Minerex Erdoel, Inc. v. Sina, Inc., No. 86-1449

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: Before CLARK, Chief Judge, BROWN, and JOHNSON; JOHN R. BROWN
• Citation: 838 F.2d 781
• Parties: , 18 Collier Bankr.Cas.2d 510, 17 Bankr.Ct.Dec. 511, Bankr. L. Rep. P 72,225 MINEREX ERDOEL, INC., et al., Plaintiffs-Appellants, Cross-Appellees, v. SINA, INC., et al., Defendants, Baker, Smith & Mills, f/k/a Baker, Miller, Mills & Murray, Defendants-Appellees Cross-Appellants.
• Docket Number: No. 86-1449
• Decision Date: 03 March 1988

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838 F.2d 781 56 USLW 2526, 18 Collier Bankr.Cas.2d 510,
17 Bankr.Ct.Dec. 511,
Bankr. L. Rep. P 72,225 MINEREX ERDOEL, INC., et al., Plaintiffs-Appellants, Cross-Appellees,
v.
SINA, INC., et al., Defendants,
Baker, Smith & Mills, f/k/a Baker, Miller, Mills & Murray,
Defendants-Appellees Cross-Appellants. No. 86-1449. United States Court of Appeals,
Fifth Circuit. March 3, 1988.

Leodis C. Matthews, Frankfurt, West Germany, C. Taylor Ashworth, Meyer, Hendricks, Victor, Osborn & Maledon, Phoenix, Ariz., for plaintiffs-appellants, cross-appellees.

Jerry R. Selinger, David E. Howe, Baker, Smith & Mills, Dallas, Tex., for defendants-appellees, cross-appellants.

Appeals from the United States District Court for the Northern District of Texas.

Before CLARK, Chief Judge, BROWN, and JOHNSON, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

Nominally this appeal concerns the proper allowance of counsel fees in a bankruptcy case. We never get to the merits of that controversy, however, because the District Court on the appeal from the bankruptcy court referred the appeal to a magistrate for determination. We hold such reference improper and vacate the unauthorized decision by the magistrate.

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In the Beginning

The firm of Baker, Smith and Mills originally undertook simultaneously to represent before the bankruptcy court both (i) a set of four limited partnerships that all filed for reorganization protection pursuant to Chapter 11 of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq., and (ii) a corporation, Sina, Inc., which served as a general partner of each of those four limited partnerships. A second corporation, Minerex Erdoel, Inc., which also served as a general partner of each of those same four limited partnerships, protested allowance of Baker, Smith's fees. Minerex alleged that the existence of a dispute over the amount of the "management fee" due to Sina, Inc. from the four limited partnerships created a conflict of interest which precluded simultaneous representation of Sina, Inc. and the four limited partnerships.

Without expressly addressing the issue of a conflict of interest, the bankruptcy court awarded Baker, Smith the full amount of expenses and approximately 80 percent of the fees the firm had requested. The bankruptcy court expressly provided, however, that these awards were subject to later reallocation or reassessment.

Minerex appealed that decision to the District Court, and upon the express consent of the parties, the District Court referred that appeal to a United States magistrate, 28 U.S.C. Sec. 636. ¹ The magistrate concluded that "it is clear that the bankruptcy judge necessarily found [that] no conflict existed between the interest of Sina, Inc. and of the [four] limited partnerships in [Baker, Smith's] representation." The magistrate reduced the fee award by $4,381.00, but otherwise affirmed the bankruptcy court order, with no further review by the District Court. Then followed this appeal by Minerex of the allowance of the fees and expenses to Baker, Smith and the cross-appeal by Baker, Smith of the reduction in the fee.

New Light from the Seventh

While the case was awaiting oral argument before this court, the Court of Appeals for the Seventh Circuit handed down its decision in In the Matter of Elcona Homes Corporation, 810 F.2d 136 (7th Cir.1987), in light of which we requested supplemental briefs addressing the issue of whether Sec. 636 authorizes reference to a United States magistrate of an appeal from a bankruptcy court decision. We do not reach the merits of the fee dispute, because we here examine 28 U.S.C. Sec. 158 ² and decide that such a reference is not authorized.

Back of the Beginning: The Origin of the Bankruptcy Reform

Act of 1978

In order to determine whether or not Congress intended for appeals from bankruptcy court decisions to be included within the very wide range of matters which Sec. 636 permits a District Court to refer to a magistrate, it is necessary to trace through in some detail the fairly tumultuous course of changes in the United States Bankruptcy Court system that began with the major reconstruction effected by the Bankruptcy Reform Act of 1978 (BRA). ³ That Act created a bankruptcy court in each judicial district, as an "adjunct to the district court." ⁴ The judges of these bankruptcy courts were to hold office for a term of fourteen years ⁵ and be paid a salary subject to annual adjustment upward or downward. ⁶

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6] Section 241(a) of BRA added a new Chapter 90 to Title 28 of the U.S. Code, concerning the relationship between the district courts and the bankruptcy courts. That chapter included Sec. 1471, which prescribed the jurisdiction of the bankruptcy courts. ⁷

For purposes of the instant case, the most important change effected by BRA was accomplished in Sec. 238(a) of the Act, which completely rewrote 28 U.S.C. Sec. 1334 ⁸ concerning appeals from bankruptcy court decisions. Under that change, Sec. 1334 provided, in subsections (a) and (b), that under certain conditions the District Court of the district in which a bankruptcy court operated would have non-discretionary ⁹ jurisdiction of appeals from all final judgments, orders, and decrees and permissive jurisdiction of appeals from interlocutory orders of the bankruptcy court of that district. Sub-section (c) of 28 U.S.C. Sec. 1334 contained a provision explicitly stating that "a District Court may not refer an appeal under that section to a magistrate or to a special master." Because of its extreme importance, we refer to this provision as the "Express Prohibition." Offhand, the antecedent of the words "that section" appearing in Sec. 1334(c) would seem to be the phrase "section 160 of this title" appearing in Sec. 1334(a). ¹⁰ But as pointed out in the margin, supra, two courts in Elcona and Morrissey read Sec. 1334(c) as if the words "that section" were absent. On this reading the words should be "this section,"

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signifying Sec. 1334 itself and not 28 U.S.C. Sec. 160.

The legislative history of BRA does not address specifically the reasons for the enactment of the Express Prohibition. That legislative history does show, however, that Congress was quite conscious of the fact that, because the bankruptcy judges lacked life tenure and protection against salary diminution, the Bankruptcy Court it sought to create could not stand against Article III of the U.S. Constitution ¹¹ unless Congress made that court to a sufficient extent the creature of the District Court. ¹²

The year following BRA, Congress in the Federal Magistrate Act of 1979 (FMA) ¹³ promulgated extensive additions to the original Magistrates Act. ¹⁴ Section 2 of the FMA amended 28 U.S.C. Sec. 636 for the purpose of enlarging the civil and criminal jurisdiction of United States magistrates in order to improve access to the federal courts. ¹⁵ Following that amendment, Sec. 636 contained the language quoted at note 1 above, which expanded the authority of magistrates to encompass the conducting of "any or all proceedings in a jury or nonjury civil matter." That language appeared directly to contradict the Express Prohibition, which was at that time still in place and which forbade reference of bankruptcy appeals to magistrates. ¹⁶

The Fallout of Marathon

The next twist in the saga of the bankruptcy courts came with the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). There the Court ruled that "the broad grant of jurisdiction to the bankruptcy courts contained in 28 U.S.C. Sec. 1471 (1976 ed., Supp. IV) [was] unconstitutional." Id., at 87, 102 S.Ct. at 2880, 73 L.Ed.2d at 625. More specifically, "[t]he case's holding is that adjudication in federal courts on questions of state law [which Sec. 1471 would permit] cannot [constitutionally] be made by officers of the United States who neither enjoy life tenure nor are controlled by life-tenured judges to a greater degree than were bankruptcy judges under [BRA]." Appendix 1 L. King, Collier on Bankruptcy 1672 (15th ed. 1979).

Four opinions were filed in Marathon, ¹⁷ containing conflicting signals which limited the utility of that decision as guidance for Congress. Even so, the decision did convey as much as that if the bankruptcy courts

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were brought somehow under the wing of the Art. III...