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Bankruptcy Courts (2)
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66328611
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Bankruptcy Courts (2)
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Records of the Office of the Chief of Staff (Reagan Administration)
James Cicconi's Subject Files
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Legislative
History
I
BANKRUPTCY DIVISION OF THE UNITED STATES DISTRICT COURTS
A.
Background
Title I of the bill establishes a bankruptcy division
of each of the United States district courts to adjudicate
bankruptcy cases and civil proceedings arising in or relating to
bankruptcy cases. The proposed bankruptcy division would resolve
the constitutional crisis now facing the bankruptcy court system
as a result of the United States Supreme Court decision in the
case of Northern Pipeline Construction Company V. Marathon Pipe
Line Company,
U.S.
, 102 S. Ct. 2858 (1982). The
Supreme Court held in Northern Pipeline that the grant of
jurisdiction to the bankruptcy courts in section 241 (a) of the
Bankruptcy Reform Act of 1978 was unconstitutional because the
bankruptcy judges are not afforded the protections provided by
Article III of the Constitution.
The Court stayed its order invalidating the juris-
dictional grant to the bankruptcy courts until October 4, 1982,
in order to give Congress time to establish a constitutional
judicial system for the adjudication of bankruptcy matters.
On October 4, 1982, the existing bankruptcy courts will no longer
have any statutory jurisdiction over bankruptcy matters and will
cease functioning. Absent Congressional action to provide a
constitutional forum for bankruptcy matters, there is some doubt
that such matters can be adjudicated at all. There are presently
pending in excess of 500,000 bankruptcy cases which involve
billions of dollars in assets and creditors' claims. Failure of
the Congress to act in a timely fashion would, at the very least,
- 2 -
result in a chaotic and highly uncertain situation for debtors
and creditors alike, as well as considerable delay in the adjudi-
cation of bankruptcy matters.
B. The Need For An Article III Tribunal
The reasoning expressed by the plurality and concurring
opinions in Northern Pipeline make clear the practical need for
an Article III tribunal to resolve the constitutional problems
inherent in the current bankruptcy court system. The plurality
found that the constitutional jurisdiction of an Article I court
must be limited to the adjudication of "public rights." The
Court does not define with precision what constitutes "public
rights" but notes generally that they must at a minimum arise
"between the government and others." (102 S. Ct. at 2870). By
contrast, private rights, which must be adjudicated by Article
III courts, are those involving "the liability of one individual
to another." (102 S. Ct. at 2870-71). The concurring opinion
authored by Justice Rehnquist would have decided the case on
narrower grounds, holding that traditional common law claims
arising under state law must be decided by Article III judges.
Under either rationale, there is no practical way to
construct an effective Article I bankruptcy court which will not
be subject to serious and continuing constitutional challenge.
There is no reason to assume that even the majority of cases
arising under Title 11 involve solely public rights which could
be constitutionally litigated by an Article I court under the
rationale advanced by the plurality. For example, the
- 3 -
adjudiçation of a proof of claim generally involves claims by one
private party against another which, by their nature, seem
clearly matters of "private right." A strong argument may be
made that a creditor's claim does not cease to be a private claim
merely because the defendant is bankrupt.
Even under the more narrow holding offered by Justice
Rehnquist's opinion, it is clear that an Article I bankruptcy
court would be subjected to continual and very serious consti-
tutional challenge. Cases arising under Title 11 frequently
entail consideration of state law or traditional common law
issues in many different contexts. To take the most obvious
example once again, proofs of claim offered by a claimant against
the bankrupt will generally be predicated on the state laws (of
contract, agency, property, etc.).
Finally, even if constitutional jurisdiction over
certain aspects of Title 11 proceedings could be defined, any
system under which such matters are relegated to Article I courts
while other matters involving private rights are referred to
Article III courts would result in an inefficient bifurcation of
the proceedings. One of the primary purposes of the 1978 Bank-
ruptcy Reform Act was to provide a single forum in which all
claims necessary to the expeditious resolution of a bankruptcy
proceeding could be consolidated. After the Northern Pipeline
decision, it is clear that this can only be achieved through an
Article III court.
- 4 -
C,
Creation of a Bankruptcy Division of
the United States District Courts
While an Article III solution is dictated to the
problems presented by Northern Pipeline, it is clear that the
existing district courts could not effectively manage the
enormous volume of bankruptcy filings currently handled by the
bankruptcy courts. In 1981, 506,829 bankruptcy petitions were
filed. This would almost quadruple the civil caseload now
handled by the district courts (there are slightly over 180,000
civil cases filed annually). The district courts are in many
cases already experiencing substantial case backlogs and will be
unable to handle the added burden of bankruptcy cases without
considerable delay and disruption in these bankruptcy cases as
well as the rest of the civil case calendar. Moreover, concern
has often been expressed in the past that district judges who
supervise general litigation would not have sufficient expertise
in bankruptcy matters to expeditiously handle complex bankruptcy
problems.
To avoid the evident problems with the assignment of
bankruptcy cases to the existing district courts, H.R. 6978, cur-
rently pending before the House of Representatives, would create
a new trial court under Article III to handle solely bankruptcy
cases and proceedings. This approach, however, creates some diffi-
culties of its own. At present, there is only one federal trial
court constituted under Article III, the district courts.
- 5 -
H.R. 6978 would create a second, parallel system of trial courts
for bankruptcy, which would inevitably result in some duplication
and overlap. There would, for example, be two sets of clerks in
each district, one for the district court and one for the bank-
ruptcy court. There would also be problems that result from the
inflexible assignment of specific numbers of judges to the dis-
trict court and the bankruptcy court, regardless of the changes
in the relative number of bankruptcy cases on one hand and civil
and criminal cases on the other. Although some of these problems
could be resolved through such mechanisms as the transfer of
improperly filed cases between the district and bankruptcy courts
and the temporary designation of judges of one court to sit as
judges of the other, the establishment of an independent,
parallel court structure would always present the likelihood of
friction and inefficiency.
This bill adopts a somewhat different solution to the
problem. The goal is on the one hand to avoid the creation of a
separate court structure, yet on the other to achieve the bene-
fits of a more specialized judiciary that can concentrate on bank-
ruptcy matters. The solution is to vest bankruptcy jurisdiction
in the district courts, but to expand their size and to assign
additional district judges specifically to bankruptcy matters.
This scheme will promote bankruptcy expertise among the judges
assigned to the bankruptcy division of the district court, and
will serve to keep bankruptcy matters separate from the backlog
of civil and criminal cases pending before the other district
- 6 -
judges, 1/ In this way, the litigation of bankruptcy matters can
be integrated efficiently into the workload of the district
court, while at the same time assuring that bankruptcy cases will
be handled promptly and knowledgeably by Article III district
judges who specialize in bankruptcy law.
The district judges who are assigned to the bankruptcy
division will be United States district judges for all purposes
under title 28 of the United States Code. Thus, unless speci-
fically provided to the contrary, such judges would be governed
by the existing provisions of law, such as those relating to
retirement, law clerks and seniority. The district judges
assigned to the bankruptcy division would, however, deal pri-
marily with cases under title 11 and civil proceedings arising
under or related to cases under title 11.
D.
Assignments of District Judges in the Bankruptcy Division
The bill provides for the appointment of 227 additional
district judges to serve in the bankruptcy division, 2/ and directs
that all bankruptcy matters before the district court be assigned
to that division. This assures that bankruptcy matters will come
before judges who have experience in the field, and that there
1/ The assignment of district judges and bankruptcy cases
specifically to the bankruptcy division will assure that
cases pending in that division will not be affected by the
Speedy Trial Act or other laws creating priorities for cer-
tain types of civil or criminal cases.
2/
The bill provides the same number of judges, distributed in
the same districts, as provided by H.R. 6978.
- 7 -
will be district judges specifically assigned to hear such
matters. The bill also allows other district or circuit judges
to be assigned temporarily to perform the duties of a district
judge in the bankruptcy division.
Further, district judges in the bankruptcy division can
be assigned to hear non-bankruptcy matters pending before other
divisions of the district court, and to sit by designation on
other district courts and the courts of appeals on the same basis
as other district judges. However, the bill would allow such
designation or assignment only to the extent that it would not
interfere with the expeditious determination of cases and proceed-
ings pending in the bankruptcy division. This provision will
assure that bankruptcy matters will not be unduly delayed because
of the assignment of district judges to hear other types
of cases, whether civil or criminal.
E. Other Provisions
Jurisdiction and venue over bankruptcy matters would be
the same for the bankruptcy division of the district courts under
this bill as was intended for the bankruptcy courts under the
Bankruptcy Reform Act of 1978 after the effective date of
April 1, 1984.
An appeal from a final order or judgment of the bank-
ruptcy division of a district court would, as with any final
order or judgment of the district court, be taken to the court of
appeals for the circuit. However, as provided in the 1978 Act,
the judicial council of a circuit, at its option, could establish,
- 8 -
for any district, bankruptcy appellate panels composed of three
district judges assigned to bankruptcy divisions of districts
within the circuit. In any district where such bankruptcy
appellate panels are established, an appeal from a bankruptcy
division judgment would be taken to the panel, and then from the
decision of the panel to the court of appeals, unless the parties
agreed to appeal directly to the court of appeals.
The bankruptcy judges who are serving on the date of
enactment of the legislation would constitute the bankruptcy
courts for the period beginning on the date of enactment and
ending on September 30, 1983 (referred to as the "transition
period"). The terms of office of all such transitional bank-
ruptcy judges who are serving on the date of enactment of the Act
would expire on September 30, 1983. During the transition period
such judges would be authorized to exercise jurisdiction over all
cases under title 11 of the United States Code and all proceed-
ings arising under title 11 of the United States Code or arising
in or related to a case under title 11 of the United States Code.
Such judges would be continued at their present salary level.
SECTION-BY-SECTION ANALYSIS
Section 2 adds a new section 132A to title 28 of the
United States Code, providing for the establishment of a bank-
ruptcy division in each United States District Court. The
bankruptcy division shall consist of the active district judges
designated and assigned to the division, but other judges may be
assigned to sit as judges of the division. The bankruptcy divi-
sion is not a separate court but an integral part of the district
court in each district, and except as otherwise provided, the
district judges assigned to the bankruptcy division shall have
the same powers and duties of any district judge.
In order to conform the terminology of title 11 and
other provisions of law to the district court bankruptcy division
system created by the bill, this section (which becomes effective
October 1, 1983) also provides that any reference to a bankruptcy
court shall be deemed to be a reference to the bankruptcy divi-
sion of a district court.
Section 3 provides for the appointment by the President,
by and with the advice and consent of the Senate, of additional
district judges to be assigned to the bankruptcy division of the
district courts. The number and allocation of additional
judgeships in each judicial district is identical to that pro-
vided in H.R. 6978, except that the judges are appointed as addi-
tional district judges rather than as bankruptcy judges.
Section 4 amends section 137 of title 28, United States
Code, which governs the division of business among the district
- 2 -
judges of a district. All bankruptcy cases and civil proceedings
arising under or related to cases under title 11 of the United
States Code are assigned to the bankruptcy division of the dis-
trict court. As provided in this section and in section 132A (b)
of title 28, United States Code (added by section 2 of this Act),
other district judges may be assigned under the district court's
rules to hear cases pending in the bankruptcy division if needed.
Also, the district judges in the bankruptcy division may be
assigned to hear other cases pending in the district court, but
only if the assignment will not impair the expeditious deter-
mination of cases and proceedings pending in the bankruptcy
division. These provisions allow some flexibility in the assign-
ment of the workload of the district, while assuring that the
resolution of bankruptcy questions will not be hindered as a
result of the assignment of the district judges in the bankruptcy
division to hear other cases.
Section 5 amends section 139 of title 28 to provide
special rules for the prompt and convenient consideration of bank-
ruptcy cases, and proceedings by the bankruptcy division of the
district court.
Section 6 amends chapter 5 of title 28 by adding a new
section 145, which authorizes the creation and appointment of
bankruptcy appellate panels in a district, at the option of the
judicial council of the circuit. This provision reenacts the
provision of Public Law 95-598, which authorized the use of
bankruptcy appellate panels. Appeals are heard by a three-member
panel composed of district judges in the bankruptcy divisions of
- 3 -
the districts within the circuit, or such other judges as may be
designated and assigned under chapter 13 of title 28.
Section 7 amends section 295 of title 28 of the United
States Code to preclude the designation and assignment of dis-
trict judges in the bankruptcy division to sit on other courts if
such designation and assignment will impair the expeditious
determination of cases pending in the bankruptcy division.
Section 8 amends section 296 of title 28 of the United
States Code to make clear that circuit and district judges may be
designated and assigned under chapter 13 of title 28 to carry out
the duties of a district judge in the bankruptcy division. The
duties of a district judge in the bankruptcy division would
include, where appropriate, service on a bankruptcy appellate
panel constituted under section 145 of title 28.
Section 9 amends the table of sections of chapter 17 of
title 28, United States Code, by striking out the item relating
to section 375.
Section 10 amends section 376 of title 28 to provide
that qualifying present bankruptcy judges who serve as long as
they are needed during the transition period may participate in
the judicial survivor's annuities system.
Section 11 adds a new section 377 to title 28 to provide
improved retirement benefits for qualifying present bankruptcy
judges who remain on the bankruptcy court for the complete transi-
tion period. Under this section, a former bankruptcy judge, who
is not appointed to the district court after September 30, 1983,
would be eligible to receive improved retirement benefits
- 4 -
after attaining the age of 60 years old, if such judge continues
in service until September 30, 1983; had served as a bankruptcy
judge for at least ten years; and advises the President in
writing of his willingness to accept appointment to the bank-
ruptcy division.
The retirement provisions contained in proposed section
377 constitute an equitable retirement scheme for judges who have
performed under an increasingly burdensome workload. Moreover,
it is important that there be a smooth and orderly transition to
the Article III bankruptcy court. That can only occur, especially
under the present workload, if experienced judges remain on the
bench during the transition period. Proposed Section 377 pro-
vides an incentive for the present bankruptcy judges to remain
during the transition period. A qualifying present bankruptcy
judge who does so would receive an annuity calculated in con-
formity with the provisions governing the annuity of Members of
Congress in 5 U.S.C. 8339 (c).
Section 12 is a technical amendment to correct errors
in designation of paragraphs in 28 U.S.C. 604 (a) and an erroneous
cross-reference in 28 U.S.C 602 (b).
Section 13 makes a conforming amendment to 28 U.S.C.
620 (b) (3) by deleting a reference to referees.
Section 14 amends 28 U.S.C. 621 (a) (2) to provide that
four district judges, one of whom is assigned to the bankruptcy
division, shall serve on the Board of the Federal Judicial
Center.
- 5 -
Section 15 makes a conforming amendment in 28 U.S.C.
631 (c) by deleting a reference to referees in bankruptcy.
Section 16 makes a conforming change in 28 U.S.C.
634 (a) by deleting a reference to referees in bankruptcy.
Section 17 makes a conforming change to authorize the
clerk of a district court to employ deputies, clerical assistants
and employees assigned to the bankruptcy division.
Section 18 adds a new section 1293 of title 28 to
provide that the courts of appeals shall have jurisdiction of
appeals from all final decisions of the bankruptcy appellate
panels established in section 145 of title 28. A court of
appeals shall have jurisdiction over an appeal from a final judg-
ment, order, or decree of a bankruptcy appellate panel or, notwith-
standing section 1480 of title 28, from a final judgment, order,
or decree of the bankruptcy division of a district court of the
United States if the parties to such appeal agree to a direct
appeal to the court of appeals.
Section 19 amends 28 U.S.C. 1294 to provide that an
appeal from a bankruptcy appellate panel lies to the court of
appeals for the circuit in which the bankruptcy appellate panel
is located.
Section 20 makes certain technical amendments
correcting errors in designation, cross-reference, and spelling.
Section 21 repeals 28 U.S.C. 1334, relating to district
court jurisdiction of bankruptcy cases.
Section 22 makes a technical amendment to 28 U.S.C.
1360 (a) relating to the status of Alaska as a territory.
- 6 -
Section 23 adds a new chapter 90 to title 28 entitled
"District Courts; Bankruptcy," governing jurisdiction and pro-
cedure for bankruptcy matters. Rules of jurisdiction, removal,
and venue for the district courts are the same as was intended
for the bankruptcy courts under the Bankruptcy Reform Act of 1978
after the effective date of April 1, 1984.
Section 24 makes a conforming change to 28 U.S.C.
1827 (i) by deleting a reference to referee in bankruptcy.
Section 25 amends 28 U.S.C. 1963 to make applicable to
discharges and confirmation orders the registration provisions
applicable to district court judgments.
Section 26 makes a conforming change to 28 U.S.C. 2107
relating to time for appeals to courts of appeals. This section
only places an outside limitation on the time for appeals.
Section 27 adds a new section 2256 to title 28 relating
to habeas corpus in bankruptcy matters.
Section 28 makes conforming and technical amendments to
5 U.S.C. 8331, 8339, 8341, and 8344 relating to certain civil
service retirement provisions.
Section 29 makes a conforming amendment to section
402 (b) of the Act of November 6, 1978 (Public Law 95-598; 92
Stat. 4682) relating to certain effective dates.
Section 30 makes a conforming change to Section 406 (a)
of the Act of November 6, 1978 (Public Law 95-598; 92 Stat. 2686)
relating to certain studies and surveys required to be made by
the Director of the Administrative Office of the United States
Courts.
- 7 -
Section 31 makes conforming amendments by repealing
sections 404, 405 (a), 405 (b), 405 (c), 409, and 410 of the Act of
November 6, 1978 (Public Law 95-598; 92 Stat. 2683).
Section 32 provides that the offices of bankruptcy
judges for which appointments are authorized, by laws in effect
immediately preceding the date of the enactment of this Act, to
be made in a judicial district shall constitute the bankruptcy
court of such judicial district during the period beginning on
the date of the enactment of this Act and ending on September 30,
1983 (referred to as the "transition period").
The bankruptcy courts established in this section shall
be deemed to be the bankruptcy courts for purposes of this Act;
the Acts amended by this Act; title 28 of the United States Code,
as amended by this Act, other than sections 133A, 293 (b), 294,
295, 331, 372, and 451 of such title; title 11 of the United
States Code; and the Acts amended by the Act of November 6, 1978
(Public Law 95-598; 92 Stat. 2549).
During the transition period and in addition to cases
and proceedings commenced during such period, all cases under
title 11 of the United States Code and all proceedings arising
under title 11 of the United States Code or arising in or related
to a case under title 11 of the United States Code pending on the
date of enactment of this Act shall be heard by the bankruptcy
courts established in subsection (a) of this section as though
such cases and proceedings had been commenced in such courts.
Section 33 provides that the judges of the bankruptcy
courts established in section 32 (a) of this Act shall have the
- 8 -
title United States bankruptcy judges. (During the transition
period, United States bankruptcy judges may exercise the juris-
diction and powers conferred by title 28 and title 11 of the
United States Code on the bankruptcy division of the district
courts.)
Notwithstanding section 34a of the Bankruptcy Act as in
effect on September 30, 1979, and section 404 (b) of the Act of
November 6, 1978, as in effect before the date of the enactment
of this Act, the terms of office of all United States bankruptcy
judges who are serving on the date of the enactment of this Act
in the bankruptcy courts established in section 32 (a) expire on
September 30, 1983.
During the transition period and for any subsequent
period of service described in section 34 (c) of this Act, the
levels of salaries of United States bankruptcy judges are
continued at the levels in effect on the date of the enactment of
this Act, subject to adjustment under section 225 of the Federal
Salary Act of 1967 (2 U.S.C. 351-361) and section 461 of title
28, United States Code.
An appeal from a judgment, order, or decree of a United
States bankruptcy judge during the transition period shall be:
(a) if the judicial council of the circuit in
which the bankruptcy judge sits SO orders for the dis-
trict in which the bankruptcy judge sits, to a panel of
three bankruptcy judges appointed in the manner des-
cribed in section 145 of title 28, United States Code,
as added by this Act,
- 9 -
(b) if no panel is appointed under subparagraph
(A) for the district in which such bankruptcy judge
sits, to the district court for such district, or
(c) if the parties to the appeal agree to a
direct appeal to the court of appeals for such circuit,
to such court of appeals.
During the transition period the district courts of the
United States will have jurisdiction to hear appeals from the
judgments, orders, and decrees of bankruptcy courts.
Section 34 (a) transfers on October 1, 1983 to the
appropriate United States district court--
(1) cases, and matters and proceedings in cases,
under the Bankruptcy Act that are pending, at the end
of September 30, 1983, in the bankruptcy courts
established in section 32 (a) of this Act, other than
cases, and matters and proceedings in cases under--
(A) section 77 of chapter IX of the
Bankruptcy Act, or
(B) chapter X of the Bankruptcy Act in which
a general reference under section 117 of the Bank-
ruptcy Act is not in effect, and
(2) cases under title 11 of the United States
Code, and proceedings arising under title 11 of the
United States Code or arising in or related to cases
under title 11 of the United States Code, that are pend-
ing at the end of September 30, 1983, in the bankruptcy
courts established in section 32 (a) of this Act.
- 10 -
Section 34 (b) transfers on October 1, 1983 to the
appropriate bankruptcy appellate panels established in section
145 of title 28, United States Code, appeals from final judg-
ments, orders, and decrees of the bankruptcy courts established
in section 32 (a) pending at the end of September 30, 1983, in the
panels appointed under section 33 (e) (1) (A).
Section 34 (c) provides that after September 30, 1983,
former United States bankruptcy judges whose terms expired on
September 30, 1983, may be temporarily designated and appointed
to hear and determine cases or proceedings that are pending in
the bankruptcy division of the district court. Section 32 (b) and
section 33 (d) of this Act shall apply to such former United
States bankruptcy judges when they sit by designation under this
subsection. Any such designation and appointment shall terminate
30 days after all appointments under section 133A of title 28,
United States Code, to the bankruptcy division of the United
States district court involved have first been made or on March
31, 1984, whichever is earlier.
Section 35 authorizes the Supreme Court to 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 system of bank-
ruptcy divisions of the district court created by this Act.
Section 36 provides for the selection of United States
judges in the bankruptcy division on the basis of merit.
Whenever a vacancy occurs in such a judgeship, the President
- 11 -
shall appoint persons whose character, experience, ability, and
impartiality qualify such person to serve in the Federal
judiciary.
Since the quality of justice in our Nation depends on
the quality of our judges, it is important that they be chosen on
the basis of their qualifications and proven excellence. The
criteria listed in this section are good character, experience,
ability, impartiality and a record of commitment to equal
justice.
Extensive practice in bankruptcy law, while desirable,
is not a required qualification under this provision. However,
judicial nominees should possess the legal qualifications to effec-
tively preside over cases which call for a knowledge of substan-
tive law, and both federal and bankruptcy rules of procedure.
The criteria set forth in this provision do not impinge
on the constitutional prerogative of the President to select
judicial nominees.
Section 37 (a) provides that, except as provided in
subsection (b), this Act and the amendments made by this Act
shall take effect on the date of enactment.
Section 37 (b) provides that sections 132A and 145 of
title 28, United States Code, as added by this Act, shall take
effect on October 1, 1983.