankruptcy courts (§ 1471(c)). It was the exercise of Article III power by Article I Courts which the Supreme Court found unconstitutional in Northern Pipeline.

The Supreme Court granted a three month stay of judgment (June 28, 1982— October 4, 1982) to permit the Congress to correct the jurisdictional problem either by increasing the stature of the bankruptcy court to an Article III plane or by reducing the level of authority to that appropriate to an Article I court. When Congressional action had not been completed by October 4, the Court granted another three month stay which expired December 24, 1982, without a law having been enacted.

An interim rule was devised by the Judicial Conference as a contingency measure to provide bankruptcy continuity in the event that Congress did not act by December 24. The rule was adopted by the circuit councils of all of the circuits and by all of the district courts within three or four days of December 24. The validity of that rule is the subject of this opinion.

BANKRUPTCY COURT JURISDICTION

The essential issue raised by the respective motions to dismiss filed in the cases and proceedings under consideration is whether this Court has jurisdiction to hear the matter. Surface refinements cause the precise question of each individual motion to dismiss to differ somewhat as to whether it is:

(a) jurisdiction to hear a bankruptcy case,

(b) jurisdiction to hear a proceeding arising from a bankruptcy case, or

(c) jurisdiction to hear a proceeding relating to a bankruptcy case.

Because the underlying core issue is the same under all circumstances, that core issue will be answered first. It happens in the view of the law adopted by this Court, as will be explained more fully later, that the result is the same under all circumstances, although that need not have been the result if the Court had taken a narrower view of the infirmities of the interim rule.

Due to loose usage of terminology for the last century, the question of bankruptcy court jurisdiction before the enactment of the Bankruptcy Code has been obscured in the decisions and in the treatises and law review articles. So that there can be no doubt as to the meaning of this opinion, a short review of bankruptcy court jurisdiction in the past will precede a discussion of current controlling factors.

In England, there was no statutory court legislation affecting bankruptcy and insolvency jurisdiction until after American independence. The Court for Relief of Insolvent Debtors was established in 1820.⁶ Originally insolvency petitions had been heard by Royal Commissions without clear lines of authority. After 1649 statutory guidelines were established for administration by commissioners or in Chancery. The Court in Bankruptcy was established in 1831.⁷ Originally bankruptcy commissioners had gone to whatever court they felt might provide them with the most prompt relief. After 1600 most bankruptcy cases and proceedings were heard in Chancery.

In the United States, under every bankruptcy act, the authority of the adjudicative body always has been delineated in the enabling statute. As in England, the nature of the assets determined the nature of the jurisdiction. Until the nineteenth century wealth ordinarily was held in the form of gold, silver, land, goods, or commodities, all tangibles. A bankruptcy action was an involuntary proceeding (until 1841) in which a bankruptcy commissioner on behalf of creditors who had filed claims would collect and liquidate the tangible assets of the debtor...