Petition — In re Farmers Union Central Exchange, Inc.

In re FARMERS UNION CENTRAL EXOHANGE, INC.;

FARMERS PETROLEUM COOPERATIVE, Mo., FCX,

INC.; LANDMARE, No.; LAND O'LAKES, INC.;

MIDLAND OOOPERATIVES, Mo.; MFA OIL oo

PANY; and TENNESSEE FARMEKS COOPERATIVE,

Petitioners.

PETITION FOR A WRIT OF MANDAMUS TO THE

UNITED STATES BANKRUPTOY COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

H. Bram Warre

(Counsel of Record)

A. Bruce

Manx E. MacDowatp

Narnan P. Brunn

Davi M. Scutrrman

One First National Plaza

Chicago, Illinois 60603

(312) 853-7000

Counsel for Petitioners

*

25

i

Did the Bankruptcy Court exceed its constitutional

authority by continuing to assert jurisdiction over state-law

claims after this Court held that “the new bankruptcy

judges cannot constitutionally be vested with jurisdiction

to decide this state-law contract claim”! Northern Pipeline

Construction Co. v. Marathon Pipe Line Co., 102 S. Ct. 2858,

2880 n.40 (1982).

In addition to the eight petitioners listed in the caption,

the parties to the litigation below were Energy Coopera-

tive, Inc. ; the Algerian national petroleum company, Societe

Nationale Pour La Recherche, La Production, La Transport,

La Transformation Et La Commercialisation Des Hydro-

carbures (“Sonatrach”) ; and the seven banks listed below:

1. Continental Illinois National Bank and Trust

Company of Chicago

2. Seattle First National Bank

3. First National Bank of Minneapolis

4. First National Bank and Trust Company of

Oklahoma City

5. Bank of Montreal (California)

First National Bank of Boston

7. St. Louis Bank for Cooperatives.

a

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED ...................0005

REASONS FOR GRANTING THE WRIT .........

I. This Court Did Not “Suspend” The Constitution

By Staying Its Judgment .....................

II. There Is No Need To Stay The Judgment Dis-

missing State-Law Claims ....................

III. A Writ Of Mandamus Is Appropriate To Re-

strain The Unconstitutional Exercise Of Juris-

. UNE WQ eee

**

iii.

TABLE OF AUTHORITIES

Cases

Baltimore d Potomac R. Co. v. Grant, 98 U.S. 398

d bie ccd bhatne veo oavocce ioc

%%4%%%%Cꝙͤ( »

Buckley v. Valeo, 424 U.S. 1 (1976)

Chicot County Drainage District v. Baxter State Bank,

een eee

Cline v. Taplan 323 U.S. 97 (194)

Collier v. United States, 382 U.S. 890 (1965) ..........

Collier v. United States, 384 U.S. 59 (1966) ...........

DeBeers Consolidated Mines, Ltd. v. United States, 325

,, ̃ ..

Ea parte Republic of Peru, 318 U.S. 578 (1943)

Ex parte United States, 287 U.S. 241 (1932)

Gosa v. Maden, 413 U.S. 665 (1973) ................

In Re Cherry Pond Coal Co., No. 82-2317 (S. D. W. Va.

July 22, 1982), rev’g sub nom. Armco, Inc. v. Cherry

Pond Coal Co., No. 81-20504, CCH Bankr. L. Rep.

{ 68,755 (Bankr. S. D. W. Va. July 16, 1982)

In Re O. P. M. Leasing Services, Inc., No, 81-B-10533,

a ton 8 L. Rep. f 68,753 (Ba kr. S. D. N. T. July

r ĩ ile

In Re Otero Mills, No. 82-00 217 M. L., CCH Bankr. L.

Rep. { 68,754 (Bankr. D. N. M. July 14, 1982)

In re Southern Distilleries, No. 82-00312 (Bankr. M.D.

. MOD: ecccicendccctbacccecévedesens

6,8

iv

PAGE

Kerr v. United States District Court, 426 U.S. 394

! tobnkbahbe es 13

Los Angeles Brush Corp. v. James, 272 U.S. 701 (1927) 13

Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1808) ... 13

Maryland Committee v. Tawes, 377 U.S. 656 (1964) ... 10

Maryland v. Soper, 270 U.S. 9 (1926))) 13

Northern Pipeline Construction Co. v. Marathon Pipe

Line Oo., 102 8. Ct. 2858 (192 ʒ )) ceceeeees passim

Roche v. Evaporated Milk Aen., 319 U.S. A (1943) .. 12

Schlagenhauf v. Holder, 379 U.S. 104 (1964) .......... 2, 12-13

Schumacher v. Beeler, 293 U.S. 367 (1984) ........... 1

Smallwood v. Gallardo, 275 U.S. 56 (1927) ........... 7

Taubel-Scott-Kitemiller Co. v. Fom, 264 U.S. 426 (1924) 12

Thermtron Products, Inc. v. Hermandsdorfer, 423 US.

r dedbabs ak sdadcbswaticder 13

White v. Ewing, 159 U.S. 36 (1895) · P) 11-12

Will v. Calvert Fire Ins. Co., 487 U.S. 655 (1978) ...... 13

Will v. United States, 389 U.S. 90 (1967) ............. 13

Other Authorities

U.S. Constitution, Article Iii passim

Bankruptcy Act of 1978, Pub.L. 95-598, 92 Stat. 2549

n piece sees co cus tavweuees 1¹

e dee 2

r codamae cucbes 1¹

r A ke Gabe ald Wor 5

va

v

PAGE

Bankruptcy Code, Chapter 11, 11 U.S.C. 6 1101 et seg. 4

, ͤ da 2

eee ene 11

Se ARNE Cds Fond nc sabe Cebsaheckevuceeedees 11

28 U.S.C. 5 1471, added by Section 241(a) of the Bank-

e bn cad ocdpvdcenr passim

, . 2-3

e ¶ .de 4

Supreme Court Rule 28. 3

Supreme Court Rule 28.4 b 4

General Order (N. D. Il. July 14, 1982) ............... 5, 7a

General Order in Bankruptcy (Bankr. D. Minn. July

P he Cagkteeeeohese es oan cebore 6, 8a

N oe

1

Supreme Court of the United States

Ocroszre 1982 Tun.

In re FARMERS UNION CENTRAL EXCHANGE, mo.

PETITION FOR A WRIT OF MANDAMUS TO THE

UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the Seventh Cirenit denying the Petition for a Writ of

Mandamus is unreported ; it is reproduced in the Appendix

attached hereto at page la. The opinion of the Bankruptcy

Court for the Northern District of Dlinois denying peti-

tioners’ motion to dismiss or stay proceedings is also un-

reported; it is reproduced in the Appendix at page 4a.

This Court hus jurisdiction over the petition for a writ

of mandamus pursuant to the All Writs Act, 28 U.S.C.

§$ 1651(a). This Court also has jurisdiction under 28 U.S.C.

§ 1254(1) to treat the petition as one for a writ of certio-

rari to the United States Court of Appeals for the Seventh

Cireuit. See Collier v. United States, 382 U.S. 890 (1965),

384 U.S. 59 (1966); Schlagenhauf v. Holder, 379 U.S. 104,

109 (1964).

48 U.S.C. 41471 (1976 ed., Supp. III),

241(a) of the Bankruptcy Act of 1978, Pub.

92 Stat. 2549:

Ef

f

(b) Notwithstanding any Act of Congress that con-

fers exclusive on a court or courts other

than the district courts, the district courts shall have

original but not exclusive jurisdiction of all civil pro-

ceedings arising under title 11 or arising in or related

to cases under title 11.

The bankruptcy court for the district in which

frie

1

A

i

i

iit 1j

lia if

i i

i 3 4410

8

shall

property,

Writs Act, 28 U.S.C. §16651(a):

Court

may

of

Honorable Frederick J. Hertz of the United States Bank

ruptey Court for the Northern District of Illinois to dis-

miss the complaints brought against petitioners on the

grounds that the Bankruptcy Court’s jurisdiction over such

state-law claims violates Article III of the Constitution.

The eight petitioners are each agricultural cooperatives,

and they are referred to in this litigation as the “Member

Owners.“ In 1976, they formed Energy Cooperative, Inc.

(“ECI”), which purchased an oil refinery in East Chicago,

—

4

Indiana. On May 15, 1981, ECT filed a petition for re-

organization under Chapter 11 of the Bankruptcy Code,

11 U.S.C. $1101 et seq., in the Bankruptcy Court for the

Northern District of IIlinois. ECI subsequently commenced

an adversary proceeding in that Court against the Member-

Owners, seeking to recover $164,403,000 for an alleged

breach of a stock subscription agreement governed by state

law. Seven banks that had provided secured loans to ECI

intervened as plaintiffs in that action, and their Amended

Complaint against the Member-Owners seeks $257,171,814.89

under several theories, all arising under state law. ECI and

the banks also commenced an adversary proceeding against

a number of ECI’s suppliers. One of those suppliers, the

Algerian national petroleum company known as “Sona.

trach,” brought a counterclaim against ECI and the banks,

demanding over $20,000,000 in compensatory damages for

willful and fraudulent misconduct. The banks thereupon

brought a third party complaint against the Member-

Owners seeking common-law indemnity for any liability the

banks might incur to Sonatrach.

In December 1981, the Member-Owners moved to dismiss

the etions then pending on the grounds that 28 U.S.C.

91471 unconstitutionally vested jurisdiction over these

claims in bankruptcy judges who do not have life tenure

and who are not appointed pursuant to Article III of the

Constitution.“ Bankruptcy Judge Hertz denied that motion

in January 1982.

Following this Court’s decision in Northern Pipeline Con-

struction Co. v. Marathon Pine Line Co., 102 S. Ct. 2858

* Pursuant to Supreme Court Rule 28.4(b), petitioners state

that 28 U.S.C. §2408(a) may be applicable and that the Bank-

ruptey Court certified that fact to the Attorney General on

December 11, 1981.

2. |

(1982), the Member-Owners renewed their motion to dis-

miss and sought, in the alternative, that the proceedings

be stayed. Judge Hertz denied that motion (Appendix,

The Member-Owners then filed a Petition for a Writ of

Mandamus in the Seventh Circuit. The Court of Appeals

denied the petition on August 13, 1982, finding “that there

has been no abuse of discretion on the part of Judge Hertz

of the Bankruptcy Court” in continuing to exercise juris-

diction.* (Appendix, p. 3a).

After filing the mandamus petition in the Seventh Circuit, the

Member-Owners filed an Application for Leave to Appeal

5

1

Although six Justices of this Court agreed in Northern

Pipeline that bankruptcy judges cannot constitutionally

hear state-law claims brought against third parties, a num-

ber of federal courts around the country, including the

court below, have authorized continued jurisdiction over

such cases.‘ They have reasoned that when this Court

granted a “limited stay” of its judgment until October 4

to avoid “impairing the interim administration of the bank-

ruptcy laws,” it issued an affirmative command to the Ban-

ruptcy Courts that they should put aside the requirements

of Article ITI, at least until October 4, and exercise the full

range of jurisdiction conferred by 28 U.S.C. § 1471, includ-

ing jurisdiction over state-law claims having nothing to do

with the administration of any provision of the Bankruptcy

Code.

To compel obedience to the Constitution, this Court

should issue a writ of mandamus requiring dismissal of the

* See In re Otero Mills, No. 82-00217 M.L., CCH Bankr. L. Rep.

7 68,754 (Bankr. D.N.M. July 14, 1982); In re OPM. Leasing

Services, Inc., No. 81-B. 10633, CCH Bankr. L. Rep. { 68,753

(Bankr. S. DN. V. July 16, 1982); In re Cherry Pond Coal Co.,

No. 82-2317 (S.D.W.Va. July 22, 1982), rev’g sub nom. Armco,

Inc. v. Cherry Pond Coal Co., No. 81-20504, CCH Bankr. L. Rep.

7 68,755 (Bankr. S. D. W. Va. July 16, 1982).

On the other hand, the Bankruptcy Court for the District of

Minnesota (which originally heard the Northern Pipeline case)

has stayed all “nonbankruptey law” proceedings. (Appendix, p.

8a). Similarly, in In re Southern Distilleries, No. 82-00312 (Bankr.

MD.Ala. July 22, 1982), the Bankruptey Court from

hearing a case that could be brought in state court:

.

7

state-law claims which the Bankruptcy Court has no con-

stitutional authority to hear. Allowing such litigation to

proceed will only lead to uncertainty, delay and more liti-

gation. Any judgment rendered by the Bankruptcy Court

may be subject to appeal for lack of jurisdietion.“ Indeed,

any action taken by the Bankruptcy Court during the course

of the litigation may be subject to reconsideration if the

case ultimately comes before a court of competent jurisdio-

tion. These problems, moreover, will only worsen if the

Court extends the stay beyond October 4 because of inaction

on

appeal from the judgment); Smallwood v. Gallardo, 275 US. 56,

61 (1927) (Holmes, J.) (“To apply the [new restriction on

diction] to present suits is not to give it retrospective effect”);

Baltimore & Potomac R. Co. v. Grant, 98 U.S. 398, 401 (1879)

vested rights” and “does not set aside any judgment already

I. This Court Did Not Suspend The Constitution By

Staying Its Judgment

The “limited stay” which this Court granted in Northern

Pipeline has been interpreted in two ways. Some authorities

have reasoned that this Court “stayed . . . the finding of

unconstitutionality” until October 4,° and on that basis have

concluded that bankruptcy judges should exercise the full

range of jurisdiction conferred by the Bankruptcy Act,

without regard to whether such jurisdiction is permitted

by the Constitution.’ The opposing view is that the Con-

stitution cust be upheld, and that bankruptcy judges are

therefore precluded from exercising jurisdiction over state-

law claims; they can, however, continue with “the interim

administration of the bankruptcy laws” in accordance with

the stay grauted in Northern Pipeline, 102 S. Ct. at 2880.

The courts that are allowing continued jurisdi:tion over

state-law claims have failed to distinguish betwee. the con-

In re OM. Leasing Services, Inc., No. 81-B-10533, CCH

Bankr. L. Rep. f 68,753 at p. 81,022 (Bankr. S. D. N. V. July 16,

1982).

Indeed, such courts have treated the stay, not merely as a

suspension of the finding of unconstitutionality, but as an in-

struction from this Court that they should ignore constitutional

challenges to the statute conferring jurisdiction. In taking this

approach, such courts have abdicated what Marbury v. Madison

called “the very essence of judicial duty”:

“If both the law [conferring jurisdiction] and the constitution

apply to a particular case, so that the court must either decide

that case conformably to the law, disregarding the constitu-

tion; or conformably to the constitution, disregarding the law;

the court must determine which of these conflicting rules

governs the case. This is of the very essence of judicial duty.”

Marbury v. Madison, 5 U.S. (1 Cranch) 137, 178 (1803)

stitutional holding in Northern Pipeline—that “the new

bankruptcy judges cannot constitutionally be vested with

jurisdiction to decide this state-law contract claim - and

the statutory holding invalidating all of 28 U.S.C. § 1471

because “the remaining grant of authority to Bankruptcy

Courts” under § 1471 is “not readily severable.” 102 S. Ct. at

2882 (concurring opinion). The entire statute was invali-

dated, not because the Court found “the remaining grant of

authority” to be unconstitutional, but because it was unsure

whether Congress would want to retain the existing Bank-

ruptcy Court system if the judges could not hear the debtor’s

state-law claims. “We think it is for Congress to determine

the proper manner of restructuring [barkruptcy juris-

diction] ... in the way that will best effectuate the legis-

lative purpose.” 102 S.Ct. at 2880 n.40. In short, by in-

validating the entire statute, Northern Pipeline allowed

Congress to write on a clean slate; and by staying that

judgment until October 4, the Court gave Congress time to

act:

“This limited stay will afford Congress an opportu-

nity to reconstitute the bankruptcy courts or to adopt

other valid means of adjudication, without impairing

the interim administration of the bankruptcy laws.”

102 S.Ct. at 2880.

This Court should make it clear that the stay means what

it says: it authorizes “the interim administration of tae

bankruptcy laws,” not continued jurisdiction over state-law

claims in violation of Article III. If the stay is confined to

its terms, there is no constitutional problem; this Court

undoubtedly has the authority to allow the constitutional

portion of a statute to remain in effect while Congress is

* 102 S.Ct. at 2880 n.40 (plurality opinion); accord, 102 S. Ct. at

2882 (concurring opinion) (“I would, therefor<, hold so much of

the Bankruptey Act of 1978 as enables a Bankruptcy Court to

entertain and decide Northern's lawsuit over Marathon’s objection

to be violative of Art. III of the United States Coustitution”).

10

deciding how to revise it. But the requirements of the

Constitution cannot similarly be suspended. Although the

Court has occasionally stayed the remedy for a constitu-

tional violation, it has never stayed. . . the finding of

unconstitutionality.” (See note 6, swpra). For example, in

the reapportionment cases, where the Court has generally

allowed legislatures to continue sitting until the next sched-

uled election, the delay in imposing a remedy did not affect

the holdings that the apportionments were unconstitutional.

See, e. g., Maryland Committee v. Tawes, 377 U.S. 656, 675-

76 (1964). It is well established that the laws passed by

such a legislature are valid. Buckley v. Valeo, 424 US. 1,

142 (1976). But it is equally well established that the

judgment of a court without jurisdiction cannot stand. Al-

though such a judgment is protected by res judicata once it

becomes final, if the court’s jurisdiction is found to be uncon-

stitutional while the case is still “open to direct review,”

any judgment must be vacated. Chicot County Drainage

District v. Baxter State Bank, 308 U.S. 371, 376-77 (1940).

In sum, neither the language nor the logic of the North-

that Bankruptcy Courts should ignore the Constitution and

continue exercising jurisdiction over state-law claims.

II. There Is No Need To Stay The Judgment Dismissing

State-Law Claims

If the Constitution is obeyed and state-law claims are

dismissed, they can immediately be re-filed in a state or

§1471(a) with §1471(b). Such claims, of course, can also be

brought in the district court if diversity jurisdiction is present.

11

as these in state court (unless the defendant consented or

there was an independent basis for federal jurisdiction).

“The purpose . was to leave such controversies to be

heard and determined for the most part in the state courts.”

Schumacher v. Beeler, 293 U.S. 367, 374 (1934). Requiring

state-law claims to be litigated in state court will not impair

“the interim administration of the bankruptcy laws,” for,

as Northern Pipeline made clear, the Bankruptcy Court’s

jurisdiction over such claims goes “far beyond that which

can even arguably be characterized as merely incidental to

the discharge in bankruptcy or a plan for reorganization.”

Id. at 2876 n.31 (plurality opinion). “[T]he restructuring

of debtor-creditor relations, which is at the core of the

federal bankruptcy power, must be distinguished from the

adjudication of state-created private rights.” Id. at 2871.

Thus, there is no reason to extend the Northern Pipeline

stay if Congress fails to act by October 4. Not only are

ther. alternative forums that can hear state-law claims,

there are also alternative forums with jurisdiction to ad-

minister the bankruptcy laws. Under 28 U.S.C. 6 4,

which remains in effect until April i, 1984, the district

courts “have original jurisdiction of... all matters and

proceedings in bankruptey.“ They also have federal ques-

tion jurisdiction with respect to all civil actions arising

under the Bankruptcy Code. See 28 U.S.C. § 1331. There-

fore, if the Court allows the stay to expire, the district

courts will have full authority to entertain petitions under

the Bankruptcy Code, to grant the remedies provided

therein, and to administer estates. See White v. Ewing,

% After April 1, 1984, an amendment to § 1334 goes into effect

which limits the district courts to appellate jurisdiction. See Sec-

tions 238(a) and 402(b) of the Bankruptcy Act of 1978. During

the “transition period” between October 1, 1979 and April 1, 1984,

the Act provides that the district courts’ original jurisdiction is to

be exercised by the Bankruptcy Courts, but of course that delega-

tion of jurisdiction was invalidated ir Northern Pipeline.

12

159 U.S. 36, 39-40 (1895) (“where an insolvent corporation

is placed in the hands of a receiver of the Circuit Court,

such appointment draws to the jurisdiction of that Court

the control of its assets”). The district courts would not,

however, have jurisdiction over state-law claims such as

these, which do not involve property in the “actual or con-

structive possession” of the court.

Thus, if Congress fails to act by October 4, 1982, and the

Northern Pipeline stay expires in accordance with its terms,

there will be no jurisdictional vacuum. State-law claims can

be litigated in the state courts and, until April 1, 1984,

bankruptcy matters can be heard ir the district courts.

I’ A Writ Of Mandamus Is Appropriate To Restrain The

Unconstitutional Exercise Of Jurisdiction

This is a classic case for issuing a writ of mandamus:

the issue presented is jurisdictional; it is a pure question

of law; it calls for no appraisal of facts and no exercise

of discretion; it is an issue of undoubted importance and

urgency affecting thousands of cases around the country;

and it is an issue that cannot await review through the

normal channels of appeal and certiorari, for by then the

damage will be done. Much litigation will have to be re-

peated in courts of competent jurisdiction.

The purpose of mandamus is to “afford an expeditious

and effective means of confining the inferior court to a

lawful exercise of its prescribed jurisdiction.” Ex parte

Republic of Peru, 318 U.S. 578, 583 (1943). Indeed, that is

“the traditional use of the writ ... both at common law and

in the federal courts.” Roche v. Evaporated Milk Aen.,

319 U.S. 21, 26 (1943); Bankers Life & Casualty Co. v.

Holland, 346 U.S. 379, 382 (1953) ; Schlagenhauf v. Holder,

11 Taubel-Scott-Kitemiller Co. v. Foz, 264 US. 426, 433-34

(1924); Cline v. Kaplan, 323 U.S. 97, 98 (1944).

13

379 U.S. 104, 109-10 (1964) ; Will v. United States, 389 U.S.

90, 95 (1967) ; Kerr v. United States District Court, 426 U.S.

394, 402 (1976); Thermtron Products, Inc. v. Hermans-

dorfer, 423 U.S. 336, 352 (1976); Will v. Calvert Fire Ins.

Co., 487 U.S. 655, 661 (1978).

In the present case, the writ should issue directly from

this Court** in order to give an authoritative interpretation

to Northern Pipeline; only this Court can “formulate the

necessary guidelines in this area.” Schlagenhauf v. Holder,

379 U.S. 104, 112 (1964). “This court has full power in its

discretion to issue the writ of mandamus, .. although the

case is one in respect of which direct appellate jurisdiction

is vested in [a lower] court, . where a question of public

importance is involved, or where the question is of such a

nature that it is peculiarly appropriate that such action

by this court should be taken.” Ex parte Republic of Peru,

318 U.S. 578, 584-85 (1943) ; accord, Ex parte United States,

287 U.S. 241, 248-49 (1932); Los Angeles Brush Corp. v.

James, 272 U.S. 701 (1927); Maryland v. Soper, 270 US.

9 (1926); DeBeers Consolidated Mimes, Ltd. v. United

States, 325 U.S. 212 (1945). “If it clearly appeared

that à practice had been adopted by district judges, as to

the order or procedure in hearing causes, at variance with

{this Court’s] rules, our writ might well issue directly to

such judges.” Los Angeles Brush Corp. v. James, 272 U.S.

701, 706 (1927); accord, Ex parte United States, 287 U.S.

241, 249 (1932).

1 If the Court decides not to grant a writ of mandamus, peti-

14

CONCLUSION

Because Article III of the Constitution prohibits bank-