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. §§ 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. § 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. § 1408
28 U.S.C. § 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. § 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. § 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. § 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. § 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
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. §§ 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.
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. § 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. § 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. § 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. § 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. § 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. § 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. § 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
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.
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. § 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. § 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
28 U.S.C. § 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.
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. §§ 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. § 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. § 1408
28 U.S.C. § 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. § 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.
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 to transfer the
case.
Some of the costs of forum shopping, when it exists, are obvious. Forum
selection becomes a strategic tool, available for clever parties to manipulate
outcomes to the disadvantage of smaller creditors who are cut out of the bankruptcy
process. Because forum shopping is available in its extreme forms only for large
companies, it also involves an element of discrimination against smaller businesses
and consumers who have no such choices.
The real costs of forum shopping, if it is widespread, might be even greater.
The damning charge that forum shopping is used to select fora that are fee-friendly,
combined with the allegation that judges want to keep high visibility cases, raises a
troubling specter of courts competing for big-case bankruptcy business. (1913) If they
do compete, they would do so by making lawyer-friendly, debtor-friendly rulings.
Of course, the application of these rulings is not limited to the mega-cases they
attract; these rulings also affect every other business case before the courts. Given
the complex appellate structure currently in existence and the extraordinary
discretionary decision-making vested in the bankruptcy courts, the impact of forum
shopping is compounded. Court competition for cases could distort analysis of legal
problems and undermine the fairness--real or perceived--of the bankruptcy
system. (1914)
This Recommendation is not directed at the bankruptcy courts in the Southern
District of New York, those in Delaware, or in any other specific bankruptcy venue.
Rather it is directed at ameliorating the problems that arise as a result of the broad
venue choices available to corporate and partnership debtors. The National
Bankruptcy Review Commission received numerous letters on the problem of the
disenfranchisement of creditors due to forum shopping. (1915) One letter recounted how
a Chicago retailer with extensive operations in Chicago could file for bankruptcy
relief in Delaware or New York. (1916) As a result, it is uneconomical for a landlord
who may have as much as $50,000-$60,000 at stake to litigate in the distant forum
and enforce her statutory rights. (1917) The Recommendation does not eliminate the
problem of creditor disenfranchisement, but rather attempts to limit a debtor's venue
choices to places most relevant to the ongoing business: the principal place of
business or location of the principal assets.
These Recommendations for change in forum selection criteria are not novel.
In large part, they reflect the state of the law on forum selection for cases under the
Bankruptcy Act between 1973 and the 1978 Reform Act.
Competing Considerations.Restricting forum choices may increase litigation
over the appropriateness of forum choices. A debtor's desire to choose an
advantageous forum, regardless of the venue rule, would not go away. While some
debtors could be expected to comply with the more restricted provisions,
undoubtedly there would be other debtors who would challenge the statute at the
margins by selecting a friendly forum, prompting their creditors to challenge the
forum choice.
"Principal place of business" is not an entirely rigid criterion. The main
debates under this approach, however, would likely be over whether the "principal
place of business" was at the location of corporate headquarters or the location of
most of the assets. Some forum choices would still exist under the Recommendation.
The difference between the Recommendation and the current system is that the
Recommendation will focus a debtor's choice of venue on places that bear a tangible
relationship to the ongoing business. Recognizing that no single venue will make all
the interested parties happy all the time, the Recommendation would ensure that
whatever venue was selected would bear a significant relationship to the operation
of the business. Place of incorporation, alone, will no longer be a valid basis for
venue of a bankruptcy case.
For some businesses, "principal place of business" would remain an elusive
concept. As companies do more work by computer, the "virtual headquarters" may
be located anywhere. Moreover, as more businesses consist of intangible assets,
questions about where the assets are located or where the business transactions take
place become ephemeral. The courts would be called on to develop new guidelines
for new kinds of corporations. (1918)
It is important to note that not all commentators believe that forum shopping
is an inappropriate practice. Professors LoPucki and Whitford documented the forum
shopping practices of the publicly traded companies in the decisions about where to
file for bankruptcy. They did not conclude, however, that such practices be
curtailed. (1919) The reason they cited for maintaining the current system is that it
permits examination of the more pernicious reasons behind forum shopping. What
factors a debtor (or its professionals) considers in choosing a particular forum and
whether those underlying reasons jeopardize the effectiveness of other bankruptcy
policies. The current system also encourages competition among courts to develop
methods to maximize a debtor's value. In addition, forum shopping permits a few
courts to develop expertise in dealing with large bankruptcy cases. These may be
positive, rather than negative implications of the current system. (1920)
A great deal of debate has been generated by the Commission's
Recommendation to amend the venue provisions of section 1408. In response to the
initial Commission Recommendation at the June 20-21, 1996 meeting, an extensive
study was undertaken by the Delaware State Bar Association to support maintaining
the existing venue choices under section 1408. (1921) The Commission was fortunate
to have been provided with this exhaustive study and thorough discussion of the
arguments against the Recommendation. The Delaware Venue Report raises a
number of important arguments.
A. Substantive Reforms Cloaked by Procedural Reform
The Delaware Venue Report argues that the Commission is attempting to
effect substantive reforms with its procedural Recommendation to eliminate place of
incorporation as a valid venue option. (1922) Venue choice has been blamed for access
to routine exclusivity extensions, favorable fee rulings, and disenfranchising small
creditors. (1923) The Delaware Venue Report argues that these problems, "if they are in
fact systemic problems, as opposed to isolated, albeit notorious instances" are
substantive issues that cannot, and should not, be remedied through a procedural
venue reform. (1924)
There is no doubt that uniformity of legal interpretation and application are
desirable. More importantly, a cornerstone of our judicial system is that the law be
subject to a variety of interpretations at the trial level and made uniformly applicable
by the courts of appeals and the Supreme Court. But when a few judges, by virtue
of sitting in desirable venues, are the only judges to review certain issues, the system
breaks down. There may be no need to make substantive law reform; there may be
a need to prevent one or two judges from making national law. Deleting state of
incorporation as a venue option increases the number of courts that can decide
important issues, and the number of appellate courts that can eventually exercise
review over those decisions. Ultimately, this approach is more likely to yield
thoughtful decision making and policy applicable to big cases.
B. Validity of Venue Based on State of Incorporation
The Delaware Venue Report notes that despite the focus on
disenfranchisement of smaller creditors in the current venue statute, "no one has
seriously suggested premising venue on creditor location."(1925) Premising bankruptcy
venue on creditor location would result in an unworkable rule that would be the
source of a great deal of litigation. (1926) The Report argues that place of incorporation
is a valid venue under numerous federal venue provisions, including the general
federal venue statute;(1927) the patent venue statute;(1928) antitrust action venue
provisions;(1929) venue for actions commenced under CERCLA;(1930) venue for actions
commenced under the Securities Act of 1933;(1931) venue for actions commenced under
the Securities and Exchange Act of 1934;(1932) and venue for actions commenced under
the Investment Advisors Act. (1933) The Delaware Venue Report concludes that if the
Commission's venue Recommendation were adopted, it would "eliminate state of
incorporation as a venue predicate for corporate debtors, thereby singling out
bankruptcy as the one significant federal statute where a company's state of
incorporation will not support venue."(1934)
This argument fails to observe how a bankruptcy case is different from the
two-party actions with which it is compared. Bankruptcy is essentially an in rem
proceeding involving a multitude of parties involving creditors of all types: it is not
the typical two-party civil litigation. A multitude of parties that are not necessarily
adverse to each other are brought into the bankruptcy court by the debtor to
determine the claims and interests in the property of the estate. Over the course of
a case it is not unusual for different parties to have allied interests on some issues and
adverse interests on others. The shifting sands in a bankruptcy case thus make it
much different than straight two-party litigation where the parties interests are
adverse throughout the case.
In addition, no plaintiff anywhere else in the system may commence a lawsuit
based on its own state of incorporation. Plaintiffs are limited to fora based on where
the defendants are subject to suit. An interpleader action is the closest civil action
analogue to the bankruptcy case. It is commenced by the holder of a fund that is
subject to competing claims, similar to a bankruptcy estate. Unlike bankruptcy,
however, an interpleader action may only be filed "where one or more of the
claimants reside."(1935) Thus, the creditors (or claimants) in an interpleader action dictate the venue of the action.
Retaining place of incorporation as a venue choice is contrary to the spirit of
all the federal venue provisions. It lets the initiating party look at factors most
convenient to itself and pick the jurisdiction it wants without regard to the other
parties to the action. Principal place of business generally demonstrates a willingness
of both parties to do business in that location. Location of principal assets similarly
bears more of a relationship to the ongoing operations of the debtor than the place of
incorporation.
C. Increased Litigation
The Delaware Venue Report argues that adoption of the Commission's venue
Recommendation will lead to increased litigation over where the debtor's principal
assets or principal place of business is located. (1936) Place of incorporation is the only
bright line venue rule that "is clear, easily ascertainable by everyone in advance, and
not subject to litigation."(1937) Moreover, as technology progresses, it will become
more difficult to fix a single place where the principal place of business is located or
where the principal assets are located. (1938) In addition, technological advances will
enable creditors to participate in bankruptcy court proceedings by telephonic and
video-conferencing, as well as monitoring a case via electronic docket information,
thus diminishing any risk of disenfranchisement by a debtor filing in a distant
forum. (1939)
Interestingly, however, from 1973 to 1979, there did not appear to be great
difficulty in deciding appropriate venue. The interpretive guidelines for principal
place of business and principal assets are already the subject of judge-made law. (1940)
The parties to a venue dispute as well as the judges presiding over those proceedings
are in the best position to argue and formulate clear standards for what constitutes
principal place of business and what constitutes location of principal assets.
The Delaware Venue Report asserts that "anyone who has ever been involved
in a major Chapter 11 case knows that the 'principal place of business' and the 'place
of principal assets,' even if readily ascertainable, bear little relationship to the
'location' of creditors."(1941) In support of this statement, the Report cites to a state by
state analysis of creditor locations for a variety of debtors who filed for bankruptcy
relief in Delaware. (1942) The Report concludes that virtually all of the debtors surveyed
who filed for relief in Delaware did not have a significant percentage of their twenty
largest creditors in the debtor's principal place of business. (1943)
The data on creditor location provided in the Delaware Venue Report tell a
different story on overall creditor location. A comparison of the debtor's principal
place of business with the bankruptcy venue chosen (all of the sample debtors filed
in Delaware), revealed that more creditors were located in the state of the principal
place of the debtor's business than in the State of Delaware, in all of the sample cases
except one. (1944) In fact, out of the thirteen debtors studied, nine had more creditors in
the state where their principal place of business was located than in any other
state. (1945) In other words, if each of these debtors had filed for Chapter 11 relief in the
district where their principal place of business was located, no other state-wide venue
would have encompassed a greater number of creditors. (1946)
It is important to draw this distinction from the conclusions reached in the
Delaware Venue Report, because in large Chapter 11 cases, the creditors holding the
twenty largest claims have enough money at stake to defend their interests no matter
what the choice of venue. The smaller creditors with the smaller claims are the ones
who are more easily disenfranchised by the choice of a remote venue. Removing
place of incorporation as a permissible venue will balance the reorganization process
in favor of smaller creditors who cannot afford to participate in distant courts. (1947)
Critics of the Recommendation to amend affiliate venue argue that the system
can sustain a few high profile abuses in order to prevent the multiple forum filing
problems that may arise under the Recommendation. Under certain circumstances,
the Recommendation will lead to a result opposite of its intention. An example is
where a parent corporation's only asset is 100% of the stock of an operating
subsidiary. Under the Recommendation, the operating subsidiary could file in the
forum where the parent's bankruptcy case was pending despite the fact that the more
appropriate venue would be where the operating subsidiary's principal place of
business or principal assets were located; but the parent could not file where the
subsidiary's case was pending. For the unusual case such as this, a motion to transfer
venue of the parent's case under circumstances where the venue bears no relationship
to the ongoing business of the debtor would be in order.
Other criticism of the Commission Recommendation includes the multiple
fora filing risk of affiliated entities where no overlapping venue options exist and the
parent does not file. Bankruptcy Rule 1014(b) addresses the multiple fora problem
by enabling the court where the first petition was filed to determine (on motion)
where the affiliated cases should be heard. (1948) The Recommendation is narrowly
tailored to deter abuse of section 1408(2). Similarly, Rule 1014(b) provides a
mechanism (in those admittedly rare instances) to prevent an uncoordinated multiple
fora bankruptcy filing by related entities.
U.S. Code Section |
Jurisdictional Effect |
28 U.S.C. § 1334(a) |
Confers original and exclusive jurisdiction on the district
courts of all cases under title 11. |
28 U.S.C. § 1334(b) |
Confers original, but not exclusive, jurisdiction on the
district courts over all civil proceedings arising under title
11, or arising in or related to cases under title 11. |
28 U.S.C. § 1334(c)(1) |
Permits a district court to abstain from hearing a particular
proceeding arising under title 11 or arising in or related to a
case under title 11. |
28 U.S.C. § 1334(c)(2) |
Upon timely motion of a party in a proceeding (a) based on
state law; and (b) related to a case under title 11 (and one
that could not have been brought in federal court absent this
section), the district court must abstain from hearing such
proceeding if the proceeding (x) is commenced; and (y) can
be timely adjudicated in a state forum of appropriate
jurisdiction. |
28 U.S.C. § 1334(d) |
Provides that only a decision not to abstain is reviewable by
the courts of appeal. |
28 U.S.C. § 1334(e) |
Vests the district court in which a case under title 11 is
commenced or pending with exclusive jurisdiction of
property of the estate, wherever located. |
28 U.S.C. § 151 |
Designates bankruptcy judges as units of the district court in
the district where they preside. |
28 U.S.C. § 152(a)(1) |
Authorizes the circuit courts of appeals to appoint
bankruptcy judges for the judicial districts in its circuit.
Grants bankruptcy judges 14 year terms and states that
bankruptcy judges "shall serve as judicial officers of the
United States district court established under Article III of
the constitution." |
28 U.S.C. § 157(a) |
Authorizes each district court to refer any or all title 11 cases
and proceedings under, arising in, or related to a case under
title 11 to the bankruptcy judges for the district. |
28 U.S.C. § 157(b)(1) |
Authorizes bankruptcy judges to "hear and determine" all
"core" proceedings and enter final orders. |
28 U.S.C. § 157(b)(2) |
Core matters, include, but are not limited to, the following: |
28 U.S.C. § 157(b)(2)(A) |
Matters concerning the administration of the estate; |
28 U.S.C. § 157(b)(2)(B) |
Allowance or disallowance of claims against the estate;
exemptions from property of the estate; estimation of claims
or interest for confirmation purposes, but not the liquidation
or estimation of contingent or unliquidated personal injury
tort or wrongful death claims against the estate for purposes
of distribution in a case under title 11; |
28 U.S.C. § 157(b)(2)(C) |
Counterclaims by the estate against persons filing claims
against the estate; |
28 U.S.C. § 157(b)(2)(E) |
Orders to turn over property of the estate; |
28 U.S.C. § 157(b)(2)(F) |
Proceedings to determine, avoid, or recover preferences; |
28 U.S.C. § 157(b)(2)(D) |
Orders in respect to obtaining credit; |
28 U.S.C. § 157(b)(2)(G) |
Motions to terminate, annul or modify the automatic stay; |
28 U.S.C. § 157(b)(2)(H) |
Proceedings to determine, avoid, or recover fraudulent
conveyances; |
28 U.S.C. § 157(b)(2)(I) |
Determinations as to the dischargeability of particular debts; |
28 U.S.C. § 157(b)(2)(J) |
Objections to discharges; |
28 U.S.C. § 157(b)(2)(K) |
Determinations of the validity, extent or priority of liens; |
28 U.S.C. § 157(b)(2)(L) |
Confirmation of plans; |
28 U.S.C. § 157(b)(2)(M) |
Orders approving the use or lease of property, including the
use of cash collateral; |
28 U.S.C. § 157(b)(2)(N) |
Orders approving the sale of property other than property
resulting from claims brought by the estate against persons
who have not filed claims against the estate; |
28 U.S.C. § 157(b)(2)(O) |
Other proceedings affecting the liquidation of the assets of
the estate or the adjustment of the debtor-creditor or the
equity security holder relationship, except personal injury
tort or wrongful death claims. |
28 U.S.C. § 157(b)(3) |
Authorizing a bankruptcy judge to determine, on motion or
sua sponte, whether a proceeding is core or noncore. A
determination that a proceeding is noncore shall not be made
solely on the basis that its resolution may be affected by state
law. |
28 U.S.C. § 157(b)(4) |
Provides that noncore proceedings under section
157(b)(2)(B) shall not be subject to the mandatory abstention
provisions of section 1334(c)(2); |
28 U.S.C. § 157(b)(5) |
Requiring the district court to try all personal injury and
wrongful death actions either in the district court where the
bankruptcy case is pending or in the district court where the
claim arose, as determined by the district court in which the
bankruptcy case is pending. |
28 U.S.C. § 157(c)(1) |
Authorizing bankruptcy judges to hear noncore proceedings
and submit proposed findings of fact and conclusions of law
to the district court. The district court can "consider" the
bankruptcy judge's findings and enter the appropriate order.
The district court may review de novo only those specific
portions to which any party has timely and specifically
objected. |
28 U.S.C. § 157(c)(2) |
With the consent of the parties, the district court can refer a
proceeding to a bankruptcy judge to hear and determine and
enter a final order. |
28 U.S.C. § 157(d) |
Permits a district court to withdraw a proceeding, in whole or
in part, from the bankruptcy judge for cause shown. The
district court must withdraw a proceeding if resolution of the
proceeding requires consideration of both title 11 and
another law of the United States affecting interstate
commerce. |
28 U.S.C. § 157(e) |
Authorizing a bankruptcy judge to conduct a jury trial if the
parties consent and the district court specially designates the
exercise of such jurisdiction. |
28 U.S.C. § 158(a) |
Authorizes district courts to hear appeals from (x) final
orders of bankruptcy judges; (y) interlocutory orders and
decrees increasing or reducing the time periods in 11 U.S.C.
§ 1121; and (z) with leave of the court from other
interlocutory orders and decrees. |
28 U.S.C. § 158(b)(1)-(b)(6) |
Authorizes the judicial council in each district to establish a
bankruptcy appellate panel comprised of bankruptcy judges
in that circuit to hear bankruptcy appeals (only in the absence
of objection by the parties) instead of the district court. |
28 U.S.C. § 158(c) |
Establishes that all appeals shall go to the BAP in the circuit
unless an interested party opts out at the time of the filing of
the appeal or within 30 days after service of the notice of
appeal. |
28 U.S.C. § 158(d) |
Provides that the courts of appeals shall have jurisdiction of
all appeals of final decisions, judgments, orders and decrees
entered under subsections (a) and (b) of section 158. |
|
Principal Place of Business Listed on Debtor's Petition |
Number of Creditors Located in State of Principal Place of Business |
Rank of Principal Business State for Creditor Location |
Venue of Bankruptcy Case |
Number of Creditors Located in State of Bankruptcy Venue |
Rank of Bankruptcy Venue State for Creditor Location |
Morrison
Knudsen
Corp. |
Idaho |
4,111 |
1st out of 50 |
Delaware |
112 |
45th out of 50 |
Rickel Home
Centers |
New Jersey |
19,653 |
1st out of 50 |
Delaware |
618 |
5th out of 50 |
Silo, Inc. |
Michigan |
130 |
18th out of 47 |
Delaware |
265 |
14th out of 47 |
SLM Int'l |
New York |
492 |
4th out of 51* |
Delaware |
12 |
37th out of
51* |
Smith Corona
Corp. |
Connecticut |
484 |
3rd out of 51* |
Delaware |
8 |
45th out of
51* |
Anacomp,
Inc. |
Indiana |
2,158 |
1st out of 51* |
Delaware |
49 |
33rd out of
51* |
Bill's Dollar
Stores |
Mississippi |
3,122 |
1st out of 39 |
Delaware |
7 |
28th out of 39 |
Spectra-vision, Inc. |
Texas |
1,634 |
1st out of 51* |
Delaware |
65 |
28th out of
51* |
Burlington
Motor
Carriers, Inc. |
Indiana |
999 |
4th out of 49 |
Delaware |
64 |
34th out of 49 |
DEP Corp. |
California |
722 |
1st out of 44 |
Delaware |
4 |
32nd out of 44 |
Homeland
Stores, Inc. |
Oklahoma |
10,106 |
1st out of 49 |
Delaware |
19 |
23rd out of 49 |
Industrial
General
Corp. |
Ohio |
2,352 |
1st out of 45 |
Delaware |
23 |
15th out of 45 |
Lomas
Financial
Corp. |
Texas |
12,755 |
1st out of 50 |
Delaware |
85 |
44th out of 50 |
Notes:
1728 The 1970 Commission, in an effort to combine the cumbersome and
costly bifurcated jurisdiction under the 1898 Bankruptcy Act, recommended
the creation of a single bankruptcy court with full jurisdiction to dispose of
bankruptcy cases. Report of the Commission on the BANKRUPTCY LAWS OF THE UNITED
STATES, Part I at 93-94 (1973). (Hereinafter cited as COMMISSION REPORT). Similarly, the
House Bill (H.R. 8200) echoed these goals and proposed an Article III
bankruptcy court. The House Report cited "forum shopping and jurisdictional
litigation that have plagued the bankruptcy systems, the unfairness to
defendants from 'jurisdiction by ambush,' and the dissipation of assets and the
expense associated with bifurcated jurisdiction will be eliminated by the
jurisdiction proposed by this bill." H.R. REP. NO. 95-595, at 49 (1977).
Return to text
1729 U.S. Const. art. III, § 1.
Return to text
1730 28 U.S.C. § 151 (1994) ("[i]n each judicial district, the bankruptcy judges in regular
active service 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.").
Return to text
1731 See Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87 (1982)
(holding that the 1978 Reform Act "has impermissibly removed most, if not all, of the 'essential
attributes of the judicial power' from the Art. III district court, and has vested those attributes in a
non-Art. III adjunct. Such a grant of jurisdiction cannot be sustained as an exercise on Congress'
power to create adjuncts to Art. III courts.").
Return to text
1732 Marathon, 458 U.S. at 80 ("it is clear that when Congress creates a substantive federal
right, it possesses substantial discretion to subscribe the manner in which that right may be
adjudicated -- including the assignment to an adjunct of some functions historically performed by
judges. Thus Crowell recognized that Art. III does not require 'all determinations of fact [to] be made
by judges,' [citation omitted] with respect to congressionally created rights, some factual
determinations may be made by a specialized fact-finding tribunal designed by Congress, without
constitutional bar").
Return to text
1733 A recent Supreme Court case -- not in the bankruptcy context -- held that "the judicial
power of the United States" is exercised when a judge makes a "dispositive judgment." Plaut v.
Spendthrift Farm, Inc., 514 U.S. 211, 219-20 (1995). For a discussion of the impact of this case on
bankruptcy courts, see Richard Lieb, Can a Bankruptcy Judge Constitutionally Hear and Determine
a "Core" Proceeding, 6 NORTON BANKR. L. ADV. 1 (June 1997) (arguing that in light of Plaut as
well as other Supreme Court precedent since Marathon, core bankruptcy jurisdiction is
unconstitutional and bankruptcy courts should be established under Article III).
Return to text
1734 Marathon, 458 U.S. at 87 n.40.
Return to text
1735 COMMISSION REPORT, at 90-91.
Return to text
1736 H.R. REP. 95-595, at 22 (1977).
Return to text
1737 S.2266, 95th Cong. (1978).
Return to text
1738 Over 25 years ago, Congressman Rogers of Colorado stated that
"more people appear in our bankruptcy courts than in all other Federal courts
combined. . . ." CONG. REC. H6215 (June 30, 1970). That statement was reiterated
in hearings before Congressional subcommittees in the late 1970s when the
present Bankruptcy Code was being considered by the Congress. His observation
would carry more force today, particularly with the extraordinary increase
over the past two decades or two of filings under the Code. The statement
includes not only debtors filing under the various chapters of the Code but
takes cognizance of the participation of creditors of all kind and other
nondebtor parties. In fact, for most people who appear in federal court, their
only exposure to the federal court system is the bankruptcy court.
Return to text
1739 This was true in 1977, when the House Report stated that over 254,000 bankruptcy cases
were being filed annually. H.R. Rep. 95-595, at 21 (1977). Over 1.2 million cases were filed in 1996.
Similarly in 1977, Judge Conrad K. Cyr cited a caseload survey finding that bankruptcy cases pending
at that time reflected in excess of $27 billion in assets and $42 billion in liabilities. Id. at Appendix
I. No asset and liability estimates are available for cases pending today, but expanding the figures
available in 1977 at the same rate as the bankruptcy caseload has expanded would result in
approximate assets administered of $127 billion and liabilities of $198 billion.
Return to text
1740 H.R. REP. 95-595, at 22 (1977). The House Report recognized that [a] life-tenured
judgeship is a more prestigious position than a term judgeship. The Department of Justice recently
observed that the more prestigious the position, the better the judges that will be attracted." The
House Report concluded by stating that "[b]ankruptcy litigants are entitled to no less qualified judges
than other federal litigants." Id.
Return to text
1741 Act of July 1, 1898, ch. 541, 30 Stat. 544 (as amended) (repealed 1979).
Return to text
1742 Act of July 1, 1898, ch. 541, 30 Stat. 544 (as amended) (repealed 1979). Summary
jurisdiction, i.e., jurisdiction that allowed a bankruptcy judge to decide a
dispute, existed (1) if the proceeding involved property in the actual or
constructive possession of the bankruptcy court; (2) if the third party
consented to the exercise of summary jurisdiction by the bankruptcy court; or,
(3) over a counterclaim asserted by the third party. Within these categories,
subgroups were formed. For example, consent was divided into actual and
implied consent; failure to object timely to the exercise of such jurisdiction
constituted implied consent. It was clear that such jurisdiction existed over
a compulsory counterclaim but it was not clear whether it existed over a
permissive counterclaim even to the last days of the Bankruptcy Act. Charles
Seligson & Lawrence P. King, Jurisdiction & Venue in Bankruptcy, J. NAT. ASS'N REF.
IN BANKR. (April- July, 1962).
Return to text
1743 H.R. REP. 95- 595, at 21 (1977).
Return to text
dagger;
1744 Act of July 24, 1970, Pub. L. No. 91-354, 84 Stat. 468.
Return to text
1745 The inefficiencies arising out of the Act's distinction between summary and plenary jurisdiction led the 1970 Commission to conclude that:
The most serious objection to the division of jurisdiction is the frequent, time-consuming,
and expensive litigation of the question whether the bankruptcy court has jurisdiction of a
particular proceeding. As Professor MacLachlan has observed, "When a 'summary'
proceeding in the bankruptcy court is appropriate and when a plenary suit is required is one
of the most involved and controversial questions in the entire field of bankruptcy."
Generally, time is on the side of the defendant. If he can subject the plaintiff trustee to the
necessity of suing in another court, he can gain the additional time which that necessity
imposes on the trustee. Similarly, the extra expense entailed by the estate when the trustee
is forced to sue elsewhere gives his adversary a counter for bargaining with him. Even when
the trustee is likely to prevail in a contest over whether the bankruptcy court has jurisdiction,
the adversary by merely litigating the issue of jurisdiction may gain most of the advantages
he would get if he won on the jurisdictional issue, viz, time and bargaining leverage against
the trustee. Thus, the adversary has a strong incentive to press his jurisdictional objections
to the bankruptcy court's jurisdiction up through the appellate courts.
COMMISSION REPORT, supra note 1728, at 90. Return to text
1746 Id.
Return to text
1747 Id., at 91.
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1748 The Commission Report, over the dissent of one of its nine members, proposed granting
bankruptcy judges the power "to determine most controversies arising from cases commenced" under
the new bankruptcy act. COMMISSION REPORT, Id. at 85. The jurisdiction of the newly created
bankruptcy court proposed by the Commission extended to "determination of all controversies"
arising out of a case commenced under the proposed act. Proposed Bankruptcy Act of 1973, § 2-201.
Return to text
1749 The Commission Report recommended extending the term for referees from six years
to fifteen years, in order to make the position far more attractive to appointees. COMMISSION REPORT,
supra note 1728, at 94-95.
Return to text
1750 Proposed Bankruptcy Act of 1973, § 2-201.
Return to text
1751 Id. §§ 2-201, 2-103, 1-104. Under the 1898 Act, bankruptcy judges were appointed by
the district court for a term of six years.
Return to text
1752 On the subject of such a broad grant of jurisdiction to the newly-created bankruptcy courts, the Commission Report concluded
The constitutionality of a grant of jurisdiction in such comprehensive terms should not be
subject to any serious doubt. The jurisdictional grants to the court of bankruptcy by the Acts
of 1841 and 1867 were almost as extensive, and the Supreme Court gave the provisions of
those Acts a generous construction and approval of their constitutionality. There appears
to be no reason why Congress cannot in the exercise of its power under the Bankruptcy
Clause of the Constitution confer jurisdiction over all litigation having a significant
connection with bankruptcy.
COMMISSION REPORT, supra note 1728, at 92. Return to text
1753 Pub. L. No. 95-598, 92 Stat. 2549 (1978).
Return to text
1754 1 COLLIER ON BANKRUPTCY ¶ 1.03[1], at 1-9 (Lawrence P. King et al. eds., 15th ed.
1996).
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1755 H.R. REP. 95-595, at 36-39 (1977). The House Report discusses the constitutional requirements of an independent bankruptcy court with a broad grant of jurisdiction over bankruptcy
cases, concluding
[i]n sum, the Constitution suggests that an independent bankruptcy court must be
created under Article III. Article III is the constitutional norm, and the limited
circumstances in which the courts have permitted departure from the requirements
of Article III are not present in the bankruptcy context. Even if they were present,
the text of the Constitution and the case law indicate that a court created without
regard to Article III most likely could not exercise the power needed by a
bankruptcy court to carry out its proper functions. In view of Congress'
independent obligation and the Congressional oath to support the Constitution, the
decision on this issue should not simply be thrown to the courts. Congress should
establish the proposed bankruptcy court under Article III, with all of the protection
that the Framers intended for an independent judiciary.
Id. at 39 (emphasis added). Return to text
1756 H.R. 8200, 95th Cong. (1978).
Return to text
1757 Id.
Return to text
1758 App. Vol. 2 COLLIER ON BANKRUPTCY XXII (15th ed. Matthew Bender).
Return to text
1759 S. 2266, 95th Cong. (1978).
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1760 Id. Indeed, the Senate Report confirmed that one of the principle goals of revising the
Bankruptcy Act was "the need to enlarge the jurisdiction of the bankruptcy court in order to eliminate
the serious delays, expense and duplications associated with the current dichotomy between summary
and plenary jurisdiction, a wasteful remnant of the referee system left over from the pre-Chandler Act
era." S. REP. NO. 939, 95th Cong., 2d Sess. 14-15 (1978).
Return to text
1761 458 U.S. 50 (1982).
Return to text
1762 Id. at 87. ("We conclude that § 241(a) of the Bankruptcy Act of 1978 has impermissibly
removed most, if not all, of the 'essential attributes of the judicial power' from the Article III district
court, and has vested those attributes in a non-Article III adjunct. Such a grant of jurisdiction cannot
be sustained as an exercise of Congress' power to create adjuncts to Art. III courts.")
Return to text
1763 Id. at 56.
Return to text
1764 Id.
Return to text
1765 See 28 U.S.C. § 1869, as amended by section 243 of the Reform Act, Pub. L. No. 95-598 (1978).
Return to text
1766 Pub. L. No. 98-353, 98 Stat. 333 (1984).
Return to text
1767 For a chart of all of the jurisdictional provisions enacted under BAFJA, see Annex A.
Return to text
1768 See 28 U.S.C. §§ 157(b) and 157(c) (1994).
Return to text
1769 The parties to a noncore proceeding may consent to the entry of a final order by the bankruptcy judge. See 28 U.S.C. § 157(c)(2) (1994). Consent to the entry of a final order must be
explicit. A party who would benefit from delay of the action has to merely withhold consent.
Return to text
1770 See, e.g., Letter from Charles A. Horsky, Chair, National Bankruptcy Conference to
Senator Dennis DeConcini (May 23, 1984) (urging that bankruptcy judges be given Article III
status); Letter from Joel Zweibel, Chair, Committee on Bankruptcy and Corporate Reorganization,
The Association of the Bar of the City of New York to Louis A. Craco, President, The Association
of the Bar of the City of New York (April 11, 1983) (urging the Bar Association of the City of New
York to adhere to its endorsement of an Article III bankruptcy court); Letter from Professors Vern
Countryman, Frank R. Kennedy, and Lawrence P. King to Representative Peter Rodino, Senator
Robert Dole and Senator Strom Thurmond (September 20, 1982) (outlining inaccuracies of Judicial
Conference Report to Congress and urging enactment of an Article III bankruptcy court); Letter from
Kenneth N. Klee to Senator Strom Thurmond (August 20, 1982) (arguing that Article III status is the
only means to cure the jurisdictional faults noted in Marathon); Letter from Robert M. Zinman, Chair,
American Council of Life Insurance to Senator Robert J. Dole (September 13, 1982) (urging that
Article III status for bankruptcy judges is the only mean to cure the jurisdictional infirmities under
Marathon).
Return to text
1771 See Report of the Judicial Conference of the United States, Northern Pipeline Construction Co. v. Marathon Pipe Line Co., et al. and Proposals for Remedial Congressional Action
(1982) (arguing that Article III status for bankruptcy judges was not necessary and not advisable).
Return to text
1772 See, e.g., Letter from Judge George C. Paine, II and Judge Keith M. Lundin, to All Federal Judges (August 20, 1982) (arguing that the Article III alternatives proposed by the Federal
Judicial Conference "would result in a return to a system in which some bankruptcy-related matters
would be tried in the federal district courts, some in state courts and others in bankruptcy courts.")
Return to text
1773 But see In re Referral of Title 11 Proceedings to the United States Bankruptcy Judges for This District, dated Jan. 23, 1997 (D. DE 1997) (withdrawing standing order automatically
referring Chapter 11 cases to bankruptcy court as of February 3, 1997; Chapter 11 cases in Delaware
are now assigned to district court judges and bankruptcy judges by the chief district judge on a case-by-case basis).
Return to text
1774 The list of core proceedings in section 157 is not exclusive. As a result, a determination of whether a proceeding is core or not core is required for every proceeding that is not listed.
Return to text
1775 See Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989); Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833 (1986); Thomas v. Union Carbide Agric. Prods., 473 U.S. 568
(1985).
Return to text
1776 See In re Baldwin-United Corp., 48 B.R. 49 (Bankr. S.D. Ohio 1985) ("the collection of a debtor's accounts receivable and other assets is a critical part of the administration of a bankrupt estate traditionally pursued in the Bankruptcy Court."); In re Belles Terres Partners, No. 85 C 5355,
1985 WL 3443 (N.D. Ill. 1985) (breach of contract, conversion, and tortious interference with
business relations called core proceedings); In re L.A. Clarke and Sons, 51 B.R. 31 (Bankr. D.D.C.
1985) (action to collect accounts receivable and defendant's breach of contract counterclaim are core
proceedings).
Return to text
1777 Under 28 U.S.C. § 157(b)(2)(C) counterclaims are listed as core proceedings.
Return to text
1778 Pub. L. No. 104-317, 110 Stat. 3847 (signed Oct. 19, 1996).
Return to text
1779 492 U.S. 33 (1989).
Return to text
1780 Id. at 36.
Return to text
1781 Section 157(b)(2)(H) provides that "Core proceedings include, but are not limited to...
Return to text
(H) proceedings to determine, avoid, or recover fraudulent conveyances;..."
1782 Granfinanciera, 492 U.S. at 54. The Court concluded that "[i]f a statutory right is not
closely intertwined with a federal regulatory program that Congress has the power to enact, and if that
right neither belongs to nor exists against the Federal Government, then it must be adjudicated by an
Article III court. If the right is legal in nature, then it carries with it the Seventh Amendment's
guarantee of a jury trial." Id. at 54-55.
Return to text
1783 For example, in a recent decision, In re Green, 200 B.R. 296 (S.D.N.Y. 1996), the district court withdrew an entire adversary proceeding (commenced to determine the dischargeability
of a claim under section 523(a) and (d)) because the third-party complaint of the debtor raised
noncore issues, a timely demand for a jury trial was made by third-party defendant, and the
bankruptcy court may not conduct the jury trial.
Return to text
1784 Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion), 4 F.3d 1095 (2d Cir. 1993) (holding that action on the alleged prepetition breach of a prepetition
contract was a noncore proceeding and bankruptcy court could not conduct the
jury trial), cert. dismissed, 114 S. Ct. 1418 (1994); Ben Cooper, Inc. v. Insurance
Co. of Pennsylvania (In re Ben Cooper), 896 F.2d 1394 (2d Cir. 1990) (holding that
action on alleged postpetition breach of postpetition contract was a core
proceeding), vacated on other grounds, 111 S. Ct. 425 (1990), reinstated, 924
F.2d 36 (1991).
Return to text
1785 See, e.g., Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (creditor who filed proof of claim
against debtor's estate waived Seventh Amendment right to jury trial) reh'g denied, 498 U.S. 1043
(1991).
Return to text
1786 The bankruptcy judge may conduct a jury trial in a core proceeding if the applicable district court has so designated and the parties consent. 28 U.S.C. § 157(e) (1994).
Return to text
1787 Even more surprising is the fact that section 157(b)(2) is not meant to be an exclusive list of all core proceedings . Notwithstanding the specific reference to fraudulent transfer actions in
section 157(b)(2)(H), the implication of Granfinanciera calls into question all core proceedings,
whether listed or not.
Return to text
1788 See Paul Bator, The Constitution as Architecture: Legislative and Administrative Courts
Under Article III, 65 IND. L.J. 233 (1990) (current system is constitutional; non-Article III courts can
perform adjudicative functions consistent with the Framers' intent as well as modern interpretations
of the requirements of Article III; bankruptcy judges should not be accorded Article III status, as it
would destroy the Article III notion of "revered elite generalists entrusted with judicial powers.");
Erwin Chemirinsky, Ending the Marathon: It is Time to Overrule Northern Pipeline, 65 AM. BANKR.
L.J. 311 (1991)(current bankruptcy system is constitutional; decision to grant Article III status to
bankruptcy judges is a political and not a constitutional issue.); Richard H. Fallon, Jr., Of Legislative
Courts, Administrative Agencies, and Article III, 101 HARV. L. REV. 915 (March 1988)(under flexible
approach to Article III, both 1978 Act as well as BAFJA are constitutional; adopts appellate review
theory which preserves delicate policy concerns while permitting delegation of certain adjudicative
functions to non-Article III courts); Daniel J. Meltzer, Legislative Courts, Legislative Power and the
Constitution, 65 IND. L. REV. 291 (1990) (current bankruptcy system is constitutional; values of
Article III should be balanced against legislative purpose behind the creation of a non-Article III
tribunal); Ralph U. Whitten, Consent, Caseload, and Other Justifications for Non-Article III Courts
and Judges: A Comment on Commodities Futures Trading Commission v. Schor, 220 CREIGHTON L.
REV. 11 (1986) (BAFJA system is constitutional because (1) "core proceedings involve some form
of "public right" that can be adjudicated by a non-Article III court" [doubtful after Court's ruling in
Granfinanciera], and (2) BAFJA provides a greater degree of judicial control over both core and non-core proceedings).
Return to text
1789 See, e.g., Erwin Chemirinsky, Ending the Marathon: It is Time to Overrule Northen
Pipeline, 65 AM. BANKR. L.J. 311 (May 1991) (the fact thatMarathon remains good law makes it
impossible to properly construct an Article I adjudicative court; Granfinanciera adds new problems
as to the constitutionality of the core/noncore distinction).
Return to text
1790 David P. Currie, Bankruptcy Judges and the Independent Judiciary, 16 CREIGHTON L. REV. 441(1983) (adopting a literalist approach to Article III and concludes that the 1978 Code was
unconstitutional; under a strict interpretation of Article III, the current system under BAFJA would
also be unconstitutional); S. Elizabeth Gibson, Jury Trials and Core Proceedings: The Bankruptcy
Judge's Uncertain Authority, 65 AM. BANKR. L.J. 145 (1991) (under a broad reading of
Granfinanciera, all core jurisdiction violates Article III; bankruptcy courts, even in core proceedings,
exercise the essential functions of the judicial power and are unconstitutional); Thomas G.
Krattenmaker, Article III and Judicial Independence: Why the New Bankruptcy Courts are
Unconstitutional, 70 GEO. L.J. 297 (1981) (system under 1978 Bankruptcy Reform Act was
unconstitutional -- arguments apply with equal force to system under BAFJA -- because bankruptcy
courts are acting like "inferior courts" without Article III protections.); G. Ray Warner, Rotten to the
'Core:' An Essay on Juries, Jurisdiction and Granfinanciera, 59 UNIV. MISS. K.C.L. REV. 991
(1991) (the boundaries of core jurisdiction, avoiding powers, turnover actions, lien priority, etc., have
been called into question by Granfinanciera's narrow view of what is properly delegated to non-Article III forum); Note, The Bankruptcy Act of 1984: Marathon Revisited, 3 YALE L. & POL. Rev.
231 (1984) (concluding that BAFJA exacerbated the system's constitutional defects; practical
problems with BAFJA system include having to litigate noncore proceedings twice and two-tiered
system diminishes prestige of bankruptcy court).
Return to text
1791 Richard Lieb, Can a Bankruptcy Judge Constitutionally Hear and Determine a "Core" Proceeding?, 6 NORTON BANKR. L. ADV. 1 (1997) (arguing that current system is unconstitutional
because bankruptcy judges exercise the "judicial power" of the United States even in "core" matters).
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1792 71 F.3d 1460 (1995), 96 F.3d 346 (1996), 78 F.3d 1456 (1996).
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1793 174 B.R. 814 (C.D.Cal. 1994).
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1794 516 U.S. 124 (1995) (holding, among other things, that appellate review
of district court's remand order was barred by statute, regardless of whether
removal was based on bankruptcy removal statute or on general removal
statute).
Return to text
1795 Langenkamp v. Culp, 498 U.S. 42, 44 (1990) (depositors who filed claims against debtor's estate waived Seventh Amendment right to jury trial for preference action; "by filing a claim
against a bankruptcy estate the creditor triggers the process of 'allowance and disallowance of
claims,' thereby subjecting himself to the bankruptcy court's equitable power."), reh'g denied, 498
U.S. 1043 (1991).
Return to text
1796 4 F.3d 1095 (2d Cir. 1993), cert. denied, 511 U.S. 1026 (1994).
Return to text
1797 See infra Annex A .
Return to text
1798 These include mandatory abstention provisions, mandatory
withdrawal provisions, and special personal injury litigation provisions.
Return to text
1799 See, e.g., Eck v. Dodge Chem. Co. (In re Power Recovery Sys. Inc.), 950 F.2d 798, 802
(1st Cir. 1991) ("well-settled law that bankruptcy courts are vested with contempt power"; but
bankruptcy courts lack power to hold persons in criminal contempt); Griffith v. Oles ( In re Hipp,
Inc.), 895 F.2d 1503, 1509 (5th Cir. 1990) (with the exception of contempts "in (or near) its
presence", bankruptcy courts lack criminal contempt power); Mountain Am. Credit Union v. Skinner
(In re Skinner), 917 F.2d 444 (10th Cir. 1990) (delegation of civil contempt power to bankruptcy
courts proper and does not offend separation of powers portion of constitution); Hicks v. Pearlstein
(In re Magwood), 785 F.2d 1077 (D.C. Cir. 1986) (bankruptcy courts lack criminal contempt power
unless exercised within the limitations provided by (now revoked) section 1481); Burd v. Walters
(In re Walters), 868 F.2d 665, 668 (4th Cir. 1989) (plain-meaning of section 105(a) gives bankruptcy
court civil contempt power); Utah State Credit Union v. Skinner (In re Skinner), 90 B.R. 470, 476
(D. Utah 1988) ("the current version of the Bankruptcy Code implicitly recognizes the inherent
contempt powers of the bankruptcy court in Section 105(a)."); Stock-Schalaeder & McDonald v.
Kittay (In re Stockbridge Funding Corp.), 145 B.R. 797, 804 (Bankr. S.D.N.Y. 1992, aff'd in part
and rev'd in part, 158 B.R. 914 (S.D.N.Y. 1993) ("A bankruptcy court's contempt power is
recognized by statute . . . and has been acknowledged or simply assumed to exist in various non-Article III tribunals."); In re Galvez, 119 B.R. 849, 850 (Bankr. M.D. Fla. 1990) ("[t]his Court . . .
is satisfied that non-Article III courts have inherent power to enforce the lawful court orders issued
in a proceeding over which the court had jurisdiction, even absent specific statutory authorization .
. . . However . . . this Court . . . finds such authority in § 105 of the Bankruptcy Code."); In re
McLean Indus., Inc., 68 B.R. 690, 695 (Bankr. S.D.N.Y. 1986) ("the power of the bankruptcy court
to issue an order of civil contempt derives from three sources: the inherent power of a court, including
an Article I court, the reference of the inherent power of the district court, and the statutory grant
contained in 11 U.S.C. § 105.")
Return to text
1800 Long Range Plan for the Federal Courts of the Judicial Conference of the United States, 52-53, Recommendation 27b (December 1995) (bankruptcy judges should be authorized to exercise
civil contempt power and limited criminal contempt power).
Return to text
1801 Such referral is not limited to appeals. Even under the appellate proposal adopted by
the Commission, the district court may hear noncore proceedings de novo. The referral bar should
apply to such proceedings as well as to proceedings withdrawn under section 157(d). It seems equally
inconsistent with the jurisdictional and procedural scheme enacted in 1984 to permit a referral of a
noncore proceeding to a magistrate judge. If permitted, the referral scenario would evolve as follows:
trial before the bankruptcy judge who submits proposed findings of fact and conclusions of law to
the district judge (11 U.S.C. §§ 157(a), 157(c)(1) (1994)); objection(s) to a finding or conclusion by
a party (FED. R. BANKR. P. 9033); submission to the district judge (who should enter a final order
after reviewing the objection(s)) (11 U.S.C. § 157(c)(1) (1994)); referral to a magistrate judge (28
U.S.C. § 636 (1994)); if no consent, magistrate judge makes proposed findings and conclusions for
a second time (28 U.S.C. § 636(b)(1)(C) (1994)); entry of final order by district judge after,
presumably, another possibility of de novo review.
Return to text
1802 Long Range Plan supra note 1800, 48 n.22 (December 1995) ("... the practice of referring bankruptcy appeals to magistrate judges should be discontinued. It is questionable both in
terms of efficient resource allocation and in its impact on expeditious resolution of appeals.")
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1803 Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 81 (1982).
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1804 Id., at 74 (quoting the Hearings on H.R. 31 and H.R. 32 before the Subcommittee on Civil and Constitutional Rights of the House Committee on the Judiciary, 94th Cong. 2697 (1976)
(letter of Paul Mishkin)).
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1805 See Glidden Co. v. Zdanok, 370 U.S. 530, 582 (1962) (holding that Congress' Article
III designations of The Court of Claims and the Court of Customs and Patent Appeals granted life
tenure and salary protection to judges sitting at time of statute's enactment; "Since the Court of
Claims and the Court of Customs and Patent Appeals are courts created under Article III, their judges--including retired judges, [citation omitted]-- are and have been constitutionally protected in tenure
and compensation.") reh'g denied, 371 U.S. 854 (1962).
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1806 Remedial legislation was necessary for both the Court of Claims and the Court of
Customs and Patent Appeals to clarify that Congress intended each of the courts to be "a court
established under article III of the Constitution of the United States." H.R. REP NO. 85-2349, at 3
(1958) (amending section 211 of title 28 to provide that the Court of Customs and Patent Appeals is
an Article III court). See also H.R. REP. NO. 83-695, at 2 (1953) (clarifying that the Customs Court
"was established as a constitutional court pursuant to article III.").
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1807 The House Report noted that 1970 Commission proposed staggering the appointees to the new bankruptcy court in order to alleviate this concern. H.R. REP. 95-595, at 22 n.135 (1977).
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1808 For a complete discussion of the appointments clause, see, Morrison v. Olson, 487 U.S.
654 (1988) (holding that independent counsel was an "inferior officer" under the Appointments
Clause; appointment by Special Division upon request of the Attorney General did not violate
Appointments Clause).
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1809 The appointment power provides that the President
shall nominate, and by and with the Advice and Consent of the Senate, shall appoint
Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all
other Officers of the United States, whose Appointments are not herein otherwise provided
for, and which shall be established by Law: but the Congress may by Law vest the
appointment of such inferior Officers, as they think proper, in the President alone, in the
Courts of Law, or in the Heads of Departments.
U.S. CONST. art. II, cl. 2. Return to text
1810 For the pension terms for bankruptcy judges, see, 28 U.S.C. § 377 (1996).
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1811 See Retirement Benefits for Bankruptcy Judges and Magistrate Judges, Administrative
Office of the U.S. Courts, 2d ed. (Sept. 1995).
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1812 This aspect of the Recommendation may benefit recent appointees to
the bankruptcy bench who have not developed significant bankruptcy expertise
when compared to bankruptcy judges who have already served multiple terms.
By enabling all sitting bankruptcy judges to complete a minimum of one term
on the bench, the Recommendation does not favor more senior bankruptcy
judges over those who have recently been appointed.
Return to text
1813 For a more complete breakdown of the expiration dates of current bankruptcy judge terms, see the chart provided by the Bankruptcy Judges Division of the Administrative Office of U.S.
Courts in the Appendix.
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1814 Section 1334(a) provides "Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11." 28 U.S.C. §
1334(a) (1996). Section 1334(b) provides
Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts
other than the district courts, the district courts shall have original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases
under title 11.
28 U.S.C. § 1334(b) (1996). Return to text
1815 28 U.S.C. § 157(a) (1996) ("Each district court 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.")
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1816 28 U.S.C. § 157(d) (1996) ("The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party,
for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if
the court determines that resolution of the proceding requires consideration of both title 11 and other
laws of the United States regulating organizations or activities affecting interstate commerce.")
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1817 28 U.S.C. § 157(b)(5) (1996) ("The district court shall order that personal injury and
wrongful death claims shall be tried in the district court in which the bankruptcy case is pending, or
in the district court in the district in which the claim arose, as determined by the district court in which
the bankruptcy case is pending.")
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1818 28 U.S.C. § 157(c)(1) (1996) ("A bankruptcy judge may hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11. In such proceeding, the
bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district court,
and any final order or judgment shall be entered by the district judge after considering the bankruptcy
judge's proposed findings and conclusions and after reviewing de novo those matters to which any
party has timely and specifically objected.").
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1819 Section 1334 (c)(1) and (c)(2) provide:
(C)(1) Nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing
a particular proceeding arising under title 11 or arising in or related to a case under title 11.
(2) Upon a timely motion of a party in a proceeding based upon a State law claim or State
law cause of action, related to a case under title 11 but not arising under title 11 or arising
in a case under title 11, with respect to which an action could not have been commenced in
a court of the United States absent jurisdiction under this section, the district court shall
abstain from hearing such proceeding if an action is commenced, and can be timely
adjudicated, in a state forum of appropriate jurisdiction.")
28 U.S.C. § 1334(c)(1) and (c)(2) (1996). Return to text
1820 28 U.S.C. § 1452(a) (1996) ("A party may remove any claim or cause of action in a civil
action other than a proceeding before the United States Tax Court or a civil action by a governmental
unit to enforce such governmental unit's police or regulatory power, to the district court for the
district where such civil action is pending, if such district court has jurisdiction of such claim or cause
of action under section 1334 of this title.")
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1821 28 U.S.C. § 158(a) (1996). Section 158(a) provides:
(a) The district courts of the United States shall have jurisdiction to hear appeals
(1) from final judgments, orders, and decrees;
(2) from interlocutory orders and decrees issued under section 1121(d) of title 11
increasing or reducing the time periods referred to in section 1121 of such title; and
(3) with leave of the court, from other interlocutory orders and decrees;
of bankruptcy judges entered in cases and proceedings referred to the bankruptcy
judges under section 157 of this title. An appeal under this subsection shall be
taken only to the district court for the judicial district in which the bankruptcy
judge is serving. Return to text
1822 Chandler v. Judicial Council of the Tenth Circuit of the United States, 398 U.S. 74, 86
n.7 (1970) ("We find nothing in the legislative history to suggest that the Judicial Council was
intended to be anything other than an administrative body functioning in a very limited area in a
narrow sense as a 'board of directors' for the circuit."), reh'g denied, 399 U.S. 937 (1971).
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1823 CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE, § 3939 (1996)
citing Fish, The Circuit Councils: Rusty Hinges of Federal Judicial Administration, 37 U. CHI. L.
REV. 203, 207 (1970).
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1824 Certain sections of this draft statutory language was compiled from two draft statutes
provided by Judge Joe Lee, on his own behalf, and by Robert A. Greenfield on behalf of the National
Bankruptcy Conference.
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1825 Proposed section 298(b) is taken from 28 U.S.C. § 205(e)(1) of Pub. L. 95-598 (Nov, 6, 1978), withdrawn by section 122(c) of Pub. L. 98-353 (July 10, 1984).
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1826 U.S. CONST. art. I, § 8, cl. 4.
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1827 For cases in which bankruptcy courts have disregarded district court precedent in the
same district, see, e.g., In re Shattuc Cable Corp., 138 B.R. 557, 565-67 (Bankr. N.D. Ill. 1992);
Pereira v. Centel Corp. (In re Argo Communications Corp.), 134 B.R. 776, 786 n.9 (Bankr. S.D.N.Y.
1991); In re California Gardens Apartments, Ltd., 130 B.R. 509, 514 (Bankr. S.D. Ohio 1991); In re
Rheuban, 128 B.R. 551, 554-55 (Bankr. C.D. Cal. 1991); In re Morningstar Enter., Inc., 128 B.R.
102, 106 (Bankr. E.D. Pa. 1991); First Am. Bank v. Gaylor (In re Gaylor), 123 B.R. 236, 241-43
(Bankr. E.D. Mich. 1991).
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1828 For cases that refuse to follow Ninth Circuit BAP precedent, see, e.g., Oregon v. Selden
(In re Selden), 121 B.R. 59, 62 (D. Or. 1990); In re Junes, 76 B.R. 795, 797 n.1 (Bankr. D. Or. 1987),
aff'd on other grounds, 99 B.R. 978 (B.A.P. 9th Cir. 1989); In re Crook, 62 B.R. 937, 941 n.2 (Bankr.
D. Or. 1986), rev'd, 79 B.R. 475, 477 n.3 (B.A.P. 9th Cir. 1987); In re Kao, 52 B.R. 452, 453
(Bankr. D. Or. 1985). But see Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir.
1990) (O'Scannlain, J., concurring); In re Windmill Farms, Inc., 70 B.R. 618, 622 (Bankr. 9th Cir.
1987), rev'd on other grounds, 841 F.2d 1467 (9th Cir. 1988); Mushkin, Inc. v. Industrial Steel Co.
(In re Mushkin, Inc.), 151 B.R. 252, 253-55 (Bankr. N.D. Cal. 1993); In re General Assoc. Investors
Ltd. Partnership, 150 B.R. 756, 760-61 (Bankr. D. Ariz. 1993); Coyne v. Westinghouse Credit Corp.
(In re Globe Illumination Co.), 149 B.R. 614 (Bankr. C.D. Cal. 1993); In re Torrez, 132 B.R. 924,
943 (Bankr. E.D. Cal. 1991).
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1829 For examples of bankruptcy issues that are litigated again and again, see Paul M. Baisier
& David G. Epstein, Resolving Still Unresolved Issues of Bankruptcy Law: A Fence or an
Ambulance, 69 AM. BANKR. L.J. 525, 526-27 n.9 (1995)(hereinafter "Unresolved Issues").
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1830 Moore v. City of Albany, 98 N.Y. 396, 410 (1885). See also West, The Doctrine of Stare Decisis, 21 WAYNE L. REV. 1043 (1975).
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1831 Daniel J. Bussel, Power, Authority, and Precedent in Interpreting the Bankruptcy Code, 41 UCLA L. REV. 1063, 1072 (1994) (citing First of Am. Bank v. Gaylor (In re Gaylor), 123 B.R.
236, 241 (Bankr. E.D. Mich. 1991)).
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1832 Hon. Edith H. Jones, Bankruptcy Appeals, 16 T. MARSHALL L. REV. 245 (1991) ("disincentives to appeal -- the cost, the inevitable delay, the possibility of jurisdictional dismissals
that would accomplish nothing -- are considerable.").
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1833 Unresolved Issues, supra note 1829, at 526-27 (using the example of claim
classification as a case in point to list "the seven bankruptcy court decisions, one district court
decision, and one court of appeals decision since 1993 that have either allowed or required separate
classification of a secured creditor's unsecured deficiency claim, and five bankruptcy court decisions,
one district court decision, five court of appeals decisions and two bankruptcy appellate panel
decisions since 1991 that have prohibited the separate classification of such a deficiency claim. In
other words, seventeen years after the enactment of the Bankruptcy Reform Act of 1978, there is
substantial support in the case law for either position, and six of eleven judicial circuits have no
binding precedent on this most basic question of substantive bankruptcy law.").
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1834 28 U.S.C. § 1334 (a) (1994).
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1835 Id. at § 1334(b).
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1836 Id. § 157(a), (d).
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1837 Id., at § 158(a), (d).
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1838 COMMISSION REPORT, note 1728, at 96-98.
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1839 H.R. REP. NO. 95-595, at 39-43 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6000-04.
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1840 S. REP. NO. 95-989, at 18 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5804.
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1841 Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, § 236(a), 92 Stat. 2549, 2667, added 28 U.S.C. § 1293(b) which provided:
A court of appeal shall have jurisdiction of an appeal from a final judgment, order or decree
of an appellate panel created under section 160 or a District court of the United States or
from a final judgment, order, or decree of a bankruptcy court of the United States if the
parties to such appeal agree to a direct appeal to the court of appeals.
Id. The consent requirement mitigated "the Senate objections against direct appeal to the court of
appeals because it protects the litigants who might otherwise be deterred from appealing small matters
to the court of appeals and lessens the caseload burden on the court of appeals." Lissa Lamkin
Broome, Bankruptcy Appeals: The Wheel is Come Full Circle, 69 AM. BANKR. L.J. 541, 544 n.16
(1995). Return to text
1842 See 1984 U.S.C.C.A.N. 576 and 28 U.S.C. § 158 (1994). See also REFORMING THE BANKRUPTCY CODE: THE NATIONAL BANKRUPTCY CONFERENCE'S CODE REVIEW PROJECT, FINAL
REPORT, 53 (rev ed. 1997) ("It is unclear whether there was a reason for the repeal of [direct
consensual appeal to the court of appeals] or whether its elimination was due to oversight.").
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1843 See Section F. infra.
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1844 28 U.S.C. § 157(b)(1) (1994).
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1845 See Survey: Has Congress Really Solved the Controversy Surrounding the Jurisdiction
of Bankruptcy Courts, 5 J. BANKR. L. & PRAC. 513 (July/August 1996)(warning that expansive
interpretation of "core" proceedings may impermissibly expand jurisdiction of bankruptcy courts).
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1846 28 U.S.C. § 636 (c)(1) (1994).
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1847 28 U.S.C. § 636(b)(1) (1994) (emphasis added).
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1848 The Supreme Court has held that "de novo determination" does not mean "de novo hearing." United States v. Raddatz, 447 U.S. 667, 673 (1980)("It should be clear on these dispositive
motions, the statute calls for a de novo determination, not a de novo hearing. We find nothing in the
legislative history of the statute to support the contention that the judge is required to rehear the
contested testimony in order to carry out the statutory command to make the required
'determination.'"), reh'g denied, 449 U.S. 911 (1980).
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1849 Id.
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1850 28 U.S.C. § 636(c)(3) (1994).
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1851 Garland v. Sullivan, 737 F.2d 1283, 1285 & n.1 (3d Cir. 1984) (appellate jurisdiction over magistrate's orders based on section 636(c) and not section 1291), aff'd on other grounds, 474
U.S. 34 (1985).
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1852 The Supreme Court has, however, upheld magistrate judge authority under the following circumstances: McCarthy v. Bronson, 111 S. Ct. 1737 (1991) (prisoner litigation challenging prison
conditions); Peretz v. United States, 111 S.Ct. 2661 (1991) (felony voir dire with defendant's
consent); Gomez v. United States, 490 U.S. 858 (1989) (felony voir dire over defendant's objection);
United States v. Raddatz, 447 U.S. 667 (1980) (evidentiary hearing in motion to suppress
proceedings), reh'g denied, 448 U.S. 916 (1980); Mathews v. Weber, 423 U.S. 261 (1976) (Social
Security proceedings); Wingo v. Wedding, 418 U.S. 461 (1974) (habeas corpus proceedings).
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1853 See Bell & Beckwith v. U.S., 766 F.2d 910 (6th Cir. 1985) (interpleader action over
investment account); D.L. Auld Co. v. Chroma Graphics Corp., 753 F.2d 1029 (Fed. Cir.) (patent
infringement case; appeal challenging constitutionality of § 636(c) was an abuse "of the judicial
process" which warranted an award of attorneys' fees under 35 U.S.C. § 285), cert. denied, 474 U.S.
825 (1985); Gairola v. Virginia Dep't of Gen. Servs., 753 F.2d 1281 (4th Cir. 1985) (Title VII
action); KMC Co., Inc. v. Irving Trust Co., 757 F.2d 752 (6th Cir. 1985) (breach of contract action);
Lehman Bros. Kuhn Loeb, Inc. v. Clark Oil & Refining Corp., 739 F.2d 1313 (8th Cir. 1984) (breach
of contract action), cert. denied, 469 U.S. 1158 (1985); Collins v. Foreman, 729 F.2d 108 (2d Cir.)
(section 1983 action), cert. denied, 469 U.S. 870 (1984); Geras v. Lafayette Display Fixtures, Inc.,
742 F.2d 1037 (7th Cir. 1984) (state law negligence and strict liability tort action); Goldstein v.
Kelleher, 728 F.2d 32 (1st Cir.) (medical malpractice case), cert. denied, 469 U.S. 852 (1984);
Puryear v. Ede's Ltd., 731 F.2d 1153 (5th Cir. 1984) (breach of contract action); Pacemaker
Diagnostic Clinic of Am., Inc. v. Instromedix, Inc., 725 F.2d 537 (9th Cir.) (en banc) (patent
infringement case), cert. denied, 469 U.S. 824 (1984); Fields v. Washington Metro. Area Transit
Auth., 743 F.2d 890 (D.C. Cir. 1984) (personal injury action); Wharton-Thomas v. United States,
721 F.2d 922 (3d Cir. 1983) (lawsuit under federal tort claims act).
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1854 150 F.R.D. 247 (1993)(hereinafter "Magistrate Report").
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1855 490 U.S. 858 (1989).
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1856 492 U.S. 33 (1989).
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1857 Magistrate Report, supra note 1854, at 251.
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1858 Id. at 289.
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1859 498 U.S. 42 (1990), reh'g denied, 498 U.S. 1043 (1991).
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1860 Magistrate Report, supra note 1854, at 303.
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1861 Id.
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1862 Id.
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1863 Id. at 304. See Monique Mulcare, Article III, The Federal Magistrate, and the Power
of Consent, 1992/93 ANN. SURV. AM. L. 297 (1994) (addressing the proper constitutional role of a
magistrate supervising part of a criminal trial); Note, Federal Magistrates and the Principals of
Article III, 97 HARV. L. REV. 1947 (1984) (concluding that the 1979 Federal Magistrate Act is
constitutional).
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1864 26 U.S.C. § 7429(b)(2) (1994).
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1865 Id. § 7482(a).
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1866 See, e.g., 15 U.S.C. § 78y(a)(1) (appeals from decisions of the SEC); 29 U.S.C. § 160(f)
(appeals from decisions of the NLRB); 29 U.S.C. § 210(a)(appeals under the Fair Labor Standards
Act of 1938); 15 U.S.C. § 57a(e) (appeals under the Federal Trade Commission Improvement Act);
15 U.S.C. § 1710(a) (appeals under the Housing and Urban Development Act of 1968); 29 U.S.C.
§ 660(a) (appeals under the Occupational Safety and Health Act of 1970); 42 U.S.C. § 300J-7(a)(2)
(appeals under the Safe Drinking Water Act); 45 U.S.C. § 355(f) (appeals under the Railway Labor
Act); 5 U.S.C. § 552b(g) (appeals under the Administrative Procedures Act); and 28 U.S.C. § 2343
(review of federal agency orders); see also 28 U.S.C. § 1491 et seq. (dictating that all appeals from
the United States Court of Federal Claims go to the Court of Appeals for the Federal Circuit). See
Gordon Bermant, The Cases of the United States Court of Appeals for the District of Columbia
Circuit, Appendix A, p. 44-45 (Federal Judicial Center 1982).
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1867 See, e.g., 47 U.S.C. § 402(b) (Communications Act Amendments of 1952); 15 U.S.C.
§ 766(c) (Department of Energy Organization Act); 26 U.S.C. § 9011 (Federal Election Campaign
Act Amendments of 1974); 22 U.S.C. § 4109(a) (Foreign Service Act of 1980); 42 U.S.C. § 4915(a)
(Noise Control Act of 1972); 42 U.S.C. § 9125 (Ocean Thermal Energy Conservation Act); 43 U.S.C.
§ 1349(c)(l) (Outer Continental Shelf Lands Act Amendments of 1978); 42 U.S.C. § 6976(a)(1)
(Resource Conservation and Recovery Act of 1976); and 42 U.S.C. § 300J-7(a)(1) (Safe Drinking
Water Act). See Bermant, supra note [1866], at 43.
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1868 See Thomas v. Union Carbide Agric. Prods., 473 U.S. at 568, 583 ("the Court has long
recognized that Congress is not barred from acting pursuant to its powers under Article I to vest
decision making authority in tribunals that lack the attributes of Article III courts. Many matters that
involve the application of legal standards to facts and affect private interests are routinely decided by
agency action with limited or no review by Article III courts." [citations omitted])
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1869 The statistics on appeals to the courts of appeals and the district courts were provided
by the Administrative Office of the U.S. Courts (On file with the National Bankruptcy Review
Commission). The statistics on appeals to the various Bankruptcy Appellate Panels were provided
by the individual clerks in charge of each respective BAP (On file with the National Bankruptcy
Review Commission).
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1870 The figures for some of the BAPs do not conform to the statistical year due to the staggered dates when some of them began accepting appeals.
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1871 Includes 134 appeals filed in the First Circuit BAP between 7/1/96 and 6/30/97.
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1872 Includes 89 appeals filed in the Second Circuit BAP between 7/1/96 and 9/12/97.
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1873 Includes 91 appeals filed in the Sixth Circuit BAP between 1/1/97 and 8/15/97.
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1874 Includes 82 appeals filed in the Eighth Circuit BAP between 1/1/97 and 9/19/97.
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1875 Includes 783 appeals filed in the Ninth Circuit BAP between 7/1/96 and 6/30/97.
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1876 Includes 114 appeals filed in the Tenth Circuit BAP between 7/1/96 and 9/19/97.
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1877 The Bankruptcy Reform Act of 1994 made the BAP requirement mandatory unless the judicial council finds that there are insufficient funds or would result in undue delay. 28 U.S.C. §
158(b)(1) (1994).
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1878 With the exception of the Western District of New York (29 bankruptcy appeals filed
for the year ended June 30, 1997), the lowest number of bankruptcy appeals to the district court are
filed in the Second Circuit BAP districts. For the year ended June 30, 1997: 18 bankruptcy appeals
were filed in the District of Connecticut; 32 bankruptcy appeals were filed in the Northern District
of New York; and, 18 bankruptcy appeals were filed in the District of Vermont. By way of
comparison, a total of 318 bankruptcy appeals were filed in the Eastern and Southern Districts of New
York during this same period.
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1879 Unresolved Issues, supra note 1829, at 531 (citations omitted). BAPs actually
exacerbate stare decisis problems because their holdings are not binding. Baisier and Epstein went
on to describe the BAP stare decisis problem:
Looking to the experience of the Ninth Circuit, the precedential effect of a decision of a
bankruptcy appellate panel is problematic for at least the following reasons:
1. The Ninth Circuit has held that the decisions of its bankruptcy appellate panel
are not binding on the district courts in the Ninth Circuit because Article III district
court judges cannot constitutionally be bound by the decisions of the Article I
bankruptcy court judges who sit on a bankruptcy appellate panel under 28 U.S.C.
§ 158(b) (citations omitted);
2. Since a bankruptcy appellate panel sits in lieu of a district court, its opinions may
only have stare decisis effect within the district from which the appeal was taken;
3. If as suggested above, district court opinions do not bind the bankruptcy courts
sitting in the same district, then the opinions of the bankruptcy appellate panel
(which sits in lieu of the district court) cannot bind those same bankruptcy courts,
and thus bind no one; and
4. A bankruptcy appellate panel may not have the power to set precedent at all
because it is an Article I court and, as such, has authority only to the extent that the
parties consent to be bound by it.
Unresolved Issues, supra note 1829, at 531 (citations omitted). Return to text
1880 Bankruptcy Appeals, Lawyers Wary of New System Begun This Month, N.Y.L.J., July
11, 1996 (comments of Judge Tina Brozman, recently appointed to sit on second circuit BAP).
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1881 Nathan B. Feinstein, The Bankruptcy System: Proposals to Restructure the Bankruptcy
Court and Bankruptcy Appellate Processes, 1995-96 NORTON'S ANN. SURV. BANKR. LAW 517, 521
(hereinafter "Bankruptcy Proposal") (arguing for the removal of district court appellate review of
bankruptcy court orders);accord Paul M. Baisier & David G. Epstein, Resolving Still Unresolved
Issues of Bankruptcy Law: A Fence or an Ambulance, 69 AM. BANKR. L.J. 525, 537 (1995) (arguing
in favor of the direct appeal of bankruptcy court decisions to an Article III panel of judges);
REFORMING THE BANKRUPTCY CODE: THE NATIONAL BANKRUPTCY CONFERENCE'S CODE REVIEW
PROJECT, FINAL REPORT 73 (rev. ed. 1997) (proposing that appeals from final bankruptcy court orders
should go directly to the courts of appeals if the parties consent); Honorable Steven W. Rhodes, Eight
Statutory Causes of Delay and Expense in Chapter 11 Cases, 67 AM. BANKR. L.J. 287, 296 (1993)
(bankruptcy court decisions should be appealed directly to three-judge panel of Article III judges);
cf. Daniel J. Bussel, Power, Authority, and Precedent in Interpreting the Bankruptcy Code, 41 UCLA
L. Rev 1063, 1094 (1994) (arguing that direct appeals would over-burden the courts of appeals and
lead to excessive delay; proposing that district courts and BAP's be bound by "law of the district" as
a way to clarify current stare decisis problems).
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1882 See COMMITTEE ON LONG RANGE PLANNING OF THE JUDICIAL CONFERENCE OF THE
UNITED STATES, PROPOSED LONG RANGE PLAN FOR THE FEDERAL COURTS (March 1995)
(recommending that "[i]n general, the decisions of . . . Article I courts should be reviewable directly
in the regional courts of appeals [Recommendation 21, p. 44]).
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1883 Bankruptcy Proposal, supra note 1881, at 522 (emphasis added).
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1884 Id.
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1885 Id., at 522 n.6.
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1886 Lissa Lamkin Broome, Bankruptcy Appeals: The Wheel Has Come Full Circle, 69 AM. BANKR. L.J. 541, 546 (1995) (citing statistics demonstrating that direct appeals to the courts of
appeals rose "modestly" between 1978 and 1984).
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1887 Id. at 549.
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1888 Section 1292 dictates the circumstances under which interlocutory orders of the district
courts may be appealed. Specifically, section 1292(b) provides that if a district court judge states in
an interlocutory order that (1) it involves "a controlling question of law to which there is substantial
ground for difference of opinion" and (2) "an immediate appeal from the order may materially
advance the ultimate termination of the litigation" the court of appeals has discretion to permit a
timely (within ten days) appeal of the district court's interlocutory order. 28 U.S.C. § 1292(b) (1996).
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1889 See, e.g., CHARLES ALAN WRIGHT, ET AL.,, FEDERAL PRACTICE & PROCEDURE, JURISDICTION & RELATED MATTERS, § 3926.2 (Supp. 1996).
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1890 28 U.S.C. § 158(a) (1994).
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1891 28 U.S.C. §§ 1292(a) & (b) (1996).
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1892 John P. Hennigan, Toward Regularizing Appealability in Bankruptcy, 12 BANKR. DEV.
J. 583, 587-88 (1996) ("Procedural completeness is achieved upon the resolution of all non-ministerial litigation within a unit. An order determines substantive rights when it decides the sorts
of entitlements at issue in civil litigation outside bankruptcy, that is, rights to money damages,
property, or injunctions.").
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1893 28 U.S.C. § 1408(1) (1994).
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1894 Section 2a(1) provided in pertinent part that:
§2. Creation of Courts of Bankruptcy and Their Jurisdiction. a. The courts of the United States
hereinbefore defined as courts of bankruptcy are hereby created courts of bankruptcy and are hereby
invested, within their respective territorial limits as now established or as they may be hereafter
changed, with such jurisdiction at law and in equity as will enable them to exercise original
jurisdiction in proceedings under this Act, in vacation, in chambers, and during their respective terms,
as they are now or may be hereafter held, to--
(1) Adjudge persons bankrupt who have had their principal place of business, resided, or
had their domicile within their respective territorial jurisdictions for the preceding six
months, or for a longer portion of the preceding six months than in any other jurisdiction. Return to text
1895 1 Collier on Bankruptcy ¶ 2.16, at 207 (Lawrence P. King et al., eds., 14th ed. 1988).
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1896 Id. at 208.
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1897 See Shaw v. Quincy Mining Co., 145 U.S. 444, 450 (1892) ("the legal existence, the
home, the domicile, the habitat, the residence, the citizenship of the corporation can only be in the
state in which it was created, although it may do business in other states whose laws permit it."); In
re Triton Chem. Corp., 46 F. Supp. 326, 328 n.1 (D. Del. 1942); In re R.C. Stanley Shoe Co., 8 F.
Supp. 681, 633 (D.N.H. 1934).
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1898 Bankruptcy Rule 116(a) provided:
(a) Proper Venue
(1) Natural Person. A petition by or against a natural person may be filed in the district
where the bankrupt has had his principal place of business, residence, or domicile for the
preceding six months or for a longer portion thereof than in any other district. A petition by
or against a natural person who has had no principal place of business, residence, or
domicile within the United States during the preceding six months may be filed in a district
wherein he has property.
(2) Corporation or Partnership. A petition by or against a corporation or partnership may e filed in the district (A) where the bankrupt has had its principal place of business or
principal assets for the preceding six months or for a longer portion thereof than in any other
district; or, (B) if there is no such district, in any district where the bankrupt has property.
(3) Partner with Partnership or Copartner. Notwithstanding the foregoing: (A) a petition
commencing a bankruptcy case may be filed by or against any general partner in a district
where a petition under the Act by or against a general partner is pending; (B) a petition
commencing a bankruptcy case may be filed by or against a partnership or by or against any
other general partner or by or against any combination of the partnership and the general
partners in a district where a petition under the Act by or against a general partner is
pending.
(4) Affiliate. Notwithstanding the foregoing, a petition commencing a bankruptcy case may
be filed by or against and affiliate of the bankrupt in a district where a petition under the Act
by or against the bankrupt is pending.
FED. R. BANKR. P. 116(a) (abrogated). The commentary to section 2a(1) provided: "Rule 116 dealing
with venue primarily revises the statutory language for clarification. Rule 116(a)(2) eliminates the
notion of residence or domicile as a useful basis to determine venue of a corporation or partnership." Return to text
1899 The predecessor provision under the Bankruptcy Reform Act of 1978 was 28 U.S.C. §
1472. Section 1472 was repealed and replaced by section 1408 by the Bankruptcy Amendments and
Federal Judgeship Act of 1984. Section 1472 was reenacted verbatim as section 1408.
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1900 28 U.S.C. § 1408(1) (1994).
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1901 28 U.S.C. § 1408(2) (1994).
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1902 28 U.S.C. § 1408(1) (1994).
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1903 Section 1408(2) provides
Except as provided in section 1410 of this title, a case under title
11 may be commenced in the district court for the district--
(2) in which there is pending a case under title 11
concerning such person's affiliate, general partner, or
partnership. Return to text
1904 Use of an affiliate for venue purposes has been referred to as the "venue hook." Lynn
M. LoPucki & William C. Whitford, Venue Choice and Forum Shopping in the Bankruptcy
Reorganization of Large, Publicly Held Companies, 1991 WIS. L. REV. 11, 20-21. (hereinafter the
LoPucki & Whitford Study).
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1905 Id., at 21 ("The subsidiary, Ionosphere, had assets of less than two million dollars and
was solvent at the time of filing. It ran hospitality clubs at airports served by Eastern. For a
discussion of the venue choice in this case, see Eastern's Bankruptcy Strategy: Go North, MIAMI
REVIEW, March 20, 1989, at 4 col. 1.").
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1906 LoPucki & Whitford Study, supra note 1904 at 26.
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1907 Id. at 26-27.
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1908 Id. at Appendix.
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1909 Id. at 45-46.
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1910 See In re Abacus Broad. Corp., 154 B.R. 682, 686 (Bankr. W.D. Tex. 1993) ("the court
writes to underscore the danger of forum shopping (or, more insidiously, judge shopping) in the
placement of venue in reorganization proceedings .... How much deference should be given to a forum
selected primarily by the lawyers, for their own convenience or concern for remuneration? How much
deference should be given to a debtor's concern that it get what it perceives to be a "debtor's judge?"
Whenever a creditor raises the venue question, none at all. Forum shopping has never been favored
by federal courts, and courts are quick to discern the evil in all its disguises .... In bankruptcy, too
often the tactic is masked by pious pronouncements about the debtor's "right" to select the most
advantageous of several possible forums, in order to advance the prospects for reorganization.")
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1911 Whether bankruptcy judges would be able to "compete" effectively for bankruptcy cases
is one of the bases for a proposal to allow corporations to choose a bankruptcy venue well before
financial distress occurs. Professors Rasmussen and Thomas conclude that permitting corporations
to choose a bankruptcy venue ahead of any financial problems will, among other things, improve the
application of the Bankruptcy Code by encouraging judges to rule in a way that promotes efficiency.
See Robert K. Rasmussen & Randall S. Thomas, Improving Corporate Bankruptcy Law Through
Venue Reform, 6, Unpublished Manuscript (1997).
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1912 Indeed, LoPucki and Whitford studied thirty-seven voluntary Chapter 11 cases which
only two had transfer motions. Both motions were unsuccessful. LoPucki & Whitford Study, supra
note 1904, at 24.
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1913 But see Rasmussen & Thomas, supra note 1911 (arguing that competition among
bankruptcy judges for cases will produce interpretations of the law that will lead to efficient uses of
resources).
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1914 See GORDON BERMANT et al., CHAPTER 11 VENUE CHOICE BY LARGE PUBLIC COMPANIES, REPORT TO THE COMMITTEE ON THE ADMINISTRATION OF THE BANKRUPTCY SYSTEM
(1997).
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1915 See NBRC Database Reports on Venue.
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1916 Letter from Steven B. Towbin, D'Ancona & Pflaum to National Bankruptcy Review
Commission, (Sept. 12, 1996).
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1917 Id.
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1918 See, e.g., In re Bell Tower Assoc., 86 B.R. 795, 800 (Bankr. S.D.N.Y. 1988) (holding
that principal place of business was where debtor made overall management decisions); In re Dock
of the Bay, Inc., 24 B.R. 811 (Bankr. E.D.N.Y. 1982) (utilizing the "nerve center" test to determine
where a multi-jurisdiction corporation has its principal place of business); In re Holiday Towers, 18
B.R. 183 (Bankr. S.D. Ohio 1982) (location of general executive offices dictated proper venue).
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1919 LoPucki & Whitford Study, supra note 1904, at 163.
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1920 Id. On the subject of amending the current venue provisions, LoPucki and Whitford conclude:
Even though elimination of forum shopping is a practical alternative, we favor the approach
of retaining the present system for selecting venue and addressing in other ways the
deleterious consequences that flow from extensive venue choice and forum shopping. The
primary benefit we anticipate from maintaining venue choice and forum shopping is
continued competition among districts in improving their methods and techniques for
maximizing the aggregate value of the enterprise undergoing reorganization. The
development of such methods and techniques is in the interest of all parties.
LoPucki & Whitford Study, supra note 1904, at 163. Return to text
1921 Report of the Delaware State Bar Association to the National Bankruptcy Review
Commission in Support of Maintaining Existing Venue Choices, dated October 3, 1996 [hereinafter
the Delaware Venue Report). The Delaware Venue Report is included in the Appendix.
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1922 Id. at 9-18.
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1923 Id.
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1924 Id. at 9-10.
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1925 Id. at 22 (emphasis added) (citing LoPucki & Whitford Study, supra note 1881, at 49,
and Robert J. Rosenberg and Marla S. Becker, The Perils of Forum Shopping and the Need for
Statutory Reform of the Venue Selection Process, printed in "The Biased Business of Venue
Shopping" 75, 81 (ABI Northeast Bankruptcy Conference, July 21, 1995).
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1926 Delaware Venue Report, supra note 1921, at 22.
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1927 Section 1391(c) provides in pertinent part that "[f]or purposes of venue under this chapter, a defendant that is a corporation shall be deemed to reside in any judicial district in which
it is subject to personal jurisdiction at the time the action is commenced." 28 U.S.C. § 1391(c)
(1996).
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1928 Section 1400(b) provides in pertinent part that "[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides,...." 28 U.S.C. § 1400(b) (1996).
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1929 15 U.S.C. § 22 provides that an antitrust action may be commenced in any judicial district where the defendant is an "inhabitant." "Under this provision, '[t]he word "inhabitant" is
synonymous with "resident" and "a corporation is a resident of the state in which it is incorporated."
Delaware Venue Report, supra note 1921, at 24 citing Aro Manuf. Co., Inc. v. Automobile Body
Research Corp., 352 F.2d 400, 404 (1st Cir. 1965).
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1930 42 U.S.C. § 9613(b) (1993).
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1931 15 U.S.C. § 77v (1995).
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1932 15 U.S.C. § 78aa (1995)
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1933 15 U.S.C. § 80b-14 (1995).
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1934 Delaware Venue Report, supra note 1921, at 22.
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1935 An interpleader action that is commenced by the holder of a "fund" to which one or more claimants seek recovery must be commenced "in the judicial district where one or more of the
claimants reside." 28 U.S.C. § 1397.
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1936 Id. at 27-30.
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1937 Id. at 27.
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1938 This issue was raised by Commissioner Alix during the plenary session of the
Commission in San Diego, CA on October 19, 1996. See Transcript of National Bankruptcy Review
Commision Meeting, San Diego, CA (Oct. 19, 1996). See Delaware Venue Report, supra note 1921,
at 27.
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1939 Delaware Venue Report, supra note 1921, at 28.
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1940 See, e.g., In re Bell Tower Assoc., 86 B.R. 795, 800 (Bankr. S.D.N.Y. 1988) (site of
overall management decisions was proper venue); In re Holiday Towers, 18 B.R. 183 (Bankr. S.D.
Ohio 1982) (location of general executive offices determined proper venue); In re Dock of the Bay,
Inc., 24 B.R. 811, 814-15 (Bankr. E.D.N.Y. 1982) (company's principal place of business not
controlled by location of financing as well as president and sole shareholder); In re Lakeside Utils.,
18 B.R. 115 (Bankr. D. Neb. 1982) (holding that the "nerve center" of the company was not the
principal place of business).
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1941 Delaware Venue Report, supra note 1921, at 28-29.
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1942 Id. Exhibit C to the Delaware Venue Report is attached in the Appendix for ease of reference.
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1943 Id.
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1944 See Delaware Venue Report, supra note 1921, at Exh. C. The Venue Exhibit analyzes
whether the principal place of business of the debtors listed in the Delaware Venue Report was more
representative in terms of number of creditors from that state than from the bankruptcy venue state
(all of the sample debtors filed for relief in Delaware). The Venue Exhibit concludes that nine out
of thirteen debtors had more creditors located in the state of their principal place of business than in
any other state. Moreover, only one debtor, Silo, Inc., had more creditors located in Delaware (the
bankruptcy venue) than it did in the state where its principal place of business was located.
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1945 See Delaware Venue Report, supra note 1921, at Exh. C.
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1946 This conclusion was also reached in the FJC Venue Report, supra, note 1914, at 62. ("We concluded that the average creditor was usually inconvenienced by a Delaware filing in relation to a (hypothetical) filing at the principal place of business.").
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1947 The Commission has a number of recommendations that help to tip the balance of equities more in favor of smaller creditors and other small parties in interest in bankruptcy cases. The
proposal on National Admission, Recommendation 3.3.4 will reduce the costs associated with
counsel appearing in a distant court. The proposals on preference amount and preference venue
Recommendation 3.2.1 -3.2.2 will help reduce noneconomical preference actions that cost more for the creditor to defend than to settle.
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1948 FED. R. BANKR. P. 1014(b) provides:
(b) Procedure When Petitions Involving the Same Debtor or Related Debtors
are Filed in Different Courts. If petitions commencing cases under the Code are
filed in different districts by or against (1) the same debtor, or (2) a partnership and
one or more of its general partners, or (3) two or more general partners, or (4) a
debtor and an affiliate, on motion filed in the district in the petition filed first is
pending and after hearing on notice to the petitioners, the United States trustee, and
other entities as directed by the court, the court may determine, in the interest of
justice or for the convenience of the parties, the district or districts in which the
case or cases should proceed. Except as otherwise ordered by the court in the
district in which the petition filed first is pending, the proceedings on the other
petitions shall be stayed by the courts in which they have been filed until the
determination is made.
FED. R. BANKR. P. 1014(b) (1994). Return to text
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