Jurisdiction and Structure of the Bankruptcy Court

JURISDICTION AND STRUCTURE OF THE BANKRUPTCY COURT

The power of a court is defined by its jurisdiction. Accordingly, the jurisdiction of a court should be based on the importance of the issues it must address, the need to enforce its orders, and the reliance placed on the soundness and finality of those orders by participants in the system. The jurisdiction of a court thus must be the form that follows the court's function. The function of the bankruptcy court is to provide a collective proceeding to treat all claims and interests in the property of a debtor's estate. The cost of administering these proceedings is borne by creditors. Principal goals of the bankruptcy process are to maximize the return to creditors and provide debtors with a fresh start or the ability to reorganize. A quick, efficient, and final determination of the claims and interests in property of the estate accomplishes these goals.

Granting bankruptcy courts broad jurisdiction so that they may quickly, efficiently, and finally resolve claims and interests in property of the estate is not a new idea. ⁽¹⁷²⁸⁾

Questions about the scope of bankruptcy court authority, however, continue to plague litigants, adding cost and delay to a system that seeks to achieve speed, efficiency, and finality. All of the Commission's Recommendations on the structure of the bankruptcy court are designed to reduce the cost, delay, and redundancy that is inherent in the current system.

RECOMMENDATIONS

3.1.1 Establishing the Bankruptcy Court under Article III of the Constitution

The bankruptcy court should be established under Article III of the Constitution.

3.1.2 Transition to an Article III Bankruptcy Court

As of the enactment of legislation to establish an Article III bankruptcy court, sitting bankruptcy judges should be permitted to finish their current fourteen year terms. As vacancies are created through attrition (including expiration of current statutory term, appointment as an Article III judge, resignation, retirement prior to end of term for any reason, or death), Article III bankruptcy judges should be appointed by the President upon the advice and consent of the Senate to fill those positions. Sitting bankruptcy judges should be permitted to apply for any Article III judgeship positions while remaining on the bench. Nothing in the Recommendation will affect the length of the current term, salary, retirement benefits, or other attributes of sitting bankruptcy judges.

During the transition period, bankruptcy jurisdiction should be treated in the following manner: as Article III bankruptcy judges are appointed, the jurisdiction provisions under 28 U.S.C. зз 1334 and 157 should be transferred on a district-by-district basis to the Article III bankruptcy judge sitting in that district. Consequently, bankruptcy jurisdiction would reside in the Article III bankruptcy judge, including the power to refer and withdraw cases and proceedings. While a district is without an Article III bankruptcy judge, the Judicial Council for that circuit should be authorized to: (1) determine the need for an Article III bankruptcy judge in that district, and (2) if necessary, designate an Article III bankruptcy judge from another district (within the circuit) to sit in that district. In the event the judicial council determines a need for an Article III bankruptcy judge and one has not yet been appointed to sit within that circuit, the Chief Justice, upon receiving a certificate of necessity from the chief judge of the circuit, should be authorized to designate an Article III bankruptcy judge from another circuit to fulfill the request.

3.1.3 Bankruptcy Appellate Process

The current system which provides two appeals, the first either to a district court or a bankruptcy appellate panel and the second to the U.S. Court of Appeals, as of right from final orders in bankruptcy cases should be changed to eliminate the first layer of review.

3.1.4 Interlocutory Appeals of Bankruptcy Orders

28 U.S.C. з 1293 should be added to provide, in addition to the appeal of final bankruptcy orders, for the appeal to the courts of appeals of interlocutory bankruptcy court orders under the following circumstances: (1) an order to increase or reduce the time to file a plan under section 1121(d); (2) an order granting, modifying, or refusing to grant an injunction or an order modifying or refusing to modify the automatic stay; (3) an order appointing or refusing to appoint a trustee, or authorizing the sale or other disposition of property of the estate; (4) where an order is certified by the bankruptcy judge that (x) it involves a controlling issue of law to which there is a substantial difference of opinion, and (y) immediate appeal of the order may materially advance resolution of the litigation, and leave to appeal is granted by the court of appeals; and (5) with leave from the court of appeals.

3.1.5 Venue Provisions under 28 U.S.C. з 1408

28 U.S.C. з 1408(1) should be amended to prohibit corporate debtors from filing for relief in a district based solely on the debtor's incorporation in the state where that district is located.

The affiliate rule contained in 28 U.S.C. з 1408(2) should be amended to prohibit a corporate filing in an improper venue unless such debtor's corporate parent is a debtor in a case under the Bankruptcy Code in that forum. Section 1408(2) should be amended as follows:

(2) in which there is pending a case under title 11 concerning such person's affiliate, as defined in section 101(2)(A) of title 11, general partner, partnership, or a partnership controlled by the same general partner.

The court's discretionary power to transfer venue in the interest of justice and for the convenience of the parties should not be restricted.

DISCUSSION

The structure of a federal court establishes the constitutional limit on the "judicial power" exercised by the judge. A fundamental element of the separation of powers between the judicial branch and the other two branches of government is Article III's requirement that "[t]he judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish."⁽¹⁷²⁹⁾ Bankruptcy courts are not established under Article III of the Constitution. Instead, bankruptcy courts operate as "units" of the district court. ⁽¹⁷³⁰⁾ As non-Article III courts, bankruptcy courts cannot exercise the "judicial power" of the United States. ⁽¹⁷³¹⁾

The Supreme Court has recognized that not every adjudication constitutes an exercise of the "judicial power" of the United States. ⁽¹⁷³²⁾ At what point a bankruptcy judge exercises the "judicial power" of the United States and is thus in violation of Article III is not easily discerned. ⁽¹⁷³³⁾ The Supreme Court in Marathon held that a non-Article III bankruptcy judge "cannot constitutionally be vested with jurisdiction to decide [a] state-law contract claim."⁽¹⁷³⁴⁾ Because bankruptcy judges had jurisdiction to hear and determine this type of claim, the Supreme Court held unconstitutional the broad grant of jurisdiction in the 1978 Reform Act.

In response to Marathon, Congress divided proceedings in bankruptcy cases into those over which a bankruptcy judge could preside and enter a final order (i.e., those where the bankruptcy judge arguably was not exercising the "judicial power" of the United States, referred to in the judicial code as "core" proceedings) and those in which the bankruptcy judge could submit findings of fact and conclusions of law to the district court judge for entry of a final order (i.e., those where the bankruptcy judge would be exercising the "judicial power" of the United States, commonly referred to as "noncore" proceedings). The resulting bifurcation of bankruptcy jurisdiction between these two types of proceedings has led to a great deal of needless cost, confusion and delay because the authority of the bankruptcy judge to enter a final order can often be disputed.

The Commission's Recommendation on the authority of the bankruptcy court would create a constitutionally sound structure and eliminate costly litigation over bankruptcy court authority. The appeals process Recommendation focuses on improving stare decisis and reducing the excessive cost and delay in the current appeals system. The Recommendation on venue eliminates place of incorporation or organization as a valid bankruptcy venue in favor of bankruptcy venue options in either the debtor's principal place of business or the location of principal assets.

3.1.1 Establishing the Bankruptcy Court under Article III of the Constitution

The bankruptcy court should be established under Article III of the Constitution.

The evolution of the bankruptcy court has not kept pace with the system's need for the efficient and final determination of bankruptcy and bankruptcy-related issues. How best to structure the bankruptcy court system in order to accomplish these goals has been debated twice since the 1970 Commission recommended the creation of an independent bankruptcy court with pervasive jurisdiction over all bankruptcy and bankruptcy-related matters. ⁽¹⁷³⁵⁾ Both sides of the debate agreed that the bankruptcy court must have pervasive jurisdiction over all bankruptcy and bankruptcy-related matters in order to effectively and efficiently adjudicate bankruptcy cases and proceedings. The difference lay in what each side of this debate believed was necessary to achieve efficient and effective bankruptcy courts. During the congressional deliberations culminating in the 1978 Bankruptcy Reform Act, the House determined that expansive jurisdiction could only be granted to an Article III bankruptcy court. ⁽¹⁷³⁶⁾ The Senate determined that expansive jurisdiction could be granted to a non-Article III court and therefore Article III status was unnecessary. ⁽¹⁷³⁷⁾ The Senate view prevailed and Article III status was not granted to the bankruptcy courts under the 1978 Bankruptcy Reform Act.

The attempts in the 1970s and 1980s to increase the efficiency and enhance the reputation of the bankruptcy courts should be continued in the 1990s. ⁽¹⁷³⁸⁾ It is not merely a matter of cosmetics or appearance. The present bankruptcy system comes into contact with more individuals and entities and handles more money than the rest of the federal court system combined. ⁽¹⁷³⁹⁾ The soundness and efficiency of the bankruptcy system is therefore paramount. Two reforms will greatly enhance the efficiency and reliability of the present system. These reforms are (1) granting bankruptcy judges Article III status, and (2) giving the bankruptcy court unfettered, pervasive jurisdiction over any matter related to a case filed under the Bankruptcy Code.

These two reforms are inextricably intertwined. The Supreme Court has ruled that a grant by Congress of pervasive jurisdiction to a non-Article III court is unconstitutional. Thus, Article III status is a sine qua non for accomplishing the jurisdictional goal. At its most fundamental, an Article III bankruptcy court would permit service by bankruptcy judges during good behavior and bar any reduction of salary while in office. These are the only two requirements under Article III. There is no constitutional requirement that Article III bankruptcy judges be given the same treatment as other Article III judges. Matters of salary, pension, and color of judicial robes can be completely different from that prescribed for other Article III judges.

Article III status will also eliminate the need for procedural complexities and devices such as the core/noncore distinction that add a great deal of delay and expense to the current system. It will also eliminate the need for other jurisdictional requirements that have no bearing on the constitutionality of the current bankruptcy court such as mandatory withdrawal, mandatory abstention, and liquidation of personal injury claims. For example, proceedings involving the interpretation and application of a nonbankruptcy federal statute would not have to be kept from the bankruptcy judge. An Article III bankruptcy judge would be sufficiently similar to the federal district judge in ability and outlook that any doubts about the resolution of this type of litigation should be dispelled. Special rules for personal injury litigation would be unnecessary because jury trials could be retained as of right and they could occur in the bankruptcy court.

The key to efficiency in bankruptcy is speed and finality. Resources in bankruptcy are limited and creditors bear the costs of administration. Under the current core/noncore system, disputes over the jurisdiction of the court can take years. Extended litigation over the jurisdiction of the court with no determination on the merits of a dispute diminish the creditors' recovery. Resources that would otherwise be available to pay unsecured creditors and fund the debtor's ongoing operation are instead used to litigate the boundaries of bankruptcy court jurisdiction. The jurisdictional inefficiency of the system thus threatens two bedrock principles of bankruptcy: maximizing recovery for creditors and providing debtors with the ability to reorganize or obtain a fresh start.

The cost of uncertainty in the present system will also be eliminated if bankruptcy courts are established under Article III. The present system generates repetitious litigation over highly technical jurisdictional issues. Only sophisticated parties who can afford to litigate these issues obtain a determination of the bankruptcy court's power in certain circumstances. Parties in bankruptcy proceedings who can not afford to litigate these issues are left with uncertainty as to the bankruptcy courts' power. This uncertainty is costly, time consuming and alters negotiating leverage between the parties who can afford to litigate and those who cannot.

Article III status will also, in synergy with these reforms, promote the goal of achieving a high quality judicial system. Critics of the current system argue that bankruptcy judges are too debtor-oriented and as a result the system is too insular and self-referential. Article III status may address some of these concerns. ⁽¹⁷⁴⁰⁾ Lifetime appointment may encourage and provide an incentive for high quality generalists who will bring a generalist perspective to the whole system to seek bankruptcy judge appointments.

The net result would be a more prestigious, more efficient court authorized to resolve quickly and completely all in a single setting the proceedings that come before it.

A. Background on Structure of the Bankruptcy Courts

1. Bankruptcy Act of 1898

Under the Bankruptcy Act of 1898, ⁽¹⁷⁴¹⁾ the jurisdictional scheme of the referees in bankruptcy (who later became bankruptcy judges) to decide contested proceedings was divided between summary and plenary jurisdiction. Bankruptcy referees could preside over contested proceedings only if summary jurisdiction existed. ⁽¹⁷⁴²⁾ If summary jurisdiction was lacking, only plenary jurisdiction existed and the contested proceeding had to be resolved in the nonbankruptcy forum in which the debtor could have brought suit had there been no bankruptcy. The resulting divided jurisdiction led to delay and increased expense to the estate, the creditors, and the third party litigants.

The rather routine process that developed under the Act when a third party was sued by the bankruptcy trustee was as follows:

1.   Suit filed in the bankruptcy court.
2.   Timely objection to the summary jurisdiction of that court.
3.   Decision by the bankruptcy judge.
4.   Appeal to the district court.
5.   Decision by the district court.
6.   Appeal to the court of appeals.
7.   Decision by the court of appeals.
8.   Petition for certiorari.
9.   Denial of petition for certiorari.

No matter how the Court of Appeals decided the issue, it was still only a decision on the jurisdictional issue. While it may have taken seconds to read the above items, that time translated into months and years in the process before the parties could turn to the merits either in the bankruptcy court or the nonbankruptcy forum, which was the court where the debtor could have sued had there been no intervening bankruptcy. The cost of litigation is an administrative expense and is borne by unsecured creditors. The delay inherent in protracted litigation also harms the debtor's chances of reorganizing successfully or in the case of an individual, obtaining a fresh start.

The system just described was, very obviously, inefficient, time consuming and expensive. As bankruptcy filings increased and became more complicated in the 1950s and 1960s, the summary and plenary structure became virtually unworkable. ⁽¹⁷⁴³⁾ The unworkability of this system was one of the main reasons behind the creation of the Commission on the Bankruptcy Laws of the United States in 1970. ⁽¹⁷⁴⁴⁾

2. Commission on the Bankruptcy Laws of the United States

The principal objective of the 1970 Commission was to streamline the bankruptcy process in order to make it more efficient. ⁽¹⁷⁴⁵⁾ This goal was achieved in part by granting broad jurisdiction to the newly-created bankruptcy courts over all property of the debtor and over all proceedings "arising out of any bankruptcy or rehabilitation case."⁽¹⁷⁴⁶⁾ In proposing a broad grant of jurisdiction to the bankruptcy courts in an effort to solve the problems that arose out of divided jurisdiction, the Commission Report concluded:

A comprehensive grant of jurisdiction to the bankruptcy courts over all controversies arising out of any bankruptcy or rehabilitation case would greatly diminish the basis for litigation of jurisdictional issues which consumes so much time, money, and energy of the bankruptcy system and of those involved in the administration of debtors' affairs. It would foster the development of a more uniform, cohesive body of substantive and procedural law which would be applicable to the administration of estates under the Bankruptcy Act. The withdrawal from state and federal district courts of jurisdiction of the so-called plenary proceedings, when coupled with the establishment of uniform federal standards and rules, as proposed by the Commission for adoption and application in lieu of the diverse state laws governing debtors' and creditors' rights, should eliminate a source of uncertainty and division of authority which has characterized bankruptcy law. ⁽¹⁷⁴⁷⁾

Two very basic propositions emanated from the work of the 1970 Commission. One was a recognition that the bankruptcy judge required the legal authority to dispose of any disputes "arising in" or "related to" a pending bankruptcy case. ⁽¹⁷⁴⁸⁾ The second was the necessity for upgrading the bankruptcy court in order to attract the highest level of qualified persons possible to that bench. ⁽¹⁷⁴⁹⁾ The first point was accomplished in the Commission Report by granting to the bankruptcy court jurisdiction over all proceedings "arising in" or "related to" a bankruptcy case. ⁽¹⁷⁵⁰⁾ The second, even complementary to the first, was to have the bankruptcy judges appointed by the President with the advice and consent of the Senate. ⁽¹⁷⁵¹⁾ At this time, the Commission was not concerned about any issue of constitutionality because it felt that Congress had the constitutional power to create such a court with such expanded jurisdiction. ⁽¹⁷⁵²⁾

3. Bankruptcy Reform Act of 1978 ⁽¹⁷⁵³⁾

In the hearings during the 1970s before the House Subcommittee on the bills that were introduced to carry forward the Commission's recommendations, there was no dispute as to the wisdom of the recommendation to give the bankruptcy court pervasive jurisdiction over disputed matters. Consistent with the recommendation of the 1970 Commission, Congress incorporated a broad grant of jurisdiction to the bankruptcy courts into the legislation it drafted. ⁽¹⁷⁵⁴⁾ There was, however, a recognition that a constitutional problem might be created by granting such broad jurisdiction to a non-Article III court. ⁽¹⁷⁵⁵⁾ When issues of constitutionality were raised, the House granted Article III status to bankruptcy judges in order to put those concerns to rest. ⁽¹⁷⁵⁶⁾ A House bill was introduced to avoid any constitutional issue by creating the bankruptcy court under Article III of the Constitution. ⁽¹⁷⁵⁷⁾ In fact, H.R. 8200 eventually passed the House of Representatives and would have passed the Senate had a hold not been placed on it by a single Senator. ⁽¹⁷⁵⁸⁾

In contradistinction, the Senate bill did not confer Article III status on bankruptcy judges. ⁽¹⁷⁵⁹⁾ Despite this significant difference, the Senate bill still conferred the same broad jurisdiction over proceedings in bankruptcy cases as the House version. ⁽¹⁷⁶⁰⁾ The bill that became the Bankruptcy Reform Act of 1978 retained the pervasive jurisdiction but provided for bankruptcy judges to be appointed by the President with the advice and consent of the Senate for a term of 14 years.

4. Northern Pipeline Construction Co. v. Marathon Pipe Line Co. ⁽¹⁷⁶¹⁾

In Marathon, the Supreme Court held that the grant of jurisdiction to bankruptcy courts under the 1978 Bankruptcy Reform Act was an unconstitutional violation of Article III. ⁽¹⁷⁶²⁾ A plurality of the Court held unconstitutional the jurisdictional framework of the 1978 Reform Act because it authorized bankruptcy judges (who, as adjuncts to the district courts, lacked Article III salary and tenure protections) to hear state-law claims asserted in a bankruptcy proceeding. ⁽¹⁷⁶³⁾

All of Title II of the 1978 Bankruptcy Reform Act (particularly section 1471(c)) was found unconstitutional by the Marathon court because it granted too much jurisdiction to a non-Article III court. ⁽¹⁷⁶⁴⁾ As enacted originally, Congress expressly provided in section 1471(c) and the remainder of Title II that there was to be no limitation of the bankruptcy court's authority. For example, 28 U.S.C. з 1480 retained the right to jury trial as it existed on September 30, 1979, which was to be exercised in the bankruptcy court. ⁽¹⁷⁶⁵⁾ Section 1481 gave the bankruptcy court the powers of a court at law, equity and admiralty, but it could not enjoin another court, or punish for criminal contempt not committed in its presence or that warranted incarceration.

Under Marathon, the lack of Article III status for bankruptcy judges proved fatal to the portions of the 1978 Reform Act that attempted to resolve the jurisdictional problems under the Bankruptcy Act by granting broad jurisdiction to bankruptcy judges.

5. Bankruptcy Amendments and Federal Judgeship Act of 1984 ⁽¹⁷⁶⁶⁾

In all the legislation, proposed and enacted up until 1984, there were no provisions regarding permissive or mandatory withdrawal, permissive or mandatory abstention, delegation of personal injury actions to another court, or, obviously, any reference to core and noncore proceedings. The Bankruptcy Amendments and Federal Judgeship Act of 1984 ("BAFJA") was Congress' legislative response to the Supreme Court's decision in Marathon. ⁽¹⁷⁶⁷⁾ BAFJA divides the authority of the bankruptcy court into core and noncore proceedings in order to buttress the constitutionality of the system. ⁽¹⁷⁶⁸⁾ As compared with the distinction under the Act between summary and plenary jurisdiction, under section 157(b), a bankruptcy judge may "hear and determine" all core proceedings, similar to the summary jurisdiction granted under the Act. Under section 157(c), however, a bankruptcy judge may hear a noncore proceeding, but may submit only proposed findings of fact and conclusions of law to the district court judge. ⁽¹⁷⁶⁹⁾ Two judges are thus required to review a noncore proceeding, with the district judge entering the final order or remanding it back to the bankruptcy judge for further review. Noncore proceedings are similar to the plenary jurisdiction under the 1898 Bankruptcy Act, except that a bankruptcy judge under the Act did not have any jurisdiction to hear a plenary action.

A comparison of the pre-Marathon legislation and the legislation responding to Marathon adds some clarity to the amendments adopted under BAFJA. Section 1471 in the 1978 Reform Act had three subsections: subsection (a) vested the district court with original and exclusive jurisdiction over all cases under title 11, a Chapter 7 or 11 case; subsection (b) vested the district court with original but not exclusive jurisdiction over proceedings arising under title 11, in a case under title 11, or related to a case under title 11; and, subsection (c) provided that the jurisdiction under subsections (a) and (b) "shall" be exercised by the bankruptcy court. Subsection (c) led to the Marathon Court's declaration of unconstitutionality.

The jurisdiction debate that began during the deliberations on the 1978 Reform Act was rekindled immediately following the Marathon decision and continued during the deliberations over the enactment of BAFJA. A number of organizations and prominent commentators argued that bankruptcy courts must be established under Article III in order to be constitutional. ⁽¹⁷⁷⁰⁾ The Judicial Conference argued that Marathon did not require Article III status for bankruptcy judges. ⁽¹⁷⁷¹⁾ Some bankruptcy judges, however, disputed the viability of the alternatives proposed and the arguments raised by the Judicial Conference. ⁽¹⁷⁷²⁾

In 1984, Congress passed BAFJA, the current law, in response to Marathon. Section 1334 was substituted for section 1471. Section 1334, in title 28, contains two of the above three subsections. Section 1334(a) and (b) read word for word the same as former section 1471(a) and (b). A related subsection (c) is not included and, in its place, Congress enacted 28 U.S.C. з 157(a), (b), and (c). It is these three subsections which currently establish the authority of the bankruptcy court in what, it is hoped, is a constitutional system.

To put it another way: jurisdiction qua jurisdiction over bankruptcy cases and proceedings is set forth in 28 U.S.C. з 1334(a) and (b). Reference of that jurisdiction to bankruptcy judges is discretionary with the district judges, pursuant to section 157(a). Automatic reference under section 157(a), however, has been accomplished nationwide either by local rule or order. ⁽¹⁷⁷³⁾ Subsections (b) and (c) of section 157 prescribe the parameters of a bankruptcy judge's authority in the exercise of the district court's jurisdiction. These limits are that the bankruptcy judge may hear and enter a final order in a matter that is listed as a core proceeding (section 157(b)), and it may hear a noncore proceeding (that which is not core) but may only submit proposed findings of fact and conclusions of law to the district court judge, unless the parties consent to entry of a final order by the bankruptcy judge. ⁽¹⁷⁷⁴⁾

Section 157 has other subsections, e.g., permissive and mandatory withdrawal and handling of personal injury and wrongful death claims, but it is really only the level of authority over core and noncore proceedings that would render the scheme constitutional.

B. Constitutionality of Current Bankruptcy System

The Supreme Court has not ruled on the constitutionality of the 1984 amendments. The issues raised by the Court in Marathon such as the adjudication of public v. private rights, whether consent of the parties satisfies Article III infirmities, and others that are determinative of the limits of an non-Article III court are nebulous at best. ⁽¹⁷⁷⁵⁾ Even with the delineation of core proceedings in section 157(b)(2), the precise authority of a bankruptcy judge to adjudicate certain matters cannot be authoritatively answered today, thirteen years after BAFJA.

The delineation between core and noncore proceedings remains in considerable dispute. Uncertainty creates fertile ground for delay tactics that force the estate to engage in wasteful litigation over the jurisdiction of the court. In an effort to make the current system work, however, some courts find that certain issues are core proceedings even though they bear a marked resemblance to the issues in Marathon. For example, some courts have held that an action to recover an outstanding account receivable of the debtor is a core proceeding that may be decided by the bankruptcy judge. ⁽¹⁷⁷⁶⁾ No distinction exists, however, between that type of proceeding and the contract damages cause of action in the Marathon case.

While other parts of BAFJA are questionable, no case has been reviewed by the Supreme Court raising a constitutional contest on the core/noncore distinction. Whether permissive counterclaims are truly core proceedings as Congress has stated is questionable. ⁽¹⁷⁷⁷⁾ A recently proposed amendment to section 157(c) might have been the catalyst for Supreme Court involvement if enacted. It provided for the entry of a final order by the bankruptcy judge in a noncore proceeding if, after the hearing, no objection is raised to the proposed findings of fact and conclusions of law submitted by the bankruptcy judge. As a result, parties to noncore bankruptcy proceedings would be bound by a final order entered by the Non-Article III bankruptcy judge, unless they object to the proposed findings of fact and conclusions of law. This provision would further attenuate the core/noncore distinction by giving bankruptcy judges the power to do that which BAFJA forbid in light of Marathon: enter final orders in noncore proceedings. Whether such implied consent alleviates the Article III requirement is problematical but untested. This provision was in the Federal Courts Improvement Act of 1996 but was deleted in the House just before that Act was passed. ⁽¹⁷⁷⁸⁾

1. Granfinanciera, S.A. v. Nordberg⁽¹⁷⁷⁹⁾

The Supreme Court has never ruled on the constitutionality of the core/noncore distinction. The closest it has come was in Granfinanciera where it held that a party who had not filed a claim against the debtor retained its Seventh Amendment right to a trial by jury of the fraudulent transfer action seeking a money judgment filed by the trustee. ⁽¹⁷⁸⁰⁾ The Supreme Court found that the defendant retained a right to a jury trial despite the fact that section 157(b)(2)(H) defines an action to avoid a fraudulent transfer as a core proceeding. ⁽¹⁷⁸¹⁾ In so holding, the Court found that Congress could not delegate a private legal right of action to a non-Article III tribunal without violating a litigant's Seventh Amendment right to a jury trial. ⁽¹⁷⁸²⁾

As a result of the Supreme Court's decision inGranfinanciera, the issue of jury trials under the Seventh Amendment and the ability of the bankruptcy judge to conduct a jury trial is subject to strategic consideration and delay tactics by attorneys. ⁽¹⁷⁸³⁾ For example, something as simple as a jury request in response to the debtor's complaint seeking to enforce certain prepetition contract rights halts the debtor's action and raises a series of time-consuming threshold issues that must be resolved before the substance of the debtor's action can proceed. First, a determination must be made whether the debtor's action is a core or noncore proceeding. Whether an action seeking to enforce a contract right is a core proceeding is the subject of considerable conflict in the courts and is not easily discerned. ⁽¹⁷⁸⁴⁾ If the proceeding is found to be core, the court must determine whether the defendant has a right to a jury trial. If the defendant has a right to a jury trial, the court must determine whether the defendant has waived its right to a jury trial. ⁽¹⁷⁸⁵⁾ If the defendant has not waived its right to a jury trial, the parties consent, and the district court has authorized the bankruptcy court in that district to conduct jury trials, the bankruptcy judge may hear the proceeding. ⁽¹⁷⁸⁶⁾ If any of these prerequisites are missing, the action must be litigated in the district court.

Granfinanciera erodes the basic principle of the current jurisdictional scheme that the core proceedings listed ⁽¹⁷⁸⁷⁾ in section 157(b)(2) are entirely and appropriately within the jurisdiction of the bankruptcy court. Core proceedings are never defined in the Bankruptcy Code. The list of core proceedings in section 157(b)(2) is not an exclusive list. As a result, whether a proceeding is a core proceeding or not may always be the subject of a dispute between the parties. If all core proceedings are subject to disagreement, debtors and creditors are at the mercy of parties who can afford to litigate the bankruptcy court's authority until the other party capitulates. Needless litigation depletes the estate of resources and unsecured creditors as a result receive very little or nothing at all. Bankruptcy jurisdiction must be clearly defined in order for the bankruptcy system to benefit creditors and debtors by avoiding cost and delay.

C. Academic Consensus on Constitutionality of Current System

A number of commentators conclude that the bankruptcy court under BAFJA is constitutional. ⁽¹⁷⁸⁸⁾ These commentators find congressional authority to designate the adjudication of certain matters to non-Article III tribunals and that core bankruptcy matters qualify for non-Article III adjudication. They conclude that a final order entered by a bankruptcy judge in a core proceeding is constitutional. At the same time, this consensus acknowledges that the bankruptcy structure is constitutionally weak in certain areas. ⁽¹⁷⁸⁹⁾

Conversely, a number of commentators have concluded that bankruptcy courts "exercise the essential attributes of the judicial function" (even in core proceedings) and are unconstitutional. ⁽¹⁷⁹⁰⁾ Under this rationale, bankruptcy judges are not authorized to enter final orders in core proceedings and the system does not satisfy Article III. ⁽¹⁷⁹¹⁾

D. The Need for an Article III Bankruptcy Court

1. Elimination of Jurisdictional Litigation

The core/noncore distinction has created a judicial system first by necessity and second by design, that is time consuming, unnecessarily expensive, and inefficient. It produces procedural routes that require court and attorney time for purposes having nothing to do with resolving the substantive merits of the controversy. Article III status would clearly eliminate the need for withdrawal provisions, special jury provisions, special abstention provisions, core vs. noncore distinctions, a double layer of litigation at the trial level through the present need for proposed findings by one judge which are given to another judge who can retry the same matter, and the like.

Opponents of the Recommendation argue that disputes over jurisdiction do not arise very often and therefore, no change to the structure of the bankruptcy court system is necessary. But the numbers do not tell the important part of the story. The important fact is that in any single case the parties--the actual debtors, creditors, trustees, employees, etc.--are forced to spend money and time in a fruitless endeavor. That is, they are required to incur litigation expense over nonsubstantive issues. Two recent decisions of the Courts of Appeals are illustrative of this needless litigation.

a. In re Conejo Enterprises, Inc.⁽¹⁷⁹²⁾

A recent example of this circular litigation over bankruptcy jurisdiction is In re Conejo Enterprises, Inc., which necessitated two opinions from the Court of Appeals for the Ninth Circuit sandwiched around a third Ninth Circuit decision withdrawing the first opinion. The issue was relatively simple. A breach of contract action was instituted by a creditor of the soon-to-be debtor in state court. While it was pending, the defendant filed a Chapter 11 petition and removed the state court action to the bankruptcy court. A motion for remand was made as was a request for relief from the automatic stay. The bankruptcy court denied both. On appeal to the district court, the bankruptcy court was reversed on both orders. ⁽¹⁷⁹³⁾ The district court (1) extended the time for the plaintiff-creditor to file a proof of claim in the Chapter 11 case, which it then did, (2) ordered the civil action remanded to the state court, and (3) lifted the stay.

On appeal to the Ninth Circuit, that court reversed both orders of the district court. Shortly thereafter, it filed a decision withdrawing that opinion. Sometime later, the court of appeals filed another opinion, confessing error in reversing the remand order in light of the Supreme Court's decision in Things Remembered, Inc.v. Petrarca. ⁽¹⁷⁹⁴⁾ It noted that courts of appeal have no jurisdiction over remand orders. The Ninth Circuit went on, however, to the lift stay order. The district court had found that the cause of action constituted a noncore proceeding, making abstention appropriate under section 1334(c)(2) (mandatory abstention). The duplicative result was that the cause of action was separated from the filing of a proof of claim in order to participate in the Chapter 11 distribution.

The Ninth Circuit ultimately held that the state law proceeding could remain in the state court but could not continue because it was subject to the automatic stay in section 362(a). If the creditor-plaintiff desired to participate in the Chapter 11 distribution, it was required to file a proof of claim, which is a core proceeding under section 157(b)(2)(B). Whether or not it files a proof of claim, the claim will be discharged to the extent it is not paid, and, therefore, there is no point in continuing the state court action. Thus, the stay should not be lifted. The point is, here is an uncomplicated set of facts that got litigated repeatedly and needlessly. Simply put, the cause of action centered around a proof of claim, the filing of which triggers the equitable jurisdiction of the bankruptcy court for which no jury trial right exists. ⁽¹⁷⁹⁵⁾ It is irrelevant if a state court action is pending prepetition.

b. In re Orion Pictures, Corp.⁽¹⁷⁹⁶⁾

Another case emblematic of this type of nonsubstantive litigation is In re Orion Pictures, Corp. In Orion, the debtor in possession moved to assume an executory contract and instituted an adversary proceeding at the same time for a declaratory judgment claiming anticipatory breach of the agreement and seeking specific performance or damages. The bankruptcy court denied the defendant's jury request, holding that the two proceedings were actually one, based on the motion to assume which necessitated a finding of the existence of the contract.

The Second Circuit reversed and held that the bankruptcy court could only decide the motion to assume, but an adversary proceeding was necessary with respect to the issues of contract existence and breach, which was not a core proceeding. In other words, the assumption proceeding was a core proceeding but whether a contract existed at all constituted a noncore proceeding. As to the latter, the nondebtor party was entitled to a jury trial and that matter had to be withdrawn. Again, a trip to the court of appeals, via the district court, without anything being decided on the merits of the dispute between the parties. Final resolution of this issue necessitated two trials: one in the bankruptcy court on assumption of the contract and the other in the nonbankruptcy court on the existence of the contract.

These cases demonstrate the confusion that exists over the boundaries of the bankruptcy courts' authority to enter a dispositive order. This confusion creates litigation that is costly not only to the parties involved but to the entire bankruptcy system. Creditors finance litigation under circumstances where parties rarely win. The party who can erect enough jurisdictional roadblocks prevails once the estate can no longer afford to fight.

2. Alternatives to Article III

Article III status was not the only solution the Commission considered to resolve the current jurisdiction quagmire. The Commission also considered a number of alternative "stream-lining" proposals. Extensive discussions were held, but the Commission did not make any recommendation with regard to these proposals. The following discussion is included to illuminate why the stream-lining proposals will not solve the fundamental jurisdictional problems in the current system.

As discussed above, the jurisdiction provisions of BAFJA were enacted in response to Marathon in an effort to reconstitute a constitutional bankruptcy court. ⁽¹⁷⁹⁷⁾ A number of provisions were added under BAFJA, however, that have no effect on the constitutionality of the bankruptcy court. For example, mandatory withdrawal, mandatory abstention, and the forum for liquidating personal injury claims are all provisions that increase the cost and delay of bankruptcy-related litigation but neither improve nor impair the constitutionality of the current system.

Under Marathon, a non-Article III court may not be given pervasive jurisdiction nor may it finally decide a proceeding involving a purely state law cause of action brought by the estate representative against a third party. If bankruptcy courts do not have Article III status, the core/noncore provisions in section 157(c) must be retained. All of the unanswered questions, such as, whether all counterclaims are core proceedings even if so listed in section 157(b)(2)(C) and whether implied consent is constitutionally tolerated under section 157(c)(2), remain as the system continues to struggle with this dichotomy.

All other provisions of a procedural nature affecting trials in the bankruptcy court may be eliminated in order to remove strategic delay-causing devices from the arsenal of litigators. ⁽¹⁷⁹⁸⁾ The delay caused by these provisions is funded by the unsecured creditors who must bear the costs of administration. Because these provisions do not buttress the constitutional nature of the current system they only serve to add further delay and expense to an already lengthy and costly core/noncore procedure.

In addition, the Commission discussed whether bankruptcy judges should be authorized to exercise the broadest contempt powers constitutionally permissible. There is considerable agreement among courts as to what contempt powers a bankruptcy court as a non-Article III court could constitutionally exercise. ⁽¹⁷⁹⁹⁾ The contempt power parameters that a bankruptcy judge may constitutionally exercise include civil contempt power and criminal contempt power for contempt committed in the presence of the court, with no power to incarcerate. This conclusion is consistent with the Judicial Conference's Long Range Plan for the Federal Courts specific recommendation that Congress enact legislation granting such contempt power to the bankruptcy court. ⁽¹⁸⁰⁰⁾

The Commission also discussed whether district court referrals of bankruptcy appeals, noncore proceedings, and withdrawn proceedings to magistrate judges was proper under BAFJA. ⁽¹⁸⁰¹⁾ The purpose of these provisions under BAFJA was to ensure that an Article III district court judge would review the proceedings. Arguably, if cause exists to withdraw a proceeding from the non-Article III bankruptcy judge, the same cause exists to prevent referral of that matter to a non-Article III magistrate judge. Prohibiting the referral of bankruptcy matters to magistrate judges accords with the recommendation of the Judicial Conference of the United States. ⁽¹⁸⁰²⁾ The result would be that a district judge would not be able to refer these matters to magistrate judges.

The net effect of these streamlining proposals would be to assist in reducing cost and increasing efficiency. The delays caused by provisions that do not buttress the constitutionality of the bankruptcy system under BAFJA only serve to exacerbate the problems that already inhere in the core/noncore distinction. The system would only become marginally more efficient by amending these provisions. The same dichotomy between core and noncore proceedings would still have to be maintained and that would lead to the same costly disputes outlined in Conejo and Orion.

Conclusion

The procedural morass of the bankruptcy judicial system is extraordinarily costly and inefficient. The cost is borne by creditors, debtors, and the court and its administration. Article III status is not a panacea, but it is a miracle cure for the majority of jurisdictional ills that currently afflict the bankruptcy court. It would not relieve the system of a motion raising the basic jurisdiction issue, i.e., "related to" jurisdiction. It would, however, relieve it of all of the other jurisdictional motions which would eliminate a great deal of expense for the estate, the creditors, interested third parties, and the system itself in terms of court and administration time.

3.1.2 Transition to an Article III Bankruptcy Court

Article III status is a prerequisite to exercising "the essential attributes of judicial power."⁽¹⁸⁰³⁾ At first glance, the creation of an Article III bankruptcy court might lead to the conclusion that such judges would have to be given the same salary, chambers, and other benefits enjoyed by district court judges. However, more flexibility exists under Article III of the Constitution than that first glance would indicate. When the Supreme Court declared unconstitutional bankruptcy court jurisdiction granted under 28 U.S.C. з 1471, the Court provided some guidance on Article III's flexibility:

Article III itself permits much flexibility; so long as tenure during good behavior is granted, much room exists as regards other conditions. Thus it would certainly be possible to create a special bankruptcy court under Article III and there is no reason why the judges of that court would have to be paid the same as district judges or any other existing judges. It would also be possible to provide that when a judge of that court retired pursuant to statute, a vacancy for a new appointment would not automatically be created. And it would be entirely valid to specify that the judges of that court could not be assigned to sit, even temporarily, on the general district courts or courts of appeals. ⁽¹⁸⁰⁴⁾

Flexibility under Article III makes it prudent for the Commission to make recommendations regarding the transition to an Article III bankruptcy court. Legislative ambiguity regarding a judge's Article III status has led to confusion in the past. ⁽¹⁸⁰⁵⁾ Congressional clarity is imperative to ensure a smooth Article III transition for the bankruptcy court. ⁽¹⁸⁰⁶⁾

During the debate over how to structure the transition to an Article III bankruptcy court a number of concerns have been raised. Of primary concern is whether one sitting president would have the power to appoint over three hundred life-tenured judges. ⁽¹⁸⁰⁷⁾ Concerns were also raised about protecting the interests of sitting bankruptcy judges. Jurisdictional concerns focused on the constitutional propriety of having an Article III bankruptcy court sitting concurrently with a non-Article III bankruptcy court. The Recommendation attempts to address all of these concerns and balance the interests of those participating in the current system with the desire for as quick and as smooth a transition as possible.

A. Phasing in Article III Bankruptcy Judges

The Recommendation addresses these concerns in a number of fundamental ways. Concern over granting such vast appointment power to a single sitting president is alleviated by phasing-in the appointment of Article III bankruptcy judges over 14 years. The interests of sitting bankruptcy judges are protected under the Recommendation by permitting them to remain on the bench for their statutory term; to seek appointment as Article III bankruptcy judges while remaining on the bench; and to retain all pension and retirement benefits currently provided. The Recommendation will facilitate the development of a higher-quality bankruptcy bench by enabling sitting bankruptcy judges (who have a breadth of specialization, experience and perspective) to seek appointment as Article III judges. In addition, the Recommendation provides fourteen years to develop a firs-rate bankruptcy bench without requiring hundreds of immediate appointments.

Under the Recommendation, Article III bankruptcy judges would be phased-in on an attrition basis. An act of attrition would include (1) expiration of the current fourteen year term of a sitting bankruptcy judge; (2) resignation; (3) retirement from the bench for any reason prior to the expiration of the statutory term; (4) being sworn-in as an Article III judge; or (5) death. Application by a sitting bankruptcy judge for appointment as an Article III bankruptcy judge would not be an act of attrition. The Recommendation permits sitting bankruptcy judges to retain their positions during the application and confirmation process. Once a sitting bankruptcy judge is appointed as an Article III judge, another vacancy would be created that could be filled by yet another Article III bankruptcy judge. The application process for a sitting bankruptcy judge to become an Article III judge will not create a vacancy under the Recommendation; however, the appointment of a sitting bankruptcy judge as an Article III bankruptcy judge or any other Article III judge would create a vacancy under the Recommendation.

Historically, Article III judges have been considered "officers of the United States"⁽¹⁸⁰⁸⁾ and have consequently been appointed by the President with the advice and consent of the Senate. ⁽¹⁸⁰⁹⁾ The Recommendation preserves this method of appointment.

Under the Recommendation, sitting non-Article III bankruptcy judges will be permitted to serve out the remainder of their fourteen year terms. Concurrent with that service, sitting bankruptcy judges are eligible to seek Article III bankruptcy judgeships. If a sitting bankruptcy judge is appointed as an Article III bankruptcy judge, the transfer of that bankruptcy judge to an Article III judgeship would be an act of attrition under the Recommendation. The vacancy left by that judge would create another vacancy on the bankruptcy bench that may be filled by another Article III bankruptcy judge.

Currently, bankruptcy judges are eligible for full pension benefits (1) upon reaching their 65th birthday, and (2) after they have served for fourteen years. ⁽¹⁸¹⁰⁾ The Recommendation does not affect the pension and other retirement benefits that current bankruptcy judges would otherwise receive in the absence of an Article III transition period.

The Administrative Office has promulgated pension and other benefit transfer provisions for bankruptcy judges that become Article III judges during their tenure on the bankruptcy court. ⁽¹⁸¹¹⁾ The Recommendation does not affect these transfer provisions; their operation will remain the same during the transition period. As a result, the Recommendation will not increase the current pension and retirement benefit costs for sitting bankruptcy judges who become Article III judges.

By phasing-in Article III judges on an attrition basis according to the length of the current term of a sitting bankruptcy judge, transition could take a maximum of fourteen years to complete. Critics may argue that fourteen years is too long to maintain two tiers of bankruptcy judges. The current system, however, already incorporates two tiers of bankruptcy judges by vesting bankruptcy jurisdiction in the district court with discretionary referral to bankruptcy judges. The current system, moreover, maintains those two tiers with no movement towards a more efficient and unified bankruptcy court structure. By phasing in Article III bankruptcy judges on an attrition basis, the Recommendation offers a minimum of disruption for all interested parties during the transition to a more efficient bankruptcy court structure. In addition, by phasing in Article III judges, the appointment power will not go to a single sitting president, but would be spread out over fourteen years. The transition period will also foster the development of a high quality bankruptcy bench by spreading the appointment power among several presidents and over the course of a number of years. ⁽¹⁸¹²⁾

The natural expiration dates of the terms of current bankruptcy judges could have a significant effect on the timing of the transition period and make a difference in the number of non-Article III bankruptcy judges who continue to sit during the transition period. Between 1999 and 2002, the terms of 215 bankruptcy judges will expire. This is in comparison with the terms of 96 bankruptcy judges that will expire between 2003 and 2009. ⁽¹⁸¹³⁾ Depending on the timing of any Article III legislation, the transition period will either include a majority of sitting bankruptcy judges or a majority of Article III bankruptcy judges.

B. Bankruptcy Jurisdiction During the Transition Period

The U.S. Code in 28 U.S.C. з 1334(a) and (b) currently places bankruptcy jurisdiction in the district courts. ⁽¹⁸¹⁴⁾ District courts have the power to, among other things, refer bankruptcy cases and proceedings in bankruptcy cases to the bankruptcy judge;⁽¹⁸¹⁵⁾ withdraw cases and proceedings from the bankruptcy judge;⁽¹⁸¹⁶⁾ liquidate personal injury tort and wrongful death claims asserted in a bankruptcy case;⁽¹⁸¹⁷⁾ enter final orders in noncore bankruptcy proceedings;⁽¹⁸¹⁸⁾ abstain from hearing certain state law claims;⁽¹⁸¹⁹⁾ hear state law claims removed by the debtor;⁽¹⁸²⁰⁾ and, hear appeals from bankruptcy court orders in core matters. ⁽¹⁸²¹⁾

Consistent with the Commission's Recommendation to eliminate the district court from the appellate process in bankruptcy, the Recommendation also eliminates the district court from the bankruptcy jurisdictional scheme. Under the Recommendation, bankruptcy jurisdiction would be transferred from the district court to the Article III bankruptcy judge(s) sitting in that district. Bankruptcy jurisdiction, as well as the bankruptcy role of the district court, would thus be with the Article III bankruptcy judge(s) on a district-by-district basis. For example, if only one Article III bankruptcy judge had been appointed in a multi-bankruptcy judge district, the Article III bankruptcy judge would assume the role of the district court and the other bankruptcy judges would sit as adjuncts of the Article III bankruptcy court. The power to, among other things, refer cases, withdraw cases, abstain from cases, determine noncore matters, hear removed claims, and liquidate personal injury claims would be handled by an Article III bankruptcy judge.

In districts where an Article III bankruptcy judge had not yet been appointed, the district court would retain its current jurisdictional and appellate role, if any, until such time as an Article III bankruptcy judge was appointed to sit permanently in that district. Designation of an Article III bankruptcy judge to sit temporarily in a district (discussed infra) will have no effect on the jurisdictional and appellate role of that district court.

The length of the transition period combined with the changing workload of the bankruptcy system necessitates a plan to deal with these needs during the transition. An Article III bankruptcy judge would greatly reduce cost and delay by presiding over a case that involves a number of noncore issues that must be resolved. A critical component of the Recommendation is the role of the Judicial Council of the Circuit to address these needs. The political processes involved in nominating and confirming Article III judges virtually guarantee that Article III bankruptcy judges will be confirmed in different districts in a manner that bears little relationship to the needs for an Article III bankruptcy judge. The Judicial Council in each circuit would be authorized to (1) assess the need for an Article III bankruptcy judge in a particular district, and (2) if necessary, designate an Article III bankruptcy judge from another district to sit in that district.

This Recommendation is in keeping with the supervisory role already played by the Judicial Council of the circuit. ⁽¹⁸²²⁾ The various duties of the Judicial Council include

[a]ssigning judges to congested districts, and to particular types of cases, directing them to assist infirm judges, ordering them to decide cases long held under advisement, requiring a judge to forego his summer vacation in order to clear his congested docket, compelling multi-judge courts to arrange staggered vacations, and setting standards of judicial ethics. ⁽¹⁸²³⁾

The Judicial Council would be able to address many situations. If, for example, a large mass-tort case is filed in a district without an Article III bankruptcy judge. Rather than permit costly and time-consuming jurisdictional litigation that can currently occur between the bankruptcy judge and the district court, the Judicial Council may choose to designate an Article III bankruptcy judge from another district to hear the case or some portions of the case. As discussed in the Article III Recommendation, no basis would exist to dispute the authority of an Article III bankruptcy judge to hear, determine, and estimate personal injury claims.

Where the Judicial Council of a circuit determines a need for an Article III bankruptcy judge in a district and no Article III bankruptcy judges have been appointed in that entire circuit, the Chief Justice would be authorized to designate an Article III bankruptcy judge to sit in another circuit upon receiving a certificate of necessity from the chief judge of the circuit.

Under the Recommendation, the Judicial Council can respond to the changing needs of each judicial district in order to make the transition as smooth as possible.

C. Suggested Statutory Language

Transitioning the Non-Article III court to an Article III court will be a somewhat complicated process. The following suggested statutory language includes only the broad enabling legislation that would be required to enact an Article III bankruptcy court transition. ⁽¹⁸²⁴⁾

"28 U.S.C. з 151 Creation and Composition of Bankruptcy Courts

(a) In each judicial district in which a judge has been appointed to sit pursuant to section 152(a) of title 28, there shall be a court of record known as the United States Bankruptcy Court for the district.

(b) In each judicial district in which a bankruptcy judge has not been appointed under section 152(a) of title 28, the bankruptcy judges shall constitute a unit of the district court to be known as the bankruptcy court for that district. Each bankruptcy judge, as a judicial officer of the district court, may exercise the authority conferred under this chapter with respect to any action, suit, or proceeding and may preside alone and hold a regular or special session of the court, except as otherwise provided by law or by rule or order of the district court."

"28 U.S.C. з 152 Appointment and Number of Bankruptcy Judges

(a) On and after the effective date of this Act, when a vacancy as defined in subsection (c) of this section occurs, the President shall appoint, by and with the advice and consent of the Senate, bankruptcy judges for the several judicial districts as follows: The total number of bankruptcy judges for each judicial district (including those bankruptcy judges appointed under this subsection and appointed under section 152(a)(1) of title 28 as in effect on the day before enactment of this Act) shall be the number authorized under this section before its amendment by the Act enacting this section. A bankruptcy judge appointed under this section shall hold office during good behavior.

(b) The judges of the district courts for the territories shall serve as the bankruptcy judges for such courts.

(c) With regard to a bankruptcy judge appointed under prior section 152(a)(1) of title 28, a vacancy as used in subsection (a) of this section shall occur upon the following events:

(1) natural expiration of the statutory term;
(2) appointment under subsection (a) of this section;
(3) resignation from the bench for any reason, including removal under subsection (e) of this section;
(4) retirement from the bench; or
(5) death."

"28 U.S.C. з 298 Assignment of Bankruptcy Judges

(a) The judicial council of each circuit created pursuant to section 332 of this title, may designate and assign one or more bankruptcy judges appointed under section 152(a) of this title, to sit in a district where a bankruptcy judge has not yet been appointed under section 152(a) of this title, whenever the business of that district so requires.

(b) The Chief Justice of the United States may designate and assign temporarily a bankruptcy judge appointed under section 152(a) of this title, of one circuit for service in another circuit, in a bankruptcy court, upon presentation of a certificate of necessity by the chief judge or circuit justice of the circuit wherein the need arises."⁽¹⁸²⁵⁾

"28 U.S.C. з 1334 Bankruptcy Cases and Proceedings

(a) Except as provided in subsections (b) and (c) of this section, the district court 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 court with original jurisdiction under either subsection (a) or subsection (c) of this section, the court with original jurisdiction under either subsection (a) or subsection (c) of this section shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to a case under title 11.

(c) Except as provided in subsection (b) of this section and notwithstanding the grant of jurisdiction in subsection (a) of this section, the bankruptcy court established by section 151(a) if this title shall have original and exclusive jurisdiction of all cases under title 11."

"28 U.S.C. з 157 Procedures

(a) A district court whose jurisdiction arises under section 1334(a) of title 28, or a bankruptcy court whose jurisdiction arises under section 1334(c) of title 28, may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district.

[Remaining subsections of section 157 should refer to applicable court referring the case under subsection (a) of this section.]"

Conclusion

A great deal of the opposition to an Article III bankruptcy court may be ameliorated through consensual transition provisions. The Recommendation balances a number of competing interests in an attempt to treat all affected parties fairly. A smooth transition process to an Article III bankruptcy court will ensure that the interests of the sitting bankruptcy judges, court administration, and the users of the system are balanced against the need for a constitutionally sound court that can swiftly and finally decide bankruptcy and bankruptcy related issues. The Recommendation is designed to reduce the cost and delay inherent in the current system over time in order to avoid the confusion that may result from an immediate change.

3.1.3 Bankruptcy Appellate Process

An appellate system should provide stability and consistency in case law decision-making. The American court model is based on a structure in which trial courts make many rulings, some of which conflict with others, and appellate courts review those decisions, resolve disputes and, over time, promote the development of a coherent body of law.

The Constitution authorizes Congress to establish a uniform law of bankruptcies. ⁽¹⁸²⁶⁾ Despite this clear constitutional mandate, the current bankruptcy appellate structure has yielded results which are far from uniform. Most appeals from bankruptcy court decisions go to the district courts. The decision of the district court binds the parties in the case but, because there may be multiple district judges in each district; often times the district court judges in the same district do not agree with each other. District court precedent in bankruptcy as a result is often in conflict. Under these circumstances, bankruptcy judges have a choice of which precedent to follow. Certain bankruptcy courts have held that the decision by one district judge does not create binding precedent for all of the bankruptcy judges within the district. ⁽¹⁸²⁷⁾ Similarly, Bankruptcy Appellate Panel ("BAP") decisions often do not have precedential effect over either bankruptcy courts or district courts. ⁽¹⁸²⁸⁾

Only when a case is appealed a second time to the court of appeals will the decision create binding precedent within the circuit. Only when decisions from the court of appeals are appealed to the Supreme Court is there a single, uniform rule binding on all bankruptcy courts. Moreover, because even the general rules are the subject of multiple nonbinding authority, even basic issues are litigated again and again. ⁽¹⁸²⁹⁾

Stare decisis is a fundamental tenet of our common law system, defined as "when [a] court has once laid down a principle of law as applicable to a certain set of facts, it will adhere to that principle, and apply it to all future cases where facts are substantially the same."⁽¹⁸³⁰⁾ Consistent application of the law leads to predictable outcomes, which leads to fewer appeals. Minimizing the number of appeals filed is a powerful policy reason behind a need for stare decisis. "Appeals are costly to litigants and society, and lower court departures from established reviewing court precedent would surely multiply appeals. Stare decisis discourages appeals, but this function is served only when litigants have reason to believe that the reviewing court will adhere to its prior decisions."⁽¹⁸³¹⁾

The problems that arise from a lack of effective stare decisis in a two-tier appellate system can not be overestimated. Because of the current multiple appellate structure, additional litigation does not result in binding precedent. Just as a lack of stare decisis results in costly and needless litigation, the existence of stare decisis will have the effect of reducing over time the number of bankruptcy appeals as issues of law become binding on a circuit-wide basis.

Concerns over cost and efficiency also support the Recommendation. Under the current system, every bankruptcy appeal is an expensive excursion for both debtor and creditor who must work through two layers of appeals for a final resolution of their disputes. ⁽¹⁸³²⁾ More importantly, the conflicting opinions and uncertainty that result from district court appellate decisions impose very real costs on all parties who use the bankruptcy system.

Without a predictable outcome on even the most basic issues, negotiations outside of court are skewed creating more litigation. Currently, case law can be found to support virtually any position on any issue and as a result, wasteful litigation ensues. Many, although not all, bankruptcy court opinions are published in a separate West and other reporters devoted to bankruptcy cases. Many bankruptcy opinions from the district courts are also published. The consequence is that about fourteen volumes of opinions of West's Reporter alone, few of which are binding on any other future case, are published each year. Practitioners assert that it is possible to find a bankruptcy opinion to support any legal proposition and any side of a legal proposition. As a result, no binding precedent exists in some circuits on certain fundamental bankruptcy issues. ⁽¹⁸³³⁾

The current appellate process provides a bankruptcy litigant with more access to direct appeals than a criminal defendant, a tax litigant, a tort victim, or almost anyone else in the federal system. This is a wasteful system in both time and money, with a great deal of duplication. Parties with greater resources to withstand a lengthy and expensive appellate process have a distinct advantage. This advantage is magnified in negotiations between a party who would benefit from delay and can afford to litigate and a party who needs a quick resolution and can not afford lengthy appeals.

A. Jurisdiction and Appellate Process of the Bankruptcy Courts

Original and exclusive jurisdiction of all bankruptcy cases currently resides in the district court. ⁽¹⁸³⁴⁾ Similarly, original, but not exclusive, jurisdiction of all civil proceedings arising under, in, or related to, a case under title 11 also resides in the district court. ⁽¹⁸³⁵⁾ Under 28 U.S.C. з 151, the bankruptcy courts are units of the district court. The district court has the power to refer "any or all cases under title 11 and any or all proceedings under title 11" to the bankruptcy court for that district and the power to withdraw a referred case or proceeding. ⁽¹⁸³⁶⁾

Title 28 gives the U.S. district courts jurisdiction to hear appeals from final judgments, orders, and decrees of the bankruptcy judges. The district courts also have discretionary jurisdiction to hear appeals from interlocutory orders and decrees of bankruptcy judges. Unless one of the parties opts out, all bankruptcy appeals in districts with bankruptcy appellate panels ("BAP") go from the bankruptcy court directly to the BAP. The courts of appeals have jurisdiction over appeals from all final orders, judgments, and decrees of the district courts and the bankruptcy appellate panels. The jurisdiction of the United States Supreme Court in bankruptcy matters is the same as its jurisdiction in ordinary civil matters. ⁽¹⁸³⁷⁾

B. Prior Attempts to Eliminate District Court Review

Elimination of district court review was considered and rejected by the 1970 Commission. The Commission Report cited (1) the geographic remoteness of the courts of appeals; (2) the risk of an overloaded appellate docket with appeals from litigants who may otherwise have been satisfied with a district court determination; and (3) that the courts of appeals would continue to hear appeals in those cases where "the stakes were sufficiently high" and the "correct resolution sufficiently in doubt" as to warrant review. ⁽¹⁸³⁸⁾

Two separate appellate routes were proposed during the deliberations prior to the enactment of the 1978 Bankruptcy Reform Act. The House Bill vested bankruptcy judges with Article III status and proposed that bankruptcy appeals go directly to the courts of appeals. ⁽¹⁸³⁹⁾ The Senate Bill, under which bankruptcy judges did not have Article III status, proposed that bankruptcy appeals go to the district court, presumably following the 1970 Commission recommendation. ⁽¹⁸⁴⁰⁾

As a compromise of these two schemes, the 1978 Bankruptcy which did not confer Article III status on bankruptcy courts, provided that the initial appeal of a decision of the bankruptcy court would be to a district court, a bankruptcy appellate panel (in circuits where one had been established), or directly to the court of appeals if both parties consented. ⁽¹⁸⁴¹⁾ Without explanation, direct appeals to the courts of appeals by consent was not carried over in the Bankruptcy Amendments and Federal Judgeship Act of 1984. ⁽¹⁸⁴²⁾

The factors that influenced the debate nearly thirty years ago have changed. Today, geographic remoteness of the courts of appeals is unlikely to add additional inconvenience and cost. As courts increasingly employ electronic filing and service of notices, appellate records, and briefs, location of the appellate court will matter less and less. Travel may be required only for oral argument and even then may be avoided by waiving oral argument or by video conferencing. The Court of Appeals for the Second Circuit is experimenting with oral argument by video rather than in person. The potential for an overloaded docket is addressed separately. ⁽¹⁸⁴³⁾ The hope of the 1970 Commission that only important cases would reach the courts of appeals has not come to pass. The cost of bankruptcy appeals precludes resolution of numerous fundamental bankruptcy issues because the parties cannot afford to litigate them. As previously stated, no binding circuit authority exists for even the most fundamental bankruptcy issues. The cost and delay inherent in taking an appeal all the way to the courts of appeals has foreclosed effective stare decisis in subsequent bankruptcy cases and proceedings.

C. Appeals from Core and Noncore Orders

Section 157(b)(1) provides that bankruptcy judges may "hear and determine all cases under title 11 and all core proceedings arising under title 11" subject to standard appellate review as provided in section 158. ⁽¹⁸⁴⁴⁾ Unless the parties consent to the entry of a final order in a "related-to" proceeding (noncore), a bankruptcy judge can submit only proposed findings of fact and conclusions of law to the district judge for "de novo review." Assuming that the core/noncore distinction remains intact and is constitutional, direct appellate review is sound in core proceedings and in those noncore proceedings where the parties have consented to the entry of a final order by the bankruptcy judge.

In a noncore proceeding, where a bankruptcy judge has the authority only to submit proposed findings of fact and conclusions of law, the proceeding goes to the district court for "de novo review." This provision ensures that bankruptcy courts are not acting outside their jurisdiction. ⁽¹⁸⁴⁵⁾ The entry of a final order by the district court is not part of the appellate process; it is the basic order from which an appeal is taken directly to the court of appeals as an order in any nonbankruptcy civil action. Sections 1291 and 1292 apply as do the Federal Rules of Appellate Procedure in place of Section 158(d) and Part VIII of the Federal Rules of Bankruptcy Procedure. As previously stated, the jurisdictional and procedural distinction between core and noncore would not be necessary if Congress enacts the Recommendation to grant Article III status to bankruptcy judges.

D. Constitutionality of Direct Appellate Review

The appellate structure has no effect on the constitutionality of the bankruptcy court system. To the extent that the current bankruptcy system is constitutionally sound, the Recommendation is constitutionally sound. To the extent that the current bankruptcy system is constitutionally infirm, the Recommendation does not remedy those faults. Direct appeals may, however, exacerbate the constitutionality problems that inhere in the current non-Article III system. While there is no constitutional distinction between having a case reviewed by the district court and by the court of appeals, the level of control currently exercised by the bankruptcy courts will become more evident if appeals are taken to the courts of appeals.

The constitutional infirmity, if any, rests in the original adjudication, not the appeal process. In the bankruptcy scheme of things, the factual trial is held in the non-Article III bankruptcy court and if the proceeding is noncore, e.g., a Marathon-type of state law action, the final order must be entered by the Article III district court that can hear the proceeding de novo. Direct appeal to the circuit court need not eliminate this de novo hearing of noncore matters. The non-Article III debate is thus not involved in the appellate review issue. Article III and Marathon are satisfied at the trial level.

E. Other Non-Article III Examples of Direct Circuit Court of Appeals Review

A number of non-Article III courts have direct appeals to the courts of appeals.

Magistrate Judge Model. The Federal Magistrates Act of 1979 (as amended) authorizes magistrate judges to conduct civil trials and enter judgments with the consent of the parties. ⁽¹⁸⁴⁶⁾ In addition, a district court judge may designate a magistrate to hear and determine any pending pretrial matter without the consent of the parties. ⁽¹⁸⁴⁷⁾ A district court judge makes a "de novo determination"⁽¹⁸⁴⁸⁾ of only those portions of the magistrate judge's report or specified findings to which objection is made. ⁽¹⁸⁴⁹⁾ Final decisions of magistrate judges are directly appealable to the applicable court of appeals and are subject to ordinary appellate review. ⁽¹⁸⁵⁰⁾ Appellate jurisdiction over a magistrate judge's orders is based on the specific grant in section 636(c) rather than on the general grant of appellate jurisdiction in 28 U.S.C. з 1291 over appeals from final orders of district courts. ⁽¹⁸⁵¹⁾ The Supreme Court has not reviewed whether the authority of magistrate judges to preside over civil trials with the consent of the parties passes muster under Article III. ⁽¹⁸⁵²⁾ Eleven circuit courts, however, have upheld a magistrate judge's jurisdiction over a wide variety of civil cases with the consent of the litigants. ⁽¹⁸⁵³⁾

In June, 1993, the Magistrate Judges Division of the Administrative Office of the U.S. Courts published "A Constitutional Analysis of Magistrate Judge Authority"⁽¹⁸⁵⁴⁾ noting that Gomez v. United States, ⁽¹⁸⁵⁵⁾ and Granfinanciera, S.A. v. Nordberg, ⁽¹⁸⁵⁶⁾ "had raised serious questions about what matters non-Article III judicial officers may handle."⁽¹⁸⁵⁷⁾ The Magistrate Report relied on the "key element of litigant consent" to distinguish both Marathon andGranfinanciera from the Magistrate Act system. ⁽¹⁸⁵⁸⁾ The importance of litigant consent to support the jury trial right in Granfinanciera was reinforced by the Supreme Court's holding in Langenkamp v. Culp, ⁽¹⁸⁵⁹⁾ that a defendant in a preference action had no jury trial right where it had filed a claim as a creditor prior to the commencement of the preference action.

The Magistrate Report concludes that the Magistrate Act satisfies the personal and structural components of Article III. ⁽¹⁸⁶⁰⁾ Litigant consent to the entry of a final order by the magistrate judge adequately waives the personal right to have a proceeding heard by an Article III judge. ⁽¹⁸⁶¹⁾ Similarly, as adjuncts of the district court, magistrate courts do not usurp the power of the Article III judiciary, "even when they exercise civil trial authority."⁽¹⁸⁶²⁾ The Magistrate Report concludes that these factors, combined with clear congressional intent, would lead a majority of the Court to "uphold the consensual civil trial authority of magistrate judges if the right case was presented to it."⁽¹⁸⁶³⁾

Tax Court Model. The tax court system also provides for direct court of appeals review of orders by non-Article III courts. At the option of the taxpayer, IRS rulings are reviewable by an Article I tax court. ⁽¹⁸⁶⁴⁾ Final orders of the Article I tax court are reviewable by the court of appeals in the circuit where the taxpayer resides "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury."⁽¹⁸⁶⁵⁾ Because Article I review in this context is at the option of the taxpayer, litigant consent exists in this scheme similar to that required under the Magistrate's Act.

Administrative Agency Model. In addition to the magistrate and tax schemes, many other administrative schemes provide for direct appeal to the courts of appeals from Article I adjudications. For example, approximately 45 administrative schemes provide for appeals either to the Court of Appeals for the D.C. Circuit or to the regional court of appeals from two types of adjudications: (1) directly from an Article I administrative agency or (2) from the appropriate district court. ⁽¹⁸⁶⁶⁾ Administrative agency determinations under certain legislation may be appealed only to the Court of Appeals for the D.C. Circuit. ⁽¹⁸⁶⁷⁾ Moreover, the delegation of certain matters for adjudication by administrative agencies--occasionally without any Article III judicial review--has been countenanced by the Supreme Court. ⁽¹⁸⁶⁸⁾

F. Impact of Direct Court of Appeals Review

Direct appeals to the courts of appeals may increase the burden on those appellate courts. By eliminating the first round of appeals from the appellate process, more cases will go to the courts of appeals for resolution. Although this will have the salutary effect of establishing consistent legal precedent within the circuit, initially it will impose a somewhat increased decision-making burden on the appellate courts. Over time, however, this burden should decrease as more issues are settled within the circuit and fewer uncertainties linger, necessitating fewer appeals.

Historical Court of Appeals Statistics. The data for bankruptcy appeals in the current system may shed some light on the predicted impact of eliminating the first layer of review of bankruptcy orders. ⁽¹⁸⁶⁹⁾ For the year ending June 30, 1997, there were a total of 40,093 appeals for all areas of the law pending in the courts of appeals. Of these appeals, bankruptcy appeals comprised 944 (2% of all appeals filed). In the district courts, 3,588 bankruptcy appeals were filed and a total of 1,293 appeals were filed in the First, Second, Sixth, Eighth, Ninth, and Tenth Circuit Bankruptcy Appellate Panels. ⁽¹⁸⁷⁰⁾ Assuming no other changes in the appellate system, the approximate impact of the Recommendation would result in an increase of 3,937 appeals to the courts of appeals (net increase of 9%).

These predictions (both above and below) represent a worst-case scenario. The post-Recommendation appeals figures assume that (1) every appeal currently filed in the district court would be filed in the court of appeals, and (2) improved stare decisis will not diminish the number of appeals taken. However, these two factors are likely to result in far fewer appeals to the courts of appeals than those predicted. The figures upon which the predictions have been based arose under a multiple appeal system where stare decisis was largely ineffective. In fact, the Recommendation should result in fewer total appeals than those predicted above and below.

2. Impact By Circuit

Bankruptcy Appeals as a Percentage of Total Appeals Pending By Circuit July 1, 1996 through June 30, 1997

Circuit Court Before the Recommendation After the Recommendation
(Worst Case Scenario)

D.C. Circuit

.2%

1%

First Circuit

2%

21%⁽¹⁸⁷¹⁾

Second Circuit

2%

18%⁽¹⁸⁷²⁾

Third Circuit

4%

16%

Fourth Circuit

2%

9%

Fifth Circuit

2%

8%

Sixth Circuit

2%

10%⁽¹⁸⁷³⁾

Seventh Circuit

2%

11%

Eighth Circuit

2%

9%⁽¹⁸⁷⁴⁾

Ninth Circuit

4%

15%⁽¹⁸⁷⁵⁾

Tenth Circuit

2%

13%⁽¹⁸⁷⁶⁾

Eleventh Circuit

2%

7%

G. Bankruptcy Appellate Panel System

Bankruptcy Appellate Panels ("BAP") are alternatives to district court appellate review. Under section 158(c)(1), all appeals from a bankruptcy court in a district that has authorized appeals to the BAP are heard by the BAP, unless one of the parties opts out. Currently, the First, Second, Sixth, Eighth, Ninth and Tenth Circuits have BAPs circuit-wide or only in a portion of the circuit and some other circuits are developing such panels. ⁽¹⁸⁷⁷⁾ The Second Circuit BAP system includes the Districts of Connecticut and Vermont, and the Northern District of New York, but excludes the most active districts, the Southern and Eastern Districts of New York. ⁽¹⁸⁷⁸⁾ The Third, Fourth, Fifth, and Eleventh Circuits have decided not to create BAPs. The Seventh Circuit has deferred its BAP decision.

Once a BAP is created, section 158(b)(6) provides that district judges determine whether appeals may be heard by a BAP in lieu of the district court. A BAP consists of three bankruptcy judges sitting as a panel to hear and decide appeals from bankruptcy court decisions. The parties to an appeal must consent to appellate review by a BAP. Failure of one party to consent means that the appeal is heard by the district court. An appeal from the BAP goes to the circuit court.

BAPs are a voluntary alternative to the district court, which means that any party facing an appeal in front of a BAP that previously has ruled unfavorably on the issue presented in the instant case can simply refuse to consent to appellate review by the BAP. The ability of individual districts to "opt out" of the BAP appellate process (within a circuit that has adopted it) further fractures any stare decisis hopes pinned on the BAP system. BAPs may actually accelerate the divergence of views on various legal questions; a combined BAP/district court appellate structure, as exists in all BAP circuits, does not create binding precedent with a single appeal. "Whatever arguments can be made in support of the creation of a bankruptcy appellate panel, the development of binding precedent is not one of them."⁽¹⁸⁷⁹⁾ The BAP program also "has 'a cost to the system' since 'three judges will be paid to do what one judge is doing now.'"⁽¹⁸⁸⁰⁾ Moreover, parties may appeal from a BAP decision to the court of appeals, just as they may from a district court decision. Thus, a BAP does not necessarily reduce the number of appeals, it is merely an alternative to the district court.

H. Academic Analysis of Direct Appellate Review of Final Bankruptcy Court Orders

Currently, section 158(a) provides that all appeals from bankruptcy court orders shall be routed through the district court or the BAP. However, because a final order is subject to ordinary appellate review at the district court or BAP level, "[n]o one has demonstrated why bankruptcy appeals should be burdened by the extra cost and delay of an 'extra' level of appeal at the district court level."⁽¹⁸⁸¹⁾

Current judicial planning trends also favor expansion of direct non-Article III appeals to circuit level Article III appellate courts. ⁽¹⁸⁸²⁾ One commentator has noted the Judicial Conference's specific bankruptcy appeal recommendation that "the dispositive orders of bankruptcy judges should be reviewable directly in the court of appeals where the parties stipulate, or the district court or the BAP certifies, that such review is needed immediately to establish legal principles on which subsequent proceedings in the case may depend."⁽¹⁸⁸³⁾ Although the Judicial Conference's bankruptcy proposal is less sweeping than its proposal vis-á-vis other non-Article III courts, it is an improvement over its November 1994 recommendation that appeals from all "[f]inal orders of bankruptcy judges should continue to be reviewable by Article III judges in the district court."⁽¹⁸⁸⁴⁾ This 'about-face' by the Judicial Conference has been attributed to "vigorous testimony and opposition to its earlier Recommendation by members of the practicing bankruptcy bar and certain academics."⁽¹⁸⁸⁵⁾

Another proposal suggested a return to direct court of appeals review with the consent of the parties. All other appeals would continue to go to the district court. ⁽¹⁸⁸⁶⁾ One commentator urges that mandatory direct appeal to the courts of appeals may be more remedy than most parties want or are willing to pay for. ⁽¹⁸⁸⁷⁾

3.1.4 Interlocutory Appeals of Bankruptcy Orders

A tangential issue to the Recommendation on direct appeals concerns the types of interlocutory orders that might be directly appealable to the courts of appeals. Even with an expanded bankruptcy concept of finality, a clear definition of appealability remains elusive. Defining the circumstances under which an interlocutory order may be appealed is a necessary step to ensure that the proposed modifications to the bankruptcy appellate process are successful in achieving the desired results, such as stare decisis, while avoiding the pitfalls, such as an overloaded courts of appeals docket. As a result, whether an interlocutory order may be appealed should remain within the discretion of the courts of appeals. This is consistent with the rule currently provided for interlocutory district court orders under 28 U.S.C. зз 1291 and 1292(b). ⁽¹⁸⁸⁸⁾ Review of the types of interlocutory bankruptcy orders that have warranted appeal and, conversely, those that have been found not final for appeal purposes demonstrates that a clear rule is necessary. ⁽¹⁸⁸⁹⁾

Section 158(a) currently provides that an interlocutory order of a bankruptcy judge may be appealed to the district court (1) if issued under section 1121(d) to increase or to reduce the time for certain parties in interest to file a plan, or (2) with leave of the district court. ⁽¹⁸⁹⁰⁾ Title 28 also provides that an interlocutory order of a district court judge may be appealed to the court of appeals if (1) it grants, modifies, or refuses to grant an injunction; (2) it appoints a receiver, winds up a receivership, or orders the sale or disposal of property; (3) it determines the rights and liabilities in an appealable admiralty case; or (4) the district judge certifies that the order involves a controlling issue of law to which there is a substantial difference of opinion, and immediate appeal of the order may materially advance resolution of the litigation; and the court of appeals, in its discretion, grants leave to appeal. ⁽¹⁸⁹¹⁾

Bankruptcy is different than civil litigation. Numerous substantive orders are entered during the course of a bankruptcy case, though technically the "final" order is the order confirming the plan in a Chapter 9, 11, or 12 case or discharging the debtor in a Chapter 7 or a Chapter 13 case. It would be procedurally and substantively unworkable for the order confirming the plan or discharging the debtor to be the only appealable order. The solution is to permit the appeal of certain interlocutory orders. Due to the nature of bankruptcy matters, however, appealable interlocutory orders are difficult to define with any precision. A list of appealable interlocutory orders would be at once over- and under-inclusive. A recent commentator proposed that an interlocutory bankruptcy order should be appealable if it is "both procedurally complete and determinative of substantive rights."⁽¹⁸⁹²⁾ This approach is consistent with the Commission's Recommendation to define only a few appealable interlocutory orders and leave all other determinations up to the court of appeals.

The Recommendation is an amalgamation of the current interlocutory appeal provisions contained in section 158(a) and section 1292(a) and (b). An appeal as of right is provided for certain specific interlocutory orders consistent with the current appellate practices of both the district courts and the courts of appeals. In addition, the Recommendation gives the courts of appeals discretion to grant an appeal of both certified and uncertified interlocutory orders. By giving discretion to the courts of appeals, the Recommendation avoids the problems inherent in attempting to codify all of the interlocutory orders that may be appealed. The parties to a dispute are in the best position to persuade or dissuade the court of appeals to grant appeal of an interlocutory order.

Competing Considerations. It may be argued that the latitude granted by the Recommendation to the courts of appeals is too broad to assure review of important interlocutory bankruptcy orders. If so, the Recommendation would diminish the stare decisis benefits of direct appeals. The Recommendation is not too broad. It essentially codifies the interlocutory appeal provisions between the bankruptcy court and the district court and the district court and the court of appeals.

Sample of Draft Statutory Provision

28 U.S.C. з 1293. Bankruptcy court decisions

(a) The courts of appeals shall have jurisdiction of final judgments, orders and decrees of bankruptcy judges entered in cases and proceedings under section 157 of this title. An appeal under this subsection or under subsection (b) shall be taken only to the court of appeals for the judicial circuit in which the order or decree is entered;

(b) The courts of appeals shall have jurisdiction of the following orders:

(1) Interlocutory orders and decrees of bankruptcy judges,

(A) granting, continuing, modifying, refusing, or dissolving injunctions, or refusing to dissolve or modify injunctions;

(B) modifying or refusing to modify the automatic stay created by section 362 of title 11;

(C) appointing a trustee or refusing to appoint a trustee, authorizing a sale or other disposition of property of the estate; and

(D) increasing or reducing the time periods referred to in section 1121(b) and (c) of title 11; and

(E) with leave of the court from other interlocutory orders and decrees.

(2) When a bankruptcy judge, in making an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate resolution of the proceeding, the bankruptcy judge shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made within ten days after the entry of the order; provided, however, that application for an appeal hereunder shall not stay proceedings in the bankruptcy court unless the bankruptcy judge or the Court of Appeals or a judge thereof shall so order.

3.1.5 Venue Provisions under 28 U.S.C. з 1408

28 U.S.C. з 1408(1) should be amended to prohibit corporate debtors from filing for relief in a district based solely on the debtor's incorporation in the state where that district is located.

The court's discretionary power to transfer venue in the interest of justice and for the convenience of the parties should not be restricted.

Current bankruptcy venue options for corporations and partnerships permit filings in the (1) place of incorporation or organization; (2) location of principal assets; or (3) location of principal place of business. ⁽¹⁸⁹³⁾ For the majority of business debtors, these options afford a choice of only one or two bankruptcy venues. For large corporations, however, the current venue provisions afford a wide range of geographic options for filing bankruptcy. Frequently, large corporations are organized in one state, have their headquarters in another, and arguably have their principal assets in yet a third (and sometimes more) locales. In a Chapter 11 reorganization case, these choices can make the choice of a bankruptcy venue a strategic one, where a debtor may be able to shape the course of its reorganization depending on its choice of venue. To the extent the creditors' interests are aligned with the debtor's interests, this choice can be a mutually beneficial one. The other side of venue choice, however, is when these interests are not aligned, and the debtor's choice of venue has the effect of disenfranchising its creditors and may prevent them from actively participating in the case and defending their claims. Smaller creditors are the ones who are disenfranchised by a bankruptcy filing in a distant forum; enough money will always be at stake for larger creditors to defend their interests no matter where the bankruptcy case is filed.

The Commission's Recommendation is designed to prevent this type of forum-shopping by large Chapter 11 debtors and their affiliates by limiting venue options to the debtor's principal place of business or location of principal assets.

A. Venue Under the Bankruptcy Act of 1898

Under the Bankruptcy Act of 1898, Section 2a(1) did not distinguish between natural persons and fictitious entities, using the generic term "persons" that was defined to include fictitious entities, such as corporations and partnerships. ⁽¹⁸⁹⁴⁾ The specific enumeration of each term in the statute maintained a legal distinction between the terms "residence" and "domicile." For natural persons, that distinction was more readily drawn: "domicile" was defined as an individual's actual residence coupled with a present intention to remain there. It "is the place where one has his true, fixed, permanent home, and principal establishment, and to which, when he is absent, he has the intention of returning, and where he exercises his political rights."⁽¹⁸⁹⁵⁾ "Residence," by contrast, does not require the intention to remain and may be nothing more than a place of "sojourn."⁽¹⁸⁹⁶⁾ The clear distinction between "residence" and "domicile" did not work for corporations. It was argued that despite the statute's delineation, the terms "residence" and "domicile" had to be identical for a corporation unless a corporation could be said to reside wherever it did some business. In order to ameliorate the interpretive difficulties and bring the venue provision in line with the interpretation in ordinary civil cases, the "residence" and "domicile" of a corporation were treated identically, as the state of incorporation. ⁽¹⁸⁹⁷⁾

In 1973, Bankruptcy Rule 116(a) revised Section 2a(1) in order to resolve the domicile/residence ambiguity. Rule 116(a) eliminated the place of incorporation (residence/domicile) option for purposes of establishing venue. The venue determination under Rule 116(a) was determined by the district where the corporation had its "principal place of business or principal assets."⁽¹⁸⁹⁸⁾

B. Venue Under the 1978 Reform Act

The 1978 Reform Act changed the venue provisions. ⁽¹⁸⁹⁹⁾ Title 28 now provides that the proper place to file a petition under the Bankruptcy Code is in the district where the debtor's domicile, residence, principal place of business is located, or principal U.S. assets were located for the greater part of the preceding 180 days. ⁽¹⁹⁰⁰⁾ The affiliate rule provides that a case under title 11 may be commenced in the district court for the district where a case concerning such person's affiliate, general partner, or partnership is pending. ⁽¹⁹⁰¹⁾

Debtors file for bankruptcy where they are located. Most cases involving consumer debtors or small businesses present no question about where to file. In some jurisdictions, however, near state borders, for example, some problems arise when debtors attempt to choose a more convenient courthouse or a more debtor-friendly forum. In general, however, venue issues do not arise in small cases.

In a global economy the determination of venue is not so obvious. For multi-state corporations, venue options can be broad and this is where the opportunity for abuse can begin. Section 1408(1) permits a corporation to file a bankruptcy petition in its state of incorporation, the location of its "principal place of business," or the location of its "principal assets."⁽¹⁹⁰²⁾ For the multi-state corporation, the ability to manipulate the state of incorporation, the location of the "principal place of business" or the "principal assets" provides a choice of a number of different jurisdictions. As more businesses incorporate in a state that is not the principal place of business, the magnitude of this opportunity, and its effect on the bankruptcy system, increases.

C. Affiliate Venue under the Bankruptcy Code

The affiliate rule contained in section 1408(2) raises a companion issue to the venue provisions in section 1408(1). The current affiliate rule permits a debtor's affiliate(s) to file a bankruptcy petition in the same venue as the debtor's case regardless of whether that court would be a proper venue for the affiliated entity. ⁽¹⁹⁰³⁾ The affiliate rule thus provides a broader range of venue alternatives than those provided in section 1408(1). Under the current rule, a multiple entity corporate structure may file petitions for all of the related entities in the same forum as long as a case of one of the affiliated entities is already pending. By permitting a coordinated filing of multiple entities in one venue, the affiliate rule prevents the problem of multiple professionals and conflicting rulings if affiliated cases are filed in separate venues and, importantly, allows a reorganization of an entire business enterprise as may be necessary.

While the current affiliate rule saves valuable time and expense by permitting a single venue filing for multiple related entities, it has also been subject to criticism. Under the rule, a parent corporation can follow a subsidiary into a venue that would otherwise be unavailable to the parent under section 1408(1). A corporation may thus follow its corporate affiliate into bankruptcy in the same venue, even if it has no other ties to that forum. For example, a corporation with an affiliate in bankruptcy in court "A" can file for bankruptcy in court "A" even if it meets none of the other criteria for filing in that court. As a result, the affiliate rule multiplies the already diverse venue choices of large, multi-entity corporate families. Given the interests at stake in a large Chapter 11 case, the risk of a "sacrificial debtor" (i.e., a subsidiary or affiliate who files for Chapter 11 relief solely for the purpose of gaining entree to a particular venue) is high. ⁽¹⁹⁰⁴⁾

Well-known examples of "affiliate venue" method of forum selection are Eastern Airlines and LTV Corporation. Eastern first filed a Chapter 11 petition for its frequent flier club, Ionosphere, Inc., in the Southern District of New York. At the time of Ionosphere, Inc.'s filing, there was no indication that Ionosphere was in need of bankruptcy protection or a financial restructuring. ⁽¹⁹⁰⁵⁾ The parent corporation, Eastern Airlines, followed its affiliate into the New York bankruptcy court soon after. Similarly, LTV Corporation followed a small subsidiary, Chateaugay Corporation, into the bankruptcy court in the Southern District of New York. At the time of LTV's filing, there was no indication that Chateaugay Corporation was in need of bankruptcy protection. Nonetheless, its filing determined the geographic location of one of the country's largest bankruptcies.

While invocation of affiliate venue rules have not been a common practice and has been employed in a limited number of cases, these types of venue stratagems discredit the fairness of the entire bankruptcy process by placing too much discretion in the hands of the debtor. The delicate balance of power between debtors and creditors must be maintained by the Bankruptcy Code and related statutory provisions. Venue should not be an exception.

D. Strategic Use of Venue Choice

Does forum shopping occur frequently? In their landmark study of the bankruptcies of publicly traded companies in the 1980s, Professors Lynn LoPucki and William Whitford documented the companies' choices for filing locations. ⁽¹⁹⁰⁶⁾ They concluded that venue could be explained only by forum shopping in about 16% of the cases, and another 63% of the cases showed some signs of forum shopping. ⁽¹⁹⁰⁷⁾ In large cases, the widespread perception is that companies can--and frequently do-- choose their fora based on a number of criteria other than those listed in the statute. When the researchers considered whether forum shopping was part of the filing decision, along with other listed factors, such as experience of the judge, another 63% of the cases were affected, for a total of 78 %--or about four out of five--of the venue choices of large businesses were influenced by forum shopping. ⁽¹⁹⁰⁸⁾

Reasons for forum shopping vary among debtors and their attorneys. Some debtors claim they choose a forum because of its well-developed case law or proximity to large, knowledgeable law firms. They argue that such advantages actually decrease the total cost of the bankruptcy. Respect for a local judiciary with demonstrated abilities to handle large cases may account for the disproportionate migration of large cases to one or two cities.

Other reasons for forum shopping are less benign. Commentators identify the desire among debtors' counsel to go to fora that permit high attorney's fees and do not pro-actively review fee applications. ⁽¹⁹⁰⁹⁾ Higher administrative costs for professional fees are borne by unsecured creditors. High professional fees also discredit the reputation of the bankruptcy system. When the professionals are able to choose the fee-friendly forum, the reputation of the bankruptcy system suffers even further.

Gaining strategic advantage over other litigants, such as choosing a forum where a harmful ruling is not applicable, is another frequently cited reason to select one forum over another. Sometimes a venue is chosen for its inaccessibility for certain litigants, driving up the costs of their pursuit of their claims and making it difficult for them to serve on committees. ⁽¹⁹¹⁰⁾ For example, when a debtor with thousands of small local unsecured creditors is able to file for bankruptcy at the other end of the country, it is impossible for these parties to represent their interests in the debtor's case. Such strategies can affect the outcome of cases.

Obtaining a debtor-friendly judge can also have an impact on the reorganization case. In a large Chapter 11 case, judges have a great deal of discretion in applying the Bankruptcy Code. For example, debtor in possession financing terms, lift stay motions, cash collateral and valuation disputes are examples of areas where the bankruptcy judge has broad discretion interpreting and applying the Bankruptcy Code. ⁽¹⁹¹¹⁾ Debtors will naturally choose the bankruptcy forum that appears the most favorable. Sometimes that choice will benefit the majority of creditors and sometimes it will not. The Recommendation does not prevent a debtor from choosing a favorable forum, it only limits those choices to principle place of business and location of principle assets.

Choosing a distant forum also has the effect of reducing local press coverage of the debtor's case. Forum shopping, as stated earlier, is limited to large corporations and the bankruptcy filing is of great local interest where the debtor's headquarters and usually the greatest number of employees are located. Dampening local press interest in the case is a side-effect of filing for bankruptcy relief in a distant location and may be beneficial to the debtor in possession. Creditors may also benefit by less negative press coverage if the debtor's business is preserved as a result.

If creditors could easily transfer venue to a more convenient or more appropriate venue, the initial rules on venue would not be as important. Judges might be counted on to exercise sound judgment in seeing to it that a case ended up in the appropriate forum. For a number of reasons, however, transfer is problematic. A bankruptcy case is not like ordinary, two-party litigation. Because a reorganization case is about the survival of a live (but struggling) business, the first day of the filing is critical.

The debtor nearly always makes the initial forum selection by choosing its filing location. For creditors to protest, often they need local counsel and they need to mount an expensive suit at the inception of the case. ⁽¹⁹¹²⁾ Because bankruptcy cases often have a number of issues decided in the first few days, judges often feel that by the end of a week, the case is already theirs, and they are understandably reluctant to transfer venue elsewhere.

In assessing the effectiveness of transfer motions, one cannot lose sight of the dynamic at work in a bankruptcy courtroom on the first day of a large Chapter 11 case. The courtroom is packed with the debtor's attorneys (both "foreign" counsel and local counsel, if necessary), as well as attorneys (and presumably local counsel) for all of the large creditors. Even before the judge makes the first ruling, the debtor and the creditors have incurred a great deal of expense in getting prepared and familiarizing their various professionals with the relevant facts.

Big bankruptcy cases often equate to big business for the local bankruptcy bar. The cost and time of educating all of the debtor's and the creditors' "local" professionals prior to and during the first few weeks of the case is often significant. Big bankruptcy cases further educate the local professionals and provide an opportunity to develop an expertise over the course of the case. Bankruptcy judges, who generally emerge from the local bar, are usually very cognizant of these factors and weigh them along with the other interests in deciding whether