In the Matter of: BP RE, L.P., Debtor.
RML WAXAHACHIE DODGE, L.L.C.; RML-MCLARTY-LANDERS AUTOMOTIVE HOLDINGS, L.L.C; RML WAXAHACHIE FORD, L.L.C; RML WAXAHACHIE GMC, L.L.C.; RLJ-MCLARTY-LANDERS AUTOMOTIVE GROUP, Appellees. BP RE, L.P., Appellant,
Appeals from the United States District Court for the Western District of Texas
Before SMITH, GARZA, and SOUTHWICK, Circuit Judges.
JERRY E. SMITH, Circuit Judge.
BP RE, L.P. ("BPRE"), filed for Chapter 11 bankruptcy relief and, along with BP Automotive, L.P.,  filed an adversary complaint in the bankruptcy court alleging various state-law tort and contract claims against multiple RML entities ("RML"). The claims related to negotiations between BPRE and RML over the sale and lease of a car dealership and the related property. The bankruptcy court entered a final judgment denying relief, and on appeal the district court, reviewing the findings of fact for clear error and conclusions of law de novo, affirmed.
Appealing the judgment of the district court, BPRE argues, on the merits, that RML breached a lease agreement; that undisputed evidence shows that defendants committed fraud; and that several findings were against the great weight of the evidence. Procedurally, BPRE contends that the bankruptcy court (1) failed to rule on some of BPRE's claims; (2) relied on evidence not in the record and failed to apply the proper legal standards; (3) erred in denying a jury trial; and (4) lacked constitutional authority to enter a final, appealable judgment.
Because the bankruptcy court lacked Article III authority to enter final judgment on BPRE's claims, we vacate the district court's judgment and remand to the district court. We thus do not reach the merits of BPRE's appeal.
The Bankruptcy Code was enacted in 1984 in response to Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), which had held the 1978 Bankruptcy Act unconstitutional. Under the 1984 Code, district courts may refer "cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" to the bankruptcy court. 28 U.S.C. § 157(a). Bankruptcy judges are appointed by the courts of appeals to fourteen-year terms, 28 U.S.C. § 152(a)(1), and do not receive the constitutional tenure and salary protection of Article III judges, N. Pipeline, 458 U.S. at 61. "In short, there is no doubt that the bankruptcy judges created by the Act are not Art. III judges." Id.
Section 157(b)(1) designates certain cases as "core proceedings" and authorizes a bankruptcy court to "enter appropriate orders and judgments" in such cases. In a core proceeding, an aggrieved party may appeal the judgment of the bankruptcy court to the district court, which applies a de novo standard of review to the conclusions of law and the clearly-erroneous standard to findings of fact. 28 U.S.C. § 158(a). The Code also gives bankruptcy courts the authority to hear non-core proceedings that are "otherwise related to a case under title 11." § 157(c)(1). For non-core proceedings, the bankruptcy court submits proposed findings of fact and conclusions of law to the district court, which then reviews the submissions de novo. Id. With consent of the parties, however, the bankruptcy court may enter final, appealable judgments in non-core proceedings. § 157(c)(2).
BPRE's adversary complaint stated that the proceedings were "non-core." BPRE also requested "judgment, after trial or final hearing, " on the claims against RML. BPRE filed, on the same day, a "Statement Regarding Consent" that noted that it sought "monetary damages for breach of contract, tortious interference, and trespass claims, among others." BPRE again acknowledged that "[t]his matter is not a proceeding identified as a core proceeding in 28 U.S.C. § 157(b)(2). Therefore, this matter is a non-core proceeding but is related to the bankruptcy in that any recovery on the claims brought by the debtor will go directly to the estate . . . . Plaintiffs consent to the entry of a final order by this court."
BPRE requested a pretrial conference and demanded a jury trial. In the request, BPRE noted that it had submitted, as required, in its Statement Regarding Consent, whether it consented to the entry of a final judgment by the bankruptcy court in a non-core proceeding. The Joint Pretrial Order also acknowledged that this was a non-core proceeding and that BPRE consented to the entry of a final judgment.
BPRE's request for a jury trial was denied as untimely. It then moved to withdraw the reference to the bankruptcy court, asking the district court instead to hear the case in the first instance. Not only did BPRE seek to preserve its jury demand, but it stated that it "does not consent to the Bankruptcy Court entering a final order or judgment in any non-core proceeding or conducting a jury trial."
BPRE maintained that the district court should withdraw the reference for reasons of judicial economy, given that BPRE had not consented to final judgment and the district court would have to conduct de novo review. The district court denied the motion, holding that because the matter had already been litigated in the bankruptcy court for over six months, it would not be a waste of resources to continue there.
BPRE filed a response to defendants' motions for partial summary judgment. The case was tried without a jury, and the bankruptcy court entered final judgment denying all of BPRE's claims. On appeal, the district court affirmed in part and vacated in part, reviewing the bankruptcy court's findings of fact for clear error and conclusions of law de novo. On remand, the bankruptcy court again denied BPRE relief and entered judgment. On a second appeal, the district court affirmed, applying the same standard of review as before.
In striking down the Bankruptcy Act of 1978 in Northern Pipeline, 458 U.S. at 57–60,  the plurality took the opportunity to examine and discuss the Framers' division of power between the branches and the importance of the Federal Judiciary's independence from the Executive and Legislative Branches. "Art. III both defines the power and protects the independence of the Judicial Branch." Id. at 58. Only courts satisfying the requirements of Article III may exercise the federal judicial power. Id. at 59. "In sum, our Constitution . . . commands that the independence of the Judiciary be jealously guarded, and it provides clear institutional protections for that independence." Id. at 60.
In Northern Pipeline, the Court acknowledged that at times the courts have allowed non-Article III courts to hear cases, although "these precedents represent no broad departure from the constitutional command that the judicial power of the United States must be vested in Art. III courts." Id. at 64. The plurality characterized three narrow exceptions: territorial courts, military courts, and the adjudication of "public rights." Id. at 64–68. Rejecting the notion that the state common-law claims at issue in Northern Pipeline could be deemed matters of public right, the Court found them to be strictly private rights, which "lie at the core of the historically recognized judicial power." Id. at 70. Although claims that go to the debtor-creditor relationshipSSand thus affect the federal bankruptcy powerSSmay be a matter of public rights, id. at 71, state-created rightsSSsuch as contract or tort claimsSSare private rights concerning "the liability of one individual to another under the law, " id. at 71–72.
Concluding that the bankruptcy courts do not fit under any of the narrow historical exceptions, the Court was unable to "discern any persuasive reason, in logic, history, or the Constitution, why the bankruptcy courts here established lie beyond the reach of Art. III." Id. at 76. Similarly, the Court rejected the suggestion that bankruptcy courts, issuing final judgments and exercising "the essential attributes" of Article III courts, could ...