The Supreme Court agreed yesterday to review a decision wiping out the entire new system of federal bankruptcy courts created in 1978 as part of a massive overhaul of the bankruptcy laws.
A lower court had ruled that Congress gave the new courts far more power than the Constitution allowed. It gave them the vast power of the other federal courts without the same protections designed to guarantee their independence, such as life-tenure for the judges, the lower court said.
The ruling placed thousands of ongoing bankruptcy proceedings under a legal cloud.
The government asked for a Supreme Court review, saying that the new courts were a "central feature" of the bankruptcy law overhaul, without which the system would experience the same inefficiency that plagued proceedings under the old law.
The case accepted for review yesterday stemmed from a reorganization petition filed in bankruptcy court in Minnesota by Northern Pipeline Construction Co. As part of the proceeding, Northern Pipeline also sued Marathon Pipeline Co., saying Marathon owed it money under a prior contract. Marathon then challenged the power of the bankruptcy court to adjudicate that suit and won a declaration by Minnesota U.S. District Court Judge Miles W. Lord that the bankruptcy court was unconstitutional.
Under the old bankruptcy system now being phased out, bankruptcy referees handled bankruptcy proceedings. But the power of the referees was strictly limited. Their jurisdiction extended only to the disposition of assets clearly in control of the company petitioning for bankruptcy. Claims by the bankrupt company that a third party--such as Marathon in the case to be reviewed--owed it money generally had to be pursued at a higher or different judicial level.
Bankruptcy proceedings then would go on indefinitely while lawyers for each side pursued claims in other courts or argued about whether they could be heard by the referees. In addition, the referees became badly overburdened with work.
The new bankruptcy judges were supposed to correct these problems. The comprehensive Bankruptcy Act of 1978 elevated their status and their powers so that they could consider, among other things, claims against third parties. They became like federal judges. But federal judges are appointed for life, can be removed only by impeachment and can't have their salaries cut while in office. The new bankruptcy judges were allowed only 14-year terms and could be removed by a majority vote of the federal judicial council in their circuit. Their salaries could be cut at any time.
The lower court said that this denied "every litigant tangentially connected with a bankruptcy an independent and impartial forum in which to have his dispute resolved. . . . The creation of a court system vested with broad federal question jurisdiction without the guarantees of life tenure and undiminishable salary disrupts the delicate balance of power in our federal system, giving rise to the possibility of a lessening of our personal freedoms," Judge Lord ruled last July.
The Supreme Court probably will issue a ruling this spring.