In Re James M. Morrissey, Sr. T/d/b/a Energy Unlimited Frank, Lawrence G., Trustee in Bankruptcy for Morrissey, James M., Sr. T/d/b/a Energy Unlimited v. Arnold, Adam A. And Arnold, Catherine

Citation: 717 F.2d 100Docket: 83-3052

Court: Court of Appeals for the Third Circuit; October 4, 1983; Federal Appellate Court

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The case concerns the appeal of Lawrence G. Frank, Trustee in Bankruptcy for James M. Morrissey, Sr., regarding the ability to assume a land sale contract with Adam and Catherine Arnold after Morrissey's bankruptcy filing. The United States Court of Appeals, Third Circuit, identified a critical jurisdictional issue: whether a district court can refer an appeal from a bankruptcy court to a magistrate with the parties' consent. The court concluded that Congress has prohibited this practice, thus not addressing the substantive issues of the case. 

The bankruptcy court had previously denied the trustee's request to assume the executory land sale contract because Morrissey was in default and had voluntarily surrendered the property before filing for bankruptcy, which effectively terminated the contract. The trustee's appeal to the district court was conducted under a consensual reference to a magistrate, who upheld the bankruptcy court's decision. 

The appellate court emphasized the limitations of federal court jurisdiction, stating that parties cannot conferred jurisdiction that has not been granted by Congress. Consequently, the court vacated the lower judgment and remanded the case for the district court to refer back to the bankruptcy court for necessary factual findings and legal conclusions. The case illustrates the complexities of jurisdiction in bankruptcy proceedings and the importance of proper procedures in appeals.

Jurisdiction for a magistrate to decide a case is not based on party consent but requires a proper designation from the district court, which is itself governed by statutory law. The key statute involved is 28 U.S.C. Sec. 1334(c), which outlines the jurisdiction of district courts regarding appeals from bankruptcy courts. Specifically, it grants district courts jurisdiction over final judgments and orders from bankruptcy courts, but restricts appeals from interlocutory orders to instances where the district court grants permission. Notably, it explicitly prohibits district courts from referring bankruptcy appeals to magistrates or special masters.

The statutory framework was in effect as of September 3, 1982, when the bankruptcy appeal was filed. The language of Sec. 1334(c) is clear in its prohibition, and the court interprets this as Congress's intent to reserve bankruptcy appeal reviews for Article III judges, mindful of the constitutional issues around the designation of bankruptcy judges. Consequently, it is concluded that the magistrate lacked jurisdiction to preside over the case.

The court identifies this jurisdictional issue independently and emphasizes that a remand to the district court is necessary. It instructs that the bankruptcy court must provide a more comprehensive explanation of its findings, particularly in cases involving complex Pennsylvania law, which were inadequately addressed in a superficial three-paragraph opinion. The district court is expected to ensure that the bankruptcy court's findings are well-supported by evidence and legal discussion, as mandated by both previous and current bankruptcy rules.

The excerpt addresses the standard of review applicable when a district court reviews a bankruptcy judge's decision following an appeal. It references the Supreme Court's ruling in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., which prompted the adoption of a model rule by U.S. district courts, including the Middle District of Pennsylvania. Under this model rule, district judges have the discretion to hold hearings, receive evidence, and modify bankruptcy judges' orders without deference to their findings. 

However, Bankruptcy Rule 8013 establishes a conflicting standard of review, requiring that findings of fact not be overturned unless they are clearly erroneous, emphasizing the bankruptcy court's role in assessing witness credibility. The excerpt concludes that the clearly erroneous standard in Bankruptcy Rule 8013 takes precedence over the model rule due to statutory authority vested in the Supreme Court and Congress for establishing bankruptcy rules. It asserts that local rules must align with national rules and cannot conflict with them. Consequently, the judgment of the district court is vacated and the case is remanded for further proceedings in accordance with these guidelines.

Coastal Steel Corp. v. Tilghman Wheelabrator Ltd. establishes that appeals from district court orders issued before the Northern Pipeline decision can be reviewed under Section 1291, not Section 1293. Section 636(c)(1) allows magistrates to conduct proceedings and issue judgments in civil matters with party consent, but the Ninth Circuit in Pacemaker Diagnostic Clinic of America, Inc. v. Instromedix, Inc. declared these consensual reference provisions unconstitutional, citing the lack of district court review for magistrate decisions. The court concluded that the district court was barred from making the Section 636(c)(1) reference per Section 1334(c), thus sidestepping the constitutional issue. It determined that Section 1334(c), enacted after the Magistrate's Act, takes precedence over Section 636(c) in case of conflict. The ruling did not address whether Section 1334(c) also prohibits references to magistrates under Section 636(b). Additionally, effective August 1, 1983, new bankruptcy procedural rules were introduced under the authority of 28 U.S.C. Section 2075, which must be reported to Congress and cannot alter substantive rights. The case at hand was an adversary proceeding under Bankruptcy Rule 7001, requiring bankruptcy judges to specifically find facts and state conclusions of law per new Bankruptcy Rule 7052, similar to previous Rule 752. Lastly, a separate case, 1616 Reminc Ltd. Partnership v. Atchison, Keller, ruled that the review standard under former Bankruptcy Rule 810 was unconstitutional when jurisdiction was based on state common law.