Appendix — In re International Harvester Co., 103 S. Ct. 1804 (1983) (No. 82-1385)

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82-1385 RECEIVED

No. 82- FEB 16 1983

OFFICE OF THE CLERK

In The SUPREME COURT, U.S.

SUPREME COURT OF THE UNITED STATES Office-Suprenie Court, U.S.

kFilLED

October Term, 1982

FEB 16 1983

ALEXANDER L. STEVAS,

IN RE INTERNATIONAL HARVESTER COMPANY and CLERK

IH STEEL CORPORATION,

Petitioners.

SPECIAL FILING OF UNREPORTED CASES RE

PETITION FOR WRITS OF PROHIBITION AND MANDAMUS

TO THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

AND THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

Robert W. Hallock

(Counsel of Record)

George D. Newton, Jr.

Marion B. Adler

Kirkland & Ellis

200 East Randolph Drive

Chicago, Illinois 60601

(312) 861-2042

Vern Countryman

1557 Massachusetts Avenue

Cambridge, Massachusetts 02138

(617) 495-4614

Wilbur F. Pell, III

401 North Michigan Avenue

Chicago, Illinois 60611

(312) 836-2171

Attorneys for Petitioners

February 16, 1983

GAF Corp. v. Johns-Manville Corp. (In re Johns-

e Corp.), No. 82-B-11656, Adv. No. 82-6221A

(Bankr. S.D.N.Y. January 10, 1983).

Prudential Ins. Co. v. Stouffer Corp. (In re

Northland Point Pe Partners), No. 82-5387-W, Adv. Nos.

- “W & -W (E.D. Mich. January 7, 1983.

Color Craft Press Ltd. Nationwide Shopper aes

Inc. (In re Color Craft cr Ltd.), No. M

Adv. No. 82-PM-974 (Bankr. D. Utah February 7, 1983).

Gillman v. Preston Family Inv. Co. (In re Richardson),

No. 82C-736, Adv. No. 82PC-746 (Bankr. D. Utah February

7, 1983.

In re Conley, No. 382-990 (Bankr. M.D. Tenn. January 26,

1983).

Walter E. Heller & Co. v. Matlock Trailer Corp. (In

re Matlock Trailer Corp.) No. 382-2778, Adv. No. 382-755

(Bankr. M.D. Tenn. January 26, 1983).

Still v. First Bank (In re Jorges Carpet Mill Inc.),

No. 1-80-2516, Adv. No. 1-82-638 (Bankr. E.D. Tenn.

January 31, 1983).

Docter v. Gleicher (In re Stillman), No. 8l- tt

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In the Matter

JOHNS-MANVILLE CORPORATION,

et al.

Debtor

GAF CORPORATION, KEENE COR-

PORATION, ARMSTRONG WORLD

INDUSTRIES, INC., H.K.

PORTER COMPANY, INC., PITTS-

BURGH CORNING CORPORATION,

GARLOCK, INC., EAGLE-PICHER

INDUSTRIES, INC., THE

CELOTEX CORPORATION and

FIBERBOARD CORPORATION,

on behalf of themselves

and the unofficial commit-

tee of Asbestos Case Co-

Defendants,

Plaintiffs,

vs.

JOHNS-MANVILLE CORP.,

et al.,

Defendants.

82 B 11656

through

82 B 11076

DECISION

NO. 1

AND ORDER

IN RELATED

AUTOMATIC

STAY PRO-

CEEDINGS

A copy of this Opinion is set forth on

pages A-20 through A-83 of the Appendix

in No. 82-1242.

UNITED STATES DISTRICT COURT :

: EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

Case No. 82-05387-W

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA,

. Debtors.

Plaintiff, Adversary No. 82-2277-W

Vv.

THE STOUFFER CORPORATION,

Defendant.

® /

NORTHLAND POINT PARTNERS,

Plaintizf, Adversary No. 82-2332-W

? °

Ve.

THE STOUFFER CORPORATION,

Defendant.

. /

aie. t eee : ORDER

*" ORDER

This cause is before the court on appellant Stouffer

Corporation's motion challenging the constitutionality of an

Interim Rule governing the administration of the bankruptcy

eexen adopted by the United States District Court for the Eastern

District of Michigan. After a careful review of the relevant

statutory and case law, we remain persuaded that this Interim Rule,

adopted in response to the Supreme Court's decision in Northern

Pipeline Construction Co. Vv. Marathon Pipe Tine Ce. , oe U.S.

peed 50 U.S.L.W. 4892 (June 28, 1982), is constitutional and valid.

; We hold that Marathon does not create a jurisdictional.

' lapse. The relevant statutory provisions taken singularly and

conjunctiveiy manifest the Congressional intention that at the very

least federal district courts would retain jurisdiction of matters

arising under Title 11 or arising in or related to cases under

Title 11 until April 1, 1984. Congress carefully kept in effect,

until 1984, statutory provisions that give the federal district

courts “original jurisdiction, exclusive of the courts of the states,

of all matters and proceedings in bankruptcy.” 28 U.S.C. § 1334.

Congress also made.cleer, through incorporation by reference,

that the jurisdictional powers of the federal district courts would

not change during the transitional period. §§ 404 and 405, Bankruptcy

Reform Act of 1978 (P.L. 95-598). Congress purposely included these

provisions to satisfy its stated concern over the constitutionality

of the broad jurisdictional grant afforded to bankruptcy judges under

the act. It is-apparent that Congress, at a minimum, wanted to

were

----.in federal court jurisdiction over matters érising in bank-

Yeorey provesdisgs.

Alternatively, it appears to us that the only jurisdictional

czant that was deemed non-severable in Marathon was that given to

che article I bankruptcy courts. The two concurring justices notecé

that "This grant of authority is not readily severable from the

remaining grant of authority to bankruptcy courts.” Marathon, id. at

4903. In considering the entire structure of the Bankruptcy Reform

Act of 1978, it appears to us that the power conferred by 28 U.S.C.

§ 1471(a) and (b) was arguably not affected by the Marathon decision.

We recognize, however, that Congress did not want federal district ©

courts to permanently exercise the jurisdictional power found in

such provisions es present § 1334 of Title 28. Seé, Marathon, id.

at 4902, n.40. The a@istrict courts are vested at least

until 1984 with jurisdiction over bankruptcy matters. The rule that

Stouffer now. challenges was promulgated in complete accord with the

inherent power of an Article III federal district court to dispose

of judicial matters that come before it. This interim rule provides

that the district courts may delegate many of the duties they

must perform undies inks bankruptcy power to bankruptcy judges.

The authority for this is found in § 105 of the Bankruptcy Reform —

Act of 1978 (11 U.S.c. § 105), which gives courts of bankruptcy

the power to "issue any order, process, or judgment that is necessary

cr appropriate to carry out the provisions of this title," and in

Bankruptcy Rule 927, which gives bankruptcy courts the power to

-3- TE ayo

aoc TwWeW www LHOMAL Mit oe ys

afory ‘rules governing practice and procedure under the Act." This

Gelecation Pe power is consistent with the long tradition established

by Congress of a bankruptcy court consisting of two judicial officers

aka the clear intent of the Congress to continue a two-officer court

of bankruptcy through 1984.

Accordingly, we hold that the Emergency Rule adopted by

the United States District Court for the Eastern District of Michigan

pursuant to a resolution of the Sixth Circuit Judicial Council

is constitutional and valid. A more detailed analysis responding to .

all of appellant's contentions will be forthcoming in a Memorandum

‘ Opinion from this, court.

NOW, THEREFORE, IT IS ORDERED that appellant Stouffer's

motion challenging the Interim Rule be and the same hereby is

DISMISSED;

IT IS FURTHER ORDERED that appellant's motion for a stay

of bankruptcy proceedings be and the same hereby is DENIED.

rt &. DeMa fe)

ited States ‘Digtrict Judge

Dated: January 7, 1983

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

In re Bankruptcy No. 81M-03184

COLOR CRAFT PRESS, LTD.,

a Utah limited partnership, Civil Proceeding No. 82PM-0974

Debtor.

COLOR CRAFT PRESS, LTD.,

a Utah limited partnership,

MEMORANDUM OPINION

Plaintiff,

vs.

NATIONWIDE SHOPPER SYSTEMS,

)

INC.,

)

Defendant.

Appearances: William G. Fowler, R. Kimball Mosier, Michael

N. Zundell, of Roe and Fowler, Salt Lake City, Utah, for the

plaintiff; Robert A. Bentley, Salt Lake City, Utah, for the

defendant.

I. INTRODUCTION AND BACKGROUND

On November 6, 1978, Congress enacted Pub. L. No. 95-598,

the first major revision of bankruptcy law in the United States

since 1938. The law contains sweeping jurisdictional reforms.

| See, Pub. L. No. 95-598, Section 241(a), 92 Stat. 2668 (1978),

codified at 28 U.S.C. Sections 1471-1482.) Section 1471, the

For an overview of these jurisdictional reforms, see, e.g., 1

COLLIER ON BANKRUPTCY 43.01 st seq. (15th ed. 1982); Babitt, "The

Bankruptcy Court, Its Judges, Their Jurisdiction and Powers, and

Appeals, Under Title 11 of the 1978 Bankruptcy Reform Act:

Transition and Beyond,” 1979 ANN. SURV. BANK. L. 89; Bondurant,

linchpin of these reforms, confers jurisdiction on a newly

Created “bankruptcy court," using a two step process. First,

Sections 1471(a) and 1471(b) grant original and exclusive

jurisdiction of all "cases" under title 11 and original but not

exclusive jurisdiction of all “proceedings” arising under title

"The Bankruptcy Court As a Constitutional Court," 45 AM. BANK.

L. J. 235 (1971); Broude, “Jurisdiction and Venue Under the

Bankruptcy Act of 1973," 48 AM. BANK. L. J. 231 (1974); Broude,

"The Referee in Bankruptcy As An Article I Judge: A Reply to Mr.

Bondurant,” 46 AM. BANK. L.J. 39 (1972); Cyr, "Structuring A New

Bankruptcy Court: A Comparative Analysis," 52 AM. BANK. L. J. 141

(1978); Drake, "The Judges’ Bill and the Commission's Bill: A

Question of Access to the Judicial Process," 26 MERCER L. REV.

1009 (1975); Eisen and Smrtnik, "The Bankruptcy Reform Act of

1978--An Elevated Judiciary," 28 DePAUL L:; REV. 1007 (1979);

Finley, “Article III Limits on Article I Courts: The Constitu-

tionality of the Bankruptcy Court," 1982 ANN. SURV. BANK. L. 1;

George, "The Bankruptcy Appellate Panels: An Unfinished Experi-

ment,” 1982 B.Y.U. L. REV. 205; Kennedy, "The Bankruptcy Court

Under The New Bankruptcy Law: Its Structure And Jurisdiction," 55

AM. BANK. L. J. 63 (1981); Kennedy, “The Bankruptcy Court Under

The New Bankruptcy Law: Its Structure, Jurisdiction, Venue, And

Procedure,” 11 ST. MARY'S L. J. 251 (1979); King, "Bankruptcy

Code~-Specialized Court Supported," 52 AM. BANK. L.J. 193 (1978);

Klee, "Legislative History of the New Bankruptcy Code," 54 AM.

BANK. L.J. 275 (1980); Krattenmaker, "Article III and Judicial

Independence: Why The New Bankruptcy Courts Are Unconstitu-

tional," 70 GEO. L. J. 297 (1981); Lieb, "Jurisdiction and

Venue in Bankruptcy Litigation," 1982 ANN. SURV. BANK. L. 69;

Levin, "Bankruptcy Appeals,” 58 NO. CAR. L. REV. 967 (1980);

Levine, "An Enhanced Conception of the Bankruptcy Judge: From

Case Administrator to Unbiased Adjudicator," 84 W. VA. L. REV.

637 (1982); Levit and Mason, “Where Do We Go From Here? Bank-

ruptcy Administration Post-Marathon,"” 87 COM. L. J. 353 (1982);

Plumb, "The Tax Recommendations of the Commission on the Bank-

ruptcy Laws--Tax Procedures,” 88 HARV. L. REV. 1360 (1975); Reed,

Sagar, and Granoff, "Subject Matter Jurisdiction, Abstention and

Removal Under The New Federal Bankruptcy Law," 56 AM. BANK. L. J.

121 (1982); Rifkind, “Bankruptcy Code--Specialized Court

Opposed,” 52 AM. BANK. L. J. 187 (1978); Note, "Determining

Proper Venue of Civil Proceedings Related to a Bankruptcy Case,"

1982 ANN. SURV. BANK. L. 393; Note, "Tenure and Salary Clause

Restrictions on the Jurisdiction of Article I Courts," 96 HARV.

L. REV. 257 (1982); Note, "Bankruptcy and the Limits of Federal

Jurisdiction,” 95 HARV. L. REV. 703 (1982); Note, "Selective

Exercise of Jurisdiction in Bankruptcy-Related Civil Pro-

ceedings,” 59 TEX. L. REV. 325 (1981).

11 or arising in or related to "cases" under title 11 to the

district court. Second, Section 1471(c) mandates that all

jurisdiction granted to the district court shall be exercised by

the bankruptcy court. Section 1471(e), which does not use this

two step process, grants exclusive jurisdiction over property of

the debtor to the bankruptcy court. Section 1478(a), which

likewise does not use a two step process, provides for removal of

“any Claim or cause of action in a civil action” from district or

state courts to the bankruptcy court. Under Section 1478(b),

"such claim or cause of action" is subject to remand "on any

equitable ground" by the bankruptcy court. A decision under

Section 1478(b) is nonreviewable "by appeal or otherwise." Most

other orders of the bankruptcy court, however, are appealable, as

of right or by permission, to the district court. See, Pub. L.

No. 95-598, Section 238(a), 92 Stat. 2667 (1978), codified at 28

U.S.C. Section 1334. These reforms, in large measure, were

designed to sever the umbilical relation which had existed

between the district court and bankruptcy matters. The district

court now exercises appellate not Supervisory jurisdiction over

the bankruptcy court. The truncated decisionmaking of former law

is replaced with comprehensive power over bankruptcy problems in

a single forum.

These reforms, however, were implemented during a period of

transition, from the effective date of the legislation, October

1, 1979, until March 31, 1984. See, Pub. L. No. 95-598, Sections

401-411, 92 Stat. 2681-2688 (1978) (uncodified). “Courts of

bankruptcy" as defined "under Section 1(10) of the Bankruptcy

Act, created under Section 2a of the Bankruptcy Act, and existing

on September 30, 1979," are continued, but as a "separate

Gepartment”" of the Gistrict court, and given jurisdiction under

Section 241(a). See, Pub. L. No. 95-598, Sections 404(a) and

405(b), 92 Stat. 2683, 2685 (1978). Consistent with Section

1471(c), cases and proceedings, in almost all regards, are

referred from the district judge to the bankruptcy judge within

the court of bankruptcy. See, Pub. L. No. 95-598, Section

405(a)(1), 92 Stat. 2685 (1978). And the System for appeals to

the district court, under Section 1334, is made effective in Pub.

L. No. 95-598, Sections 405(¢)(1)(C) and 405(c)(2), 92 Stat. 2685

(1978). The courts of bankruptcy thus are assimilated into the

new order.

On June 28, 1982, the Supreme Court ruled that Section

241(a), insofar as it authorizes non-Article III bankruptcy

judges to hear certain proceedings, is unconstitutional. Northern

Pipeline Construction Co. v. Marathon Pipe Line Co., 102 s. ce.

2858 (1982) (hereinafter Marathon). A Majority of the Court did

not agree on what were unconstitutional Proceedings under Section

241(a). Both Plurality and concurring opinions agreed, however,

that since Section 241(a) was nonseverable, it must be wholly

invalidated. The Court Stayed its judgment, first until October

4, and then until December 24, allowing time for curative

legislation,

By December 24, Congress had not acted, and the stay of

judgment expired. on December 27, in lieu of legislation, the

Gistrict court entered a rule to fill the jurisdictional gap.

The rule assumes that the district court has jurisdiction over

cases and proceedings in bankruptcy, and in essence refers them

—

to the bankruptcy judges who act for the district court as

special masters. The district court, on its own initiative, or

on motion by a party, may withdraw a reference in whole or in

part from the bankruptcy judges. The bankruptcy judges, with

certain exceptions, are empowered to perform "all acts and duties

necessary for the handling of those cases and proceedings.” The

rule divides "related" from "unrelated" proceedings. Related

proceedings "are those civil proceedings that, in the absence of

a petition in bankruptcy, could have been brought in a district

court or state court,” and include, without limitation, "claims

brought by the estate against parties who have not filed claims

against the estate.” Related proceedings do not include matters

growing out of the administration of an estate. Nor is a pro-

ceeding “related” “merely because the outcome will be affected by

state law.” If the proceeding is "related," the "bankruptcy

judge may not enter a judgment or dispositive order, but shall

submit findings, conclusions, and a proposed judgment or order to

the district judge, unless the parties to the proceeding consent

to entry of the judgment or order by the bankruptcy judge." The

bankruptcy judge, however, may enter orders in "unrelated"

proceedings. A district judge must review proposed orders in

“related” proceedings, even absent appeal by a party. A district

judge must also review orders in “unrelated” proceedings when

certified by a bankruptcy judge. The scope of review, in any

case, is unlimited: it may be de novo, and the district judge

“need give no deference to the findings of the bankruptcy judge."

II. PROCEDURAL POSTURE

Plaintiff is a debtor in possession under Chapter 11 of the

Bankruptcy Code. On August 20, 1982, it commenced this pro-

ceeding against defendant. The complaint alleges that plaintiff

performed services under a contract with Gefendant, that defen-

Gant breached this contract, and that damages equal $14,986 plus

attorneys fees and interest. On November 2, defendant answered

the complaint and counterclaimed for negligence and breach of

contract, seeking damages of $28,600. Defendant also challenged

the jurisdiction of the bankruptcy court in light of Marathon.

On December 16, the jurisdiction of the bankruptcy court was

questioned again in a proposed pretrial order.

On December 24, as noted above, the Stay of judgment

expired, and on December 27, the district court entered the rule,

These events shifted the focus of inquiry from the bankruptcy

court to the district court. The parties agree, and the rule in

its preamble confirms, that the bankruptcy court no longer has

jurisdiction to try this case. The parties disagree, however, on

whether the district court has this authority, and if so, whether

it may be deflected to the bankruptcy judges through the rule.

Because of this disagreement, and in the face of an impending

trial date, the parties filed briefs on January 4, 1983, and

argument was heard January 5.

Plaintiff argues that the rule is valid because the district

court has jurisdiction over bankruptcy cases and proceedings

under Sections 147l(a) and 1471(b), either as amendments to title

28, or as implemented during transition under Sections 404 and

405.

-7=

This bankruptcy judge must address the validity of the rule

because it refers the entire proceeding, including issues of

jurisdiction, to him. The district court, under the rule, may

withdraw any reference, with issues of jurisdiction, from a

bankruptcy judge, but has not done go in this case. Nor has any

party sought in the district court a withdrawal of reference from

the bankruptcy judge in this case. Instead, they have made

arguments on jurisdiction here. thus, a decision is unavoidable.

| The rule is invalid insofar as it relies upon

jurisdiction under Sections 1471(a), 1471(b), and the transition

statutes. No other jurisdictional basis validates the rule in

this proceeding.2 Thus, the complaint must be dismissed.

Plaintiff has not asked whether the prospective character of

Marathon or whether federal question jurisdiction under 28 U.S.C.

Section 1331 salvages this proceeding, but these questions have

been answered elsewhere in the negative. See, e.g., In re

Richardson, C.P. No. 82PC-0746 (slip opinion) (Bky. D. Utah,

ebruary /, 1983). Nor has it argued that the counterclaim of

defendant confers jurisdiction by consent, an argument which, in

any event, would be unavailing. See, $i2°! SEN. REP. No. 95-989,

95th Cong., 24 Sess. 153 (1978)("The idea of possession and

consent as bases for jurisdiction is eliminated"); H.R. REP. Wo.

95-595, 95th Cong., lst Sess. 445 (1977)(same); In re Motion to

Dismiss: Constitutionality of Jurisdiction of the Bankruptc

ourt, oR. ° y. N. a. ° ut see,

In re The National Sugar Refining Com any, 22 B.R. 275, 280

y- &5.D.N.Y. ° ut cr. In re Cox Cotton Compan

3 C.B.C. 24 615, 625 (E.D. Ark. 1980); In re Hotel Keareiates

inc., 22 B.R. 964, 965 (Bky. E.D. Pa. 1 .

Plaintiff has argued that the district court has jurisdiction

under old 28 U.S.C. Section 1334. It is unnecessary to decide

whether old Section 1334 validates the rule because old Section

1334 conferred no more than “summary” jurisdiction on the

district court. See, e. +» 1 MOORE's PEDERAL PRACTICE q0.61[3)

(26 ed. 1982), 13°C. Wright, A. Miller, and E. Cooper, FEDERAL

PRACTICE AND PROCEDURE §3570 (1975). Since this proceeding is

“plenary” rather than “summary,” id., it would not be sustainable

in any event. Moreover, the survival of old Section 1334, in the

wake of the Reform Act, has been questioned. See, e.9., H.R.

REP. No. 97-807, 97th Cong., 24 Sess. 88-107 (1582)~

”

III. SECTIONS 1471(a) AND 1471(b)

Plaintiff argues that Marathon eliminated the jurisdiction

of bankruptcy courts under Section 1471(c) but did not disturb

the jurisdiction of district courts under Sections 1471l(a) and

1471(b). This residuum of power, it is said, may be delegated by

the district court to Others, bankruptcy judges in this case who

act as special masters. This argument is unconvincing, however,

for at least two reasons. First, Marathon held that Section

241(a) was nonseverable and struck the entire statute, leaving no

remnant of power in either bankruptcy or district courts. Second,

assuming that Section 24l(a) is severable, the mandatory refer-

ence of cases and Proceedings to bankruptcy courts under Section

1471(c) prevents the exercise of power by district courts under

Sections 147l(a) and 1471(b).

A. Nonseverability

Marathon expunged Section 241(a) which embraces all not

merely part of Section 1471. The Plurality opinion dia not parse

the statute making distinctions between district and bankruptcy

courts. Indeed, it refused to route proceedings to the district

court because the statute is nonseverable and "it is for Congress

to determine the proper manner of restructuring the Bankruptcy

Act of 1978 to conform to the requirements of Article III, in the

way that will best effectuate the legislative purpose.” Marathon,

Supra at 2679-2880 and n. 40. The concurring justices agreed,

citing footnote 40. Id. at 2882 (Justice Rehnquist, concurring

opinion).3 Justice white, in dissent, chides the majority for

The majority did not delineate acceptable from unacceptable

claims or legitimate from illegitimate forums because it feared

its "sweeping invalidation" of Section 241(a), Marathon, supra at

2884 n. 3 (Justice White, dissenting Opinion), acknowledging the

holding on nonseverability.4 The Chief Justice also may have

"the delay and expense of jurisdictional disputes," Marathon

Supra at 2880 n. 40, a fear which was prescient in ] ght o

4 recent events.

Justice White, joined by Chief Justice Burger and Justice

Powell, criticized the notion that non-Article ITI judges may

consider questions of federal but not state law, observing that

"clearly this ground alone cannot Support the court's

invalidation of $24l(a) on its face. The plurality concedes that

in adjudications and discharges in bankruptcy, ‘the manner in

which the rights of debtors and creditors are adjusted,' ante,

at 2878, n. 36, are matters of federal law. Under the

Plurality's own interpretation of the cases, tnerefore, these

matters could be heard and decided by Article 1 judges. But

because the bankruptcy judge is also given authority to hear a

case like that of petitioner against Marathon, which the Court

Says is founded on state law, the Court holds that the section

must be stricken down on its face. This is @ grossly unwarranted

emasculation of the scheme Congress has adopted. Even if the

Court is correct that such a state law claim cannot be heard by a

bankruptcy judge, there is no basis for doing more than declaring

the section unconstitutional as applied to the claim against

Marathon, leaving the section Otherwise intact. In that event,

cases such as this one would have to be heard by Article Ir

judges or by state courts--unless the defendant consents to suit

before the bankruptcy judge--just as they were before the 1978

Act was adopted. But this would remove from the jurisdiction of

the bankruptcy judge only a tiny fraction of the cases he is now

empowered to adjudicate and would not otherwise limit his

jurisdiction." "14, at 2883-2884,

AS an afternote to this observation, he remarks: "The

Plurality attempts to justify its Sweeping invalidation of

§241(a), berause of its inclusion of State-law claims, by

Suggesting tnat this Statutory provision is nonseverable. Ante,

atn. 40. The concurring Justices specifically adopt this

argument as the reason for their decision to join the judgment of

the Court. The basis for the conclusion of nonseverability,

however, is nothing more than a Presumption: ‘Congress has

vested jurisdiction over this and all matters related to cases

under title.11 in a single non-Art. III court, and has done so

pursuant to a single Statutory grant of jurisdiction. In these

circumstances, we cannot conclude that if Congress were aware

that the grant of jurisdiction could not constitutionally

encompass this and similar Claims, it would simply remove the

‘jurisdiction of the bankruptcy court Over these matters.’ rbid.

Although it is possible, as a historica) matter, to find cases of

this court Supporting this Presumption, see, e, ee Williams vy.

Standard Oil Co., 278 U.s. 235, 242, 49 5. cte- 15, ° °

e ¢ I had not thought this to be the contemporary

approach to the problem of severability, Particularly when

dealing with federal statutes. I would follow the approach taken

¢ -1U0-

recognized the implications of nonseverability since he invites

Congress, not the judiciary, to repair the damage wrought by the

judgment of the court. Marathon, Supra at 2882 (Chief Justice

Burger, dissenting opinion.)5

Moreover, nonseverance makes sense. If Section 1471(c)

and the bankruptcy court are excised from Section 24l(a), the

statute becomes dysfunctional. The district court, for example,

might have partial jurisdiction, viz., over cases and proceedings

under Sections 147l(a) and 1471(b), but the balance of juris-

diction, over property, reserved to the bankruptcy court under

Section 147l(e), is left in limbo.6 Sections 1478(a) and

by the Court in Buckley v. Valeo, 424 U.S. 1, 108, 96 S. Ct. 612,

677, 46 L. Ed. 20 659 eRNIE "Unless it is evident that the

Legislature would not have enacted those provisions which are

within its power, independently of that which is not, the invalid

part may be dropped if what is left is fully operative as a iaw.'

as ae { Co. v. Corporation Commission, 286

ee f

° ° ’ e ° e S presumption

seems particularly strong when Congress has @lready ‘enacted

those provisions which are within its power, independently of

that which is not' ~---i.e., in the older Bankruptcy Act. *

id. at 2885 n. 3. See also, infra note 16, at 26

5 Other authorities have opined that Marathon declared Section

<41(a) nonseverable and extirpated the statute. See, e.g.,

Friend, “League President Urges Elevation of Bankruptcy Courts to

Article Three Status at Congressional Subcommi ttee Eearings," 87

COM. L. J. 394, 396 (1982); Levit and Mason, "Where Do We Go Prom

Here? Bankruptcy Administration Post-Marathon," 87 COM. L.J.

353, 355-357 (1982); Note, “Tenure and Salary Clause Restrictions

on the Jurisdiction of Article IT Courts," 96 HARV. L. REV. 257,

260 (1982); In re Cherry Pond Coal Compan e 21 B.R. 592, 593

(S.D. W. Va. 1582); In re Motion to Dismiss: Constitutionalit

of Jurisdiction of the Bankrupt Court, 23 BR. 334, 330. (EB.

N.D. Ga. 1962); in re Otero mtITs Inc., 21 B.R. 645, 647 (Bky.

D.N.M. 1982); In re M.J.5. A ref Inc., 22 B.R. 736, 737 (Bky.

E.D.N.Y. 1982); In re Rapco Seca tnc., 22 B.R. 637, 640 (Bky.

W.D.N.Y. 1982); In re Jorges Carpet Hills Inc., Adv. Pro. No.

1-82-0638 (slip Opinion at 9- anvary 31, 1983);

In re Cumberland Enterprises, Inc., 22 BR. 626, 430-631 (By.

-D. Tenn. + Suk See, in the Matter of Northland Point

Partners, Adv. Nos. 62-2277-W and 83- » Mich.,

= ° er .

anuary 7, 1983); Moore v. White Motor Co ration, 24 B.R. 200,

202-203 (N.D. Ohio sIn re Braniff Airways Incor rated,

Misc. No. 4-22l-E (slip opinion) (N.D. exas, January ° 83);

In re Stillman, Adv. Pro. No. 82-0073A (slip Opinion) (Bky. D.

~¢ January 13, 1983). But cf. In re Vaniman International

« inc., 22 B.R. 166, 195-156 (Bky. £.D.8.¥. 1982).

The distinction between jurisdiction over cases and

ceedings, first to district courts, and then to bankruptcy

-ll-e

1478(b) would be unserviceable, since they contemplate removal

from district and state courts to a bankruptcy court,’ and under

appropriate circumstances, remand by a bankruptcy court. Venue,

courts, under Sections 147l(a), 1471(b), and 1471(c), and

jurisdiction over property of the debtor, conferred on bankruptcy

courts under Section 147l(e), has not gone unremarked. Collier,

for example, notes that "[w]hat subsections (a)-(c) of Section

1471 do for title 11 cases and civil proceedings, Section 1471(e)

does for property; that is, it leaves no doubt as to the juris-

Gictional reach of the bankruptcy court over property. Inter-

estingly this is the one type of jurisdiction as to which vesting

is not first in the district courts. As such, it may be that

subsection (e), which appeared in none of the proposed House or

Senate bills, and was added at the House-Senate conference, was

merely intended to make explicit that all property of the debtor,

which becomes property of the estate, is in custodia legis of the

bankruptcy court.” 1 COLLIER ON BANKRUPTCY 43.0119], at 3-55

(15th ed. 1982). See also, P. Murphy, CREDITORS' RIGHTS IN

BANKRUPTCY 42.02, at 2-4 and n. 1 (1981). Section 1471(e), among

other things, underpins the power of turnover found at 11 U.S.C.

Section 542, 1 COLLIER ON BANKRUPTCY, supra 13.01[9), at 3-56,

which if denied to the district court, acting under the rule,

would impede business reorganizations. See, e.g., United

States v. Whiting Pools, Inc., 674 F. 24 144 (26 Cir. 1982);

; In re Alpa Corp., II BR. 261 (Bky. D. Utah 1981).

The legislative history of Section 1478(a) indicates an intent

to deny removal jurisdiction in bankruptcy matters to the

district court. The Senate bill, Section 219(a), S. 2266, 95th

Cong., 2d Sess. (1978), like Sections 147l(a), 1471(b), and

1471(c), used a two step process in vesting removal jurisdiction,

first through the district court, and then to the bankruptcy

court. See, SEN. REP. No. 95-989, 95th Cong., 24 Sess. 156

(1978). This procedure, however, was rejected and replaced with

Section 1478(a). Collier observes that the Senate bill was

“truer” to the two step “vesting” process used in Section 1471:

"The word ‘truer’ was used ...for the following simple reason:

The section as passed ignores the fact that jurisdiction over

civil proceedings is vested first in the federal district courts

and then in the bankruptcy courts. The Senate version of section

1478 recognized this fact by providing for removal to the

Gistrict court; the House version and the section as enacted can

be said to have ignored or bypassed this two-step jurisdictional

grant by providing for direct removal to the bankruptcy court."

1 COLLIER ON BANKRUPTCY 43.01[2])[b], at 3-62 (15th ed. 1982).

Section 1478(a) thus “permits removal of a claim or cause of

action to one court only--the bankruptcy court for the district

in which the relevant civil action is pending. The language of

the statute permits no exception." Id. 93.01[f) (i), at 3-73.

See also, Kennedy, "The Bankruptcy Court Under The New

Bankruptcy Law: Its Structure, Jurisdiction, Venue, and

Procedure," 11 ST. MARY'S L. J. 251, 286 n. 142 (1979).

-12-

in cases and Proceedings, 28 U.S.C. Sections 1472-1477, pro-

visional remedies, 28 U.S.C. Section 1479(¢), jury trials, 28

U.S.C. Section 1480(b), the power to act in "equity, law, and

admiralty," 28 U.S.C. Section 1481, are keyed to the bankruptcy

not the district court.8 Severance, in short, would unhitch the

bankruptcy court from these procedural moorings. And since

Section 241(a) may not be rewritten by rule, see, e.g., Pub. L.

No. 95-598, Section 247, 92 Stat. 2672 (1975), amending 28 U.S.C.

Section 2075, Ford Motor Company v. Transport Indemnity Company,

12 B.R. 143, 145-146 (E.D. Mich 1981), the district court would

be left with a jurisdiction which is incomplete, rudderless, and

in substantial measure, powerless. It seems improbable that the

Supreme Court would expect district courts to handle bankruptcy

cases and proceedings, many Of which are complex and demanding,

with such infirm and uncertain jurisdictional tools.

Finally, the Stay of judgment, first to October 4, and then

to December 24, confirms these views; if the damage could be

Papered over by rule, there would be no need for a Stay. See, In

re Motion to Dismiss: Constitutionality of Jurisdiction of the

Bankruptcy Court, 23 B.R. 335, 337, 338 (Bky. N.D. Ga. 1982); In

re M.J.S. Apparel, Inc., 22 B.R. 736, 737 (Bky. E.D.N.Y. 1982).

Collier notes that the power to act in “equity, law,

and admiralty," conferred on the bankruptcy court under Section

1481, is instrumental respecting other substantive provisions of

the Code: “For example, entering an order for relief or an order

of discharge under title 11 determines a status, one of the

indicia of a decree in equity....The bankruptcy court may, under

11 U.8.C. §510(c)(1) subordinate claims ‘under principles of

equitable subordination.' Further, the ability of the court to

fashion decrees giving ‘adequate protection’ when required by 11

U.S.C. §§362-64, is totally equitable in nature.” 1 COLLIER ON

BANKRUPTCY 93.01[5) [b) [ii), at 3-102 (15th ed. 1982). (Emphasis

in original.)

-13-

The stay was deemed necessary to “afford Congress an opportunity

to reconstitute the bankruptcy courts or to adopt other valid

means Of adjudication without impairing the interim admini-

stration of the bankruptcy laws." Marathon, Supra at 2880,

(Emphasis supplied.)9 Indeed, the Supreme Court may have

rulemaking power under Section 410, and if so, did not need to

wait upon the district courts for an emergency resolution. See,

Pub. L. No. 95-598, Section 410, 92 Stat. 2687 (1978). The

failure to use this power may Suggest an awareness that, absent

legislative action, the bankruptcy system would face a juris-

dictional abyss.10

The Court realized that Section 24l1(a), in the words of

Justice White, had been "emasculated." Rebuilding the statute,

of necessity, means reallocation of judicial power over bank-

ruptcy matters. (Indeed, the district court has done this by

rule, reversing the mandate of Section 1471(c), and rechanneling

authority to the district court, which in turn, has delegated it

to the bankruptcy judges as special masters.) This reallocation

of judicial power may be a legislative rather than a judicial

prerogative. The holding of nonseverability may have been

intended to preclude judicial interference with a legislative

right. Cf. Finley, “Article III Limits On Article 1 Courts: The

hig tr rece. of the Bankruptcy Court," 1982 ANN. SURV. BANK.

10 L. 1, 24.

Section 410 provides: "The Supreme Court may issue such

additional rules of procedure, consistent with Acts of Congress,

as may be necessary for the orderly transfer of functions and

records and the orderly transition to the new bankruptcy court

System created by this Act." On its face, the “orderly transi-

tion" language may be broad enough to supply a cure for Marathon.

The legislative history, however, notes that rules promu ga

under Section 410 will "be of an internal, administrative nature,

and unlike the rules prescribed under 28 U.S.C. 2075, will not

ordinarily affect litigants or parties in pending cases." 48.R.

REP. No. 95-595, 95th Cong., lst Sess. 462 (1977). Whether the

phrase “not ordinarily" implies that in extraordinary circum-

stances, like the present, the Court may issue a rule affecting

parties in cases is uncertain. In any event, rules under Section

410 must be “consistent with Acts of Congress."

B. Section 1471(c)

Assuming that Section 24l(a) be severable, Section 147l(c),

which refers cases and Proceedings to the bankruptcy court,

precludes the exercise of jurisdiction by the Gistrict court,11

This construction of Section 1471 is Supported by the legislative

history and case law.

1. Legislative History

The Reform Act was designed to mend the fractured

jurisdiction of former law. Reformers, early on, targeted the

bifurcated jurisdiction of district courts and the courts of

There may be an exception to this rule. The Gistrict court

may have original jurisdiction over proceedings in bankruptcy to

enjoin another court or to punish certain criminal contempts.

This exception is derived by implication, in part, from Section

1481 which denies these powers to the bankruptcy court. See, P.

Murphy, CREDITORS' RIGHTS IN BANKRUPTCY 42.04, at 2-10 and $2.06,

at 2-13 (1981); Kennedy, "The Bankruptcy Court Under The New

Bankruptcy Law: Its Structure and Jurisdiction," 55 AM. BANK. L.

J. 63, 69-70 n. 24, 74 n. 49, 79, 89 n. 114, 90 ana n. 115

(1981). But see, 1 COLLIER ON BANKRUPTCY 97.05[l)[a}, at

7-58 (15th ed. 1982).

The exception for injunctions and contempts

likewise explains Section 1471(d) which "does not prevent" a

district court, under appropriate circumstances, from “abstaining

from hearing a particular Proceeding arising under title 11 or

arising in or related to a@ case under title 11." Some have

Suggested that Section 1471(d) demonstrates that the district

court has general, Original jurisdiction under Sections 1471(a) and

1471(b). This negative YHrevente, however F, 18 \tipersuasive for

at least two reasons. First, no negative inference may be drawn

respecting the jurisdiction of the district court over cases

under Section 1471(a), since Section 1471(d) governs proceedings

only. Abstention over cases is determined by the bankrupt.c

court under 11] U.8.C. Section 305(a), and is nonreviewable y the

Gistrict court under 11 U.S.C. Section 305(c). See, e.g.,

y. D. a - Becond, as discussed below, the legislative

history and case law shew that the district court may not

exercise general, original Jurisdiction over proceedings under

Section 1471(b). This legislative history and case law may be

reconciled with Section 1471(4), if at all, by reference to the

exception for injunctions and contempts which has been carved

out of Section 1471(c).

-]5-

bankruptcy for abolition. The Commission on the Bankruptcy Laws

of the United States, for example, noted that "a considerable

part of a trustee's litigation to recover assets of the estate

must be initiated in some court," including a district court,

“other than the bankruptcy court." REPORT OF THE COMMISSION ON

THE BANKRUPTCY LAWS OF THE UNITED STATES, H. DOC, No. 93-137, pt.

I, at 89 (1973). This "division of jurisdiction" was "objection-

able" because it caused Gelay: “Not only are the proceedings in

nonbankruptcy courts [such as the district court) likely to be

paced more slowly with longer intervals between successive steps,

but the dockets of the nonbankruptcy courts are likely to be more

crowded and commencement of the trials more l{kely to be post-

poned in such courts than in bankruptcy courts. Delay is

critical in cases under the Bankruptcy Act, particularly in the

business cases where litigation is most likely to occur. This is

true because of the prejudicial effect it might have on prospects

for rehabilitating an enterprise in financial distress and the

aggravated risk of deterioration of the estate in the course of

liquidation." Id. It was believed that "[a] comprehensive grant

of jurisdiction to the bankruptcy courts over all controversies

arising out of any bankruptcy or rehabilitation case would

greatly diminish the basis for litigation of jurisdictional

issues which consumes so much time, money, and energy of the

bankruptcy system and of those involved in the administration of

debtors affairs. It would foster the development of a more

uniform, cohesive body of substantive and procedural law which

would be applicable to the administration of estates under the

Bankruptcy Act. The withdrawal from state and federal district

re A A

courts of jurisdiction of the s0O-called plenary proceedings, when

coupled with the establishment of uniform federal standards and

rules, as proposed by the Commission for adoption and application

in lieu of the diverse state laws governing debtors’ and credi-

tors’ rights, should eliminate a source of uncertainty and

division of authority which has characterized bankruptcy law."

Id. at 90-91. (Emphasis supplied.)

The Commission views were reduced to legislation which,

after several years of Study and revision, evolved into H.R.

8200, 95th Cong., lst. Sess. (1977). H.R. 8200 would have

established bankruptcy courts independent of the district courts.

Assigning bankruptcy cases and Proceedings to the district courts

was considered but Gisapproved “for a variety of reasons";

The district courts are generally over-

burdened. Their caseload has increased

dramatically in recent years without a

corresponding increase in the number of

judges. Though a judgeship bill is presently

pending in both Houses of Congress, the

increased number of district judges proposed

in those bills probably would be inadequate

to absorb the bankruptcy caseload,

Second, the Speedy Trial Act requires that

criminal matters be given precedence on the

district court calendars. The Constitution

does not require a “speedy trial" for

bankruptcy matters as it does for criminal

cases. Thus, criminal matters would continue

to be accorded priority. However, the nature

of bankruptcy is such that it, too, for

practical reasons, requires expeditious

disposition. The original Bankruptcy Act in

1898 left many matters to the State courts

for disposition because often they were

speedier forums than the bankruptcy courts.

Today, however, the State courts are seri-

ously overburdened, although the bankruptcy

courts are nearly current with their dockets.

Such delays as there are in bankruptcy cases

often result from the need for a matter to

progees to decision in a State court. H.R.

200 does much to alleviate the problem, but

-17-

the change proposed would be to little avail

if bankruptcy disputes were required to fight

the judicial logjam caused by the Speedy

Trial Act and by the volume of litigation

pending in district courts. Assets would

Geteriorate; creditors would be delayed in

recovering money to which they are justly

entitled; and, to use the familiar medical

metaphor, in business reorganization cases,

the patient would die on the Operating table

while diagnosis slowly proceeded.

Third, assignment of bankruptcy disputes to

the district judges would be generally

unacceptable because district judges have

long made clear their lack of interest in

bankruptcy matters. In 1959, the Judicial

Conference recommended legislation that would

remove one of the last remaining functions of

the district judges in bankruptcy cases:

making an order of reference. The law now

requires automatic reference, and district

judges no longer have any involvement in

bankruptcy cases. More recently, the

Judicial Conference has made known its lack

of interest in bankruptcy cases by its

recommendation that they continue to be

handled by bankruptcy judges, and not by

Gistrict judges.

Finally, a generalist judge that only

occasionally handled bankruptcy cases would

not have a sufficient understanding of the

law and the fact situations that arise in

bankruptcy cases. He would be unable to make

the quick decisions that these cases so often

require. H.R. REP. No. 95-595, 95th Cong.,

lst Sess. 14-15 (1977)

The Senate, in a counterproposal, S. 2266, 95th Cong., 24

Sess. (1978), rejected the court structure of H.R. 8200, but

agreed that jurisdiction should not be Givided between district

and bankruptcy courts. S&S. 2266 established the bankruptcy court

as an “adjunct” of the district court, but commissioned the

bankruptcy court to exercise all of the jurisdiction of the

district court. This delegation of jurisdiction meant that

"[aletions that formerly had to be tried in the state court or in

-18-

the Federal district court, at great cost and delay to the

estate, may now be tried in the bankruptcy court," SEN. REP. No.

95-989, 95th Cong., 24 Sess. 153 (1978). (Emphasis supplied.)

See also H.R. REP. No. 95-595, Supra at 445. Moreover, the

“statutory scheme" of s. 2266 "[was) adopted [so that) the

totality of this jurisdiction....shall be exercised by the

bankruptcy court, which is Created as an adjunct of each U.S.

district court." SEN. REP. No. 95-989, supra at 153. (Emphasis

supplied.) Elsewhere the Senate Report emphasizes that the

"expanded jurisdiction vested in the U.S. district courts” is

"delegated by statute for exercise exclusively by bankruptcy

judges, subject always to review, as under present law, by the

Gistrict courts," id. at 16 (emphasis supplied), and reemphasizes

that "except where the bankruptcy court abstains from hearing an

action or Proceeding arising under or related to a case under

title 11, all cases under title 11 and all civil actions and

proceedings arising under or related to cases under title 11 are

to be before the bankruptcy judge....[The amendments on juris-

diction], while conferring expanded jurisdiction in bankruptcy

cases and related civil actions and proceedings Girectly upon the

district courts, Gelegate the exclusive exercise of that juris-

Giction at the trial level to bankruptcy judges." Id. at 18,

(Emphasis supplied.)

The Senate version of the legislation was adopted and

enacted as Section 1471 of the Reform Act. As noted above, it

confers jurisdiction on the bankruptcy court using a two step

process, first to the district court, and then to the bankruptcy

court. Floor leaders of the legislation explained, however, in

words which echoed the Commission, House, and Senate Reports,

that the jurisdiction initially vested in the Gistrict court was

“completely Gelegated to the bankruptcy court....The bankruptcy

court is thus given pervasive jurisdiction over all Proceedings

arising in or relating to bankruptcy cases. In addition, the

bankruptcy court is given exclusive jurisdiction of the Property

Of the estate in a case under title 11." 124 Cong. Rec. 817,424

(daily ed., October 6, 1978); 124 Cong. Rec. #11 ,107-11,108

(daily ed., September 28, 1978), (Emphasis supplied.)12 congress

Commentators have remarked upon the legislative

rationale for Section 1471(c). Judge Conrad Cyr, in 1978, while

the Reform Act was incubating in Congress, wrote that "it has

become an increasingly intolerable inefficiency to permit the

continued adulteration of bankruptcy court jurisdiction in

deference to overcrowded state and federal courts of general

jurisdiction," Cyr, "Structuring a New ankruptcy Court: A

Comparative Analysis," 52 AM. BANK. L. J. 171, 173 and n. 1

(1978). (Emphasis in Original omitted in part.) He did not

foresee any lessening of this problem: "The federal Gistrict

courts determine many of the more important and prominent issues

of our time. There seems little likelihood that either the

volume, scope or importance of the general jurisdiction of the

federal district courts will be restricted appreciably in the

foreseeable future. The prominence and importance universally

attributed to much of the litigation overcrowding the dockets of

the federal district courts cannot be compared to the much less

glamorous gruel of the bankruptcy court, It seems all too

predictable that the time and attention of the district judge of

the bankruptcy division would soon be diverted to nonbankruptcy

cases to such an extent that bankruptcy litigation would become a

distinctly secondary concern. The unremitting demands of the

enormous volume of large and smal) insolvency cases would then

require reference by the district judge of the bankr

circle--back to the referee system, with the probable additional

referees’ would be generalists,

the commitment required to develop or maintain expertise in

bankruptcy law an practice is likely to exist on the part of

most of the otherwise overburdened federal judges." Id. at 157.

Others have observed that "[t)he Act's jurisdictional” scheme

OO Ee ——E—E————

believed there was no time, expertise, or inclination in the

district courts, and therefore, vested jurisdiction "completely"

and “exclusively” in the bankruptcy courts.13

2. Case Law

The Supreme Court and several district courts, recognizing

the import of this legislative history, and in more contemplative

times, have read Sections 1471(a), 1471(b), and 1471(¢) to mean

that district courts have the shadow but not the substance of

power, all of which must be exercised by the bankruptcy courts.

take jurisdiction of an issue but had to await its resolution in

a@ nonbankruptcy forum, where proceedings are usually slower and

more likely to be postponed. Thus, commentators calling for

bankruptcy reform often complained that state courts or federal

Gistrict courts sitting at law or in equity heard far too many

ankruptcy matters because @ same results could be more

efficiently and speedily reached in one bankruptcy forum'",

Note, "Selective Exercise of Jurisdiction in Bankruptcy-Related

Civil Proceedings,” 59 TEX. L. REV. 325, 329 (1981) (emphasis

supplied), citing Drake, “The Judges' Bankruptcy Bill and the

Commission's Bill: A Question of Access to the Judicial Process,"

26 MERCER L. REV. 1009, 1011 (1975).

The Senate version, Section 216 of &S. 2266, which would have

amended old 28 U.S.C. Section 1334 and added a new paragraph

(d)(1), said that the bankruptcy court “may exercise" the

jurisdiction given to the district court. The Senate Report,

however, emphasized that “[t)he use of the term 'may' in this

section is not intended to imply that the district court has any

discretion whatsoever in withholding bankruptcy cases or civil

proceedings arising under title 11 or arising under or related to

a case under title 11 from the bankruptcy court." SEN. REP. No.

95-989, supra at 154. To remove any doubt however, Section

1471(c), as enacted, was changed to read the bankruptcy court

“shall exercise" the jurisdiction given to the district court.

Similarly, Pub. L. No. 95-598, as passed, amends title 28 by

adding a new Chapter 6. Section 151 of Chapter 6 creates and

composes the new “engage courts which are to be "adjuncts" of

the district courts. Section 151(3) provides for the designation

and assignment of judges from circuit and district courts to sit

on the new bankruptcy courts. See generally, Kennedy, “The

pment | Court Under The New Bankruptcy te: Its Structure and

Jurisdiction,” 55 AM. BANK. L. J. 63, 66-79 (1981). This

provision might be surplusage if these judges, who are otherwise

assignable throughout the federal system, could exercise juris-

Giction through the district court.

=2)<-

The plurality in Marathon, for example, gave this con-

struction to the statute, noting that Sections 147l(a) and

1471(b) are a “facade” because “the bankruptcy courts exercise

"all of the jurisdiction’ conferred by the act on the district

courts." Marathon, supra at 2879. (Emphasis in original.)24

Indeed, this view is necessary to their holding “that

§241(a)...has impermissibly removed most, if not all, of ‘the

essential attributes of the judicial power' from the Art. III

district court, and has vested those attributes in a non-Art. III

adjunct.” Id. at 2880. The concurring justices were likewise

“of the opinion that the extent of review by Art. III courts

provided On appeal from a decision of the Bankruptcy Court in a

case such as Northern's does not save the grant of authority to

the latter...All matters of fact and law in whatever domains of

the law to which the parties' dispute may lead are to be resolved

by the Bankruptcy Court in the first instance, with only tradi-

tional appellate review apparently contemplated by Art. III

courts. Acting in this manner the Bankruptcy Court is not an

‘adjunct’ of either the District Court or the Court of Appeals."

Id. at 2882.

Marathon Pipeline Company v. Northern Pipeline Construction

Company, CCH FED. BANK. L. REP. 468,268 (D. Minn., July 24,

1981), the district court opinion, also noted the two step

The “two step process" was a legislative "legerdemain,"

“circumlocution,"” “stratagem,” or “sleight of hand" to sidestep

constitutional problems. See, e.g., 1 COLLIER ON BANKRUPTCY

€2.01[{1)[c), at 3-36--3-37 (I5th ed. 1982); id. 43.0l[e), at

3-44; Kennedy, "The Bankruptcy Court Under The New Bankruptcy

Law: Its Structure and Jurisdiction," 55 AM. BANK. L. J. 63,

80-81 (1981); Lieb, “Jurisdiction and Venue in Bankruptcy

Litigation,” 1982 ANN. SURV. BANK. L. 69, 76, 78.

process of Section 1471, and observed that “the ultimate reposi-

tory of this jurisdiction is not the federal district court. 28

U.S.C. §1471(c) assigns the jurisdiction granted to the district

courts by subsections (a) and (b) to the bankruptcy courts. This

assignment or transfer of jurisdiction from the district courts

to the bankruptcy courts is mandatory, as the bankruptcy courts

‘shall exercise all the jurisdiction [so] conferred.' Thus, the

statutory scheme is constructed in such a manner as to remove

with one hand what was just previously bestowed by the other."

Id. at 79,491-79,492.

In Chamberlain Livestock Auction, Inc. v. Aberdeen Pro-

duction Credit Association, 22 B.R. 750 (D. S.D. 1982), the

bankruptcy court abstained from hearing a suit for conversion and

transferred the proceeding to the district court. The district

court dismissed the proceeding for want of diversity juris-

diction. Plaintiffs asked the district court to vacate the order

of dismissal, arguing that it had jurisdiction under Section

1471(b). The district court rejected this argument, stating that

it "ignores the intent of Congress when it passed the Bankruptcy

Code in 1978. Subsections (a) and (b) of 28 U.S.C. $1471 were

of expansive jurisdiction to bankruptcy courts by making them

adjuncts of the district courts...The intent of Congress...was to

channel the bankruptcy proceedings to the bankruptcy courts.

There appears no indication that Congress intended that the

district courts have expanded jurisdiction to hear new kinds of

proceedings.” Id. at 751. The motion to vacate the order of

Gismissal was denied.

In In re Related Asbestos Cases, 23 B.R. 523 (N.D. Cal.

1982), plaintiffs had brought products liability actions against

several asbestos manufacturers in district court. Two manu-

facturers, Unarco and Johns-Manville, filed petitions under

Chapter 11 of the Bankruptcy Code. The automatic stay, found at

11 U.S.C Section 362(a), barred continuation of the suits against

Unarco and Johns-Manville, but it was questioned whether the stay

protected the nondebtor codefendants. These codefendants argued

that the district court was without jurisdiction to construe the

scope of Section 362(a) and that plaintiffs must obtain relief

from the stay from the bankruptcy courts. The codefendants, in

Support of this position, cited In re Coleman American Companies,

8 B.R. 364 (Bky. D. Kan. 1981), which held that a creditor must

obtain relief from the stay in the bankruptcy court where the

case is commenced. The district judge in Related Asbestos Cases

distinguished Coleman, noting that he was construing the scope of

the stay, but agreed that he had no power to grant relief from

the stay: "[T]he original bankruptcy courts alone would have

exclusive power to lift an actual stay under section 362. A

contrary conclusion would contravene the intention of Congress to

centralize litigation concerning the bankrupt's affairs in a

Single forum." In re Related Asbestos Cases, Supra at 526.

In In re Wolf, CCH BANK. L. REP. 467,947 (D. Mass,, February

9, 1981) creditors had filed a petition for involuntary bank-

ruptcy against a debtor under 11 U.S.C. Section 303. The debtor

moved to dismiss or abstain in the bankruptcy court. While this

motion was pending, debtor filed an action in district court,

seeking a declaratory judgment that the bankruptcy court should

-24-

dismiss the involuntary petition. The creditors sought dismissal

of the suit in district court on the ground that it lacked

subject matter jurisdiction. The Gistrict court agreed "that the

present posture of the...dispute does not permit the exercise of

either appellate or Original jurisdiction. Appellate jurisdiction

Goes not exist because the bankruptcy court has not yet issued an

order on the debtor's motion to dismiss...Until an order is

issued...there is nothing for this court to review. Original

jurisdiction is inappropriate because a party may not use an

action for declaratory relief as a substitute for appeal. The

debtor may not by pass [sic] the appellate procedures set out in

the 1978 Reform Act by bringing a declaratory notion. The

‘debtor's only recourse, therefore, was to await the decision of

the bankruptcy court on his motion to dismiss." Id. at

78,879-78,880. Wolf thus implies that district courts have

appellate but not original jurisdiction under the Reform Act.

In In re William 0. Petrusch, Jr. d/b/a B & L Distribution

Center, 8 B.C.D. 160 (N.D.N.Y¥. 1981), a bankruptcy court enjoined

a union from picketing a business which had filed a petition

under Chapter 13 of the Bankruptcy Code. The union, Claiming

that the injunction violated the Norris-LaGuardia Act, sought a

stay from the district court, pending appeal. The debtor argued

that the district court "has no authority to overturn... the

Bankruptcy Court's injunction since, in matters of bankruptcy,

the district courts and the bankruptcy courts have concurrent

jurisdiction under 28 U.S.C. §1471." Id. at 180 n. 1. The

Gistrict court rejected this argument, noting that it was acting

in an appellate not a trial capacity. Id. See also, Lieb,

-25-

"Jurisdiction and Venue in Bankruptcy Litigation," 1982 ANN.

SURV. BANK. L. 69, 101-102. Like Wolf, Petrusch implies that

district courts have appellate but not Original jurisdiction

under the Reform Act.

Bankruptcy court decisions, pre- and post- Marathon, have

concurred with this construction of Section 1471. See, e.g., In

re Motion to Dismiss: Constitutionality of Jurisdiction of the

Bankruptcy Court, Supra at 338,345; In the Matter of the Schear

Realty & Investment Co., Inc., 9 B.C.D. 1210, 1215 (Bky. S.D.

Ohio 1982); In the Matter of Century Entertainment Corp.,

20 B.R. 126, 128 (Bky. S.D. Ohio 1982); In re Jorges Carpet

Mills, Inc., Adv. Pro. No. 1-82-0638 (slip opinion at 8-10) (Bky.

E.D. Tenn., January 31, 1983). Other authorities are in accord.

See, e-.g-., W. Norton and R.Lieb, RECONSTITUTING THE BANKRUPTCY

COURT IN 1982: CONGRESSIONAL CONSTITUTIONAL OPTIONS 6-7, 13-14

(1982); Babitt, "The Bankruptcy Court, Its Judges, Their Juris-

diction and Powers, and Appeals, Under Title 11 of the 1978

Bankruptcy Reform Act: Transition and Beyond,” 1979 ANN. SURV.

BANK. L. 89, 92, 95; Clarkson, "A Brief Overview of the Con-

gressional Debate on the Bankruptcy Court System," 1979 ANN.

SURV. BANK. L. 63, 69; Finley, "Article III Limits on Article I

Courts: The Constitutionality of the Bankruptcy Court,” 1982 ANN.

SURV. BANK. L. 1, 6, 22-23; Krattenmaker, "Article III and

Judicial Independence: Why the New Bankruptcy Courts are Uncon-

stitutional,” 70 GEO. L. J. 297, 308 (1981); "Brief for the

United States of America in Support of the Constitutionality of

the Provisions of 28 U.S.C. §1471 Vesting in the United States

District Court and Delegating to Adjunct Bankruptcy Courts

+o oe oe Deen

Jurisdiction Over all Bankruptcy-Related Controversies,"

reprinted in 56 am. BANK. L. J. 97, 99,

108 (1982). But cf.

Kennedy, "The Bankruptcy Court Under The New Bankruptcy Law: Its

Structure and Jurisdiction," 55 AM. BANK. L. J. 63, 77 (1981),15

The rule is inconsistent with the language, history, and

Purpose of Section 1471l(c). District courts, before December

24, have disclaimed Original jurisdiction under Section 1471.

Plaintiff, to counter this history and these cases, argues that

the jurisdiction of the district court,

like a "springing use,"

was "revived" when the stay expired. This argument, however, in

effect, amends the Statute and invents

district court never possessed.16

| Jurisdiction which the

Three district court Opinions have disagreed with this

construction of Section 1471. In Moore v. White Motor Cor

ration, 24 B.R. 200 (N.D. Ohio 1983),

udge rich opines that

Strict courts may exercise trial jurisdiction under Section

1471. She admits, however, that the "issue is not specifi-

cally before this Court at this juncture." Id. at 203. (Indeed, she

asserts jurisdiction under Section 13

34 as an appellate court.

Id. at 201.) In In the Matter of Northland Point Partners, Adv.

OS. 82-2277-wW an - -

order De CNhe,

1983), Judge DeMascio remarks that "it appears to

power conferred by 28 U.S.C. $1471(a)

anuary 7,

us that the

and (b) was arguably not

affected by the Marathon decision. 14, at 3. Although unclear,

this conclusion may flow from a belie? that Section 24l1(a) is

severable. Id. In any event, the history and case law dealing

with Section 1471 are not discussed.

Incorporated, Misc. No. 4-221-E (N.D.

Judge wahoo, relying upon the severa

finds that district courts have trial

1471. The history and case law Geali

16 discussed.

In In re Braniff Airwa s

Tex., anuary ’ ’

bility of Section 241(a),

jurisdiction under Section

ng with Section 1471 are not

Plaintiff argues that Section 24l(a) is severable and that the

death of Section 1471(c) gives life to Sections 1471(a) and

1471(b). The rules of severance, however, do not allow a

“springing use," especially in the face of contrary legislative

intent or inadequate Statutory remainder.

Severance is impermissible where it is “evident that the

legislature would not have enacted those provisions which are

within its power, independently of that which is not" or where

the balance of a statute is not "fully operative as a law."

IV. TRANSITION STATUTES

Plaintiff points to the transition statutes as an alternate

basis for jurisdiction over bankruptcy matters in the district

court. It argues that Section 404(a) continues the court of

bankruptcy of former law, that this court of bankruptcy was the

district court, and therefore the district court may act in

bankruptcy mséeors. Plaintiff further argues that Section

405(a)(2) confirms this view. Section 405(a)(2) provides:

"Except as provided in subsection (c) of this section, any

proceeding in a court of bankruptcy in a case under title 11 of

the United States Code that is not before the United States

bankruptcy judge shall be before the judge of the court of

bankruptcy for the district in which such case is pending.” The

Buckley v. Valeo, 424 U.S. 1, 108 (1976). Even where a statute

contains a severability clause, it will not apply if the effect

"would be to create a program quite different from the one the

legislature actually adopted." Sloan v. Lemon, 413 U.S. 825, 834

(1973).

These tests underline the nonseverability of Section 241(a).

The plurality and concurrence were concerned with splitting

jurisdiction between forums, Thus, footnote 40 emphasizes that

"Congress has vested jurisdiction over this and all matters

related to cases under title 11 in a single non-Art. III court,

and has done so pursuant to a single statutor

diction," and that "one of the express purposes o

was to ensure adjudication of all claims in and to

avoid the delay and expense of jurisdiction dteputtaen eae this

reason, it would not be "Congress' choice...to have this case

‘routed to the United States district court of which the

bankruptcy court is an adjunct.'* Marathon, s

"judge of the court of bankruptcy” is the district judge, it is

said, and he may hear bankruptcy matters when the bankruptcy

judge may not. These arguments are unpersuasive, however, for

several reasons.17

This reading of legislative intent is consistent with the

Statutory scheme. Jurisdiction over cases and proceedings is

taken from the district courts and given to the bankruptcy

courts. Jurisdiction over property is given to the bankruptcy

courts. Removal jurisdiction and the option to remand are given

to the bankruptcy courts. Venue, provisional remedies, jury

trials, and the power to act in "equity, law, and admiralty” are

tied to the bankruptcy courts.

In short, the indivisibility of jurisdiction conferred on the

bankruptcy court is the reason for nonseverance. Severance of

Section 147l(c) from Section 241(a), far from atest a "revival"

of Sections 1471l(a) and 1471(b), offends legislative ntent, and

pod @ statutory remainder which is not “fully operative as a

aw.

The dissent, in the opinion of Justice White, argued that the

Court should sever the jurisdiction of the bankruptcy court over

Marathon-type proceedings. This, in its view, "would remove

rom the jurisdiction of the bankruptcy judge only a tiny

fraction of the cases he is now empowered to adjudicate and would

not otherwise limit his jurisdiction." Marathon, supra at

2684 (Justice White, dissenting opinion). The Ao did not

argue, however, that if the entire jurisdiction of the bankruptcy

court were stricken, the jurisdiction of the district court

nevertheless could be severed and revived. Put differently, the

Gissent argued that legislative intent would permit severance of

Marathon-type proceedings. It did not argue that legislative

ntent would allow severance of the bankruptcy court and its

replacement by the district court.

Plaintiff has not argued that Marathon worked a “revival,”

via Section 404(a), of jurisdiction under the old re had

ct. The revival argument, in any event, has been soundly

Giscredited. See, e.g., H.R. REP. No. 97-807,97th Cong., 24

Sess. 88-107 (1962).

First, the arguments beg the question of jurisdiction.

Assuming the district judge or district court may sit as the

court of bankruptcy continued under Section 404(a), what is the

source of its jurisdiction? The answer is in Section 405(b)

which makes Section 24l(a) applicable to the courts of bankruptcy

Guring transition. Hence, the source of jurisdiction for the

district judge or district court, qua district court or court of

bankruptcy, is the same, viz., Section 241(a). As noted above,

however, Section 241(a) is nonseverable and was stricken by

Marathon, leaving no jurisidiction for the district judge or

Gistrict court, acting in any capacity, to exercise. Indeed,

Marathon involved a transition case and its culing applied to the

transition statutes. See, In re Motion to Dismiss:

Constitutionality of Jurisdiction of the Bankruptcy Court,

supra at 345-346,18

The status of the district judge or district court as a court

of bankruptcy under Section 404(a), as noted in the text, adds

nothing to the debate over jurisdiction under the Reform Act.

The Court of bankruptcy during transition is a forum to

deal with cases still pending under and governed by the former

Bankruptcy Act. See, Pub. L. No. 95-595, Section 403(a), 92

Stat. 2683 (1978). Cf. Central Trust Co. v. Creditor’' Committee,

454 U.S. 354 (1982).

The court of bankruptcy, as such, serves no purpose under

the Reform Act. It is continued during transition, but "[e]ach

of the courts of bankruptcy so continued shall constitute a

separate department of the district court that is such court of

bankruptcy. Read literally, Section 404(a) says that the court

of bankruptcy is at once the district court and a separate

department of the district court. This confusion is compounded

by Section 405(b) which grants the court of bankruptcy juris-

diction under Section 241(a) where the bankruptcy and district

courts are functionally distinct entities. This view is

reinforced by Section 405(a)(2) and 405(c) which, as discussed

below, with narrow exceptions, confine the district judges and

district court to an appellate role.

In short, the bankruptcy system, under the transition

Statutes, is the analogue of the court structure and jurisdiction

post-transition. This is evidenced by the many parallels between

ila a a a

Moreover, assuming that Section 24l(a) be severable,

Section 405(a)(1), like Section 1471(c), mandates the reference

of all cases and proceedings in bankruptcy to the bankruptcy

judge and thereby prevents the exercise of jurisdiction by the

district judge. See, e.g., H.R. REP. No. 95-595, supra at

460; 1 COLLIER ON BANKRUPTCY 47.05 [l][a), at 7-55--7-59 (15th

ed. 1982). Cf. In re Jorges Carpet Mills, Inc., Adv. Pro.

No, 1-82-0638 (slip opinion at 11-12)(E.D. Tenn., January 31,

1982).

Section 405(a)(2), contrary to the contention of plaintiff,

does not alter this mandate if read with Sections 405(a)(1) and

405(c). Sections 405(a)(1)(A), (B), and (C) forbid bankruptcy

judges from hearing motions to enjoin another court, certain

criminal contempts, and appeals from a bankruptcy judge.

Sections 405(c)(1) and (2) make Section 1334 operative

Guring transition and constitute the district court as an appellate

tribunal. ples

titles II and IV of the Reform Act, as well as Pub. L. No.

95-598, Section 406, 92 Stat. 2686 (1978) which requires the

Administrative Office of United States Courts to make "continuing

studies and surveys of conditions in the judicial districts to

determine,” among other things, “the number of bankruptcy judges

of the United States bankruptcy courts established under Section

201 of this Act that will be needed after March 31, 1984, to

provide for the expeditious and effective administration of

ustice.” These prognostications would be

naccurate unless the transition system, from which measurements

are made, will be substantially the same as the post-transition

system. Indeed, the House Report notes that the transition

courts will operate “enough like the proposed new court system so

that the measurement process of case-load and judicial time

requirements will be accurate." H.R. REP. No. 95-595, supra at

459. See also, id. at 460; 1 COLLIER ON BANKRUPTCY 42. , at

2-30 (I5th ed. T5982); ia. 93.01 [1) [a], at 3-10; ia. ¢q 7.04[1),

at 7-25-~-7-27; id. 97.04[5], at 7-49--7-50; id, ¢ 7.05 (1)

7-55;In the Matter of Glover Inc., No. 82-1722 (slip opinion at

6)(10th Cir. 1983); In re Callister, 673 F.24 305, 306 (10th

Cir. 1982); In re Shannon 670 Toa 904, YO (loth Cir. Yby).

Section 405(a)(2) was Gesigned to mesh

405(a)(1) and 405(c).

with Sections

Section 405(a) (2) provides that where a

Proceeding is not before a bankruptcy judge,

enumerated in Section

meaning proceedings

405(a)(1)(A), (B), and (C), such as certain

criminal contempts, they may be heard by the district judge. See,

@.g.-, 1 COLLIER ON BANKRUPTCY, Supra 47.05[1)[5), at

7-59--7-61; W. Norton and R. Lieb, THE APTERMATH OF NORTHERN

PIPELINE: BANKRUPTCY JURISDICTION UNDER LOCAL COURT RULE 25

(1983); Kennedy "The Bankruptcy Court Under the New Bankruptcy

Law: Its Structure and Jurisdiction," Supra at 69 n. 24, 74 n.

49, 89 n. 114. Section

to emphasize that the di

in atrial ana appellate

405(a)(2) is made subject to Section 405(c) °

strict judge shall not function

simultaneously

capacity,

Plaintiff's construction ignores the harmonious relation of

Sections 405(a)(1), 405(a)(2), and 405(c). It would broaden the

matters triable before the district judge beyond those enumerated

in Sections 405(a)(1)(A), (B), and (C), in derogation of the

mandatory reference of Section 405(a)(1), in contravention of the

Proviso which precludes the Gistrict judge from wearing trial and

appellate hats in Section 405(a)(2), and in Opposition to the

legislative intent earlier describea.19

Section 405(a)(2) is not broad enough, in any event, to

validate the rule, since at most it permits the district judge to

hear proceedings not cases under title 11.

V. CONCLUSION

‘ The rule does not confer Power to hear this proceeding

because it rests upon faulty jurisdiction. If the rule dies

under law, equity cannot resuscitate it. Equity so employed would

become inequity to those who improvidently--or

involuntarily--relied. The complaint must be dismissed .20

Recognizing, however, that the law in this case may be, as

Justice Holmes suggested, “nothing more" than a “prophe[cy] of

what the [appellate] courts will Go in fact,” 0. Holmes THE PATH

OF THE LAW (1697), the judgment Gismissing the complaint is

stayed and certified to the district court for review under

paragraphs (4)(2) and (e)(2)(A)(ii) of the rule.

DATED this 7th day of Pebruary, 1983.

mee Me 4

United States nkruptcy Judge

Because of the disposition of this proceeding on juris-

Gictional grounds, it is unnecessary to determine whether the

Gistrict court has authority to promulgate the rule, and if so,

whether the rule has been issued consistent with that authority.

Nor is it necessary to decide whether, under the guidelines of

Marathon, or within other relevant restraints, the rule properly

e os es power from the district court to bankruptcy judges as

Special masters.

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF UTAH

In re Bankruptcy Case No. 82C-00736

KENT D. RICHARDSON, and

F. NADINE RICHARDSON,

Debtors.

)

DUANE H. GILLMAN, Trustee of ) Civil Proceeding No. 82PC-0746

the estate of NENT D. and )

F. NADINE RICHARDSON, )

)

Plaintiff.

PRESTON FAMILY INVESTMENT

COMPANY, and FIRST INTERSTATE

BANK OF UTAH, MEMORANDUM OPINION ON

SUBJECT MATTER JURISDICTION

Defendants.

Appearances: Duane H. Gillman, Boulden & Gillman, Salt Lake

City, Utah, for plaintiff; Stephen T. Preston, Salt Lake City,

Utah, for defendant Preston Family Investment Company; Roy A.

Williams, Jones, Waldo, Holbrook & McDonough, Salt Lake City,

Utah, for defendant First Interstate Bank of Utah.

Preston Family Investment Company, defendant in a civil pro-

ceeding brought by a trustee in bankruptcy, arising under title

11, United States Code, and commenced before June 28, 1982,

requests dismissal for lack of subject matter jurisdiction. The

motion is granted.

Page 2

82PC-0746

FACTUAL AND PROCEDURAL BACKGROUND

Debtors filed a joint petition for relief under Chapter 7 on

March 25, 1982. On June 15, 1982, the trustee of the debtors’

estates filed this action to avoid a transfer of property under

11 U.S.C. §§ 544(a)(3), 544(b), and 548(a)(2). The trustee then

filed a motion for summary judgment which was granted in part and

denied in part by an order entered on October 2, 1982. It was

held, as a matter of law, that the trustee could not avoid the

transfer under Section 544(a)(3), that a summary judgment on the

trustee's cause of action under Section 544(b) was not then

appropriate, and that the trustee was entitled to a partial

summary judgment on his cause of action under Section 548(a)(2).

Gillman v. Preston Family Investment Co. (In re Richardson),

23 B.R. 434 (D. Utah 1982). Thus, the trustee's causes of action

under Sections 544(b) and 548(a)(2) were left for trial, which

was set for January 14, 1983. At trial, defendant Preston Family

Investment Co. moved to dismiss the trustee's complaint for lack

of subject matter jurisdiction.2 In support of its motion,

Preston relies on Northern Pipeline Construction Co. v. Marathon

Pipe Line Co., U.S. , 102 S. Ct. 2858 (June 28,

1982) (hereinafter, Marathon).

Marathon holds that the grant of subject matter jurisdiction

to the bankruptcy courts in Section 241(a) of the Bankruptcy

See Rule 712 Bankr. R. P. and Rule 12(b)(1) and (h)(3) Fed. R.

ve. P.

Page 3

82PC-0746

Reform Act of 1978, Pub. L. No. 95-598, § 241(a), 92 Stat. 2668

(codified at 28 U.S.C. §§ 1471-1482), violates Article III of the

Constitution of the United States. Marathon also holds Section

24l(a) invalid in its entirety. The Court refused to sever any

constitutional portions of the jurisdictional grant from those

portions which are not constitutional.2

The Supreme Court's judgment in Marathon did not take effect

until December 24, 1982. See page 7, below. On December 24, the

United States District Court for the District of Utah adopted a

rule which became effective December 25. That rule applies "to

all bankruptcy cases and proceedings not governed by the

Bankruptcy Act of 1898 as amended, and filed on or after

October 1, 1979." Section (h). The trustee's action falls

within this provision. Sections (c)(1) and (h) of the rule refer

this proceeding to this bankruptcy judge.

The trustee argues that either this court or the United

States district court for this district has subject matter

jurisdiction of this action. First, the trustee argues, this

court retains jurisdiction under Section 241(a) of the Bankruptcy

Reform Act. This action was filed on June 15, 1982, before the

date of the Marathon decision and before the Marathon judgment

became effective. In the trustee's view, because the Supreme

For a thorough discussion of the holding of Marathon, see In re

Color Craft Press, Ltd., B.R. , Bankr. No.

M- , Civ. Pro. No. 82PM-0974, slip Op. (D. Utah Feb. 7,

1983). I concur completely in the views expressed In re Color

Craft Press and adopt that opinion as a part of this Opinion.

Page 4

82PC-0746

Court ruled that its holding in Marathon would apply only

prospectively, this court retains subject matter jurisdiction

under Section 24l(a). Alternatively, the trustee argues that

this court retains jurisdiction under 11 U.S.C. § 105 and

Section 404(a) of the Bankruptcy Reform Act of 1978. The

trustee's final argument is that the United States district court

for this district derives jurisdiction from 28 U.S.C. § 1331 and

that the rule adopted in this district made a valid reference to

this bankruptcy judge of the trial of this action. These argu-

ments are analyzed below.

THIS COURT DOES NOT RETAIN SUBJECT MATTER

JURISDICTION OF THIS ACTION UNDER THE “PROSPECTIVE ONLY"

HOLDING OF MARATHON

"([O)ur decision today," the Court said in Marathon, “shall

apply only prospectively.” 102 S. Ct. at 2880. Appended to this

sentence is footnote 41, which cites portions of three cases:

Buckley v. Valeo, 424 U.S., at 142; Chicot County Drainage

District v. Baxter State Bank, 308 U.S. 371, 376-377 (1940);

Insurance Corp. v. Compagnie des Bauxites, U.S. °

e nm. 93 102 S. Ct. 2099, 2104 n. 9 (1982). The Court's

intention is illuminated, not only by the authorities cited in

footnote 41, but by the context in which its “prospective only”

holding was made.

Page 5

82PC-0746

Before reaching the issue of the possible retroactive

application of its decision, the Court “concluded that the broad

grant of jurisdiction to the bankruptcy courts contained in

§ 24l1(a) is unconstitutional.” 102 S. Ct. at 2880. Then, the

Court asked “whether [its] holding should be applied retro-

actively to the effective date of the Act,” October 1, 1979. Id.

The Court turned its attention to Marathon's effect on actions

taken pursuant to the jurisdictional grant of Section 241(a)

between October 1, 1979 and June 28, 1982, the date of the

Marathon opinion. ’

Analysis of the retroactivity question began with a review

of "the three considerations recognized by our precedents as

properly bearing upon the issue of retroactivity. They are,

first, whether the holding in question ‘decid[ed] an issue of

first impression whose resolution was not clearly foreshadowed’

by earlier cases, (citation omitted); second, ‘whether retro-

spective operation will further or retard [the] operation’ of the

holding in question (citation omitted); and third, whether

retroactive application ‘could produce substantial inequitable

results’ in individual cases (citation omitted)." 102 S. Ct. at

2880 (citing Chevron Oil v. Huson, 404 U.S. 97, 106-107 (1971)).

Next, the Court found that “in the present case, all of these

considerations militate against the retroactive application of

our holding today. It is plain that Congress‘ broad grant of

judicial power to non-Art. III bankruptcy judges presents an

unprecedented question of interpretation of Art. III. It is

Page 6

82PC-0746

equally plain that retroactive application would not further the

operation of our holding, and would surely visit substantial

injustice and hardship upon those litigants who relied upon the

Act's vesting of jurisdiction in the bankruptcy courts." Id. The

Court's reference to “litigants who relied upon the Act's vesting

of jurisdiction in the bankruptcy courts" leaves room for

speculation. Did the Court mean parties who had secured judg-

ments or orders by June 28, 1982? Did the Court refer to parties

to matters filed by June 28 who had not yet obtained dispositive

orders or judgments? Did the Court intend to include debtors

and petitioning creditors who filed bankruptcy petitions before

June 28 as well as parties to lawsuits, no matter when filed,

which might arise within the penumbrae of pre-June 28 bankruptcy

cases?2 A convincing answer to these questions has not yet been

given.

After holding “that our decision today shall apply only

prospectively,” the Court affirmed the judgment of the lower

court. Then, the Court stayed its judgment until October 4,

1982. In the Court's view, a limited stay would “afford Congress

an opportunity to reconstitute the bankruptcy courts or adopt

other valid means of adjudication, without impairing the interim

administration of the bankruptcy laws." 102 S. Ct. at 2880.

As will be seen below, because of the stay of the Marathon

judgment until December 24, references here and elsewhere to

June 28 are, in effect, equivalent to references to December 24.

Page 7

82PC-0746

Because the Court stayed its judgment until October 4, its

holding on retroactivity is fully applicable to the period

between June 28, 1982 and October 4, 1982. And because the Court

later extended the stay until December 24, 1982,4 the Court's

holding on retroactivity governs the period between October 4,

1982 and December 24, 1982. In other words, because of the stay

until after December 24, 1982, bankruptcy cases and civil

proceedings filed before June 28, 1982 stand on equal jurisdic-

tional footing with those filed after June 28, but before the

stay expired on December 24.

The Court's stay of its judgment in Marathon is a signifi-

cant key to the meaning of its holding on retroactivity.

Logically, the jurisdiction of the bankruptcy courts after

December 24 to act in cases and proceedings filed through

December 24 is the same as the jurisdiction of the bankruptcy

courts would have been after June 28 to act in cases and pro-

ceedings filed through June 28 had there been no stay. Thus, the

Court's view of what would have occurred after June 28 absent a

stay is of prime importance.

According to the Court, absent a stay of its Marathon

judgment, the interim administration of the bankruptcy laws would

have been impaired. 102 S. Ct. at 2880. While it may be that

the impairment the Court had in mind was limited to the absence

of subject matter jurisdiction to act in bankruptcy cases filed

U.S.

Page 8

82PC-0746

after June 28 and in lawsuits connected with those cases, the

Court did not qualify its statement. In any event, if the

Court's “prospective only” holding permitte@ the exercise of

Section 24l1(a) jurisdiction after June 28 in bankruptcy cases

filed before June 28 and in connected lawsuits, it would have

been unnecessary, at least for those bankruptcy cases and

lawsuits, for the Court to stay its judgment; the Court could

have entered its judgment on June 28 and in all filed bankruptcy

cases and in connected lawsuits, the bankruptcy courts could have

continued to exercise Section 24l(a) jurisdiction. Thus, the

"prospective only” holding may relate only to orders and

judgments which had become final when the Court's judgment in

Marathon went into effect. This inference is supported by the

cases cited in Marathon footnote 41.

In Buckley v. Valeo, supra, the Court held that some of the

powers granted by Congress to the Federal Election Commission

could not constitutionally be exercised by Commission members not

appointed by the President. At page 142, the citation appearing

in footnote 41 in Marathon, the Court said

It is also our view that the Commission's

inability to exercise certain powers because

of the method by which its members have been

Selected should not affect the validity of

the Commission's administrative actions and

determinations to this date, including its

administration of those provisions, upheld

today, authorizing public financing of

federal elections. The past acts of the

Commission are therefore accorded de facto

validity, just as we have recognized should

be the case with respect to legislative acts

performed by legislators held to have been

Page 9

82PC-0746

elected in accordance with an unconsti-

tutional apportionment plan.

Id. (emphasis supplied).

If the Marathon court meant, by its “prospective only”

holding, the same thing said in Buckley, “actions and deter-

minations to this date” and "past acts," orders and judgments

entered between October 1, 1979 and December 24, 1982, are

validated. Buckley is not authority for the exercise of juris-

diction after December 24,

In Chicot County Drainage District v. Baxter State Bank,

supra, a federal district court, acting pursuant to a juris-~-

Gictional grant in the 1934 Act of Congress providing for

municipal debt readjustments,” confirmed a plan of readjustment

for the Chicot County Drainage District which affected the rights

of bondholders. The order confirming the plan was entered in

March of 1936. About two months later, on May 25, 1936, the

Supreme Court held that the statute under which the district

court had acted was unconstitutional. Ashton v. Cameron County

Water Improvement District, 298 U.S. 513 (1936) .6

Act of May 24, 1934, 48 Stat. 798.

After the May 25, 1936 ruling there were pending in the circuit

courts several appeals from orders entered under the Act Ashton

held unconstitutional. The Supreme Court did not make its ruling

prospective and did not stay its judgment. The circuit courts

had no choice but to apply the Ashton decision to the cases

before them.

In cases where an objection to the constitutionality of the

Act had been made before the Ashton decision was rendered and

(Cont. Page 10) Le Wiig 825

Page 10

82PC-0746

the rulings on those objections were on appeal after the

Ashton decision, the circuit courts followed Ashton and

required dismissal of the proceedings. Adams v. City of

Sarasota, 83 F. 24 1005 (Sth Cir. June 6, 1936) (The city

ed a petition under the Act, certain bondholders intervened

in opposition to the petition and argued the unconsitution-

ality of the Act, and the lower court ruled against the

bondholders. The Fifth Circuit said, "On the authority of

Ashton... , the judgment is reversed and the case remanded,

with instructions to dismiss the proceeding."); Schaller v.

Board of Supervisors, 83 F. 24 1016 (8th Cir. June 26, 1936)

(A drainage ATatrict tiled a petition under the Act, the lower

court approved a plan of readjustment, a bondholder moved to

dismiss the petition on the ground that the Act was unconsti-

tutional, and the lower court denied the motion. The Eighth

Circuit said, “Subsequent to the ruling on the motion to

dismiss . .. the Supreme Court of the United States in the

case of C.L. Ashton .. . has held that section 80 of the

Bankruptcy Act as amended (11 U.S.C.A. §303) was invalid under

the Constitution. The holding is directly applicable here and

requires us to rule that the motion to dismiss should have

been sustained by the trial court."). Id. at 1017.

Even in cases on appeal when Ashton was decided in which no

objection to jurisdiction had been raised in the lower court,

at least as far as can be seen from the published opinions,

the appellate courts applied Ashton to require dismissal of

the pending bankruptcy cases. Covell v. Waterford Irrigation

District, 86 F. 24 22 (9th Cir. Oct. 19, 1936) cert. aontea

-S. 682 (1937). (An irrigation district filed a petition

under the Act, the lower court approved a fs» May Fg plan,

and bondholders of the district appealed. The Ninth Circuit

Court of Appeals ordered dismissal of the bankruptcy case:

"During the pendency of this appeal the Supreme Court has held

that the provisions of the Bankruptcy Act relied upon are

unconstitutional . . . (citing Ashton). For that reason the

order of the lower court must be reversed, and the case

remanded to the District Court for further action consistent

with this opinion."). In Bekins v. Merced iret ation District

89 F. 24 1002 (9th Cir. Apr » expla n In re

Merced Irrigation District, 25 F. Supp. 981, 986-987 (5.0.

Calif. 1535}, an irrigation district filed a petition under

the Act later held unconstitutional in Ashton. The district

court confirmed a plan of readjustment and a dissatisfied

group of investors appealed. Before the appeal was heard, the

Supreme Court decided Ashton. The Ninth Circuit Court of

Appeals ordered that "a decree be filed and entered reversing

the decree of [the] District Court, and remanding the cause

with instructions to dismiss the cause ...." 89 F. 2d

1002. (Cont. Page 11)

Page ll

82PC-0746

After the confirmation order became final, bondholders of the

drainage district sued the district in a collateral proceeding to

redeem their bonds. In defense, the drainage district pled the

res judicata effect of the order of confirmation. The bond-

holders argued, and the district court and court of appeals held,

that the order of confirmation was void because, after its entry,

the Supreme Court had declared unconstitutional the statute

authorizing the plan's confirmation. The theory of the lower

courts was that “the Act of Congress, having been found to be

unconstitutional, was not a law; that it’ was inoperative,

conferring no rights and imposing no duties, and hence no basis

for the challenged decree.” Chicot, supra at 374,

The Supreme Court, however, said that “such broad statements

as to the effect of a determination of unconstitutionality must

be taken with gualifications:”"

The actual existence of a statute, prior to

such a determination, is an operative fact

and may have consequences which cannot justly

be ignored. The past cannot always be erased

by a new judicial declaration. The effect of

the subsequent ruling as to invalidity may

have to be considered in various aspects,

“--with respect to particular relations,

individual and corporate, and particular

conduct, private and official. Questions of

rights claimed to have become vested, of

status, of prior determinations deemed to

have fina

poiicy g ure both

of the statute and of ike. previous appli-

cation, demand examination. These questions

These decisions were rendered in appeals from decisions made

under the unconstitutional Act. The appeals were pending or

perfected after Ashton. Chicot County Drainage District v.

Baxter State Bank, 306 U.

circumstances. See discussion of Chicot in text.

Page 12

82PC-0746

are among the most difficult of those which

have engaged the attention of the courts,

state and federal, and it is manifest from

numerous decisions that an all-inclusive

statement of a principle of absolute retro-

active invalidity cannot be justified.

Id. (emphasis supplied). After making these observations, the

Court found that with respect to the confirmation order, apart

from the question of the effect of the later decision as to

constitutionality, all the elements of the defense of

res judicata were present.

Next, the Court asked whether the district court, because

the statute under which it entered the order of confirmation was

later declared unconstitutional, was without jurisdiction to

entertain the readjustment proceeding and whether its order was

therefore subject to collateral attack. In response, the Court

gave the following answer at pages 376 to 377, the citations

given in footnote 41 of Marathon:

We think the argument untenable. The lower

federal courts are all courts of limited

jurisdiction, that is, with only the juris-

diction which Congress has prescribed. But

none the less they are courts with authority,

when parties are brought before them in

accordance with the requirements of due

process, to determine whether or not they

have jurisdiction to entertain the cause and

for this purpose to construe and apply the

statute under which they are asked to act.

Their determinations of such questions, while

open to direct review, may not be assailed

collaterally.

In the early case of M'Cormick v. Sullivant,

10 Wheat. 192, where it was contended that

the decree of federal district court did not

show that the parties to the proceedings were

citizens of different States and hence that

the suit was coram non judice and the decree

—_

Page 13

82PC-0746

void, this Court said: "But this reason |

proceeds upon an incorrect view of the |

character and jurisdiction of the inferior

Courts of the United States. They are all of

limited jurisdiction; but they are not, on

that account, inferior Courts, in the

technical sense of those words, whose

judgments, taken alone, are ‘o be disre-

garded. If the jurisdiction be not alleged

in the proceedings, their judgments and

decrees are erroneous, and may, upon a writ

of error, or appeal, be reversed for that

cause. But they are not absolute nullities.”

Id., p. 199. See, also, Skillern's Executors

v. May's Exe cutors. 6 Cranch 267; Des Moines

Navigation Co. Iowa Homestead Co.,

; we ate, 152

U. ‘s. 327, 340; ’ evers v. Watson, Fe o-5-'527,

533; Cutler v. Huston, 1568 U.S. 423, 430,

431. This rule applies equally to the

decrees of the District Court sitting in

bankruptcy, that is, purporting to act under

a statute of Congress passed in the exercise

of the bankruptcy power. The court has the

authority to pass upon its own jurisdiction

and its decree sustaining jurisdiction

against attack, while open to direct review,

is res judicata in a collateral action.

Stoll v. tlieb, 305 U.S. 165, 171, 172.

Whatever the contention as to jurisdiction

may be, whether it is that the boundaries of

a valid statute have been transgressed, or

that the statute itself is invalid, the

question of jurisdiction is still one for

judicial determination. If the contention is

one as to validity, the question is to be

considered in the light of the standing of

the party who seeks to raise the question and

of its particular application. In the

present instance it is suggested that the |

situation of petitioner, Chicot County

Drainage District, is different from that of

the municipal district before the court in

the Ashton case. Petitioner contends that it

is not a political subdivision of the State

of sebrigice fe stg an Ph dy of the abe, rede

owners within the District. See Drainage

District No. 7 of Poinsett Coun Vv.

Hutchins, 167 Ark. 521; 42 5. W. 24 556.

ootnote omitted). We do not refer to that

phase of the case as now determinative but

Page 14

82PC-0746

merely as illustrating the sort of question

which the District Court might have been

called upon to resolve had the validity of

the Act of Congress in the present appli-

cation been raised. As the question of

validity was one which had to be determined

by a judicial decision, if determined at all,

no reason appears why it should not be

regarded as determinable by the District

Court like any other question affecting its

jurisdiction. There can be no doubt that if

the question of the constitutionality of the

statute had actually been raised and decided

by the District Court in the proceeding to

effect a plan of debt readjustment in

accordance with the statute, that determi-

nation would have been final save as it was

open to direct review upon appeal. Stoll v.

Gottlieb, supra. (footnote omitted):

While some language in Chicot might support a broader holding,

Chicot involved an attack on a final order and its holding rests

on that fact. Chicot did not preserve proceedings which had not

been disposed of by a final order. Thus, Chicot stands only for

the proposition that orders which have become final prior to a

decision of the Supreme Court invalidating the jurisdictional

provisions under which the orders were entered are not open to

collateral attack.

Like Buckley, Chicot confirms the validity of orders and

judgments entered under the authority of Section 241(a) between

October 1, 1979 and December 24, 1982 which have become final.

Chicot is not authority for the proposition that after

December 24, 1982, bankruptcy courts possess any vestige of

subject matter jurisdiction.

In Insurance Corp. v. Compagnie des Bauxites, supra, the

Court held that a federal district court, as a sanction for

Page 15

82PC-0746

disobedience of a discovery order seeking facts related to

personal jurisdiction, could deem those facts established. In

making its ruling, the Court distinguished subject matter

jurisdiction from personal jurisdiction, and in so doing stressed

the source and import of the subject matter jurisdiction of

federal courts:

The validity of an order of a federal court

depends upon that court's having jurisdiction

over both the subject matter and the parties.

(citations omitted).

Federal courts are courts of limited juris-

diction. The character of the controversies

over which federal judicial authority may

extend are delineated in Article III, §2,

cl. 1. Jurisdiction of the lower federal

courts is further limited to those subjects

within a statutory grant of jurisdiction.

Again, this reflects the constitutional

source of federal judicial power. Apart from

this Court, that power only exists “in such

inferior Courts as the Congress may from time

to time ordain and establish.” Art. III, §1.

Subject matter jurisdiction, then, is an

Article III as well as a statutory require-

ment; it functions as a restriction on

federal power, and contributes to the

characterization of the federal sovereign.

Certain legal consequences directly follow

from this. For example, no action of the

parties can confer subject matter juris-

diction upon a federal court. Thus, the

consent of the parties is irrelevant,

(citation omitted), principles of estoppel do

not apply, (citation omitted), and a party

does not waive the requirement by failing to

oe jurisdiction early in the proceed-

ngs.

Similarly, a court, including an appellate

court, will raise lack of subject matter

jurisdiction on its own motion. “(T]he rule,

springing from the nature and limits of the

judicial power of the United States is

inflexible and without exception, which

Page 16

82PC-0746

requires this court, of its own motion, to

deny its jurisdiction, and, in the exercise

of its appellate power, that of all other

courts of the United States, in all cases

where such jurisdiction does not affir-

matively appear in the record.” Mansfield

Coldwater & Lake Michigan Ry. Co. v. Swan,

102 S. Ct. at 2104. This paragraph is followed by footnote 9,

cited in footnote 41 in Marathon:

A party that has had an opportunity to

litigate the question of subject matter

jurisdiction may not, however, reopen that

question in a collateral attack upon an

adverse judgment. It has long been the rule

that principles of res judicata apply to

jurisdictionl determinations -- both subject

matter and personal. See Chicot Count

Drainage Dist. v. Bank., 306 U.S. 371 (1940);

Stoll v. Gottlieb, 305 U.S. 165 (1938).

Footnote 9 adds nothing to Marathon except an explanation of

Chicot. Insurance Corp., as a restatement of the law of subject

matter jurisdiction, however, shows that reliance on consent as

the sole basis for jurisdiction, or on estoppel, or on failure

to object, is improper.’ The only legitimate source of subject

matter jurisdiction in the lower federal courts is an express

statutory grant from Congress. It may not be derived from the

Executive, from the Judiciary, or from litigants. If a federal

court finds itself without jurisdiction, it must so declare.

Under former law, the consent of a defendant sued by a trustee in

bankruptcy was sufficient to confer federal subject matter

jurisdiction, but only because a federal statute so provided.

Bankruptcy Act of 1898, § 23b, former 11 U.S.C. § 46b. That

statute has been repealed. Pub. L. No. 95-598, § 40l(a), 92

Stat. 2682 (1978).

Page 17

82PC-0746

Taken together, the authorities cited in Marathon foot-

note 41 legitimize only those orders and judgments of bankruptcy

courts entered pursuant to Section 24l(a)'s jurisdictional grant

which have become final, to which the principles of res judicata

apply, and which were entered before December 24, 1982. In

Marathon and in the cases cited in footnote 41, jurisdiction to

act after December 24, 1982, does not “affirmatively appear" and

for that reason must be denied.&®

"([T)he rule .. . is inflexible and without exception, which

requires this court... to deny jurisdiction . .. in all cases

where such jurisdiction does not affirmatively appear in the

record.” Mansfield, Coldwater & Lake Michigan Ry. Co. v. Swan,

111 U.S. ° » cite n Insurance Corp., supra at

2104.

Accord, Still v. First Bank of Newton (In re sorges carpet

Millis Inc.), No. 1-80-02516, Adv. Proc. No. 4 “Vv , & Pp

Oop. (Bkrtcy. E.D. Tenn. Jan. 31, 1983) ("On [December 25,

1982) it became the law of the United States that the bank-

ruptcy courts as bankruptcy courts do not have jurisdiction to

do anything in a case pending under the 1978 Act. The

argument that the ruling in Northern applies only to cases

filed after December 24, 1982, Is unconvincing . .. In the

Northern case, the Supreme Court said that its decision would

be prospective only. In other words, the court held that its

decision would not affect orders that were already final...

Bankruptcy court orders that became final between the date of

the Northern decision and the date it took effect were not

affected by the lack of jurisdiction because the Northern

order did not apply retroactively . .. Nothing in Northern

reasonably leads to the conclusion that it affects juris-

diction only in cases and proceedings filed after it took

effect . . . The Supreme Court delayed the effect of Northern

to preserve jurisdiction not just for cases and proceedings

not yet filed but also for cases and proceedings already

pending . . . Furthermore, the cases cited by the Supreme

Court dealt with the effect of a decision like Northern on

orders that were final or actions that were taken without

challenge before the decision . . . This court must conclude

that beginning on December 24, 1982, the bankruptcy courts as

bankruptcy courts ceased to have jurisdiction to make any

orders in cases or proceedings under the 1978 Act.").

(Cont. Page 18)

Page 18

82PC-0746

In Walter E. Heller and Co. v. Matlock Trailer Corp., (In re

Matlock Trailer Corp.), Bk. No. - , Adv. No. 382-0755,

Slip op. (M.D. Tenn. Jan. 26, 1983), the bankruptcy court for

the Middle District of Tennessee ruled that it retained

"§ 24l1(a) jurisdiction to adjudicate all bankruptcy cases

filed prior to December 24, 1982, including all adversary

proceedings and related matters to those cases, whenever

filed.” Id. at 2.

In reaching this conclusion, the court followed three lines of

reasoning. First, citing Supreme Court decisions on the

retroactive effect of rulings on criminal procedure, the court

noted that "in the criminal area, the Court has often allowed

cases to continue despite constitutional questions and

infirmities concerning underlying issues . . . on the theory

that justice is better served when cases begun in reliance on

a particular constitutional interpretation are allowed to

continue to completion.” Id. at 10. Second, the court

reasoned that any holding not permitting the continued

exercise of jurisdiction in filed bankruptcy cases would not

give "meaning and effect to the Court's concern for fairness,

equity and the prevention of hardship which motivated their

decision to apply [Marathon] prospectively,” and would "create

an inequitable travesty. Litigants would be treated differ-

ently based solely on the date a particular proceeding was

completed." Id. at 11. The court found nothing in Marathon

"to indicate that the Court intended to promote a Trace to

judgment' so that parties who received judgments prior to

December 24 would be protected and those whose cases could not

be accomodated by the court's schedule or were taken under

advisement would be prejudiced.” Id. Third, the court found

that, given the Supreme Court's concern for injustice and

hardship, a ruling denying jurisdiction in cases filed before

December 24 and connected proceedings would be inconsistent,

for "the administration of all bankruptcy cases would come to

a halt... , [bankruptcy would be reduced] to a meaningless

concept . .. , [and] bankruptcy cases pending before this

court would disappear with consequent unimaginable waste and

prejudice to the parties involved.” Id. at 13.

The Supreme Court, one week before its decision in Marathon,

concluded that “retroactivity must be rethought," and went on

to analyze the issues involved in giving retroactive effect to

one of its criminal procedure decisions. United States v.

Johnson, U.S. , 102 S. Ct. 2579, 25606 (June 21,

. Johnson specifically notes the distinction between

civil and criminal retroactivity: "all questions of civil

retroactivity continue to be governed by the standard enun-

ciated in Chevron Oil Co. v. Huson, 404 U.S. 97, 106-107

(1971)." {02 5. Ct. at 2594-2595. Significantly, Marathon

did not cite Johnson or any other opinion on the retroactivity

(Cont. Page 19)

Page 19

82PC-0746

THIS COURT DOES NOT RECEIVE SUBJECT MATTER

JURISDICTION OF THIS ACTION FROM 11 U.S.C. § 105(a)

AND SECTION 404(a) OF THE BANKRUPTCY REFORM ACT

The trustee argues that the bankruptcy courts derive subject

matter jurisdiction over actions arising under title 11, such as

this action, from the combination of two provisions of the

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

of criminal procedure decisions. Because "'prospective' has

no single meaning,” Matlock, supra at 6, Marathon's "pros-

pective only” holding is best measured by the guideposts found

in Marathon itself, not by those found elsewhere.

Arguments based on the resulting inequities if filed bank-

ruptcy cases cannot be continued may stem more from consider-

ations of expedience than from analysis of Marathon and the

authorities cited in footnote 41. To the extent that expe-

dience, practicality, and the like are proper measures of the

prospective effect of Marathon, they may recommend denying

jurisdiction to act after December 24, 1982. If there is room

for error in interpreting the prospective effect of Marathon,

it may be worse to err by finding jurisdiction to act after

December 24 than to err by denying jurisdiction. If the Court

holds in some future opinion that its “prospective only"

holding was limited to the validation of past acts, the

post-December 24 exercise of nonexistent jurisdiction will be

more damaging to those who rely on orders and judgments of the

bankruptcy courts than the postponement of action pending

curative legislation or further guidance from the Court.

While it may be argued that the Court did not mean to cut off

the exercise of jurisdiction in pending cases because other-

wise great hardship would result, this argument is not

supported by the authorities cited in Marathon footnote 41.

Moreover, as noted in the text, this argument makes the

Court's imposition of a stay of its judgment, at least with

respect to cases filed before June 28, meaningless.

Page 20

82PC-0746

Section 404(a) and ll U.S.C. § 105(a).9 Section 404(a) of the

Bankruptcy Reform Act provides that

The courts of bankruptcy, as defined unger

section 1(10) of the Bankruptcy Act, [+]

created under section 2a of the Bankruptcy

Act,[++] and existing on September 30, 1979,

The trustee does not argue that after Marathon, bankruptcy

jurisdiction reverts to its pre-Reform Act status. Others have

theorized that Section 404(a)'s continuance of the court struc-

ture existing on September 30, 1979 during the transition period

between October 1, 1979 and April 1, 1984, coupled with Marathon,

revive the jurisdictional provisions of former law.

Section 40l(a) of the Reform Act, however, repealed all of the

jurisdictional grants found in former law, permitting their use

only in cases commenced under former law. Section 404(a),

entitled "Courts During Transition,” retained the courts, not

their jurisdiction. Section 405, entitled "Jurisdiction and

Procedure During Transition,” provides that Section 241(a) is the

sole source of jurisdiction over bankruptcy matters for the

courts continued by Section 404(a).

Section 1(10) of the Bankruptcy Act supplied the definition of

courts of bankruptcy: “'courts of bankruptcy’ shall include the

United States district courts and the district courts of the

Territories and possessions to which this Act is or may hereafter

be applicable."

Section 2a of the Bankruptcy Act provided for the creation of

courts of bankruptcy and their jurisdiction: "The courts of the

United States hereinbefore defined as courts of bankruptcy are

hereby created courts of bankruptcy and are hereby invested,

within their respective territorial limits as now established or

as they may be hereafter changed, with such jurisdiction at law

and in equity as will enable them to exercise original juris-

diction in proceedings under this Act, in vacation, in chambers,

and during their respective terms, as they are now or may be

hereafter held, to -- [then follows a list of actions which may

be taken]."

Page 21

82PC-0746

shall continue through March 31, 1984, to be

the courts of bankruptcy for the purposes of

this Act and the amendments made by this Act.

Each of the courts of bankruptcy so continued

shall constitute a separate department of the

district court that is such court of bank-

ruptcy under the Bankruptcy Act.

11 U.S.C. § 105(a) provides that

The bankruptcy court may issue any order,

process, or judgment that is necessary or

appropriate to carry out the provisions of

this title.

Under Section 404(b) of the Bankruptcy Reform Act, bankruptcy

judges serve in the courts of bankruptcy continued under Section

404(a). Pub. L. No. 95-598, ‘ 404(b), 92 Stat. 2683. The

existence of the courts of bankruptcy, which constitute separate

departments of the United States district courts, is not affected

by Marathon, which invalidates the jurisdiction granted in

Section 24l(a), but does not dissolve the courts of bankruptcy.

From these premises, the trustee concludes that the courts of

bankruptcy continued under Section 404(a) derive subject matter

jurisdiction from 11 U.S.C. § 105.

Disregarding the problems of statutory construction raised

by the trustee's argument,12 the argument fails because 11 U.S.C.

Arguments can be made on both sides of the question of Section

105's availability during the transition period between

October 1, 1979 and April 1, 1984. Section 105(a) “became

effective on October 1, 1979, under sec. 402(a) of Public Law No.

95-598, and since the bankruptcy court created by 28 U.S.C.

§ 151(a) does not come into existence under sec. 402(b) of Public

Law No. 95-598 until April 1, 1984, there appears to be no

statutory recognition of the power of the court of bankruptcy

continued through the transitional period by Public Law No.

95-598, sec. 404(a), to ‘issue any necessary order, process, or

judgment." Subsections (a)(1) and (b) of sec. 405, however,

(Cont. Page 22)

Page 22

82PC-0746

§ 105 does not confer subject matter jurisdiction. Instead, it

is an investiture of broad powers to act after subject matter

jurisdiction is established.

Section 105 of the Bankruptcy Reform Act is identical to

proposals made in H.R. 8200, 95th Cong., lst Sess. (Sept. 8,

1977) and S. 2266, 95th Cong., 2d Sess. (May 17, 1978). The

House and Senate reports on those bills clarify the function of

Section 105. House Report 95-595, 95th Cong., lst Sess. 316

(1977), explained that

Section 105 is derived from section 2a(15) of

present law,[{13 ] with two changes. First, the

limitations on the power of a bankruptcy

judge (powers that were reserved to the

district judge) are removed as inconsistent

with the separation of the two courts and the

increased powers and jurisdiction of the new

court .. . . Second, the bankruptcy judge is

prohibited from appointing a receiver in a

case under title 11 under any circum-

stances. [14 ]

authorize the bankruptcy judges of the continued court of

bankruptcy to exercise the jurisdiction and powers of the

bankruptcy courts created by 28 U.S.C. § 151 and those powers

surely include the power granted by 11 U.S.C. § 151(a)." Kennedy,

"The Bankruptcy Court Under the New Bankruptcy Law: Its

Structure, Jurisdiction, Venue, and Procedure,” 11 ST. MARY'S L.

13 J. 251, 279 n. 110 (1979).

Section 2a(15) provided that the courts of bankruptcy were

invested with such jurisdiction as would enable them to exercise

original jurisdiction in proceedings under the Bankruptcy Act to

"make such orders, issue such process, and enter such judgments,

in addition to those specifically provided for, as may be

necessary for the enforcement of the provisions of this Act:

Provided, however, that an injunction to restrain a court may be

14 Issued by the judge only.”

Section 105(b) provides that “notwithstanding subsection (a) of

this section, a bankruptcy court may not appoint a receiver ina

case under this title."

Page 23

82PC-0746

Section 105 is similar in effect to the All

Writs Statute, 28 U.S.C. 1651, under which

the new bankruptcy courts are brought by an

amendment to 28 U.S.C. 451. H.R. 8200 § 213.

The section is repeated here for the sake of

continuity from current law and ease of

reference, and to cover any powers tradi-

tionally exercised by a bankruptcy court that

are not encompassed by the All Writs

Statute.

Senate Report 95-989, 95th Cong., 2d Sess. 29 (1978),

gave a briefer but consistent interpretation:

Section 105 is derived from section 2a(15) of

present law, with two changes. First, the

limitation on the power of a bankruptcy judge

(the power to enjoin a court being reserved

to the district judge) is removed as incon-

sistent with the increased powers and

jurisdiction of the new bankruptcy court.

Second, the bankruptcy judge is prohibited

from appointing a receiver in a case under

title 11 under any circumstances.

These reports emphasize Section 105 as a source of powers

commensurate with the expanded jurisdiction of the bankruptcy

courts.

Section 105 is derived from Section 2(a)(15) of the former

Bankruptcy Act. “The use of section 2(a)(15) of the Act,”

according to one commentator, “[was] not to expand the court's

jurisdiction, but to give it the right to issue orders in aid of

the jurisdiction -- subject to legal principles -- which it

already had." Levine, "An Enhanced Conception of the Bankruptcy

Judge: From Case Administrator to Unbiased Adjudicator," 84 W.

VA. L. REV. 637, 653 (1982).

Page 24

82PC-0746

Section 105 is “similar in effect" to 28 U.S.C. § 1651.15

Section 1651 "does not operate to confer jurisdiction ... No

new grant of judicial power is contemplated by the statute;

§ 165l1(a) is rather only an incident of jurisdiction. An order

may issue pursuant to this statute to preserve jurisdiction

already lawfully acquired, but a court may not, by said order,

acquire jurisdiction over an individual or property not otherwise

subject to its jurisdiction." Commercial Security Bank v. Walker

Bank & Trust Co., 456 F. 24 1352, 1355 (10th Cir. 1972) (foot-

notes omitted). .

Although Section 105(a) is broader than Section 1651(a)

because Section 105(a) covers “any powers traditionally exer-

cised by a bankruptcy court that are not encompassed by the All

Writs Statute," House Report, supra, there is no hint in the

legislative history or in the Reform Act itself that Section

105(a) is a source of subject matter jurisdiction. Instead,

Section 105(a) was placed in the Reform Act “for the sake of

continuity from current law," “for ease of reference," and to

broaden the powers granted by Section 165l(a). Subject matter

jurisdiction was provided for in Section 1471 of the Bankruptcy

Reform Act of 1978.

28 U.S.C. § 1651 provides that "(a) The Supreme Court and all

courts established by Act of Congress may issue all writs

necessary or appropriate in aid of their respective jurisdictions

and agreeable to the usages and principles of law. (b) An

alternative writ or rule nisi may be issued by a justice or judge

of a court which has jurisdiction."

Page 25

82PC-0746

Section 105(a) endows the bankruptcy courts with a broad

range of powers they may exercise, within the bounds of necessity

and propriety, to carry out the provisions of bankruptcy law.

Section 1471 identifies the matters respecting which the bank-

ruptcy courts, applying those and other powers, may issue binding

decrees. Without Section 1471, or some other source of subject

matter jurisdiction which would permit cases or proceedings to

come before the bankruptcy courts for disposition, those powers

granted by Section 105(a) are useless.

THE UNITED STATES DISTRICT COURT DOES NOT

HAVE SUBJECT MATTER JURISDICTION OF

THIS ACTION UNDER 28 U.S.C. § 1331

Section 1331 of title 28, United States Code, provides that

The district courts shall have original

jurisdiction of all civil actions arising

under the Constitution, laws, or treaties of

the United States.

The trustee maintains that because his complaint alleges causes

of action under title 11, Sections 544(b) and 548(a)(2), subject

matter jurisdiction lies in the United States district court for

this district under Section 1331 and, under the emergency rule

adopted by the district court, the trial of his complaint has

Page 26

82PC-0746

properly been referred to this court.!® Section 1331, however,

does not vest jurisdiction of this action in the district court.17

28 U.S.C. § 1331 was not intended to grant subject matter

jurisdiction of actions arising under the bankruptcy laws of the

United States.

The trustee does not argue that the district court derives

jurisdiction of this action from 28 U.S.C. § 1334. In light of

the analysis in Color Craft Press, supra note 2 at 7 xn. 2,

Section 1334 is not a valid source of subject matter jurisdiction

of this action. But see In re Northland Partners, Case No.

82-05387-W, unpublished order (E. D. Mich. Jan 7, 1963) (District

Judge Demascio) ("Congress carefully kept in effect, until 1984,

[28 U.S.C. § 1334, which gives] the federal district courts

‘original jurisdiction, exclusive of the courts of the states, of

all matters and proceedings in bankruptcy.'"); see also Blue v.

Mathena, 259 F. Supp. 926, 927 (1966) (former law -- although

headnotes suggest the court relied on Section 1334, the court's

language and rationale show it relied instead on former 11 U.S.C.

§ 107(e)). see also In re Jorges Carpet Milles Inc., supra note 8

(leaving open the question o ection as a source of

bankruptcy jurisdiction post-Marathon).

Thus, the issue of the validity of the district court's rule is

not reached. If the district court had jurisdiction over this

action, the referral of this action to this court under the

emergency rule would raise difficult questions. For example, was

there authority to adopt the rule? Does the rule conflict with

Marathon? Does the rule conflict with those provisions of the

Bankruptcy Reform Act not invalidated by Marathon?

Page 27

82PC-0746

The lower federal courts are courts of limited, not general,

jurisdiction. They have no subject matter jurisdiction except

that given them by Congress. Because they are courts of limited

jurisdiction, it has long been the law in the federal courts that

"the fair presumption is (not as with regard to a court of

general jurisdiction, that a cause is within its jurisdiction

unless the contrary appears, but rather) that a cause is without

jurisdiction till the contrary appears." Turner v. Bank of North

America, 4 U.S. ( 4 Dall.) 8, 11 (1799). Thus, “there are no

presumptions in favor of the jurisdiction cf the courts of the

United States." Ex parte Smith, 94 U.S. 455, 456 (1877). And,

therefore, when the inquiry involves the jurisdiction of a

federal court, “the presumption in every stage of a cause [is]

that it is without the jurisdiction of a court of the United

States." Lehigh Mining & Manufacturing Co. v. Kelly, 160 U.S.

327, 337 (1895).

Given this "protective wall built around federal subject

matter jurisdiction,"18 two principles must not be forgotten in

interpreting 28 U.S.C. § 1331. First, although Section 1331

provides a broad jurisdictional grant to the federal courts,/9

"with rare exception, the courts have not in fact seen fit to

accord to the statutory language the sweep of its constitutional

13 Wright, Miller & Cooper, FEDERAL PRACTICE & PROCEDURE § 3522,

19 2t 55 (1975).

Powell v. McCormack, 395 U.S. 486, 515 (1969) (citing Mishkin,

e Federa uestion' in the District Courts," 53 COLUM. L.

REV. 157, 160 (1953)).

Page 28

82PC-0746

® ancestor [Article III of the Constitution of the United

States)."29 The phrase “arising under ... the Laws of the

United States" in Article III and the identical phrase in 28

U.S.C. § 1331 are not of the same scope.

[A] different approach is proper in inter-

preting a jurisdictional statute than that

taken in interpreting the constitutional

a provisions of Article III... A broad and

liberal construction of Article III in favor

of federal judicial power is proper, for the

Constitution is permanent in nature, normally

has a broader purpose than a statute, and its

language should have a living flexibility. A

] statute granting jurisdiction to a federal

court is something quite different. Here

Congress is dealing with courts of limited

jurisdiction. While the statute should

receive a fair interpretation, and at times a

broad construction, quite generally it is

tainty by construing the statute against

federal jurisdiction .. . Mistake, if any,

can be rectified by Congress, if it sees fit

to do so.

e 1 MOORE'S PEDERAL PRACTICE 40.60 [2.--3], at 618 (1982).

Mishkin, supra note 19.

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82PC-0746

Because Section 1331 is not as broad as its Constitutional

counterpart,2! authority for the proposition that actions arising

under bankruptcy law are within the scope of Article III is not

necessarily authority for the proposition that they are within

the scope of Section 1331. Thus, descriptions of the breadth of

Article III should not be taken as definitions of the scope of

Section 1331. For example,

Bankruptcy matters, arising as they do under

the article I, section 8 power of Congress to

provide uniform bankruptcy rules, are clearly

"federal question" cases. Matters “related

to" bankruptcy proceedings, even those

resting on state law, can also be considered

to "arise under” federal law. Congress has

made a policy decision that to implement

effectively its duty to impose uniformity on

bankruptcy cases, all issues, i.e., all

proceedings, that might affect the estate

should be resolved in one federal forum.

Plenary bankruptcy proceedings therefore flow

directly from a legislative power, and they

are thus “federal question” article III

cases.

Finley, “Article III Limits on Article I Courts: The

By contrast, 28 U.S.C. § 1471 may be as broad as Article III

permits. "Congress intended that the only limits on Federal

court jurisdiction in bankruptcy matters should be those estab-

lished by the Constitution. The [Bankruptcy Reform Act's] grant

of subject matter jurisdiction confers on the district courts

‘original but not exclusive jurisdiction of all civil proceedings

arising under title 11 or arising in or related to cases under

title 11.° The [Bankruptcy Reform Act's) legislative history

leaves no doubt that this open-ended language should receive the

most expansive reading possible. (footnotes omitted)." Comment,

“Bankruptcy and the Limits of Federal Jurisdiction,” 95 HARV. L.

REV. 703, 706 (1982) (citing S. Rep. No. 95-989, 95th Cong., 2d

Sess. 153-154 (1978) and H.R. Rep. No. 95-595, 95th Cong., lst

Sess. 445 (1977)).

Page 30

82PC-0746

Constitutionality of the Bankruptcy Court," 1982 ANN. SURV.

BANKR. L. 1, 7.

A second rule for interpreting Section 1331 is that

Congress’ grant of federal question jurisdiction should not be

read to include actions Congress did not intend to include. The

Supreme Court's opinion in Romero v. International Terminal

Operating Co., 358 U.S. 354 (1959), illustrates this rule. There,

the Court held that Section 1331 did not grant jurisdiction of

Claims based on the general maritime law. Before inquiring

whether the federal question statute permitted maritime claims

"rooted in federal law to be brought on the law side of the lower

federal courts,” Id. at 359-360, the Court said

Abstractly stated, the problem is the

ordinary task of a court to apply the words

of a statute according to their proper

construction. But “proper construction" is

not satisfied by taking the words as if they

were self-contained phrases. So considered,

the words do not yield the meaning of the

statute. The words we have to construe are

not only words with a history. They express

an enactment that is part of a serial, and a

serial that must be related to Article III of

the Constitution, the watershed of all

judiciary legislation, and to the enactments

which have derived from that Article.

Moreover, Article III itself has its sources

in history. These give content and meaning

to its pithy phrases. Rationally construed,

the Act of 1875 [the first lasting statute

giving general federal question jurisdiction

to a lower federal court] must be considered

part of an organic growth -- part of the

evolutionary process of judiciary legislation

that began September 24, 1789, and projects

into the future.

Page 31

82PC-0746

Id. at 360. Section 1331 is understood only in light of its

history and purposes. “If the history of the interpretation of

judiciary legislation teaches anything,” the Court “~bserved, “it

teaches the duty to reject treating such statutes as a wooden set

of self-sufficient words ... . The Act of 1875 is broadly

phrased, but it has been continuously construed and limited in

the light of the history that produced it, the demands of reason

and coherence, and the dictates of sound judicial policy which

have emerged from the Act's function as a provision in the mosaic

of federal judiciary legislation. It is*a statute, not a

Constitution, we are expounding." 358 U.S. at 379. Even though

an action fits the words of Section 1331, if it is one Congress

did not intend to include, proper interpretation of Section 1331

demands its exclusion. "The policy of the statute calls for its

strict construction." Healy v. Ratta, 292 U.S. 263, 270 (1934).

The federal district courts established by the Judiciary Act

of 1789 were “vested with original jurisdiction over cases in

admiralty and some lesser civil and criminal matters.” 7B

MOORE'S FEDERAL PRACTICE 4[0--3], at JC-6 (1982). At that time,

there was no federal bankruptcy law.

Later, under the short-lived Bankruptcy Acts of 180022 and

1841,23 the district courts became courts of bankruptcy, vested

aoe of Apr. 4, 1800, 2 Stat. 19; repealed Dec. 19, 1803, 2 Stat.

re of Aug. 19, 1841, 5 Stat. 440; repealed Mar. 3, 1843, 5 Stat.

Page 32

82PC-0746

with jurisdiction of matters arising under the federal bankruptcy

statute.24 In neither Act was reliance placed on the juris-

dictional provisions of the Judiciary Act then existent. During

the life of those Acts, except for a brief period between 1801

and 1802 when the Act of Feb. 13, 180125 was in force, the federal

courts had no general federal question jurisdiction. The Act of

Feb. 13, 1801, granted federal question jurisdiction to the old

circuit courts, in Section 11 of that Act, as follows:

"(T]he . . . circuit courts respectively shall have cogni-

zance .. . of all cases in law or equity, arising under the

constitution and laws of the United States." But this juris-

dictional grant did not encompass bankruptcy matters. Section 12

of the same Act, provided that "the said circuit courts respec-

tively shall have cognizance concurrently with the district

courts, of all cases which shall arise, within their respective

circuits, under the act to establish an uniform system of

bankruptcy throughout the United States." Federal question

The Act of 1841, supra n. 23, § 6, expressly granted jurisdiction

of "all matters Be proceedings in bankruptcy arising under this

act," and "all cases and controversies in bankruptcy.” The Act

of 1800, although it had no express jurisdictional provision,

"appears to have contemplated that certain specific proceedings

and functions (e.g., conducting meetings of creditors, exami-

nation of the bankrupt, sending notices, making distributions),

would be performed by the commissioners [whose appointment was

provided for in the Act], under the supervision of the federal

district judge." Reed, Sagar, and Granoff, "Subject Matter

Jurisdiction, Abstention and Removal Under the New Federal

25 Bankruptcy Law,” 56 AM BANKR. L. J. 121, 125 n. 6 (1982).

aes of Feb. 13, 1801, 2 Stat. 89; repealed, Mar. 8, 1802, 2 Stat.

Page 33

82PC-0746

jurisdiction and jurisdiction over cases arising under the

bankruptcy law were unconnected.

When the Bankruptcy Act of 186726 became law, the lower

federal courts still had no federal question jurisdiction. Juris-

diction of actions arising under bankruptcy law, including

actions to avoid liens and fraudulent or preferential transfers,

was vested concurrently in the federal circuit and district

courts by specific provisions in the bankruptcy statute.

In 1875, while the Bankruptcy Act of 1867 was still in

place, Congress enacted the Judiciary Act of 1875,27 which gave

the old circuit courts of the United States jurisdiction of "all

suits of a civil nature at common law or in equity, .. - arising

under the Constitution or laws of the United States." The

jurisdictional provisions of the Bankruptcy Act of 1867 were not

mentioned. The Court in Romero described the purpose of the

Judiciary Act of 1875 as follows: "the far-reaching extension of

national power resulting from the victory of the North, and the

concomitant utilization of federal courts for the vindication of

that power in the Reconstruction Era, naturally led to enlarged

jurisdiction of the federal courts over federal rights.” Romero,

supra at 368.28 The aim of the Judiciary Act of 1875 was "to

Act of Mar. 2, 1867, 14 Stat. 517; repealed, Act of June 7, 1878,

7 20 Stat. 99.

8 Act of Mar. 3, 1875, 18 Stat. 470.

See Frankfurter and Landis, THE BUSINESS OF THE SUPREME COURT

65 (1928).

Page 34

82PC-0746

provide a forum for the vindication of new federally created

rights,” Id., not to duplicate the existing jurisdictional

provisions of the bankruptcy law. The Act of 1875, applying by

analogy the Supreme Court's analysis of its coverage of maritime

Claims, “was designed to give a new content of jurisdiction to

the federal c irts, not to reaffirm one long-established smoothly

functioning" within the confines of the Bankruptcy Act of 1867.

Id. Applying the Court's language further in these analogous

circumstances, “we have uncovered no basis for finding the

additional design of changing the method by which federal courts

had administered admiralty [bankruptcy] lew from the beginning.

The federal admiralty [bankruptcy] courts had been completely

adequate to the task of protecting maritime [bankruptcy] rights

rooted in federal iaw." Id. at 368-369. The relationship between

federal question jurisdiction and bankruptcy jurisdiction was one

of separation, not intersection.

The Bankruptcy Act of 1867 was repealed in 1878, see

note 26, supra. When Congress next enacted a bankruptcy law, in

1898,29 the federal question statute was still in the Judicial

Code. If the federal question statute was intended to include

bankruptcy jurisdiction, another provision for jurisdiction of

actions arising under the new bankruptcy law would have been

unnecessary. But Sections 2 and 23 of the Bankruptcy Act of 1898

made specific grants of subject matter jurisdiction to the

Act of July 1, 1898, 30 Stat. 544.

Page 35

82PC-0746

district and circuit courts. Congress placed no reliance on

federal question jurisdiction.

In 1903 and in 1910, in response to a decision of the

Supreme Court holding that the district courts, sitting as courts

of bankruptcy, lacked subject matter jurisdiction of actions by

trustees in bankruptcy to avoid liens, fraudulent conveyances,

and preferential transfers,29 Congress granted concurrent juris-

diction of those actions to the state courts and the federal

district courts.31 As a result of these amendments to the

Bankruptcy Act of 1898, the bankruptcy statute specifically

provided for subject matter jurisdiction of actions to enforce

the avoiding powers of the trustee in bankruptcy. In 191ll,

Congress revised the federal question statute by abolishing the

01d circuit courts and by transferring all of their jurisdiction,

including federal question jurisdiction, to the federal district

courts.32 If the federal question jurisdiction then vested in the

district courts included jurisdiction of actions arising under

the bankruptcy laws, such as actions to avoid liens, preferences,

or fraudulent transfers, no further amendments to the bankruptcy

law for such actions would have been necessary. But in 1926,

when Congress amended Section 23b of the Bankruptcy Act of 1898

to substitute the words “district courts" for the words “circuit

31 Bardes v. First National Bank, 178 U.S. 524 (1900).

Act of Feb. 5, 1903, 32 Stat. 797, 798, 800, c. 487, § 8; Act of

32 June 25, 1910, 36 Stat. 838, 840.

Act of March 3, 1911, 36 Stat. 1087.

Page 36

82PC-0746

courts,"33 Congress specifically lodged jurisdiction of actions to

set aside liens or preferential or fraudulent transfers in the

federal district courts. Again, jurisdiction of actions arising

under bankruptcy law was distinct from federal question juris-

diction.

Over the years, this disjunction continued. The bankruptcy

law gave jurisdiction of actions arising under bankruptcy law,

independently of the federal question jurisdiction vested in the

district courts. Congress never invoked the general federal

question jurisdiction of the federal district courts as a source

of jurisdiction of actions arising under bankruptcy law. In

Romero, supra, the Court concluded,

It is . . . significant that in the entire

history of federal maritime legislation,

whether before the passage of the Act of

1875... or after .. ., Congress has not

once left the availability of a trial on the

law side [of the district courts] to infer-

ence. It has made specific provision. It is

difficult to accept that in 1875... a most

far reaching change was made _ subter-

raneously.

358 U.S. at 371. The historical separation of the federal

question statute from the jurisdictional grants in the successive

bankruptcy laws forcefully advocates the same conclusion here.

Neither Section 1331 nor any of its predecessors was designed to

grant subject matter jurisdiction of actions arising under

federal bankruptcy law.

Act of May 27, 1926, 44 Stat. 662. In 1911, the circuit courts

rao ing. igs exist and the district courts took their place. See

note .

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82PC-0746

Additional support for this conclusion is found in the

amount in controversy requirement which, until 1980, limited

federal question jurisdiction. The required amount in contro-

versy began at five hundred dollars in 1875 and was raised to two

thousand dollars in 1887, to three thousand dollars in 1911, and

to ten thousand dollars in 1958.34 Actions arising under bank-

ruptcy law have never been conditioned on a minimum amount in

controversy.

Moreover, federal question jurisdiction, even if meant to

cover. actions arising under bankruptcy law, may not cover actions

arising under bankruptcy laws which incorporate state law as the

determinant of the result. In Shoshone Mining Co. v. Rutter, 177

U.S. 505 (1900), a federal statute provided that “adverse suits”

involving rights to federally owned mining lands, even though

such suits were expressly authorized by federal law, did not

present federal questions because the federal law authorizing

them provided that the outcome of the actions would be determined

by the laws of the territory or state in which the land was

located.25 Relying on Shoshone, it may be argued that actions by

trustees in bankruptcy under Section 544(b), for example, which

permits the trustee to “avoid any transfer ... that is voidable

See Act of Mar. 3, 1875, 18 Stat. 470; Act of Mar. 3, 1887, 24

Btat. 552; Act of Mar. 3, 1911, 36 Stat. 1091; Act of July 25,

. 1958, 72 Stat. 415.

For a discussion of the Shoshone case, see Mishkin, supra

eee se! at 161; 13 Wright & Miller, supra note 18 § 3563, at

1 Ns .

Page 38

82PC-0746

under applicable law... ," do not present federal questions

because although actions under Section 544(b) are authorized by

federal law, the trustee's rights “may not involve any question

under the Constitution or laws of the United States, but simply a

determination of local rules and customs, or state statutes.”

Shoshone, supra at 508.36 "A statute,” such as Section 544(b),

"authorizing an action to establish a right is very different

from one which creates a right to be established. An action

brought under the one may involve no controversy as to the scope

and effect of the statute, while in the other case it necessarily

involves such a controversy, for the thing to be decided is the

extent of the right given by the statute.” Id. at 510.

For these reasons, neither 28 U.S.C. § 1331 nor any of its

statutory ancestors was intended to grant subject matter juris-

diction over actions arising under the bankruptcy laws of the

United States and correct construction of Section 1331 requires

its elimination from the possible sources of subject matter

jurisdiction over this action.97

A cause of action is not one arising under the laws of the United

States within the meaning of the federal question statute simply

because it is asserted by a trustee in bankruptcy. Bardes v.

First National Bank, 178 U.S. 524, 536 (1900); Spencer v. Duplan

Silk Co., 191 U.S. 526, 531 (1903); Lovell v. Heaman, 327 0-8. 7S.

Fiz, 421 (1913); Newland v. Edgar, 362 F. 2d 911, S13 (9th Cir.

1966).

37 ,

Compare In re Conley, B.R. , Case No. 382-00990,

Slip op. at Zi-22 chr Tenn. Jan 26, 1983) ("(Tjhe district

courts do not possess bankruptcy jurisdiction as a consequence of

their federal question jurisdiction."); contra, Braniff Airways

Airways, 1 )

Inc. v. Civil Aeronautics Board (In re Branitf y , inc.),

B R ’ Misc. No. oa “Ke . r ankr. °

(Cont. Page 39)

Page 39

82PC-0746

2. If 28 U.S.C. § 1331 was intended to grant subject matter

jurisdiction of actions arising under the bankruptcy laws of the

United States, the continued existence of Section 1331 as an

independent grant of subject matter jurisdiction of actions

arising under the bankruptcy laws is inconsistent with the

Bankruptcy Reform Act of 1978.

Assuming that 28 U.S.C. § 1331 granted subject matter

jurisdiction of actions arising under the bankruptcy laws of the

United States before the enactment of the Bankruptcy Reform Act

of 1978, Pub. L. 95-598, 92 Stat. 2549, the continued operation

of Section 1331 as a grant of subject matter jurisdiction of

those actions contradicts the Bankruptcy Reform Act of 1978.38

4-82-00369, slip op., at 12 n. 17 (N.D. Tex. Jan. 20, 1983)

("Arguably, any suit to lift the stay is a federal question and

cognizable under 28 U.S.C. § 1331.")3 contra, Chamberlain

Livestock v. Aberdeen Production Credit Ass'n., 22 B.R. ’

D. &.D. ° proceeding arising under Title 11 is a case

38 involving a Federal question.")

At least two federal courts, ruling before the Bankruptcy Reform

Act came into being, relied on Section 1331 in finding subject

matter jurisdiction of actions brought against colleges by former

students who had received discharges in bankruptcy alleging

post-bankruptcy discrimination by means of withholding tran-

scripts of credits for failure to repay student loans. Girardier

v. Webster College, 563 F. 24 1267 (8th Cir. 1977); Handsome v.

Rutgers University, 445 F. Supp. 1362 (D.N.J. 1978). These courts

found that a federal question was raised because the bankrupts

asserted violations of rights granted by federal bankruptcy law.

Girardier and Handsome are distinguishable from this action

Because neither was an action by a trustee in bankruptcy as~-

serting the avoiding powers provisions of the bankruptcy statute.

In any event, as will be shown in the text, Congress intended

that after the enactment of the Bankruptcy Reform Act, actions

such as these be tried in the bankruptcy courts, not in the

(Cont. Page 40)

Page 40

82PC-0746

In the Bankruptcy Reform Act of 1978, Congress clearly

intended to vest, for all practical purposes, all subject matter

jurisdiction of actions arising under the bankruptcy laws in the

bankruptcy courts. Section 1471(b) of title 28, U.S.C., enacted

by Section 24l(a) of the Reform Act, conferred on the district

courts "original but not exclusive jurisdiction of all civil

proceedings arising under title 11 or arising in or related to

cases under title 11." But this grant of jurisdiction to the

district courts, as the Supreme Court recognized in Marathon, was

a "facade." 102 S. Ct. at 2879. In fact, subject matter juris-

diction was vested in the bankruptcy courts, who, under Section

147l(c), “shall exercise all of the jurisdiction conferred by

this section on the district courts." (emphasis supplied).

The legislative history of Section 1471 shows not only that

it was to be the sole grant of subject matter jurisdiction of

actions arising under title 11, but also that it was to be so

broad that any grant of jurisdiction made by Section 1331 would

be superfluous.

district courts. Section 525 of the Reform Act prohibits

governmental units such as state colleges from discriminating

against persons solely for failure to repay a dischargeable debt.

Congress designed 28 U.S.C. § 1471 to include actions brought to

enforce the rights granted by Section 525: "Very often, issues

will arise after a case is closed, such as... the existence of

prohibited post-bankruptcy discrimination, proposed 11 U.S.C.

525... The bankruptcy courts will be able to hear these

proceedings because they arise under title 11." H.R. Rep. No.

95-595, 95th Cong., lst Sess. 445 (1977) (explanation of Section

1471). Thus, even if Girardier and Handsome correctly inter-

preted Section 1331, they have been legislatively overruled by

the Bankruptcy Reform Act.

Page 41

82PC-0746

Congress intended Section 1471 to be the sole grant of

subject matter jurisdiction of proceedings arising under title

ll. The Supreme Court in Marathon found that "as part of a

comprehensive restructuring of the bankruptcy laws, Congress has

vested jurisdiction over this and all matters related to cases

under title 11 in a single non-Art. III court, and has done so

pursuant to a single statutory grant of jurisdiction... [O]ne

express purpose of the Act was to ensure adjudication of all

Claims in a single forum and to avoid the delay and expense of

jurisdictional disputes." (emphasis supplie@). Marathon, supra

at 2880 n. 40. (citing H.R. Rep. No. 95-595, supra at 43-48; S.

Rep. No. 95-989, 95th Cong., 24 Sess. 17 (1978)).

House Resolution 6200, 95th Cong., lst Sess. (Sept. 8,

1977), would have vested subject matter jurisdiction of "all

civil proceedings arising under title 11 or arising under or

related to cases under title 1!) directly in the bankruptcy

courts. This provision was intended to supplant the existing

jurisdictional regime:

H.R. 8200 grants the bankrupt courts broad

and complete jurisdiction over a matters

and proceedings that arise in connection with

bankruptcy cases .... All matters arising

under title 11, or arising under or related

to cases under title 11 will be within the °

urisdiction of the bankruptc court,

ncluding proce ngs to ch the trustee is

a party, proceedings to which the debtor is a

party if the outcome of the proceeding. will

have an impact on the case (such as deter-

mination of exemptions, determination of

Gischargeability of debts, liquidation of

non-dischargeable debts, and determination of

right granted under e , and a

proceedings involving stration of

Page 42

82PC-0746

the case. The forum shopping and juris-

dictional litigation that have plagued the

bankruptcy system, the unfairness to

defendants from “jurisdiction by ambush,” and

the dissipation of assets and the expense

associated with bifurcated jurisdiction will

Page ogee by the jurisdiction proposed by

this bill.

H.R. Rep. No. 95-595, 95th Cong. lst Sess. 48 (1977). (emphasis

supplied). Section 1471 would be

the broadest grant of jurisdiction to dispose

Of proceedings that arise in bankruptcy cases

or under the bankruptcy code. Actions that

formerly had to be tried in State court or in

Paaccay district court, at great cost and

elay to the estate, may now be tried in the

bankruptcy courts.

The phrase “arising under” has a well defined

and broad meaning in the jurisdictional

context. By a grant of jurisdiction over all

proceedings arising under title ll, the

bankruptcy courts will be able to hear any

matter under which a claim is made under a

provision of title 11... Any action by the

trustee under an avoiding power would be a

proceeding arising under title ll, because

the trustee would be claiming based on a

right given by one of the sections in

subchapter III of chapter 5 of title ll.

Id. at 445. (emphasis supplied). Thus, actions like this one to

avoid transfers under Sections 548 and 544(b) were to be governed

solely by the jurisdictional grant of Section 1471, and, further-

more, were to be tried only in the bankruptcy courts.39

The statement in the House Report that "the phrase ‘arising

under’ has a well defined and broad meaning in the jurisdictional

context” is significant. One of the most prominent appearances

of the phrase “arising under” in the law of federal jurisdiction

is in 28 U.S.C. § 1331. It is highly unlikely that Congress

would grant to the bankruptcy courts ee sdiction of “proceedings

arising under title 11" but at the same time harbor a secret

intention to permit the phrase “arising under" in Section 1331 to

ry Reon ger in the district courts in proceedings arising under

ell.

Page 43

82PC-0746

The Senate's proposal, S. 2266 95th Cong., 24 Sess. (May 17,

1978), would have conferred subject matter jurisdiction of "all

civil proceedings arising under title 11 or arising under or

related to cases under title 11" on the district courts, but then

would have required the bankruptcy judges to exercise "all powers

and jurisdiction conferred on the district court." Section 216

of S. 2266, proposed 28 U.S.C. § 1334. While the Senate differed

with the House on the appropriate structure of the bankurptcy

court system, it was in full agreement that the grant of subject

matter jurisdiction over bankruptcy matters should be complete

and that bankruptcy jurisdiction at the trial level should be

exercised exclusively by the bankruptcy courts, not the district

courts:

It is the purpose [of the Senate's proposed

jurisdictional provisions] to eliminate

entirely the present jurisdictional dichotomy

between summary and plenary jurisdiction.

Therefore, except where the bankruptcy court

abstains from hearing an action or proceeding

arising under or related to a case under

title 11, all cases under title ll and all

civil actions and proceedings arising under

or related to cases under title 11 are to be

before the bankruptcy judge.

Jurisdiction in bankruptcy cases and in civil

actions and proceedings arising under or

related to bankruptcy cases is vested

directly in the district courts .. .- (The

Senate's proposed jurisdictional provisions),

while conferring expanded jurisdiction in

bankruptcy cases and related civil actions

and proceedings directly upon the district

courts, delegate the exclusive exercise of

that jurisd:

ankruptc pages lexcept as provided in

proposed : i }(2), which prohibited a

bankruptcy judge from enjoining another court

Page 44

82PC-0746

or punishing contempts by imprisonment or by

a fine of more than $1,000.)

S. Rep. No. 95-989, 95th Cong., 2d Sess. 18 (1978) (emphasis

supplied). The Senate intended that "the totality of this

jurisdiction [except for punishment of contempts by imprisonment

or by a fine of more than $1,000, enjoining other courts, and

acting in municipal adjustment and railroad reorganization cases)

+ «+ Shall be exercised by the bankruptcy court." Id. at 153.

The district courts, with the exceptions just noted, were to

function only in an appellate capacity. Id. at 153-154,

Present Section 1471 is a compromise of the positions taken

in the House and in the Senate on court structure. At the same

time, however, it embodies the clearly expressed intention of

both houses of Congress to supply subject matter jurisdiction

over bankruptcy matters in a single statute and to ensure that

all such jurisdiction would be exercised only by the bankruptcy

courts.40 Moreover, it reflects Congress’ decision that the grant

of subject matter jurisdiction over bankruptcy matters be as

broad as possible. Thus, the continued existence of Section 1331

Accord, Benchic v. Century Entertainment Corp., (In re Centur

Entertainmen . Ohio 1582) ("The

District Court's Jurisdiction under ‘title ll, however, should not

be exercised by the District Court as a trial court. Instead,

Congress has mandated that the Bankruptcy Court, as ‘adjunct,’

"shall exercise all of the jurisdiction conferred by this

section... ° in a scheme which contemplates the independent

exercise of the District Court's bankruptcy jurisdiction by the

Bankruptcy Court, subject to appellate review by the District

Courts or the United States Courts of Appeals. 28 U.S.C. §§ 1334

and 1471(c). The use of the word, ‘adjunct,’ was not intended to

imply ... the existence of a dual forum option.").

Page 45

82PC-0746

as a grant of subject matter jurisdiction over bankruptcy matters

is inconsistent with the Bankruptcy Reform Act, not only because

it would split the grant of subject matter jurisdiction between

two statutes and permit earttes to invoke bankruptcy trial

jurisdiction in the district courts, but also because it is

superfluous. With respect to bankruptcy matters, Section 1331

grants no jurisdiction not granted by Section 1471.41

Construing Section 1331 to grant jurisdiction of actions

arising under Title 11 would conflict not only with Section 1471,

but also with the transition provisions of thé Bankruptcy Reform

Act of 1978. During the transition period between October l,

1979 and April 1, 1984, "all cases commenced under title ll...

shall be referred to the United States bankruptcy judges” and

"all proceedings in such cases shall be before the United States

bankruptcy judges [except proceedings to enjoin courts, certain

contempt proceedings, and appeals).”" Pub. L. No. 95-598,

405(a)(1), 92 Stat 2685. Permitting proceedings arising under

Py title 11 to be before the United States district courts under 28

U.S.C. § 1331 is inconsistent with this statute.

Moreover, Section 405(b), Pub. L. No. 95-598, 92 Stat. 2685,

e placed under the heading “Jurisdiction and Procedure During

Transition," identifies the source of subject matter jurisdiction

of bankruptcy matters during transition.

Accord, In re Conley, supra note 37, at 21: "[A]) specific grant

of power, such as tha contained in § 1471, prevails over the

broader language of § 1331."

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During the transition period, the amendments

made by sections 241 [which includes the

enactment of Section 1471] .. . shall apply

to the courts of bankruptcy continued by

Section 404(a) of this Act the same as such

amendments apply to the United States

bankruptcy courts established under section

201 of this Act.

Only Section 1471 was identified. Section 1331 was ignored.

Finally, jurisdiction of bankruptcy civil proceedings under

Section 1331 produces irreconcilable conflict between the venue

and removal provisions pertaining to district courts and the

venue and removal provisions of the Bankruptcy Reform Act of

1978.

28 U.S.C. §§ 1472-1477 and 1478 codify the venue and removal

provisions of Section 24l(a) of the Bankruptcy Reform Act.

Marathon, as noted abcve, invalidates all of Section 241(a),

including the venue and removal statutes. Thus, the district

court, if it assumes jurisdiction of bankruptcy cases and

proceedings pursuant to 28 U.S.C. § 1331 or some other provision

outside Section 24l1(a), must look to 28 U.S.C. §§ 1391-1407 and

1441, which govern venue and removal in the district courts.

These venue and removal rules are so different from those enacted

by Section 24l(a) of the Bankruptcy Reform Act, however, that

their use in bankruptcy cases and proceedings would run afoul of

Congress’ intent to provide distinct venue and removal rules in

bankruptcy. 42

Sections 1391-1407 of title 28 contain the venue rules for the

district courts. These rules are for “civil actions." No

provision is made for bankruptcy cases. If the district courts

asserted jurisdiction over bankruptcy cases, they would be left

without venue rules. Equally difficult problems would result in

bankruptcy civil Ome IN Oe The venue of civil proceedings was

covered by 28 U.S.C. §§ 1473, 1475, and 1477, now invalidated by

Marathon. ‘These provisions are different from the venue rules

{ 2)

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In summary, even if under former law Section 1331 granted

jurisdiction of bankruptcy civil proceedings, the continued

existence of that jurisdiction is inconsistent with the

Bankruptcy Reform Act of 1978.

CONCLUSION

Recognizing that hardship and disruption may result from a

decision denying the jurisdiction of district and bankruptcy

courts over this and similar actions, the court has carefully

sought a valid basis for subject matter jurisdiction. Having

applicable in the district courts. For example, Section 1473(a)

provides that proceedings arising in or related to a case under

title 11, with two exceptions found in 1473(b) and (d), may be

commenced in the bankruptcy court in which the title 11 case is

pending. Section 1391, on the other hand, generally places venue

in the district where all plaintiffs or all defendants reside or

in which the claim arose in diversity actions, and in the

district where all defendants reside or in which the claim arose

in non-diversity actions. Section 1475 permits a change of venue

“to a bankruptcy court for another district, in the interest of

justice and for the convenience of the parties." But Section

1404(a) permits a change of venue “to any other district or

division where it might have been brought,” and only “for the

convenience of parties and witnesses."

Removal to the bankruptcy courts was governed by 28 U.S.C.

§ 1478, now invalidated by Marathon. Removal to the district

courts is governed by 28 U.S.C. § 1441. While Section 1478

permits "a party" to remove, only "the defendant or the defen-

dants" may remove under Section 1441. While Section 1478 permits

removal of "any claim or cause of action in a civil action,"

Section 1441 provides only for removal of a “civil action."

Although under Section 1478 a claim or cause of action may be

removed from any court, state or federal, except the United

States Tax Court, under Section 1441 a civil action may be

removed only from state courts. Under Section 1478, removal is

to "the bankruptcy court for the district where such civil action

is pending,” but under Section 1441 removal is to “the district

court of the United States for the district and division em-

bracing the place where such action is pending.” Finally, while

removal can occur under Section 1478 “if the bankruptcy courts

have jurisdiction over [the] claim or cause of action,” removal

can occur under Section 1441 only if “the district courts of the

tes have original jurisdiction.*

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searched and finding no jurisdiction, it is the court's duty to

dismiss the trustee's complaint.

Without jurisdiction the court cannot proceed

at all in any cause. Jurisdiction is power

to declare the law, and when it ceases to

exist, the only function remaining to the

court is that of announcing the fact and

dismissing the cause. « «+ {[J]udicial duty is

not less fitly performed by declining

ungranted jurisdiction than in exercising

firmly that which the Constitution and the

laws confer.

Ex parte McCardle, 74 U.S. (7 Wall.) 506, 514-515 (1869).

The exercise of jurisdiction when none exists would violate

my oath of office and do catastrophic and irreparable harm to

those who act in reliance upon the court's orders and judgments.

The court certifies that the circumstances require immediate

review.

Marathon's invalidation of Section 241(a) and the absence of

curative legislation have closed the doors of the federal courts

to civil proceedings arising under bankruptcy law. For the

present, at least for this action and others like it, no legiti-

mate source of jurisdiction appears. An order consistent with

this opinion was entered which will be stayed by this court

pending a

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