Satelco, Inc. v. North American Publishers, Inc. (In Re Satelco, Inc.)Satelco, Inc. v. North American Publishers, Inc. (In Re Satelco, Inc.)
MEMORANDUM OPINION
On 15 July 1985 Satelco, Incorporated (hereinafter “Debtor”) filed its petition for relief under Chapter 11 of the Bankruptcy Code,
On 17 February 1986 these adversary proceedings were scheduled for pre-trial conference, at which time the Court
sua sponte
raised the question of its jurisdiction to hear and finally adjudicate a dispute between a debtor and a non-creditor defendant based upon state contract law, in light of the Supreme Court’s ruling in
Northern Pipeline Construction Company v. Marathon Pipe Line Company,
DISCUSSION
As the national bankruptcy bar and bench have quickly discovered, the post- Marathon era has developed into one of the most confusing periods in the history of federal jurisprudence. The explosive proliferation of lower court opinions following Marathon and the Bankruptcy Amendments and Federal Judgeship Act of 1984, P.L. 98-353 (hereinafter “1984 Amendments”) attests to the degree of uncertainty and resulting inconsistency among lawyers and judges. As might be expected, this dissonance has led to a decline in the ability of counsel to accurately evaluate, and determine a proper forum for, the wide variety of actions which ordinarily arise in the course of administering a bankruptcy estate. The Court has previously undertaken a discussion of the various points of view concerning the permissible scope of a bankruptcy court’s jurisdiction, and will not reiterate that discussion here. 4 It is sufficient at this time to note that Marathon found invalid the attempt by Congress to allow the bankruptcy courts, which find their raison d’etre in Article I, to exercise powers reserved to the Article III judiciary. As Justice O’Connor recently stated, albeit in dicta in a non-bankruptcy case,
“[t]he Court’s most recent pronouncement on the meaning of Article III is [Marathon ]. A divided Court was unable to agree on the precise scope and nature of Article Ill’s limitations. The Court’s holding in that case establishes only that Congress may not vest in a non-Article III court the power to adjudicate, render final judgment, and issue binding orders in a traditional contract action arising under state law, without consent of the litigants, and subject only to appellate review.”
Thomas v. Union Carbide Agricultural Products Company,
— U.S. -, -,
“[t]he Marathon case eliminated the theory that the bankruptcy courts could be given plenary jurisdiction under Article I. See Marathon, supra,458 U.S. at 63-76 ,102 S.Ct. at 2867-2874 . In response, Congress, rather than grant the bankruptcy courts Article III status, chose to place the type of noncore, related bankruptcy proceeding involved in this case [i.e., an action to collect accounts receivable owed the debtor] with the district court.”
This explicit recognition that the bankruptcy courts, as Article' I courts, are courts of limited jurisdiction, seems quite appropriate in the aftermath of Marathon. Unfortunately, this Court concludes that while Congress clearly refused to grant the bankruptcy courts Article III status, Congress nonetheless intended bankruptcy courts to exercise certain Article III authority. More specifically, the Court surmises that Congress fully intended to allow this Court to adjudicate state law contract disputes such as the proceedings at bar.
The Court acknowledges that the 1984 Amendments are certainly less clear than desired, resulting in a maelstrom of conflicting decisions. This confusion is doubtless due to the failure of Congress to include any legislative history from which the courts could legitimately draw an inference.
6
The Courts have generally split into two camps, those which feel the 1984 Amendments resolved the constitutional deficiencies of the 1978 Code, and now permit bankruptcy courts to adjudicate state law contract actions by the estate against non-creditor defendants;
see e.g., In re All American of Ashburn, Inc.,
1. Turnover
Debtor has alleged this Court has jurisdiction to hear these actions, and therefore to enter default judgments, regarding collection of accounts receivable by virtue of Bankruptcy Code § 542, which states:
(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.
(b) Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor.
(c) Except as provided in section 362(a)(7) of this title, an entity that has neither actual notice nor actual knowledge of the commencement of the case concerning the debtor may transfer property of the estate, or pay a debt owing to the debtor, in good faith and other than in the manner specified in subsection (d) of this section, to an entity other than the trustee, with the same effect as to the entity making such transfer or payment as if the case under this title concerning the debtor had not been commenced.
(d) A life insurance company may transfer property of the estate or property of the debtor to such company in good faith, with the same effect with respect to such company as if the case under this title concerning the debtor had not been commenced, if such transfer is to pay a premium or to carry out a nonforfeiture insurance option, and is required to be made automatically, under a life insurance contract with such company that was entered into before the date of the filing of the petition and that is property of the estate.
(e) Subject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs, to turn over or disclose such recorded information to the trustee.
Debtor further alleges that these are core proceedings by virtue of
Under the Bankruptcy Act, it was necessary for the court to determine whether an action was summary or plenary in nature before it could ascertain whether it had
Under the Act, the bankruptcy court had summary jurisdiction over property in the actual or constructive possession of the debtor, if property was not within the possession of the debtor,
or
if the debtor’s right to the property was disputed by a substantially adverse claim, the dispute was not properly subject to the bankruptcy court’s jurisdiction; rather, the parties were required to seek resolution in a court of plenary jurisdiction, i.e., a state or federal district court.
10
Slenderella Systems of Berkely, Inc. v. Pacific Telephone & Telegraph Company,
“These limits on the jurisdiction of the bankruptcy court still exist under the [1984 Amendments], albeit under a slightly different nomenclature which simply places actions arising under state law outside the compass of federal bankruptcy court jurisdiction ... as to the substantive parameters of bankruptcy court jurisdiction, the current Act is precisely in line with the pre-1979 law and the entire range of bankruptcy court jurisdiction is accordingly predicated upon possession, actual or constructive, of the debtor’s property ... [a]nd property with respect to which a substantial adverse claim has been raised has never been considered within the actual or constructive possession of the bankruptcy court.”
In re Midwestern Companies, Inc.,
The approach urged by Debtor has indeed been recognized and adopted by several courts.
See In re Baldwin-United Corporation,
It may be instructive to examine Debt- or’s action in the proper procedural context as well. Debtor essentially seeks an injunction to compel the defendants to pay money. Should Debtor prevail on the merits, the defendants would be required, on pain of contempt, to forthwith pay the judgment. Such a scheme is manifestly unfair to the defendants, who are thus deprived of significant procedural rights. A turnover order, unlike a money judgment by a state or federal district court, is less a determination of liability than an exercise of the court’s equitable power. While the typical judgment is a mere “hunting license” for the prevailing plaintiff to pursue the defendant’s assets, a turnover order renders the defendant answerable in equity to the court. To use turnover in the manner suggested by Debtor invites the question, what if the defendant cannot or will not pay? Is the defendant then subject to the wide range of sanctions available against those who disobey court orders?
[T]o extend the proposition urged by the Debtor would mean that a Debtor may collect, by way of mandatory injunction, disputed claims to monies, claims based strictly on state law which are unliqui-dated . and contingent. Certainly such procedure could not be sanctioned outside bankruptcy and there is no just reason why it should be sanctioned just because the entity seeking to collect disputed funds happens to be a Debtor under the Bankruptcy Code. To approve the proposition urged by the Debtor would be without a doubt, a gross violation of the most basic concepts of due process to which every Defendant is entitled, which involves at least the right to enjoy all the procedural safeguards otherwise available to all litigants in civil litigation.
In re Chick Smith Ford, Inc.,
Debtor has asserted as a secondary basis for jurisdiction the residual grant of authority set forth in
Debtor has alleged that the money attributable to the accounts receivable sought to be collected here is property of the estate, a notion which the Court cannot accept for reasons set forth above. By invoking
The asset in question here, a chose in action, may be liquidated in one of three ways. It may be sold to a third party, a means contemplated by
A second mechanism for liquidation is compromise and settlement, a possibility not present here. The third means by which this asset might be liquidated is litigation. To conclude that this alternative was not intended by Congress is to rob the quoted portion of
There can be little question that this manifest intention of Congress to permit the bankruptcy court to exercise jurisdiction over litigation by the estate against non-creditor defendants in the course of liquidating a chose in action flies in the face of Marathon. The courts are thus placed squarely between the constitutionally permissible jurisdictional parameters for Article I courts prescribed by the Supreme Court, and the apparent liberality of the subsequent Congressional enactment. It is clear that where the latter runs afoul of the strictures of the former, the former must control. Yet the constitutionality of a statute is presumed; 13 and before the Court will declare the statute void, it will assay a look at the floor debates, mindful of the ruling in Garcia, 14 in an effort to grasp at some basis to infer a Congressional intent to stay within the confines of Marathon.
It is apparent that precisely the sort of problem facing the Court today was foreseen by the Senate, which included in its proposal for the 1984 Amendments a provision requiring remand to the state courts in any proceeding based solely upon state law. As Senator Hatch lamented after the Committee deleted that provision,
“Permitting federal bankruptcy courts to adjudicate state law claims would deprive state law claimants of the protections of state law merely because they happened to do business with or be injured by a party who later became bankrupt. Each state has its own safeguards for the judicial process, such as evidentiary or jury trial rules. Permitting a federal bankruptcy court to assert jurisdiction over state law claims will deprive state law claimants of the protections of their own state laws. In this sense, this is an issue of litigation leverage. The bankrupt creditor would like to bring all cases in a single forum which may be distant from the situs of the injury or infraction. The state law claimant would prefer the ease of litigating where the action arose. The Constitution resolves these issues by preserving state court jurisdiction over purely state law issues. The broad jurisdictional grant of the 1978 act sought to improve judicial efficiency. Not only was that found unconstitutional, a recent commentary suggests that ‘exercise of jurisdiction by bankruptcy courts to the full extent permitted by the Code may impede rather than facilitate congressional goals because full exercise may congest bankruptcy courts with state law issues ... ’ [citation omitted] in order to pass constitutional muster, any bankruptcy amendments must remove adjudication of purely state law claims from federal courts.”
The Senator’s primary concern was that federal district courts would, under the Amendments, be able and perhaps compelled to adjudicate strictly state law claims where no other basis of federal jurisdiction, e.g., diversity, existed. More to the point in these proceedings, however, is the memorandum Senator Hatch attached to his comments.
“Even where the district court can constitutionally exercise jurisdiction over state based actions in cases where there is diversity jurisdiction, it is clear, from Marathon, that the bankruptcy court, in its role as adjunct to the district court,can adjudicate no such causes of action. Therefore, the matters over which the bankruptcy court can exercise summary jurisdiction — core proceedings (28 U.S.C. 157(b)) — should exclude adjudication of state law based causes of action.”
130 CONG.REC.S. 8893-8897 (daily ed. June 29, 1984), reprinted in 1984 U.S. CODE CONG. & AD .NEWS 577, 585. It is clear from the remarks of members of the Conference Committee that Congress was aware of these potential problems, considered them, and consciously eliminated the safeguards proposed by the Senate. It is equally clear that the Conference Committee sought, as under the 1978 Code, to make the bankruptcy court a central clearinghouse and liquidating forum, in direct contravention of the ruling in Marathon. As Representative Kastenmeier, a member of the Committee, stated,
“The change in the definition in the Senate passed bill would have contradicted the basic purposes of the consolidated jurisdiction we adopted in 1978.... it would have dissipated the assets of the estate by creating a multiplicity of forums for the adjudication of parts of a bankruptcy case. The conference report largely rejects the Senate limitations on the tasks which are to be performed by a bankruptcy judge.”
130 CONG.REC.H. 7492 (daily ed. June 29, 1984),
reprinted in
1984 U.S.CODE CONG. & AD.NEWS 579. While the Court does not rely upon these comments of individual legislators as the basis for its conclusion,
15
they certainly are supportive of the inference drawn by the Court, i.e., that Congress intended collection actions such as those at bar to fall within the core jurisdiction of the bankruptcy court. As a result of this intention, the very cause of action at issue in
Marathon
would, under the 1984 Amendments, be considered subject to Article I bankruptcy court’s final orders.
For the reasons stated above, this Court holds that actions to collect accounts receivable based upon state law contract principles do not fall within the scope of turnover actions as contemplated by § 542 and
Notes
. See Tex.Rev.Civ.Stat.Ann. Art. 2226 (Vernon Supp.1982).
. Because a similar question had arisen in a recent case, in which the Court was required on remand to exhaustively review the question, no further briefing or argument was deemed necessary. See M & E Contractors, Inc. v. Rodgers Construction, Inc. and Rolex Texas Realty Corporation, Adv. No. 385-3025 (Bkrtcy.N.D.Tex. 2 January 1986).
. Bankruptcy Rule 7052.
. See M & E Contractors, supra Note 2.
. It should be noted that the 1984 Amendments took effect in October 1984, several months pri- or to Justice O’Connor’s explication of the meaning of Marathon. This is, if nothing more, at least an indication that the 1984 Amendments did not eliminate the concerns expressed in Marathon, with respect to the scope of the bankruptcy court’s powers.
. Certain comments of individual legislators have been published in the Congressional Record and various professional magazines. The Supreme Court has admonished the judiciary against relying upon such unofficial commentary. . "In surveying legislative history we have repeatedly stated that the authoritative source for finding the legislature’s intent lies in the committee reports on the bill ... we have eschewed reliance on the passing comments of one member ... and casual statements from floor debates."
Garcia v. United States,
.Of course, some core-noncore determinations are more clear-cut than others.
See In re Lanza,
. In
M & E Contractors, supra
Note 2, the Court articulated its findings and conclusions pursuant to an order of remand by the District Court, and was restricted to a core-noncore determination and a discussion of the ability of the bankruptcy court to conduct a jury trial. Because the order of remand was thus limited, the Court did not elaborate on, but did allude to, severe reservations as to the constitutionality of
. At least one court has suggested that, in the interests of judicial economy, noncore proceedings should be brought in the district court.
In re Crabtree,
. Use of the disjunctive should be carefully noted. Debtor must establish that possession exists, regardless of whether there may be substantial claims adverse to the interest of the estate in the property in question.
.M & E Contractors, supra Note 2.
. Georgia-Pacific Corporation v. Sigma Service Corporation, 712 F.2d 962 (5th Cir.1983) may appear to hold otherwise, but can be distinguished in that the defendant there admitted liability but contested whether the estate or third party claimant should be paid. Here there is no such admission of liability.
.See also
.
See Marathon,
. See Note 6, supra.
. Indeed, the sentiments expressed by Representative Kastenmeier on behalf of the Conference Committee are clearly reflected in the last sentence of
. Thomas v. Union Carbide Agricultural Products Company, page 4, supra.