Appendix — Alabama Furniture Co. v. Still

A-l

In re ULYSSES RIVERS, JR.,

Debtor

No. 1-81-00682

Chapter 13

E.D. Tennessee

April 14, 1982

RALPH H. KELLEY, Bankruptcy Judge

MEMORANDUM

[2] The debtor, Ulysses Rivers, Jr., filed a petition and plan

under Chapter 13 of the Bankruptcy Code. A creditor, Alabama

Furniture Company, filed a motion to dis:niss the case.

The motion avers that the court cannot constitutionally exer-

cise jurisdiction in a bankruptcy case because the bankruptcy

judge does not have the tenure and salary protections afforded to

federal judges by Article III, § 1 of the United States

Constitution.

The creditor filed a proof of claim for § 782.23. The claim was

secured by a perfected, unavoidable, purchase money security

interest in household goods. In his Chapter 13 plan, the debtor

proposed to treat § 350.00 of the claim as secured and pay that

part in full, but over a longer period of time than allowed by the

contract with the creditor. See 11 U.S.C. §§ 506 and 1325(a)(5).

The plan proposed to pay 50% on the remainder, § 432.23, as a

general unsecured claim. See 11 U.S.C. § 1325(a)(5). The court

confirmed the plan specifically without prejudice to creditor’s

motion to dismiss.

Article III, § 1 of the United States Constitution provides:

The judicial power of the United States shall be

vested in one Supreme Court, and in such inferior

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courts as the Congress may from time to time ordain

and establish. The judges, [3] both of the Supreme

Court and the inferior courts, shall hold their offices

during good behavior, and shall, at stated times

receive for their services, a compensation, which

shall not be diminished during their continuance in

office.

Tenure during good behavior and a protected salary will hereafter

be referred to as “constitutional tenure.”

Bankruptcy judges serve for a term of years, rather than during

good behavior. Presently, the term is until 1984. Bankruptcy

Reform Act § 404(b) and (d).' In 1984, the term will be increased

to fourteen years. Bankruptcy Reform Act § 201 (28 U.S.C.

§ 152) and § 402(b), (c), and (d). A bankruptcy judge may be

removed from office for reasons other than breach of the constitu-

tional standard of good behaviour. Bankruptcy Reform Act

§ 404(d); Bankruptcy Act § 34, 11 U.S.C. § 62 (1976). By

statute a bankruptcy judge’s salary can be reduced during his

term but not below what it was at the beginning. Bankruptcy

Reform Act § 404(d); Bankruptcy Act § 40a and b, 11 U.S.C.

§ 68 (1976). Without the constitutional protection, a change in

the statutes can reduce the slight protection they give.

The legislative history of the Bankruptcy Reform Act shows

that the major compromise between the Senate and [4] the

House of Representatives was deletion from the final bill of any

provisions that would make the bankruptcy courts Article II

courts or give the bankruptcy judges constitutional tenure. See

the following articles in the 1979 Annual Survey of Bankruptcy

Law: Klee, Legislative History of the Bankruptcy Reform Act of

' Bankruptcy Reform Act of 1978, Pub.L.No. 95-598, 92 Stat. 2549 (1978).

The cited provisions leave it unclear whether a judge first appointed during the

transition is appointed for six years or until the end of the transition period on

March 31, 1984.

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1978, reprinted from 28 DePaul L. Rev. — (1979); Feidler &

Dixon, Reflections of the Legislative History of the Bankruptcy

Reform Act of 1978; Wallop, Footnotes to the Bankruptcy

Reform Act of 1978; Clarkson, A Brief Overview of the Congres-

sional Debate on the Bankruptcy Court System. See also | Collier

on Bankruptcy para. 2.01[c], (15th ed. 1981).

It is clear that bankruptcy judges do not have constitutional

tenure. The question is whether the Constitution requires that

they have it. Before considering the arguments in detail, the court

must answer a preliminary question.

(1)

The creditor has standing to raise the constitutional issue. The

provisions of Article III, § 1 were meant to preserve the

idependence of federal judges not for their own benefit but for the

benefit of litigants in the federal courts. In Glidden v. Zdanok the

petitioners contended that they were denied the right to indepen-

dent judges because [5] judges of the Court of Claims and the

Court of Customs and Patent Appeals, sitting by designation,

participated in their cases in the federal district court and the

circuit court of appeals. 370 U.S. 530, 82 S.Ct. 1459, 8 L.Ed.2d

671 (1962). In an opinion joined in by three justices, the court

held that the petitioners could raise the issue.

No contention is made that either [judge] dis-

played a lack of appropriate judicial independence,

or that either sought by his rulings to curry favor

with Congress or the Executive. Both indeed enjoy

statutory assurance of tenure and compensation,

and were it not for the explicit provisions of Article

III we should be quite unable to say that either

judge’s participation even colorably denied the peti-

tioners independent judicial hearings.

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Article III, § 1, however, is explicit and gives

petitioners a basis for complaint without requiring

them to point to particular instances of mistreat-

ment in the record...

82 S.Ct. at 1464. Cf. Palmore v. United States, 411 U.S. 389, 93

S.Ct. 1670, 36 L.Ed.2d 342 (1973); Crowell v. Benson, 285 US.

22, 52 S.Ct. 285, 76 L.Ed. 598 (1931).

It cannot rightfully be said that the creditor was not a litigant.

Its contract rights were affected by the Chapter 13 case at least as

much as they could have been affected in a suit involving the

creditor and the debtor as plaintiff and defendant. Furthermore,

the question was not lost as a result of confirmation of the Chap-

ter 13 plan. Confirmation [6] did not require and was not

obtained by creditor’s consent. The creditor may argue after

confirmation that it was denied the constitutional protection of an

independent judge.

The importance of the independent judiciary requirement sup-

ported the Supreme Court’s invocation of the Rule of Necessity in

United States v. Will, 449 U.S. 200, 101 S.Ct. 471, 66 L.Ed.2d

393 (1980). In that case, federal district judges challenged the

application to them of a statute that would deny compensation to

which they arguably had become entitled. The statute also

applied to the justices of the Supreme Court. The Supreme Court

held that the Rule of Necessity required them to decide even

though another statute would disqualify them because of their

personal interest in the outcome. Writing for himself and the

seven other justices who took part, Chief Justice Burger said:

As this court has observed elsewhere, the Compen-

sation Clause is designed to benefit, not the judges as

individuals, but the public interest in a competent

and independent judiciary. Evans v. Gore, 253 US.

245, 253, 40 S.Ct. 550, 553, 64 L.Ed. 887 (1920).

The public might be denied resolution of this crucial

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matter if first the District Judge, and now all the

Justices of this Court, were to ignore the mandate of

the Rule of Necessity and decline to answer the

question presented.

101 S.Ct. at 481-482.

It must be said that the independent judiciary provisions are

more than a due process protection of the [7] rights of litigants.

As the court will explain later, an independent judiciary is a

crucial element in the constitutional structure of the federal gov-

ernment. The structure of the federal government as required by

specific constitutional provisions implementing “separation of

powers” is the first line of defense of rights secured by the Consti-

tution. This is essentially the point made in Glidden v. Zdanok;

quoted above.

The writings of the philosopher Montesquieu were familiar to

some of the drafters of the Constitution. Montesquieu conceded

that “constitutional liberty,” by which he meant a government

structured to secure individual liberty, would not necessarily

secure it.* Nevertheless, the drafters of the Constitution intended

to create a federal government whose structure would be effective

toward securing the political rights of the people.’ To that end,

federal courts are bound by self-interest to decide cases in which

the question is whether a tribunal created by Congress is estab-

lished contrary to particular constitutional limits respecting the

structure of the federal government; at [8] least, the courts are

* C. Montesquieu, The Spirit of Laws, Book XI & Book XII, Part 1, reprinted

in Vol, 38, Great Books of the Western World (1952).

* The drafters’ method is revealed in the final paragraph of the quotation from

The Federalist No. 51, below at p. 11, Montesquieu made essentially the same

point in Part 4 of Book XI of The Spirit of Laws: “To prevent this abuse [of

power], it is necessary. . .that power should be a check to power.”

A-6

bound to decide in cases where there are satisfactory criteria for

judicial application of the constitutional limits.‘ As will be evi-

dent, there are satisfactory criteria for decision in this case.

The creditor should not be denied the right to raise this impor-

tant issue because it has shown no particular harm resulting to it

from the fact that the judge who decided the issues lacked consti-

tutional tenure. Such a requirement of proof would write the

tenure provisions out of the Constitution as a protection of the

rights of litigants. It is important to all citizens that the federal

government be structured as required by the Constitution, but it

is particularly important to persons compelled to participate in

federal court proceedings that the court be established in accord-

ance with specific constitutional provisions intended to secure

protection of their rights.

(2)

The creditor’s motion was opposed by C. Kenneth Still, the

Chapter 13 trustee; and by Southeast Tennessee Legal Services,

which was allowed to participate as amicus curiae. The Attorney

General of the United States declined to intervene.

[9]There are basically two arguments made in opposition to

creditor’s motion. The first argument is that bankruptcy cases

need not be heard by an Article III court. The trustee’s argument

on this point is divided generally according to the several points it

includes but often in the confusing terms of “the judicial power.”

Amicus took a different approach. Amicus argued that Congress

has the power to commit bankruptcy matters to a non-Article III

court.

The trustee made another argument — that the bankruptcy

court is not independent of the Article III judicial system, The

thrust of this argument is that even if a judge with constitutional

* See Wright, Law of Federal Courts § 14 (3d ed. 1976) (discussion of the

“political question” limit on justiciability),

A-7

tenure is required, the requirement is met by the right to appeal to

an Article III court or by the federal district court’s control of

bankruptcy cases. This argument is not relevant unless it is

decided that constitutional tenure is required. The court will

therefore consider the main question first. Does the Constitution

require that the bankruptcy judges have constitutional tenure?

(3)

Despite Article III, § 1, Congress can establish courts whose

judges do not have constitutional tenure. The [10] tenure provi-

sions of Article III, § 1 are not an invariable mandate to Con-

gress, but must be a limit on its power to create courts. Otherwise,

they are meaningless. When is Congress constitutionally justified

in disregarding the constraints of Article III?

In searching for a rationale, the court must follow fundamental

ideas of constitutional interpretation. The Constitution estab-

lishes only a basic framework for the operation of the federal

government. This makes every provision important but calls for

restraint in interpretation. It must be remembered that the Con-

stitution was meant to establish a workable system of govern-

ment. Its provisions must be read in light of the purposes they

were meant to serve in the overall constitutional plan of

government.

The constitutional tenure provisions can be understood only in

light of the Constitution's implementation of “separation of pow-

ers.” With regard to constitutional separation of powers, two

points are important.

The Constitution does not specifically provide for separation of

powers, It creates a federal government composed of three

branches — legislative, executive, and judicial — and gives each

powers to perform its functions. The Constitution also contains

specific provisions meant to give each branch the independence

and ability to restrain the others to their proper functions. Thus,

A-8

constitutional [11] separation of powers can be given effect only

by interpretation of the specific provisions meant to implement

separation of powers.

The second point is related. Compulsion of the people or the

states is the ultimate object of federal power. In this sense, the

federal power is indivisible. Separation of powers controls the

complete exercise of federal power by requiring the cooperation

of more than one of the three not always cooperative groups of

people who form the three branches. In other words, separation of

powers is concerned primarily with who performs what function,

In Number 47 of The Federalist, James Madison reviewed

Montesquieu's reasons for separation of powers:

“When the legislative and executive powers are united

in the same person or body,” says he, “there can be no

liberty because apprehensions may arise lest the same

monarch or senate should enact tyrannical laws to exe-

cute them in a tyrannical manner.” Again: “Were the

power of judging joined to the legislative, the life and

liberty of the subject would be exposed to arbitrary

control, for the judge would then be the /egis/ator. Were

it joined to the executive power, the judge might behave

with all the violence of an opressor.”’

In Number 48, Madison explained that separation of powers

did not mean complete separation of powers.

[12] I shall undertake, in the next place, to show that

unless these departments be so far connected and

blended as to give each a constitutional control over the

others, the degree of separation which the maxim

requires, as essential to a free government, can never in

practice be duly maintained.

A-9

This is consistent with the common understanding that the

Constitution was intended to give each branch power to check the

other branches’ exercise of power. The tenure provisions can be

understood in this light as an element of separation of powers.

Madison’s comments in Number 51 of The Federalist show

that the tenure provisions of Article III are an element of separa-

tion of powers.

In order to lay a due foundation for that separate and

distinct exercise of the different powers of govern-

ment... it is evident that each department should have

a will of its own; and consequently should be so consti-

tuted that the members of each should have as little

agency as possible in the appointment of the members of

the others. . .

It is equally evident that the members of each depart-

ment should be as little dependent as possible on those

of the others for the emoluments annexed to their

offices. Were the executive magistrate, or the judges, not

independent of the legislature in this particular, their

independence in every other would be merely nominal.

But the great security against a gradual concentration

of the several powers in the same department consists in

giving to those who administer each department the

necessary constitutional means and personal motives to

resist encroachments of the others... Ambition must

be made to counteract ambition. The interest of the man

must be connected with the constitutional rights of the

place,

[13] More specific reasons for the tenure provisions were given

by Alexander Hamilton in The Federalist Number 78. He consid-

ered tenure during good behavior necessary to give the judiciary

the independence needed —

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(1) to declare unconstitutional and unenforceable laws

passed by Congress but contrary to specific constitutional

limits on Congress’ lawmaking authority;

(2) to protect individuals from unconstitutional depri-

vations of their rights and dangerous, unconstitutional inno-

vations in government, even though brought about by or

reflecting the will of the majority of citizens;

(3) to restrict the application of and thereby discour-

age passage of laws that are unjust to particular classes of

citizens;

(4) to attract competent people to the federal bench.

Of these concerns, all but the fourth are relevant to the ques-

tion at hand. It is wholly a legislative consideration,

Hamilton justified the absence of a provision on removal of

judges for inability because it would be too difficult to apply and

so vague it “would much oftener give scope to personal and party

attachments and enmities than advance the interests of justice

and the public good.” The Federalist No. 79.

In Number 79, Hamilton did not add any other [14] reasons

for judicial independence but did reiterate the point that the

judges’ salaries should be protected because “[i]n the general

course of human nature, a power over a man’s subsistence

amounts to a power over his will.”

The decisions of the Supreme Court follow an understandable

pattern with regard to the purpose of the tenure provisions in

preserving separation of powers. But the decisions can be under-

stood only in light of the related concept of “federalism.” It

concerns the relationship between the federal government and the

states.

The Constitution does more than divide the power of the union

among the three branches of the federal government. It first

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divides general sovereign power over the people between the

states and the federal government. The Constitution was meant to

limit the federal government's sovereign power to that necessary

for national functions. General, indefinite sovereign power was

reserved to the states or the people,

In Number 39 of The Federalist, James Madison explained;

The difference between a federal and national govern-

ment, as it relates to the operation of the government, is

by the adversaries of the plan of the convention sup-

posed to consist in this, that in the former the powers

operate on the political bodies composing the Confeder-

acy in their political capacities; in the latter, on [15] the

individual citizens composing the nation in their indi-

vidual capacities. On trying the Constitution by this

criterion, it falls under the national not the federal

character; though perhaps not so completely as has been

understood, . .

But if the government be national with regard to the

operation of its powers, it changes again when we con-

template it in relation to the extent of its powers. The

idea of a national government involves in it not only an

authority over the individual citizens, but an indefinite

supremacy over all persons and things, so far as they are

objects of lawful government, . . In this relation, then,

the proposed government cannot be deemed a national

one; since its jurisdiction extends to certain enumerated

objects only, and leaves to the several States a residuary

and inviolable sovereignty over all other objects. . .

In Number 9, Alexander Hamilton remarked that the constitu-

tional scheme of distribution of powers between the states and the

United States government comports with the idea of federal

government,

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The proposed Constitution, so far from implying an

abolition of the State governments, makes them constit-

uent parts of the national sovereignty, by allowing them

a direct representation in the Senate, and leaves in *heir

possession certain exclusive and very important portions

of sovereign power. This fully corresponds, in every

rational import of the terms, with the idea of a federal

government.

The Tenth Amendment, adopted soon after the Constitution,

also reflects the idea of federalism.

[16] The powers not delegated to the United States by

the Constitution, nor prohibited by it to the states, are

reserved to the states respectively, or to the people.

In Article III, federalism is reflected primarily in § 2, cl.1, the

“judicial power” clause,

The judicial power shall extend to all cases, in law and

equity, arising under this constitution, the laws of the

United States, and treaties made, or which shall be

made, under their authority; — to all cases affecting

ambassadors, other public ministers and consuls; —- to

all cases of admiralty and maritime jurisdiction; — to

controversies to which the United States shall be a

party; — to controversies between two or more states;

—~ between a state and citizens of the same state claim-

ing lands under grants of different states, and between a

state or citizens thereof, and foreign states, citizens or

subjects.

This provision limits application of the judicial power by describ-

ing the kinds of cases or controversies to which it applies. Cases or

controversies omitted from the description are not subject to the

judicial power, The most notable omission clearly reveals the

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federalism basis of the description: cases between citizens of the

same state and not involving the Constitution or any federal law

or treaty are not subject to the judicial power.

On the other hand, the terms “case” or “controversy” have

been interpreted as a separation of powers limitation. The Article

III courts perform only the traditional [17] functions of courts,

primarily deciding cases or controversies, Coneress cannot

impose other duties on the Article III courts,

Generally, the federalism concerns behind constitutional ten-

ure are also reflected in The Federalist No, 78. The Article III

courts have a political place in our system of government, With

respect to specific constitutional limitations on state and federal

power, the Article III courts niediate between the other branches

of the federal government and the people, between the federal

government and the states, and between the states and the people,

That this function is performed by deciding specific cases and

controversies does not mean it is not a “political” function in the

general sense. For our purposes, the important point is that when

a court is in the position to decide such questions, the federalism

policies behind constitutional tenure apply.

As to the specific federalism limits on the judicial power, this is

a situation where the Constitution connects “[t]he interests of the

man, . . with the constitutional rights of the place.’ The Federal-

ist No. 51 (Madison). The independence of Article III judges is

meant to be felt by them as a personal virtue that is threatened by

congressional attempts to require them to perform duties not

traditionally performed by courts or to decide cases not [18]

described in Article III, even though the reach of their individual

power would be increased,

(4)

Before considering the bankruptcy courts in light of the poli-

cies behind constitutional tenure, the court must clarify the issue.

A-14

It is established that most of the jurisdiction exercised by the

bankruptcy courts is jurisdiction that could be exercised by Arti-

cle III courts. There is some question as to whether it includes

cases or controversies not of a kind described in Article III.

§ 2,cl.1. See generally, Note: Bankruptcy and the Limits of

Federal Jurisdiction, 95 Harv. L. Rev. 703 (1982). That is not a

problem in this case. In this case, the question is whether the

bankruptcy jurisdiction that can be exercised by Article III courts

can also be exercised by non-Article III courts. The court is

concerned with constitutional justifications for giving non-Article

III courts or other tribunals, including administrative agencies,

the power to decide disputes that definitely are cases cr controver-

sies justiciable in Article III courts.

Congress is not required to create “inferior federal courts” as

contemplated in Article III. § 1. Congress can and often has let

the state courts decide cases [19] and controversies of the kinds

described in Article III. It has been argued that such cases can

therefore be decided by non-Article III federal courts.

The argument overlooks the point that the standards of Article

III are basic elements in the structure of the federal government.

They constrain the methods by which the federal government can

exercise “the judicial power.”” Whenever Congress creates a fed-

eral tribunal, the question necessarily arises whether it must meet

the standards of Article III. They are a limit on Congress’ power

to create federal courts.

The separation of powers and federalism concerns behind Arti-

cle III are not a problem with allowing state courts to decide cases

that could be decided in Article III courts. As to separation of

powers, the tenure and salary of state judges are free of direct

control by Congress or the President. As to federalism concerns,

they apply when Congress creates a federal tribunal as a mediator

A-15

of federal and state power. Though federalism concerns may lead

Congress to create lower Article III courts, the Constitution does

not demand it.

The argument based on the use of the state courts is essentially

a part of the argument that constitutional tenure is a due process

right and is therefore required only when necessary for a fair trial.

Cf. Crowell v. Benson, 285 U.S. 22, 86-87, 52 S.Ct. 285, 306-307,

76 L.Ed. 598 (1931) [20] (J. Brandeis dissenting): Den (Murray's

Lessee) v. Hoboken Land & Improvement Company, 59 U.S. 272,

15 L.Ed. 372 (1856). That a case can be left for decision before a

state court judge who lacks constitutional tenure suggests that

due process does not require constitutional tenure for a fair trial.

That may be true, but it overlooks the fact that Article III tenure

is an element in the constitutional structure of the federal govern-

ment. In that sense, it may be a right of litigants in a federal

forum even if it is not necessary for a fair trial.

The court comes now to consideration of the bankruptcy courts

in light of the separation of powers and federalism concerns

behind constitutional tenure.

(Sa)

Whether these concerns indicate that the judges of a particular

tribunal should have constitutional tenure depends on the kind of

cases they decide or preside over. It is less evident, but the extent

of the tribunal’s power is also relevant.

The point that is easiest to overlook is the beginning point.

With regard to the subject at hand, exactly how does the Consti-

tution distribute sovereign power between the states and the fed-

eral government and federal power among the branches of the

federal government?

A-16

[21] To a great extent, the decisions of the Supreme Court can

be explained on the ground that an Article III court with limited

jurisdiction and constitutionally independent judges was not

required under the Constitution’s specific distribution of powers.

The first examples are courts in the territories and the District

of Columbia. In the territories and the District of Columbia, there

are no sovereign state governments between the people and the

federal government. The concerns of federalism do not demand

that the territorial courts or the local courts of the District meet

the standards of Article III. Furthermore, the Constitution says

that Congress shall provide for the government of the territories

and govern the District of Columbia, Art. IV, § 3,cl.2;° Art. I,

§ 8,cl.17.° These provisions recognize the necessity of differences

in the form of the federal government in the territories and the

District of Columbia. They are the basis for saying that the local

courts of each need not be subject to the separation of powers

requirements of Article [22] III, particularly the case or contro-

versy limitation and the constitutional tenure provisions. See Pal-

more v. United States, 411 U.S. 389, 93 S.Ct. 1670, 36

L.Ed.2d342 (1973): O'Donoghue v. United States, 289 US.

516.53 S.Ct. 740, 77 L.Ed. 1356 (1932); American Insurance Co.

v. Canter, 26 U.S. 518, 7 L.Ed. 248 (1828).

The non-Article III military courts provide another example,

though for a particular subject matter rather than geographic

5 “The congress shall have the power to dispose of and make all needful rules

and regulations respecting the territories or other property belonging to the

United States...”

* “The congress shall have the power. . .[t]o exercise exclusive legislation in

all cases whatsoever, over such district. . .as may. . . become the seat of govern-

ment of the United States...”

7 “The congress shall have the power. . .[t]o make rules for the government

and regulation of the land and naval forces.”

A-17

areas. The Constitution gives Congress the power to provide for

the government of the military forces. Art. I, § 8, cl. 14;” see also

Art. I. § 8, cl. 15.°

This has been interpreted to mean that Congress can create

non-Article III military courts but with limited jurisdiction. Gen-

erally, their jurisdiction is limited to members of the military and

to offenses that interfere with the internal discipline necessary to

maintain the military as an effective fighting force. O’Callahan v.

Parker, 395 U.S. 258, 89 S.Ct. 1683, 23 L.Ed.2d 291 (1969);

Kinsella v. United States, 361 U.S. 234, 80 S.Ct. 297, 4 L.Ed.2d

268 (1960); McElroy v. United States, 361 U.S. 281, 80 S.Ct.

[23]305, 4L.Ed.2d 282 (1960); Grisham v. Hagan, 361 U.S. 278,

80 S.Ct. 310, 4L.Ed.2d 279 (1960); Reid v. Covert, 354 U.S. 1,77

S.Ct. 1222, 1 L.Ed.2d 1148 (1957); United States ex rel. Toth v.

Quarles, 350 U.S. 11, 76 S.Ct. 1, 100 L.Ed. 8 (1955).

These limitations were imposed in cases involving criminal

offenses on the ground that defendants generally should be enti-

tled to all the protections of the Bill of Rights and Article III,

some of which are not afforded the defendants in the military

courts.

The first question is whether there is any similar provision in

the Constitution with respect to bankruptcies.

The court begins with the premise that if a federal court is to be

created to decide cases or controversies subject to the judicial

power, Article III is the constitutional norm.’ Congress’ Article I

® Subject to some limitations, this clause gives Congress the power to provide

for governing such part of the state militia as may be employed in the service of

the United States.

® See L. Finiey, Article Il] Limits on Article I Courts: The Constitutionality

of the Bankruptcy Court and the 1979 Magistrate Act, 80 Colum.L.Rev. 561,

581-82 (1980); T. Krattenmaker, Article II] and Judicial Independence: Why

the New Bankruptcy Courts are Unconstitutional. 70 Geo. L.J. 297, 301-303

(1982).

A-18

power to pass a statute is the commonest source of federal power

over a particular subject matter, but the constitutional structure

of the federal government is the constrictive channel through

which that power usually must flow.

[24] Congress’ legislative powers with regard to the territories,

the District of Columbia, and the military, are powers to provide

for their government. The constitutional provisions recognize

obvious and necessary variations in the structure of the federal

government with respect to how federal power can be exercised in

the territories, the District of Columbia and the military.

The Constitution gives Congress the power “(to establish. . .

uniform laws on the subject of bankruptcies throughout the

United States.” Art. I, § 8, cl. 4. This does not recognize any

exception to the normal structure of the federal government.

The clause does limited the power of the states to legislate on

the subject of bankruptcies. All this means is that with respect to

the enactment of statutes on the subject, Congress governs the

nation. It does not mean that Congress is the whole of the federal

government or can ignore its normal form in selecting the agen-

cies to carry out bankruptcy statutes.

Generally, the power of Congress to pass a statute on a particu-

lar subject does not mean it is constitutional for Congress to

create non-Article III courts to decide cases arising under the

statute. Such a rule would make the constraints of Article III

meaningless. That the Constitution gives Congress exclusive

power to enact bankruptcy [25] statutes only settles the questions

of where the concerns of federalism directed the legislative power.

As to how that power can be put into effect, the normal considera-

tions of federalism and separation of powers determine whether a

tribunal with bankruptcy jurisdiction must meet the Article III

standards.

A-19

(5b)

The decisions of the Supreme Court reveal that there are dis-

putes that can be decided by the Article III courts but may be

decided by non-Article III courts. The next question is whether

bankruptcy cases are in that category.

The Court of Claims cases reveal that money claims against

the United States can be tried in non-Article III courts. This

result is constitutionally justifiable on the ground that it presents

no separation of powers problem. Because of sovereign immunity

and the necessity of Congressional appropriations for the pay-

ment of debts of the United States, Congress and the President, as

a matter of basic constitutional law, have complete control of the

payment of money claims against the United States.’ The [26]

Constitution does not require judges constitutionally independent

of Congress to decide cases that Congress could completely

decide. Williams v. United States, 289 U.S. 553, 53 S.Ct. 751, 77

L.Ed. 1372 (1933), overruled on other grounds, Glidden v. Zda-

nok, 370 U.S. 530, 82 S.Ct. '459, 8 L.Ed.2d 671 (1971)."

In Ex Parte Bakelite Corporation, the Supreme Court avoided

specific case or controversy problems by holding that the Court of

Customs Appeals was not an Article III court. 279 U.S. 438, 49

S.Ct. 411, 73 L.Ed. 789 (1929), overruled on other grounds Glid-

den v. Zdanok, cited above.” It is not at all clear why the

Supreme Court thought enforcement of the customs laws gener-

ally could be left to executive officers. Perhaps it was a tradition,

0 “No money shall be drawn from the treasury, but in consequence of appro-

priations made by law..." U.S. Const. Art. I. § 9. cl. 2.

"In Williams the Supreme Court reasoned that since the jurisdiction of the

Court of Claims could be given to a non-Article III court, then it was not an

Article III court. Glidden rejected this reasoning as a non sequitur. It also

rejected the conclusion that a suit in which the United States is a defendant is

not a controversy to which it is a party as contemplated in § 2. cl. 1 of Art. III.

A-20

already existing when the Constitution was adopted, that revenue

statutes are enforced in all respects by executive officers. In any

event, the case is of little import to the question at hand, [27]

since bankruptcy statutes certainly are not revenue laws. The

more general rationale suggested in the Court of Claims cases

and others is the important one.

It is necessary to understand the public rights rationale sug-

gested in Den (Murray's Lessee) v. Hoboken Land & Improve-

ment Company, cited above. The suggested rationale actually

says only what the court has already explained. Some disputes

between the government and individuals can be finally resolved by

Congress and the President because the Constitution allows it.

For such disputes, executive officers can be given the power to

make decisions that bind the Article III courts as to the facts or

both the facts and the law, even though Congress might have

brought the controversy within the cognizance of the Article III

courts in the first instance. 59 U.S. 284-285, 15 L.Ed. 377-378.

Obviously, bankruptcy cases are not primarily disputes between

the government and individuals that the Constitution allows to be

finally resolved by Congress or the President.

The Den opinion also states that the Constitution may allow

Congress or the President to decide some disputes between indi-

viduals. In such cases, the actions of executive officers can be

conclusive. 59 U.S, 284-285, 15 L.Ed. 378. Nothing in the Consti-

tution suggests that bankruptcy cases are in that category.

Finally, the court must distinguish the administrative [28]

agency rationale. It allows executive officers to decide in the first

instance many cases that do not come under the public rights

‘2 In Bakelite the Supreme Court had made the same illogical leap it later

made in Williams. See note 11. The problem suggested by all three cases is that

the case or controversy requirement is a difficult-to-apply separation of powers

limitation on the kinds of disputes Congress can make into cases or

controversies.

A-21

rationale and are not disputes between private parties that can be

decided by Congress or the President. The administrative agency

rationale will be discussed more fully later. At this point, suffice it

to say that it depends on limiting the power of administrative

agencies.

(Se)

There remains the argument that bankruptcy proceedings are

mostly “administrative” in nature, The court has pointed out that

bankruptcy jurisdiction as a whole includes matters that are cases

or controversies of the kinds usually decided by courts. The char-

acterization as mostly “administrative” apparently means that

bankruptcy courts receive documents that are not complaints,

answers, or motions under the rules of civil procedure and enter

orders that do not settle disputes between plaintiffs and

defendants.

A proceeding can be adversarial through the parties are not

called plantiff and defendant and the pleading is not carried out

according to the rules of civil procedure. An objection to a credi-

tor’s claim is perhaps the most basic [29] adversary proceeding in

bankruptcy cases. It determines how much a creditor can receive,

and affects other rights to participate in the bankruptcy case. The

questions raised are not always simple matters of form. The same

can be said of objections to confirmation in Chapter 11 or 13

cases. In both situations the proceeding is begun by an “objec-

tion,” and the parties are not called plantiff and defendant.

Furthermore, it does not make the court an administrative

agency because a dispute between particular opposing parties

does not arise in every case, and every order does not settle a

dispute. The so-called “administrative” actions of the court are

directed toward the disposition of such disputes. They also settle

A-22

rights and liabilities between creditors and debtors even though

no specific dispute has arisen. In this regard, even entry of the

discharge order could be considered merely “administrative.”

The argument is best treated as meaning that much of what the

bankruptcy courts do could be done by an administrative agency.

The court doubts that is true, but even if it is, as the court points

out later, it is basically irrelevant.

[30] (5d)

The court has found no existing rationale for constitutional

non-Article III bankruptcy courts. That does not mean the main

issue is completely resolved.

Proper treatment requires the court to consider whether the

underlying separation of powers and federalism concerns apply to

a court whose jurisdiction is limited to bankruptcy cases and

related proceedings.

The bankruptcy courts do not have general jurisdiction of fed-

eral civil rights, voting rights, or criminal cases. The bankruptcy

courts deal primarily with property rights and contract rights.

Perhaps they are not as important as individual liberty and rights

to participate in the political process. Nevertheless, they are

important rights protected by specific provisions of the Constitu-

tion. U.S. Const., Amends. III, IV.

The bankruptcy courts do not have general jurisdiction of fed-

eral civil rights, voting rights, or criminal cases. The bankruptcy

courts deal primarily with property rights and contract rights.

Perhaps they are not as important as individual liberty and rights

to participate in the political process. Nevertheless, they are

‘8 The Bankruptcy Reform Act was intended to take much of the administra-

tive burden from the bankruptcy judge so that he will primarily be involved in

hearing disputes between particular parties. See generally 9 Am.Jur.2d, Bank-

ruptcy § 10 at 58 (1980).

A-23

important rights protected by specific provisions of the Constitu-

tion. U.S. Const., Ameds. III, IV. The drafters of the Constitu-

tion recognized that private property rights operate as a restraint

on governmental power and must be protected,

Bankruptcy jurisdiction also extends to cases arising under the

Bankruptcy Code, such as discharge and dischargeability cases,

and to civil cases related to a bankruptcy case. As a result, the

bankruptcy courts can have jurisdiction of antitrust cases, securi-

ties fraud cases, employment discrimination cases, patent and

trademark infringement [31] cases, and admiralty cases, that

would otherwise be heard in Article III court. The court also

notes that bankruptcy courts can issue writs of habeas corpus

when a debtor is imprisoned pursuant to civil process issued for

collection of a debt that is dischargeable or provided for in a plan

in a case under Chapter 11 or 13. 28 U.S.C. § 2256; Bankruptcy

Reform Act §§ 250 & 405(b).

In deciding the question at hand, the court cannot ignore the

full extent of bankruptcy jurisdiction. Whether the judge should

have constitutional tenure depends partly on what kinds of cases

come before him. The court's jurisdiction of a particular case

might be denied on constitutional grounds without affecting its

jurisdiction of another case, but the judge is the judge for all

cases.

The Constitution does not say that Congress or the President

can have a greater opportunity to influence the decisions of a

federal court in a broad range of cases simply because they arise

in the context of bankruptcy. Federalism concerns are even more

evident.

It must be remembered that bankruptcy is generally a modifi-

cation of specific rights and liabilities arising under state law. It is

perhaps the severest possible legal modification of contract rights.

In this respect, the federal government’s legislative power exceeds

that allowed to the states. Cf. U.S. Const., Art. 1, § 10, cl.1.

A-24

[32] Since the bankruptcy statutes modify but do not establish

the relevant state created rights and liabilities, the states, by

changing their statutes, can resist application of the bankruptcy

laws. However, the Supremacy Clause may prohibit the states

from making some changes that in effect are attempts to modify

the bankruptcy statutes. U.S. Const., Art. Vi, cl. 2. This is partic-

ularly likely with respect to statutes such as § 522(f) of the

Bankruptcy Code, dealing with exemptions. 11 U.S.C. § $22(f).

Compare In re Foster, 16 B.R. 467, 8 BCD 360 (ND OH 1981)

and Jn re Redin, 14 B.R. 727, 8 BCD 332 (Bankr. D CO 1981).

Bankruptcy statutes in general exert a powerful influence on

what state laws can provide in the areas of exemptions and

secured transactions. It is also worth noting that in addition to

admiralty jurisdiction, a bankruptcy court can have jurisdiction

of a case between citizens of the same state and involving primar-

ily state law, if the case is sufficiently related to the bankruptcy

case. Consider, for example, a suit brought in the bankruptcy

court by a bankruptcy trustee to collect a debt owed to the debtor.

Such “nondiversity” cases are generally excluded from federal

jurisdiction because of federalism concerns.

[33] Bankruptcy laws are a broad scale federal invasion of

areas of the law generally subject to state control. On the other

hand, the bankruptcy statutes should be given their intended

affect within constitutional limits, despite pressure to unduly limit

them or extend them beyond constitutional limits.

It is difficult to see any constitutional justification for having

judges without constitutional tenure exercise the decisionmaking

power of the bankruptcy courts. The bankruptcy courts decide

cases where the concerns behind constitutional tenure apply. The

breadth of bankruptcy court jurisdiction by itself calls for consti-

tutional tenure to secure judicial independence. The bankruptcy

A-25

courts are in the constitutional vortex position in our system of

government that is reserved for courts that meet the standards of

Article III.

Of course, this might be said with respect to some federal

administrative agencies, at least as to some of the cases they

decide. They, however, lack the power that would make them

constitutional arbiters or political agencies in the sense that the

bankruptcy courts are. The bankruptcy courts have not only the

opportunity to decide but also the power that makes the concerns

behind constitutional tenure apply. This brings the court to the

administrative agency problem.

[34] (Se)

The court doubts that the reasons for constitutional tenure

strongly apply in many cases and controversies decided by admin-

istrative agencies, but admits they apply with respect to some.

There is constitutional justification for allowing administrators

without constitutional tenure to decide such cases, but the expla-

nation escapes concise statement. The following quotation is a

good attempt:

Moreover, in relying on administrative agencies

as precedents for Article I courts, this argument

gives inadequate weight to the functional difference

between agencies and courts. In establishing admin-

istrative agencies pursuant to its power over reme-

dies, Congress has not endowed them with judicial

power, which may be defined as the ultimate deci-

sion making core of the adjudicative function. The

exercise of judicial power encompasses far more

then making factual determinations. At its mini-

mum it involves rendering binding decisions on

points of law that affect or alter the rights and obli-

gations of parties and establish precedents for future

A-26

litigants. It also encompasses certain coercive pow-

ers, such as the power to render self-executing judg-

ments or to cite for contempt. Administrative

agencies possess neither of these attributes.

Although they can adjudicate questions of law, their

decisions are not final, but subject to review in Arti-

cle III courts. Similarly, although agencies can issue

coercive orders, they can enforce them only with the

aid of an Article III court. Administrative agencies

do not, therefore, provide a precedent for broad-

scale creation of legislative courts.

[35] Finley, Article III Limits on Article I Courts: The Constitu-

tionality of the Bankruptcy Court and the 1979 Magistrate Act,

80 Colum.L.Rev. 560, 578-580 (1980). See also Katz, Federal

Legislative Courts, 43 Harv.L.Rev. 894 (1930).

The extent of a tribunal’s power is a consideration in determin-

ing whether the judge should have constitutional tenure. Admin-

istrative agencies are not courts in this respect. The court is

concerned only with what Congress did, rather than what it might

have done. Congress meant to and did give the bankruptcy courts

all the essential powers of a court. This is just as true during the

transition period as it will be afterward. See 28 U.S.C. §§ 1471,

1475, 1477, 1478, 1479(c), 1480, 1481, 2256; Bankruptcy

Reform Act § 405(b); 11 U.S.C. § 105(a). See also 28 U.S.C.

§ 771-775; Bankruptcy Reform Act § 404(e)."

There are two insignificant limitations on the powers of a bank-

ruptcy court. A bankruptcy court cannot punish a criminal con-

tempt that was not committed in the judge’s presence or a

criminal contempt that warrants a punishment of imprisonment.

These powers relating to clerks, records, and employees may be said to

characterize courts rather than define decisionmaking powers that identify a

tribunal as a court.

A-27

28 U.S.C. § 1481; Bankruptcy [36] Reform Act §§ 405(a)(1) &

(b). There are similar limitations on the federal district courts. 18

U.S.C. §§ 401, 402, 3691; Fed. R. Crim. Proc. 42.

A bankruptcy court cannot enjoin another court. Federal! dis-

trict courts do not have the power to enjoin state courts in every

case where general principles of equity would allow it. 28 U.S.C.

§ 2283; Wright, Miller, & Cooper, Federal Practice and Proce-

dure §§ 2942 and 4221-4226 (1978)."° Furthermore, even when

they can enjoin another court, the district courts may refuse to do

so on the grounds of comity. Finally, in light of the statutory

injunctions and other provisions of the Bankruptcy Code, this is a

slight limitation on the powers of the bankruptcy courts. See 11

U.S.C. §§ 350(b), 362,524; U.S.C. §§ 1471(e), 1478, 2256;

Bankruptcy Reform Act § 405(b).

These two limits on the powers of bankruptcy courts were

apparently imposed because Congress thought they would reduce

the constitutional problems with creating the bankruptcy courts

without constitutionally tenured judges. Removing the limits

would make it clearer that the bankruptcy courts exercise “the

judicial power” but these powers do [37] not define judicial

power. Indeed, the denied powers are rather extraordinary powers

that may be properly subject to limitations on their exercise.

Thus far the court has not remarked on whether a hearing on

confirmation is the kind of proceeding that requires judicial

action and cannot be heard in the first instance by executive

officers (an administrative agency). See Den (Murray's Lessee) v.

Hoboken Land & Improvement Company, cited above. The rea-

son should be evident. Even if it is, that does not mean the

bankruptcy judge need not have constitutional tenure. A more

general inquiry was necessary. Furthermore, the limitations on

the powers of the bankruptcy court are not enough to make it

© The powers denied to the bankruptcy courts are apparently granted to the

district courts. Bankruptcy Reform Act § 405(a)(2).

A-28

justifiable as an administrative agency. It has “the judicial

power.” Though “the judicial power” may not be constitutionally

required for a particular proceeding, the court’s actions may

nevertheless amount to exercise of “the judicial power.” That is

the situation in this case. The parties are entitled to have a judge

with constitutional tenure exercise the judicial power.

(Sf)

The court thus comes to the conclusion that the bankruptcy

courts should have judges with constitutional tenure. All the

jurisdiction of the bankruptcy courts could not be given to non-

Article III] courts under existing [38] rationales. There is no

apparent rationale for non-Article III courts for this particular

subject matter. The reasons for constitutional tenure are applica-

ble to the business of bankruptcy courts, and the bankruptcy

courts are not administrative agencies. In terms of how “the

judicial power” is interpreted to determine whether a court

should have judges with constitutional tenure, the analysis can be

summarized as follows.

If the court in question decides cases or controversies of a kind

described in Article III, then it is exercising “the judicial power”

in its elementary sense. That does not mean the court must be an

Article III court. Some disputes within the description of Article

III, § 2, can be completely disposed of by Congress, the President,

or theiz agents. Whether this is true depends on the specific

separation of powers made by the Constitution with respect to the

particular dispute or kind of dispute. The Constitution does not

give Congress or the President any special power with respect to

the decision of cases or controversies of the kinds decided by the

bankruptcy courts. It is nevertheless true that Congress has cre-

ated non-Article III administrative agencies to decide cases and

controversies for which the Constitution does not provide any

special distribution of decisionmaking power. The [39] differ-

ence recognized by Congress and the courts is that the decision-

making power of administrative agencies is restricted so that they

A-29

do not completely perform the constitutional, political function of

the Article III courts. See generally M. Shapiro, The Supreme

Court and Administrative Agencies (1968). On the other hand,

the powers of the bankruptcy courts are complete. Thus, the

bankruptcy courts exercise “the judicial power of the United

States” in the sense that they must have judges with constitu-

tional tenure.

(5g)

The court cannot leave this subject without disposing of two

arguments that did not fit into the narrative so far.

First is the argument that practical concerns can justify the

creation of non-Article III courts. As to the bankruptcy courts, it

is argued that the volume of business varies with the performance

of the economy, and so the number of judges must be variable.

This is similar to the argument, that if the territorial courts must

be Article III courts, then the United States might have too many

courts and judges when the territory becomes a state.'* American

Insurance Co. v. Carter, cited above.

[40] The volume of litigation in most Article III courts varies

with changing conditions. Furthermore, Congress can control the

jurisdiction of the inferior Article III courts. Congress may

restrict their jurisdiction though some constitutionally tenured

judges are idled. The variability of the volume of business in

relation to the number of judges is also a problem whenever

Congress creates an Article III court.

Practical concerns should guide the courts in interpretation of

the Constitution but not to the point of overriding its fundamental

limitations. There is no principle of constitutional law that allows

© This appears to be a straw man argument. The problem should not exist at

least with respect to courts in territories that become states. Of course, Congress

should not be able to abolish an Article III court solely for the purpose of

removing the judge.

A-30

Congress to create a court without regard to Article III] whenever

the nature of the court’s subject matter jurisdiction gives rise to

practical reasons for having judges without constitutional tenure.

There are other ways, primarily the creation of administrative

agencies, to avoid this problem without testing the limits of Arti-

cle III.

As to the non-Article III military courts and courts in the

territories and the District of Columbia, the Constitution recog-

nizes practical problems as to the form of government that justify

the creation of non-Article III federal courts. Except for those

practical concerns, the argument must be considered a make-

weight, despite the [41] Supreme Court’s continued reliance. See

Palmore v. United States, cited above; Glidden v. Zdanok, cited

above.

In the second argument the trustee attempts to classify bank-

ruptcy cases as among those justiciable in Article III or non-

Article III courts. The argument is not based on Congress’ power

to decide or control the decision in any particular disputes arising

in bankruptcy cases. It is based on Congress’ power to pass bank-

ruptcy statutes.

In Schumacher v. Beeler, the Supreme Court was concerned

with a case in the federal district court between a bankruptcy

trustee and an adverse claimant of property. There was no

attempt to prove diversity jurisdiction or jurisdiction (in rem)

based on the court’s control of the property in question, 293 U.S.

367, 55 S.Ct. 230, 79 L.Ed. 433 (1934). When a federal court

lacked control of the property, § 23b of the Bankruptcy Act

allowed jurisdiction if it would have had jurisdiction regardless of

the bankruptcy case or if the adverse claimant consented. The

Supreme Court said:

The Congress, by virtue of its constitutional author-

ity over bankruptcies. ..could confer or withhold

A-31

jurisdiction to entertain such suits and could pre-

scribe the condition on which the federal courts

should have jurisdiction.

293 U.S. 374, 55 S.Ct. 233.

[42] This suggests that Congress can constitutionally confer

jurisdiction of such cases on non-Article III federal courts only

becuause of its “constitutional authority over bankruptcies.” See

also Williams v. Austrian, 331 U.S. 642, 67 S.Ct. 1443, 91 L.Ed.

1718 (1947). The quotation must be read in light of the unclearly

stated premise of the opinion, that the case in question was a case

arising under a federal statute within the meaning of Article III

and constitutionally could be heard in the Article III courts."’

The point of the quotation is that the Constitution does not

require Congress to give the lower federal courts jurisdiction of

every Case or controversy justiciable in an Article III court. Fur-

thermore, for such cases Congress can impose consent as a pre-

requisite to jurisdiction or use it as a ground of statutory

jurisdiction. The question was not whether the Constitution

allowed federal jurisdiction, but whether Congress could condi-

tion it on consent.

,

The reference to Congress’ “constitutional authority over

bankruptcies” could be read as a misstatement, since the relevant

power was Congress’ power to control jurisdiction of the lower

Article III courts. Or, the [43] Supreme Court could have meant

that such cases should be considered cases arising under a federal

statute because of the broad constitutional scope of bankruptcy

statutes."* Perhaps the Supreme Court meant only to state the

The premise was probably unclearly stated because the Supreme Court had

not clearly decided the issue. Note, Bankruptcy and the Limits of Federal

Jurisdiction, 95 Harv. L. Rev. 703, 711-713 (1982).

© If bankruptcy can include a complete wrapping up of the debtor's financial

affairs, then most related cases are merely disputes arising under the bankruptcy

statutes.

A-32

obvious, that Congress’ power to pass the jurisdictional statute

was part of its general power to pass statutes on the subject of

bankruptcy.

It is certain the Supreme Court did not mean to say what the

trustee says, which is what three justices said in National Mutual

Insurance Co. v. Tidewater Transfer Co., 337 U.S. 582, 69 S.Ct.

1173, 93 L.Ed. 1556 (1949).

In the Tidewater casc, Justice Jackson argued that Congress

can constitutionally impose on the Article III courts jurisdiction

of cases not of a kind described in Article III. As an example, he

said nondiversity cases brought by bankruptcy trustees but

involving only questions of state law are not cases arising under a

federal statute, yet they can be heard in the Article III courts.

The argument was based on misreading the Schumacher and

Austrian cases in the same way that the trustee has misread them.

Justice Jackson’s argument and example were [44] rejected by

six justices. The argument is so obviously wrong it is difficult to

refute. By passing statutes, Congress can create cases arising

under federal statutes, but it cannot add to the descriptions of

Article III, § 2, cl. 1. The trustee argues that all bankruptcy

matters generally are within the class of cases for which Justice

Jackson argued in Tidewater. The majority of the Supreme Court

clearly rejected the notion that such a class of cases exists.

(6)

The court has decided that the bankruptcy judges should have

constitutional tenure. The court turns now to the question of

whether the relationship between the bankruptcy courts and the

federal district court makes it constitutional for the bankruptcy

judges to exercise “the judicial power” though they lack constitu-

tional tenure.

A-33

The trustee argues that the right to appeal to an Article III

court is all that is required. In other words, even if all the consid-

erations underlying the standards of Article III apply to the lower

court, it need not meet those standards so long as there is a right

to appeal to an Article III court.

This essentially follows the argument that since Congress need

not create lower Article III courts and can [45] let the state

courts decide, then non-Article III federal courts are always con-

stitutional. The court has already pointed out the fallacy of that

argument. Moreover, if a judge with constitutional tenure is

required because of the function and political place of the court, it

does not matter that there are Article III courts to hear appeals

from its decisions. Section | of Article III explicitly requires that

the judges of any federal court, at whatever level, have constitu-

tional tenure if the court exercises “the judicial power.”

The trustee also argues that decisions by a bankruptcy court

are subject to a “de novo determination” by the federal district

court in the same district. United States v. Raddatz, 447 US.

667, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980). In Raddatz, the

district judge referred a motion to suppress evidence in a criminal

case to the magistrate. The magistrate heard the evidence, made

findings of fact, and recommended to the district judge that the

motion be denied. The district judge reviewed the transcript of the

hearing, the magistrate’s report, and the pleadings and

memoranda filed by the parties. He denied the motion without

hearing the witnesses. The Supreme Court held the procedure

was constitutional despite Article III problems:

[46] Thus, although the statute permits the district court to give

to the magistrate’s proposed findings of fact and recommenda-

tions “such weight as [their] merit commands and the sound

discretion of the judge warrants”. . .that delegation does not vio-

late Art. III so long as the ultimate decision is made by the judge.

100 S.Ct. 2416.

A-34

It is evident what the Supreme Court meant by a “de novo

determination.” The district judge is not bound to give any partic-

ular weight to the magistrate’s findings of fact. He is not required

to accept them even if supported by substantial evidence in the

record. Furthermore, if he is dissatisfied with the record, he can

hear the witnesses himself or require the magistrate to hold

another hearing. That decision is in his “sound discretion.”

On the other hand, the district court, as an appellate court for

decisions of the bankruptcy court, must accept its findings of fact

unless clearly erroneous. Bankruptcy Reform Act § 405(a) and

(d); Bankruptcy Rule 801. Obviously, this denies the district

judge the right to make a “de novo determination” within the

meaning of Raddatz."

It does not help the argument to refer to administrative agency

fact-finding. With regard to them, it is first necessary to identify

the Article III problem.

[47]The problem is not withtaking away jurisdiction of func-

tions that could be performed by an Article III court. The prob-

lem is with giving “the judicial power” to non-Article III

administrative agencies. There is no problem when the agency is

legislating or performing functions reserved to the executive

branch. There is less of a problem when the agency is deciding

only cases or controversies that could, under existing rationales,

be decided by a non-Article III court. The problem is most appar-

ent when the agency decides cases or controversies that could be

decided by an Article III court but not by a non-Article III

federal court. When it finds the facts, an executive agency is

' By agreement parties may appeal directly to the court of appeals, 28 U.S.C.

§ 1293; Bankruptcy Reform Act §§ 236 and 405(c)(2).

A-35

performing part of the function that under the federal govern-

ment appears to be reserved to the judiciary branch. It is a separa-

tion of powers problem.”

It is easy to see that fact-finding is not a complete exercise of

the judicial power but only one step in the process leading to its

exercise. The scope of judicial review of the facts must vary with

the constitutional [48] importance of the issues to which they are

relevant.” For especially important “political rights,” the lower

Article III courts or the Supreme Court are more likely to hold

that judicial review of the findings of fact is not only constitution-

ally required but must have a broad scope. For some cases, it

might even be held that the fact-finding function cannot be given

to executive agencies, or if it can, the findings can be given little

weight or binding effect in the Article III courts.”

It should be appareut that for many issues decided by adminis-

trative agencies, a narrow scope of review of their findings of fact

is justified. Furthermore, the necessary scope of judicial review as

a constitutional separation of powers limitation on agency fact-

finding can be determined by the Article III courts only as cases

come from the administrative agencies. For any particular case or

issue, it is extremely difficult to say to what extent administrative

agency fact-finding by itself intrudes on the sphere of action

reserved to the judicial branch of the federal government.

*” “It is rather the question of the appropriate maintenance of the federal

judicial power in requiring the observance of constitutional restrictions, It is the

question whether the Congress may substitute for constitutional courts. . .an

administrative agency. . . for the final determination of the facts upon which the

enforcement of the constitutional rights of the citizens depend.” Crowell v.

Benson, 285 U.S, 22, 56-57, 52 S.Ct. 285, 294-95, 76 L.Ed. 598 (1931),

"| The much vaunted change in the law since Crowell v. Benson, has taken

place with respect to this part of the question.

™ Consider to what extent an administrative agency could be given the power

to find the facts regarding a motion to suppress evidence in a federal criminal

prosecution or regarding a claim of denial of equal protection by a state's

peculiar voting rights statutes.

A-36

[49] It is not a problem in this case. The bankruptcy courts are

not administrative agencies, It is irrelevant that the court's

findings of fact might have the same effect if it was an agency. If it

was an agency, its power would be limited to the extent necessary

to deprive it of “the judicial power.” That is not the case, When a

bankruptcy court finds the facts, it is exercising “the judicial

power,”

The trustee’s final argument is based on the relationship

between the district court and the bankruptcy court for the same

district. It is a continuation of the Raddatz argument on a

broader scale. The idea is that the bankruptcy court is sufficiently

within the control of the district court that the district judge is a

constitutionally tenured judge for the bankruptcy court. The idea

is expressed in the following quotation from Justice Blackmun’s

concurring opinion in Raddatz:

[T]he handling of suppression motions invariably

remains completely in the control of the federal district

court. The judge may initially decline to refer any mat-

ter to a magistrate. When a matter is referred, the judge

may freely reject the magistrate’s recommendation, He

may rehear the evidence in whole or in part. He may call

for additional findings or otherwise “recommit the mat-

ter to the magistrate with instruction.” [Citation omit-

ted.] Moreover, the magistrate himself is subject to the

Art. II] judge’s control. Magistrates are appointed by

district judges... and subject to removal by them... In

addition, district [50] judges retain plenary authority

over when, what, and how many pretrial matters are

assigned to magistrates... Thus, the only conceivable

danger of a “threat” to the “independence” of the mag-

istrate comes from within, rather than without, the judi-

cial department.

A-37

Even assuming that, despite these protections a contro-

versial matter might be delegated to a magistrate who is

susceptible to outside pressures, the District Judge —

insulated by life tenure and irreducible salary — is

waiting in the wings, fully able to correct errors. Under

these circumstances, I simply do not perceive the threat

to the judicial power or the independence of judicial

decisionsmaking that underlies Art. III. We do not face

a procedure under which “Congress [has] delegate[d]

toa non-Art. III judge the authority to make final deter-

minations on issues of fact’... Rather, we confront a

procedure under which Congress has vested in Art. III

judges the discretionary power to delegate certain func-

tions to competent and impartial assistants, while ensur-

ing that the judges retain complete supervisory control

over the assistants’ activities.

100 S.Ct, 2417-2418.

Generally, there are two kinds of connections that taken

together could make the district judge the judge of the bank-

ruptcy court for Article III purposes. One is personsal supervisory

power over the bankruptcy judge and the bankruptcy court. By

far the more important kind of connection is the ability to exercise

judiciat power in bankruptcy cases and civil proceedings in the

bankruptcy court.

The subject matter jurisdiction exercised by the bankruptcy

courts in cases under the Bankruptcy Code is [51] vested in the

district courts with the bankruptcy courts as “separate depart-

ments” of the district courts. 28 U.S.C. § 1471; Bankruptcy

Reform Act §§ 404(a) and 405(b).

This does not mean the district court has any judicial power it

can exercise in a bankruptcy case or civil proceeding pending in

the bankruptcy court. The statutes leave little doubt that the

A-38

district judge has practically no power to issue orders in a bank-

ruptcy case or civil proceeding pending in the bankruptcy court.

Section 1471(c) of 28 U.S.C. provides:

The bankruptcy court for the district in which

a case under Title II is commenced shall exer-

cise all of the jurisdiction conferred by this

section on the district courts.

This does not directly say the district courts are prohibited from

exercising any of the jurisdiction given them, but the legislative

history makes it clear that this section was intended to have that

effect with respect to almost all bankruptcy jurisdictions.

The Senate was opposed to the creation of Article II] bank-

ruptcy courts and ultimately prevailed. Its version of subsection

(c) said that the bankruptcy courts “may” exercise the jurisdic-

tion given to the district courts. The report of the Senate Judici-

ary Committee explained:

[52] The use of the term “may” in this section is not

intended to imply that the district court has any discre-

tion whatsoever in withholding bankruptcy cases or civil

proceedings arising under Title II or arising under or

related to a case under Title II from the bankruptcy

court... It is the intent of these provisions that the

bankruptcy court will receive and the bankruptcy judge

will handle cases and proceedings under Title II, an that

all actions filed under [§ 147(b)]... will be automati-

cally referred to the bankruptcy judge. It is contem-

plated that the rules of Bankruptcy Procdure will be

adopted to carry out this intent in order that the bank-

ruptcy judge shall exercise the full range of jurisdiction

in bankruptcy cases and proceedings... [T]he district

judge will be expected to act in Title II cases only in

limited instances (1) where it is necessary to enjoin a

State or Federal court or (2) to punish a person for

A-39

contempt by imprisonment or by a fine of more than

$1,000. Otherwise, the district judge will function only

as an appellate judge in bankruptcy matters. . .

S. Rep. No. 95-989, 95th Cong., 2d Sess. 154 (1978)

In an attempted compromise vesting jurisdiction in the courts

of appeals, the House used “shail” instead of “may.” The bill as

finally enacted was the House’s suggested compromise amended

to substitute “district courts” in all the relevant provisions that

had referred to the courts of appeal. 1 Collier on Bankruptcy

para. 1.03[5] at 1-50 - 1-53.” [53]Certainly, the word “shall” is a

better expression of what the Senate intended by using “may.”

Except on appeal, the district court’s jurisdiction gives the

district judge only those powers denied to the bankruptcy court —

the power to punish some criminal contempts and the power to

enjoin another court. Section 405(a)(2) of the Bankruptcy

Reform Act apparently reserves those powers to the district court

but does not give it any general powers. The grant of jurisdiction

to the district courts is meaningless except for the contempt and

injunctive powers reserved to the district judge.

The district judge’s lack of power to act in bankruptcy proceed-

ings practically answers the question. He lacks the ultimate deci-

sionmaking power. He lacks control of the decisionmakiag

process except in the role of appellate judge. The court has

already rejected the argument that the right to appeal to an

Article III court solves the constitutional problem. Likewise, the

8 “It was thus perfectly plain from Section 1471... added ... by this

amendment to H.R. 8200, that the bankruptcy courts, though adjuncts of the

courts of appeals, were to be the repositories for the exercise of all of the judicial

functions flowing from the conferral of that jurisdiction, and the bankruptcy

court was to exercise all of this jurisdiction through its judicial officers.” /d. at 1-

53.

A-40

district judge’s power as an appellate judge does not give him

sufficient control of the bankruptcy court’s judicial power to make

him a constitutionally tenured judge tor the bankruptcy court.

In iight of the dearth of decisionmaking power in the district

court, it is difficult to see how giving the [54] district judge

personal supervisory power over the bankruptcy judge would

make a constitutional difference. During the transition period the

district judges retain som of the power they had under the Bank-

ruptcy Act. New bankruptcy judges must still be appointed by the

judge or judges of the district court. Likewise, removal for cause

is still within the power of the district judge or judges. Bankruptcy

Reform Act § 404(b) and (d); Bankruptcy Act § 34. II U.S.C.

§ 62.

The fact that a new bankruptcy judge “owes” his appointment

to the district judge is not likely to induce in him a feeling of

dependence or need for approval of his actions, since the power to

reappoint will be in the President. Bankruptcy Reform Act § 201

(28 U.S.C. § 152); § 402(b); $404(b)-(d). In any event, the

appointment power can only affect new bankruptcy judges.

Thus, it is the power to remove that must be the main source of

supervisory power in the district judge. Included in the causes for

removal are incompetency and neglect of duty. A district judge

might urge these grounds for removal of a bankruptcy judge

whose decisions he disagreed with. Such an action would be

uncharacteristic of district judges. Removal cannot be carried out

immediately and is a dire remedy not likely to be often

threatened. Furthermore, over the years the district courts and

judges have sought to [55] decrease their involvement in bank-

ruptcy matters. H.R. Rep. No. 95-595, 95th Cong., Ist Sess. 14

(1977). The court does not believe the removal power gives the

district judge the kind of day-to-day supervisory power that

makes for control of the decisionmaking processes of the bank-

ruptcy court.

A-41

As to the day-to-day operation of the bankruptcy court, it has

been separated from the district court and freed from control by

the district judge. Bankruptcy Reform Act § 404(e) and (f).

The trustee has attempted to bolster this argument by saying

that the court system under the Bankruptcy Act had envolved to.

practically the same point, yet that system was constitutional.

The trustee has not pointed out any case that held it was

constitutional. Furthermore, though the degree of connection

between the district court and the bankruptcy court was unclear

under the Bankruptcy Act and Rules of Procedure, the severance

of all connections is apparent under the Bankruptcy Code and

accompanying amendments to 28 U.S.C. It is only during the

transition period that a few connections remain, and they are not

enough to support the trustee’s argument that the bankruptcy

courts are merely subordinate agents of the district courts subject

to the supervision and control of the district judges.

[56] The court thus comes to the final conclusion that there is

no constitutional justification for having judges without constitu-

tional tenure exercise the powers of the bankruptcy courts. It is

basic to our system of government and to our freedom that Con-

gress conform to Article III of our Constitution. It has not done

so.**

Conclusion

The transition statutes show Congress’ intent to postpone until

1984 a complete break from the court system that existed under

the Bankruptcy Act. Bankruptcy Reform Act § 404(a); Bank-

~ ruptcy Act §§ 1(10) & 2a. 11 U.S.C. §§ 1 and 11. The bankruptcy

courts could have been made sufficiently dependent on the district

*4 The same conclusion has been reached with respect to bankruptcy court

jurisdiction of civil proceedings related to a bankruptcy case. The decision is now

before the Supreme Court for review. Marathon Pipeline Company v. Northern

Pipeline Construction Co., 12 B.R. 946, 7BCD 1373, 5 C.B.C.2d 114 (1981).

A-42

courts that there would be no constitutional problem, but Con-

gress failed to follow that course. The jurisdiction and transition

statutes that make the bankruptcy courts essentially independent

of the district courts result in vesting “the judicial power” in

courts without constitutionally tenured judges.” See especially

28 U.S.C. § 1471(c). The jurisdiction of the bankruptcy [57]

court cannot be constitutionally exercised by the bankruptcy

judge.

The case must be dismissed. However, there are no other fed-

eral courts with the statutory authority or the time and resources

necessary to handle bankruptcy cases. The order of dismissal will

be stayed pending a final appellate decision in this case.

This memorandum constitutes findings of fact and conclusions

of law. Bankruptcy Rule 752.

At Chattanooga, Tennessee.

* The power of appointment is vested in the President at the end of the

transition period. Giving the executive branch the power of appointment will

make the system even more objectionable under Article III]. The court being

unconstitutional will expire on March 31, 1984 and all pending cases will be

taken over by the district courts.

A-43

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE EASTERN DISTRICT OF TENNESSEE

IN RE:

ULYSSES RIVERS, JR. No. 1-81-00682

Chapter 13

eee eee ee ee

Debtor

ORDER

Upon the motion of Alabama Furniture Company, a secured

creditor of the debtor, Ulysses Rivers, Jr., to modify the judgment

of the Court entered April 14, 1982, the Court having already

considered the matters encompassed within the motion in the

memorandum opinion and order of April 14, 1982, and having

found the Bankruptcy Reform Act of 1978 to be otherwise in

effect, the motion to modify judgment shall be and the same is

overruled.

The order of April 14, 1982, as stayed by the Court, remains in

full force and effect.

IT IS SO ORDERED.

At Chattanooga, Tennessee.

BY THE COURT

Ralph H. Kelley

United States Bankruptcy Judge

A-44

BANKRUPTCY CODE,

11 U.S.C. §§ 301-304, 362, 363

§ 301. Voluntary cases. A voluntary case under a chapter of

this title is commenced by the filing with the bankruptcy court of

a petition under such chapter by an entity that may be a debtor

under such chapter. The commencement of a voluntary case

under a chapter of this title constitutes an order for relief under

such chapter.

§ 302. Joint cases.

(a) A joint case under a chapter of this title is commenced

by the filing with the bankruptcy court of a single petition under

such chapter by an individual that may be a debtor under such

chapter and such individual’s spouse. The commencement of a

joint case under a chapter of this title constitutes an order for

relief under such chapter.

(b) After the commencement of a joint case, the court shall

determine the extent, if any, to which the debtors’ estates shall be

consolidated.

§ 303. Involuntary cases.

(a) An involuntary case may be commenced only under

chapter 7 or 11 of this title, and only against a person, except a

farmer or a corporation that is not a moneyed, business, or com-

mercial corporation, that may be a debtor under the chapter

under which such case is commenced.

(b) An involuntary case is commenced by the filing with the

bankruptcy court of a petition under chapter 7 or 11 of this title

(1) by three or more entities, each of which is either a

holder of a claim against such person that is not contingent

as to liability or an indenture trustee representing such a

A-45

holder, if such claims aggregate at least $5,000 more than

the value of any lien on property of the debtor securing such

claims held by the holders of such claims;

(2) if there are fewer than 12 such holders, excluding

any employee or insider of such person and any transferee of

a transfer that is voidable under section 544, 545, 547, 548,

549, or 724(a) of this title, by one or more of such holders

that hold in the aggregate at least $5,000 of such claims ;

(3) if such person is a partnership —

(A) by fewer than all of the general partners in

such partnership; or

(B) if relief has been ordered under this title with

respect to all of the general partners in such partnership,

by a general partner in such partnership, the trustee of

such a general partner, or a holder of a claim against

such partnership; or

(4) bya foreign representative of the estate in a foreign

proceeding concerning such person.

(c) After the filing of a petition under this section but

before the case is dismissed or relief is ordered, a creditor holding

an unsecured claim that is not contingent, other than a creditor

filing under subsection (b) of this section, may join in the petition

with the same effect as if such joining creditor were a petitioning

creditor under subsection (b) of this section.

(d) The debtor, or a general partner in a partnership debtor

that did not join in the petition, may file an answer to a petition

under this section.

(e) After notice and a hearing, and for cause, the court may

require the petitioners under this section to file a bond to indem-

nify the debtor for such amounts as the court may later aliow

under subsection (i) of this section.

A-46

(f) Notwithstanding section 368 of this title, except to the

extent that the court orders otherwise, and until an order for relief

in the case, any business of the debtor may continue to operate,

and the debtor may continue to use, acquire or dispose of property

as if an invoiuntary case concerning the debtor had not been

commenced.

(g) At any time after the commencement of an involuntary

case under chapter 7 of this title but before an order for relief in

the case, the court, on request of a party in interest, after notice to

the debtor and a hearing, and if necessary to preserve the property

of the estate or to prevent loss to the estate, may appoint an

interim trustee under section 701 of this title to take possession of

the property of the estate and to operate any business of the

debtor. Before an order for relief, the debtor may regain posses-

sion of property in the possession of a trustee ordered appointed

under this subsection if the debtor files such bond as the court

requires, conditioned on the debtor’s accounting for and deliver-

ing to the trustee, if there is an order for relief in the case, such

property, or the value, as of the date the debtor regains possession,

of such property.

(h) If the petition is not timely controverted, the court shall

order relief against the debtor in an involuntary case under the

chapter under which the petition was filed. Otherwise, after trial,

the court shall order relief against the debtor in an involuntary

case under the chapter under which the petition was filed, only if

(1) the debtor is generally not paying such debtor’s

debts as such debts become due; or

(2) within 120 days before the date of the filing of the

petition, a custodian, other than a trustee, receiver, or agent

A-47

appointed or authorized to take charge of less than substan-

tially all of the property of the debtor for the purposes of

enforcing a lien against such property, was appointed or took

possession.

(i) If the court dismisses a petition under this section other

than on consent of all petitioners and the debtor, and if the debtor

does not waive the right to judgment under this subsection, the

court may grant judgment —

(1) against the petitioners and in favor of the debtor

for —

(A) costs;

(B) a reasonable attorney's fee; or

(C) any damages proximately caused by the tak-

ing of possession of the debtor’s property by a trustee

appointed under subsection (g) of this section or section

1104 of this title; or

(2) against any petitioner that filed the petition in bad

faith, for

(A) any damages proximately caused by such

filing; or

(B) punitive damages.

(j) Only after notice to all creditors and a hearing may the

court dismiss a petition filed under this section —

(1) on the motion of a petitioner;

(2) on consent of all petitioners and the debtors; or

(3) for want of prosecution.

(k) Notwithstanding subsection (a) of this section, an invol-

untary case may be commenced against a foreign bank that is not

A-48

engaged in such business in the United States only under chap-

ter 7 of this title and only if a foreign proceeding concerning such

bank is pending.

§ 304,

Cases ancillary to foreign proceedings.

(a) A case ancillary to a foreign proceeding is commenced

by the filing with the bankruptcy court of a petition under this

section by a foreign representative.

(b) Subject to the provisions of subsection (e) of this sec-

tion, if a party in interest does not timely controvert the petition,

or after trial, the court may —

(1) enjoin the commencement or continuation of —

(A) any action against —

(i) adebtor with respect to property involved

in such foreign proceeding; or

(ii) such property; or

(B) the enforcement of any judgment against the

debtor with respect to such property, or any act or the

commencement or continuation of any judicial proceed-

ing to create or enforce a lien against the property of

such estate;

(2) order turnover of the property of such estate, or the

proceeds of such property, to such foreign representative; or

(3) order other appropriate relief.

(c) In determining whether to grant relief under subsection

(b) of this section, the court shall be guided by what will best

assure an economical and expeditious administration of such

estate, consistent with —

A-49

(1) just treatment of all holders of claims against or

interests in such estate;

(2) protection of claim holders in the United States

against prejudice and inconvenience in the processing of

claims in such foreign proceeding;

(3) prevention of preferential or fraudulent disposi-

tions of property of such estate;

(4) distribution of proceeds of such estate substantially

in accordance with the order prescribed by this title;

(5) comity; and

(6) if appropriate, the provision of an opportunity for a

fresh start for the individual that such foreign proceeding

concerns.

§ 362. Automatic stay.

(a) Except as provided in subsection (b) of this section, a

petition filed under section 301, 302, or 303 of this title operates

as a stay, applicable to all entities, of —

(1) the commencement or continuation, including the

issuance or employment of process, of a judicial, administra-

tive, or other proceeding against the debtor that was or could

have been commenced before the commencement of the case

under this title, or to recover a claim against the debtor that

arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against

property of the estate, of a judgment obtained before the

commencement of the case under this title;

(3) any act to obtain possession of property of the

estate or of property from the estate;

(4) any act to create, perfect, or enforce any lien

against property of the estate;

A-50

(5) any act to create, perfect, or enforce against prop-

erty of the debtor any lien to the extent that such lien secures

a claim that arose before the commencement of the case

under this title;

(6) any act to collect, assess, or recover a claim against

the debtor that arose before the commencement of the case

under this title;

(7) the setoff of any debt owing to the debtor that arose

before the commencement of the case under this title against

any claim against the debtor; and

(8) the commencement or continuation of a proceeding

before the United States Tax Court concerning the debtor.

(b) The filing of a petition under section 301, 302, or 303 of

this title does not operates as a stay —

(1) under subsection (a) of this section, of the com-

mencement or continuation of a criminal action or proceed-

ing against the debtor;

(2) under subsection (a) of this section, of the collec-

tion of alimony, maintenance, or support from property that

is not property of the estate;

(3) under subsection (a) of this section, of any act to

perfect an interest in property to the extent that the trustee's

rights and powers are subject to such perfection under sec-

tion 546(b) of this title;

(4) under subsection (a)(1) of this section, of the com-

mencement or continuation of an action or proceeding by a

governmental unit to enforce such governmental unit's police

or regulatory power;

(5) under subsection (a)(2) of this section, of the

enforcement of a judgment, other than a money judgment,

A-51

obtained in an action or proceeding by a governmental unit

to enforce such governmental unit's police or regulatory

power;

(6) under subsection (a)(7) of this section, of the setoff

of any mutual debt and claim that are commodity futures

contracts, forward commodity contracts, leverage transac-

tions, options, warrants, rights to purchase or sell commodity

futures contracts or securities, or options to purchase or sell

commodities or securities;

(7) under subsection (a) of this section, of the com-

mencement of any action by the Secretary of Housing and

Urban Development to foreclose a mortgage or deed of trust

in any case in which the mortgage or deed of trust held by

said Secretary is insured or was formerly insured under the

National Housing Act and covers property, or combinations

of property, consisting of five or more living units; or

(8) under subsection (a) of this section, of the issuance

to the debtor by a governmental unit of a notice of tax

deficiency.

(c) Except as provided in subsections (d), (e), and (f) of this

section —

(1) the stay of an act against property of the estate

under subsection (a) of this section continues until such

property is no longer property of the estate; and

(2) the stay of any other act under subsection (a) of

this section continues until the earliest of —

(A) the time the case is closed;

(B) the time the case is dismissed; and

A-52

(C) if the case is a case under chapter 7 of this title

concerning an individual or a case under chapter 9, 11,

or 13 of this title, the time a discharge is granted or

denied.

(d) On request of a party in interest and after notice and a

hearing, the court shall grant relief from the stay provided under

subsection (a) of this section, such as by terminating, annulling,

modifying, or conditioning such stay —

(1) for cause, including the lack of adequate protection

of an interest in property of such party in interest; or

(2) with respect to a stay of an act against property, if

(A) the debtor does not have an equity in such

property; and

(B) such property is not necessary to an effective

reorganization.

(ec) Thirty days after a request under subsection (d) of this

section for relief from the stay of any act against property of the

estate under subsection (a) of this section, such stay is terminated

with respec: to the party in interest making such request, unless

the court, after notice and a hearing, orders such stay continued

in effect pending, or as a result of, a final hearing and determina-

tion under subsection (d) of this section. A hearing under this

subsection may be a preliminary hearing, or may be consolidated

with the final hearing under subsection (d) of this section. If the

hearing under the subsection is a preliminary hearing —

(1) the court shall order such stay so continued if there

is a reasonable likelihood that the party opposing relief from

such stay will prevail at the final hearing under subsection

(d) of this section; and

A-53

(2) such final hearing shall be commenced within

thirty days after such preliminary hearing.

(f) The court, without a hearing, shall grant such relief from

the stay provided under subsection (a) of this section as is neces-

sary to prevent irreparable damage to the interest of an entity in

property, if such interest will suffer such damage before there is

an opportunity for notice and a hearing under subsection (d) or

(c) of this section.

(g) In any hearing under subsection (d) or (e) of this section

concerning relief from the stay of any act under subsection (a) of

this section —

(1) the party requesting such relief has the burden of

proof on the issue of the debtor's equity in property; and

(2) the party opposing such relief has the burden of

proof on all other issues,

§ 363. Use, sale or lease of property.

(a) In this section, “cash collateral” means cash, negotiable

instruments, documents of title, securities, deposit accounts, or

other cash equivalents in which the estate and an entity other than

the estate have an interest,

(b) The trustee, after notice and a hearing, may use, sell, or

lease, other than in the ordinary course of business, property of

the estate,

(c)(1) If the business of the debtor is authorized to be oper-

ated under section 721, 1108, or 1304 of this title and unless the

court orders otherwise, the trustee may enter into transactions,

including the sale or lease of property of the estate, in the ordi-

nary course of business, without notice or a hearing, and may use

property of the estate in the ordinary course of business without

notice or a hearing,

A-54

(2) The trustee may not use, sell, or lease cash collateral

under paragraph (1) of this subsection unless —

(A) each entity that has an interest in such cash collat-

eral consents; or

(B) the court, after notice and a hearing, authorizes

such use, sale, or lease in accordance with the provisions of

this section,

(3) Any hearing under paragraph (2)(B) of this subsection

may be a preliminary hearing or may be consolidated with a

hearing under subsection (c) of this section, but shall be sched-

uled in accordance with the needs of the debtor. If the hearing

under paragraph (2)(B) of this subsection is a preliminary hear-

ing, the court may authorize such use, sale, or lease only if there is

a reasonable likelihood that the trustee will prevail at the final

hearing under subsection (¢) of this section. The court shall act

promptly on any request for authorization under paragraph

(2)(B) of this subsection,

(4) Except as provided in paragraph (2) of this subsection,

the trustee shall segregate and account for any cash collateral in

the trustee's possession, custody, or control,

(d) The trustee may use, sell, or lease property under subsec-

tion (b) or (c) of this section only to the extent not inconsistent

with any relief granted under section 362(c), 362(d), 362(e), or

362(f) of this title,

(ec) Notwithstanding any other provision of this section, at

any time, on request of an entity that has an interest in property

used, sold, or leased, or proposed to be used, sold, or leased, by the

trustee, the court shall prohibit or condition such use, sale, or

lease as is necessary to provide adequate protection of such inter-

est. In any hearing under this section, the trustee has the burden

of proof on the issue of adequate protection,

A-55

(f) The trustee may sell property under subsection (b) or (c)

of this section free and clear of any interest in such property of an

entity other than the estate, only if —

(1) applicable nonbankruptcy law permits sale of such

property free and clear of such interest;

(2) such entity consents;

(3) such interest is a lien and the price at which such prop-

erty is to be sold is greater than the aggregate value of such

interest;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable

proceeding, to accept a money satisfaction of such interest.

(g) Nothwithstanding subsection (f) of this section, the trus-

tee may sell property under subsection (b) or (c) of this section

free and clear of any vested or contingent right in the nature of

dower or curtesy.

(h) Notwithstanding subsection (f) of this section, the trustee

may sell both the estate's interest, under subsection (b) or (c) of

this section, and the interest of any co-owner in property in which

the debtor had, immediately before the commencement of the

case, an undivided interest as a tenant in common, joint tenant, or

tenant by the entirety, only if —

(1) partition in kind of such property among the estate and

such co-owners is impracticable;

(2) sale of the estate's undivided interest in such property

would realize significantly less for the estate than sale of such

property free of the interests of such co-owners;

(3) the benefit to the estate of a sale of such property free of

the interests of co-owners outweights the detriment, if any, to

such co-owners; and

A-56

(4) such property is not used in the production, transmis-

sion, or distribution, for sale, of electric energy or of natural or

synthetic gas for heat, light, or power.

(i) Before the consummation of a sale of property to which

subsection (g) or (h) of this section applies, or of property of the

estate that was community property of the debtor and the

debtor’s spouse immediately before the commencement of the

case, the debtor’s spouse, or a co-owner of such property, as the

case may be, may purchase property at the price at which such

sale is to be consummated.

(j) After a sale of property to which subsection (g) or (h) of

this section applies, the trustee shall distribute to the debtor’s

spouse or the co-owners of such property, as the case may be, and

to the estate, the proceeds of such sale, less the costs and expenses,

not including any compensation of the trustee, of such sale,

according to the interests of such spouse or co-owners, and of the

estate.

(k) At a sale under subsection (b) of this section property

that is subject to a lien that secures an allowed claim, if the holder

of such claim purchases such property, such holder may offset

such claim against the purchase price of such property.

(1) The trustee may use, sell, or lease property under subsec-

tion (b) or (c) of this section, or a plan under chapter 11 or 13 of

this title may provide for the use, sale, or lease of property,

notwithstanding any provision in a contract, a lease, or applicable

law that is conditioned on the insolvency or financial condition of

the debtor, on the commencement of a case under this title con-

cerning the debtor, or on the appointment of a taking possession

by a trustee in a case under this title or a custodian, and that

effects, or gives an option to effect, a forfeiture, modification, or

termination of the debtor’s interests in such property.

(m) The reversal or modification on appeal of an authoriza-

tion under subsection (b) or (c) of this section of a sale or lease of

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property does not affect the validity of a sale or lease under such

authorization to an entity that purchased or leased such property

in good faith, whether or not such entity knew of the pendency of

the appeal, unless such authorization and such sale or lease were

stayed pending appeal.

(n) The trustee may void a sale under this section if the sale

price was controlled by an agreement among potential bidders at

such sale, or may recover from a party to such agreement any

amount by which the value of the property sold exceeds the price

at which such sale was consummated, and may recover any costs,

attorneys’ fees, or expenses incurred in voiding such sale or recov-

ering such amount. The court may grant judgment in favor of the

estate and against any such party that entered into such agree-

ment in willful disregard of this subsection for punitive damages

in addition to any recovery under the preceding sentence.

28 U.S.C. § 1471. Jurisdiction.

(a) Except as provided in subsection (b) of this section, the

district courts shall have original and exclusive jurisdiction of all

cases under title 11.

(b) Notwithstanding any Act of Congress that confers exclu-

sive 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.

(c) The bankruptcy court for the district in which a case

under title 11 is commenced shall exercise all of the jurisdiction

conferred by this section on the district courts.

(d) Subsection (b) or (c) of this section does not prevent a

district court or a bankruptcy court, in the interest of justice, from

abstaining from hearing a particular proceeding arising under

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title 11 or arising in or related to a case under title 11. Such

abstention, or a decision not to abstain, is not reviewable by

appeal or otherwise.

(e) The bankruptcy court in which a case under title 11 is

commenced shall have exclusive jurisdiction of all the property,

wherever located, of the debtor, as of the commencement of such

case.

Pub.L.No. 95-598, Title IV (Transition)

92 Stat. 2549 § 401-404

§ 401 (a) The Bankruptcy Act is repealed.

(b) Section 3 of the Act entitled “An Act to amend an Act

entitled ‘An Act to establish a uniform system of bankruptcy

throughout the United States’, approved July 1, 1898, and Acts

amendatory thereof and supplementary thereto”, approved

March 3, 1933 (47 Stat. 1482; 11 U.S.C. § 101a), is repealed.

(c) Sections 3, 6, and 7 of the Act entitled “An Act to amend

an Act entitled ‘An Act to establish a uniform system of bank-

ruptcy throughout the United States’, approved July 1, 1898, and

Acts amendatory thereof and supplementary thereto”, approved

June 7, 1934 (48 Stat. 923, 924; 11 U.S.C. § 76a, 203a, 205a), are

repealed.

(d) The sentence beginning “Said section 74” in section 2 of

the Act entitled “An Act to amend an Act entitled ‘An Act to

establish a uniform system of bankruptcy throughout the United

States’, approved July 1, 1898, and Acts amendatory thereof and

supplementary thereto”, approved June 7, 1934 (48 Stat. 924; 11

U.S.C. § 103a), is repealed.

(e) Subsection (b) of section 4 of the Act entitled “An Act to

amend an Act entitled ‘An Act to establish a uniform system of

bankruptcy throughout the United States’, approved July 1,

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1898, and Acts amendatory thereof and supplementary thereto”,

approved June 7, 1934 (48 Stat. 924; 11 U.S.C. § 103a), is

repealed.

(f) Section 2 of the Act entitled “An Act to amend an Act

entitled ‘An Act to establish a uniform system of bankruptcy

throughout the United States’, approved July 1, 1898, as

amended and supplemented”, approved June 5, 1936 (49 Stat.

1476; 11 U.S.C. § 93a), is repealed.

(g) Section 3 of the Act entitled “An Act to amend the

Interstate Commerce Act, as amended, and for other purposes”,

approved April 9, 1948 (62 Stat. 167; 11 U.S.C. § 208), is

repealed.

§ 402 (a) Except as otherwise provided in this title, this

Act shall take effect on October 1, 1979.

(b) Except as provided in subsections (c) and (d) of this

section, the amendments made by title 2 of this Act shall take

effect on April 1, 1984.

(c) The amendments made by sections 210, 219, 220, 222,

224, 225, 228, 229, 235, 244, 245, 246, 249, and 251 of this Act

shall take effect on October 1, 1979.

(d) The amendments made by sections 217, 218, 230, 247,

302, 314(j), 317, 327, 328, 338, and 411 of this Act shall take

effect on the date of enactment of this Act.

(ec) The amendments made by sections 335(a) and 336(a) of

this Act shall take effect on April 1, 1984.

§ 403. (a) A case commenced under the Bankruptcy Act, and

all matters and proceedings in or relating to any such case, shall

be conducted and determined under such Act as if this Act had

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not been enacted, and the substantive rights of parties in connec-

tion with any such bankruptcy case, matter, or proceeding shall

continue to be governed by the law applicable to such case, mat-

ter, or proceeding as if the Act had not been enacted.

(b) Notwithstanding subsection (a) of this section, sections

1165, 1167, 1168, 1169, and 1171 of title 11 of the United States

Code, as enacted by section 101 of this Act, apply to cases pend-

ing under section 77 of the Bankruptcy Act (11 U.S.C. & 205) on

the date enactment of this Act in which the trustee has not filed a

plan of reorganization.

(c) The repeal made by section 401(a) of this Act does not

affect any right of a referee in bankruptcy, United States bank-

ruptcy judge, or survivor of a referee in bankruptcy or United

States bankruptcy judge to receive any annuity or other payment

under the civil service retirement laws.

(d) The amendments made by section 314 of this Act do not

affect the application of chapter 9, chapter 96, section 2516,

section 3057, or section 3284 of title 18 of the United States Code

to any act of any person—

(1) committed before October 1, 1979 or

(2) committed after October 1, 1979, in connection

with a case commenced before such date.

(e) Notwithstanc .g subsection (a) of this section, a fee may

not be charged under section 40c(2)(b) of the Bankruptcy Act in

a case in which the plan is confirmed after September 30, 1978, to

the extent that such fee exceeds $100,000.

§ 404. (a) The courts of bankruptcy, as defined under section

1(10) of the Bankruptcy Act, created under section 2a of the

Bankruptcy Aci, and exisitng on September 30, 1979, shall con-

tinue through March 31, 1984, to be the courts of bankruptcy for

the purposes of this Act and the amendments made by this Act.

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Each of the courts of bankruptcy so continued shall constitute a

separate department of the district court that is such court of

bankruptcy under the Bankruptcy Act.

(b) The term of a referee in bankruptcy who is serving on the

date of enactment of this Act is extended to and expires on March

31, 1984 or when his successor takes office. During the period

commencing on October 1, 1979, and ending on March 31, 1984

(hereinafter in this title referred to as “the transition period’),

unless such referee is found to be not qualified by the Chief Judge

of the Circuit Court after consultation with a merit screening

committee established as provided in subsection (c) of this sec-

tion, such a referee in bankruptcy upon the expiration of his

appointed term as referee shall have the title of United States

bankruptcy judge, and shall serve in the court of bankruptcy

continued under subsection (a) of this section that appointed such

United States bankruptcy judge, in the manner prescribed by this

title. Section 8335(a) of title 5 of the United States Code shall not

apply in respect of United States bankruptcy judges during the

transition period.

(c) There shall be established for each State a merit screening

committee composed of the president or the designee of the presi-

dent of the State bar association, the dean or the designee of the

dean of a law school located within the State, and the president or

designee of the president of a local bar association for the area

wherein a referee in bankruptcy maintains his official headquar-

ters with the State. Each such merit screening committee shall be

organized and summoned to meetings by the circuit executive for

the circuit embracing the State, who shall serve as secretary of

each such screening committee established within the circuit.

Before the expiration of the term of a referee in bankruptcy in

office on the date of enactment of this Act, or if his successor has

not been appointed before the date of enactment of this Act, a

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merit screening committee shall be organized by the circuit exec-

utive to pass on the qualifications of such referee for the purpose

of determining whether the term of such referee shall be extended

as provided under subsection (b) of this section.

(d) Except as otherwise provided in this section or in section

407 of this Act, matters relating to the office of United States

bankruptcy judges and to United States bankruptcy judges shall

continue to be governed during the transition period by the rules

set forth in sections 34, 35, 36, 40a, 40b, 40d, 41, and 43 of the

Bankruptcy Act as such Act existed on September 30, 1979. A

court of bankruptcy may not appoint an individual under such

sectin 34 if the merit screening committee established under sub-

section (c) of this section for the district of such court finds such

individual to be not qualified.

(e) During the transition period, the United States bankruptcy

judges of each district may appoint a clerk, necessary other

employees, including law clerks and secretaries, and court report-

ers the same as the judges of a United States bankruptcy court

established under section 201 of this Act may appoint such

officers and employees under the amendment made by section 233

of this Act. Such clerk, other employees, and reporters shall have

the same rights and powers, shall perform the same functions and

duties and shall be subject to the same provisions of title 28 of the

United States Code, as a clerk, other employee, or reporter, as the

case may be, appointed under the amendment made by section

233 of this Act by a United States bankruptcy court established

under section 201 of this Act. The United States bankruptcy

judges of each district shall have the same rights and powers as a

United States bankruptcy court established under section 201 of

this Act with respect to such clerk, other employees, and

reporters.

(f) During the transition period, the provisions of sections 455,

456, 569(a), 571(b), 620(b)(3), and 957(a) of title 28 of the

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United States Code shall apply to United States bankruptcy

judges and to any court officers or employees appointed or

employed under subsection (e) of this section the same as such

sections apply to the bankruptcy judges, and to any court officers

or employees, of a United States bankruptcy court established

under section 201 of this Act. During the transition period, the

position of United States bankruptcy judge shall be deemed to be

a position within the purview of subparagraph (C) of section

225(f) of the Federal Salary Act of 1967 (2 U.S.C. § 356(C)).

(g) During the transition period, the Judicial Conference of the

United States may from time to time in the light of the recom-

mendations of the judicial councils of each circuit, made after

advising with the district judges and the United States bank-

ruptcy judges of the respective circuit, and of the Director of the

Administrative Office of the United States Courts, increase the

number of full-time United States bankruptcy judges, or provide

that a part-time United States bankruptcy judge for a particular

district may serve in the capacity and receive the salary of a full-

time United States bankruptcy judge, as the expeditious transac-

tion of the business of the several courts of bankruptcy may

require.

A-64

STATEMENT PURSUANT TO RULE 238.1

Petitioner Alabama Furniture Co. has no parent companies,

subsidiaries or affiliates.