A Guide to the Bankruptcy Amendments and Federal Judgeship Act of 1984
| Publication year | 1984 |
| Pages | 1775 |
| Citation | Vol. 13 No. 9 Pg. 1775 |
1984, October, Pg. 1775. A Guide to the Bankruptcy Amendments and Federal Judgeship Act of 1984
On June 28, 1982, the United States Supreme Court rendered its decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co.(fn1) invalidating the jurisdictional scheme of the Bankruptcy Reform Act of 1978 ("Code") that broadly delegated jurisdiction to bankruptcy judges. In effect, Marathon left the bankruptcy courts without the power delegated by the Code and did not clearly vest jurisdiction in the federal district courts. Recognizing that its decision would require reform by Congress and potentially create chaos in the bankruptcy system, the Court stayed the effect of its decision until October 1982. Congress was slower to act than the Court estimated and seemingly ignored the confusion and demoralization of the bankruptcy courts caused by congressional failure to address the jurisdictional issue. Not until June 28, 1984, did Congress finally enact legislation designed to rectify the constitutional problem.
In adopting the Bankruptcy Amendments and Federal Judgeship Act of 1984 ("Amendments"), Congress established a new jurisdictional scheme for bankruptcy. In addition, Congress took the opportunity to make significant changes in other areas of the Code which it had studied for several years. The jurisdictional changes were to become effective immediately (June 28, 1984). All other substantive changes to the Code are applicable to cases filed on or after October 9, 1984.
This article explains and comments on the new jurisdictional structure of the bankruptcy courts, the new amendments affecting consumer debtors who file for bankruptcy, changes affecting leases, timeshares and union contracts, as well as several other significant miscellaneous changes to the Code. This article is intended only to notify the practitioner as to the highlights of changes and to make preliminary observations as to their effect.(fn2)
The Code vested the district courts with original and exclusive jurisdiction over all cases arising under Title 11 or related to a case arising under Title 11, but provided that the bankruptcy courts exercised all of this jurisdiction. The Code also gave the bankruptcy courts exclusive jurisdiction over all property of the debtor, wherever located.(fn3) As a practical matter, bankruptcy judges heard and determined all cases directly or indirectly related to bankruptcy.
In Marathon, the Supreme Court held that Congress had unconstitutionally created bankruptcy courts which exercised the judicial power reserved by the Constitution only for judges with lifetime tenure and irreducible salaries. Bankruptcy judges did not have these attributes. Recognizing that it had permitted non-Article III courts to adjudicate certain types of matters,(fn4) the Marathon court again broadly demarcated the boundaries of permissible action by non-Article III judges:
[First,] with respect to congressionally created rights, some factual determinations may be made by a specialized fact-finding tribunal designed by Congress without a constitutional bar. [Second,] the functions of the adjunct must be limited in such a way that "the essential attributes" of judicial power are retained in the Article III court.(fn5)
In essence, therefore, the district court must make the final decision.
The Marathon court found that bankruptcy court jurisdiction under the Code did not meet these tests for several reasons: (1) subject matter jurisdiction exceeded traditional bankruptcy matters and encompassed state law claims; (2) bankruptcy courts exercised
To meet the constitutional criteria announced by Marathon, Congress had the option of retaining the jurisdictional scheme, but giving Article III status to all bankruptcy judges. In the alternative, Congress could refuse to give lifetime tenure to bankruptcy judges and allow these judges to perform limited functions in cases referred to them and ultimately controlled by the district court. The House favored creation of Article III judges, while the Senate favored a reference system to non-Article III judges. The reference system ultimately prevailed. The Amendments implement the new scheme by first restructuring the jurisdiction and second, by establishing procedures for reference of matters from the district court to the bankruptcy court.
Congress made the jurisdictional changes by amending 28 U.S.C. § 1334. This section now provides that the district courts will have original and exclusive jurisdiction of all cases arising under Title 11 and original but not exclusive jurisdiction of all civil proceedings arising under Title 11 or arising in or related to cases under Title 11. This section also vests the district court with exclusive jurisdiction of all property of the debtor.
The most significant change to the jurisdictional scheme involves state law claims related to a bankruptcy. To avoid the problem posed in Marathon of having a federal court decide a state law claim only because of the bankruptcy, Congress provided in § 1334(c)(2) that upon motion of a party in a proceeding based upon a state law claim or state cause of action related to a case under Title 11 in an action which could not have been commenced in a federal court absent bankruptcy, "the district court shall abstain from hearing such proceeding if an action is commenced and can be timely adjudicated, in a State forum of appropriate jurisdiction."(fn7) The court's decision to abstain is not reviewable by appeal or otherwise. Despite this mandatory abstention, the automatic stay continues to apply to any property of the estate.(fn8)
Under the abstention amendment, a party involved in a state law claim will have the ability to remove that case back to the state court. The Code no longer affords either district courts or bankruptcy courts the pervasive jurisdiction which once allowed them to adjudicate contract and tort claims, as well as dissolution of marriage proceedings. Because abstention occurs upon motion, it is conceivable that a party may consent to the adjudication of a state law claim in the bankruptcy court subject to the guidelines of the reference system.
Having placed all jurisdiction in the district courts, the Amendments then establish the reference system which allows bankruptcy judges to hear and determine most day-to-day matters. The reference system embodied in the Amendments largely follows the scheme set forth in the Emergency Rule formulated by the United States Judicial Conference and adopted by all federal circuits in December 1982 to fill the jurisdictional gap created when Congress failed to act at the expiration of the Marathon stay. Under the Rule, the district court automatically referred core proceedings arising under the Code to the bankruptcy judges. The Rule provided for a de novo hearing and prohibited the bankruptcy judge from presiding over jury trials and from entering binding findings and conclusions in a claim arising under state law claim.
Most district courts and all circuit courts that considered the constitutionality of the Rule found it to be a valid delegation of duties from the district courts to the bankruptcy judges.(fn9) This judicial approval of the reference system as workable and constitutional supported proponents of its codification.(fn10)
To implement the reference system, Congress added a new Chapter 6 to Title 28 of the United States Code.(fn11) Section 157 establishes the reference procedure by first allowing the district court discretion to refer to bankruptcy judges all cases arising in or related to Title 11. Subsection (b) authorizes bankruptcy judges to hear, determine and enter judgments in all cases arising under Title 11 and all core proceedings.
Section 157(b)(2) illustrates what matters are core proceedings, which consist basically of matters involving administration of the estate, discharge-ability of debts and the collection or disposition of property of the estate.(fn12) Subsection (b)(3) provides that this illustrative list is not exhaustive and allows a bankruptcy judge to determine whether a proceeding is a core proceeding. The criteria for a decision is not to be made solely on the basis that its resolution may be affected by state law. Thus, matters involving the bankruptcy estate or which counsel can argue fall within the particular expertise or fact-finding abilities of the bankruptcy judge consistent with the criteria of Marathon could be considered core matters.
Under § 157(c), the bankruptcy judge may hear a related case under Title 11 which is not a core proceeding, but in this case must submit proposed findings of fact and conclusions of law to the district court for review. As under the Emergency Rule, a party may request a de novo review in the district...
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