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In re Jaritz Industries

July 20, 1998


On Appeal From the District Court For the Virgin Islands (D.C. Civil Action No. 96-cv-00003)

Before: Sloviter, Chief Judge, Stapleton and Mansmann, Circuit Judges

The opinion of the court was delivered by: Stapleton, Circuit Judge:

Argued December 9, 1997


We are here asked to review a decision of the District Court of the Virgin Islands in an appeal from an order of a bankruptcy Judge sitting in the Virgin Islands by designation of the Third Circuit Judicial Council under 28 U.S.C. § 155. The district court held that section 155 does not authorize the Council to transfer bankruptcy Judges temporarily to the Virgin Islands. It concluded that the order appealed from was thus entered without authority and was invalid. We will reverse and remand for further proceedings.


Section 155 of Title 28 of the United States Code provides, in relevant part:

(a) A bankruptcy Judge may be transferred to serve temporarily as a bankruptcy Judge in any judicial district other than the judicial district for which such bankruptcy Judge was appointed upon the approval of the judicial council of each of the circuits involved.

(b) A bankruptcy Judge who has retired may, upon consent, be recalled to serve as a bankruptcy Judge in any judicial district by the judicial council of the circuit within which such district is located.

The Honorable Joseph L. Cosetti is a retired bankruptcy judge of the United States District Court for the Western District of Pennsylvania. On August 13, 1996, an order was entered by the Judicial Council of the Third Circuit memorializing its determination that there was an unmet need for the services of a bankruptcy Judge in the Virgin Islands and recalling Judge Cosetti, pursuant to § 155(b), to meet that need.*fn1 Jaritz Industries, Ltd. ("Jaritz"), a printing and copying business, filed for Chapter 11 bankruptcy in the District Court of the Virgin Islands. The case was referred to Judge Cosetti pursuant to the district court's standing order of reference. Joel Urice, the owner of Jaritz, had purchased the business from Vickers Associates, Ltd. ("Vickers") in return for an 8-year note that called for two large balloon payments at the end of the term. Jaritz sought bankruptcy protection primarily due to its inability to make the first of these balloon payments to Vickers.

Several months after the bankruptcy proceedings began, A. Jeffrey Weiss entered an appearance as counsel for Vickers. Over the next few months, Weiss filed numerous frivolous and duplicitous motions and appeals, and his unprofessional conduct ultimately resulted in the entry of a sanction order by Judge Cosetti. On appeal, the district court sustained Judge Cosetti's order sanctioning Weiss and Vickers, and then directed Weiss and Vickers to show cause why the district court should not invoke its inherent power to impose additional sanctions for their conduct during the appeal.

Prior to the return date of the order to show cause, the district court sua sponte raised and requested briefing on the issue of its jurisdiction to hear appeals from orders of a U.S. bankruptcy Judge under 28 U.S.C. § 158(a). The court ultimately concluded that it had "jurisdiction to review the order of a bankruptcy Judge who would be properly authorized by statute to act as a judicial officer of the District Court of the Virgin Islands." In re Jaritz Indus., 207 B.R. 451, 453 (D.V.I. 1997). The court held, however, that section 155 authorizes temporary transferring of bankruptcy Judges only to Article III district courts, that judge Cosetti accordingly lacked authority to sit on the District Court of the Virgin Islands, an Article I court, and that "there simply [was] no such valid order to review in this case." Id. The district court viewed Judge Cosetti's lack of authority as depriving it of subject matter jurisdiction and dismissed the appeal. Shortly thereafter, the court entered an order withdrawing its standing order of reference. Jaritz timely appealed, and we have jurisdiction pursuant to 28 U.S.C. §§ 1291 and 1294(3). The issue in this appeal is a question of law over which this court exercises plenary review. Epstein Family Partnership v. Kmart Corp., 13 F.3d 762, 765-66 (3d Cir. 1994).


Bankruptcy Judge Cosetti imposed sanctions on Vickers and Weiss pursuant to Fed. R. Bankr. P. 9011, which provides for sanctions parallel to those specified in Fed. R. Civ. P. 11. In Willy v. Coastal Corp., 503 U.S. 131 (1992), the Supreme Court held that a district court has jurisdiction to impose Rule 11 sanctions on litigants and attorneys appearing before it even if the court is subsequently determined to lack subject matter jurisdiction over the case in which the sanctionable conduct occurred. While acknowledging that "[a] final determination of lack of subject-matter jurisdiction of a case in a federal court, of course, precludes further adjudication of it," the Court nonetheless clarified that "such a determination does not automatically wipe out all proceedings had in the district court at a time when the district court operated under the misapprehension that it had jurisdiction." Id. at 137.

The Court explained that "maintenance of orderly procedure" provided sufficient grounds to justify an imposition of non-case dispositive sanctions "even in the wake of a jurisdiction ruling later found to be mistaken." Id. Although parties may eventually seek appellate review of a court's invocation of jurisdiction over their dispute, they are required to demean themselves appropriately before that court while awaiting that appeal:

The interest in having rules of procedure obeyed. . . does not disappear upon a subsequent determination that the court was without subject-matter jurisdiction. Courts do make mistakes . . . . But . . . there is no constitutional infirmity under Article III in requiring those practicing before the courts to conduct themselves in compliance with the applicable procedural rules in the interim, and to allow the courts to impose Rule 11 sanctions in the event of their failure to do so.

Id. at 139.

We recognize that the validity of Judge Cosetti's sanction orders poses a somewhat different issue than that posed in Willy. The authority of the sanctioning Judge to sit in his district was not challenged in Willy. Nevertheless, we believe that the principles found controlling in Willy must control here. Judge Cosetti was a duly appointed Judge with the authority to exercise the judicial power of the United States in bankruptcy matters. He was sitting in the District of the Virgin Islands, rather than his home district, pursuant to a duly adopted resolution of the Judicial Council of the Third Circuit. He exercised judicial power over this particular controversy by virtue of a standing order of the district court and without protest from Vickers or Weiss. Both he and the litigants had a substantial interest in the proceedings being conducted in an orderly manner. Just as in Willy, Judge Cosetti's and the litigants' interests in having rules of procedure obeyed did not disappear upon the subsequent determination of the district court that Judge Cosetti lacked jurisdiction. By the same token, Vickers and Weiss were and are obligated to conduct themselves appropriately in these proceedings unless and until it is finally determined that the apparent authority of Judge Cosetti is invalid.

It follows that the district court was in error when it concluded that Judge Cosetti's sanction order was invalid because it was issued without jurisdiction. It also follows, in our view, that the district court had appellate jurisdiction to review that order and that any sanctions which the district Judge might have imposed as a result of improper conduct during the appellate proceedings would have to be sustained by us without reference to our determination regarding the validity of the Circuit Council's transfer order. See In re Orthopedic "Bone Screw" Prod. Liab. Litig., 132 F.3d 152, 156 (3d Cir. 1997).

Under normal circumstances, we would conclude our analysis here. The foregoing Discussion therefore provides adequate support for our mandate. Nonetheless, the district court's opinion expresses the view that any bankruptcy judge transferred to the Virgin Islands by the Circuit Council lacks authority to adjudicate any bankruptcy matters there, and this view has resulted in the withdrawal of the district's standing order of reference. This has substantially burdened the administration of bankruptcy in the Virgin Islands. Because the issue is of such significance and the parties have briefed it extensively, we pursue our discussion of whether Judge Cosetti was properly authorized to hear bankruptcy matters in the Virgin Islands.


The specific issue for decision here is a narrow one: what did Congress intend when it used the term "judicial district" in section 155. Did it use the term in a generic sense to refer to the geographic area in which a district court exercises judicial authority in bankruptcy matters, or did it intend its scope to be limited to the geographic area in which an Article III district court exercises judicial authority over such matters. If Congress intended the former, section 155 authorizes transfers of bankruptcy judges to serve in the district in which the District Court of the Virgin Islands exercises bankruptcy jurisdiction. If Congress intended the latter, section 155 provides no such authority.

The Bankruptcy Amendments and Federal Judgeship Act of 1984 effected a comprehensive reorganization of our bankruptcy system in the wake of the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line, 458 U.S. 50 (1982), finding the jurisdictional provisions of the Bankruptcy Reform Act of 1978 unconstitutional. Chapter 6 of Title 28, as amended by the 1984 Act, specifies the character and operation of the reorganized system. The transfers authorized by section 155 are an integral part of that Chapter and of that reorganized system.

We find nothing in the text of section 155 that limits its scope to judicial districts having an Article III district court. Similarly, we find nothing in the text of Chapter 6 that, as a matter of textual analysis, so limits the scope of that section. Finally, we find nothing in the very sparse legislative history of the 1984 Act that suggests an intent to restrict the authorization conferred by section 155 to Article III districts. Thus, consideration of the text and legislative history of Chapter 6 alone would tend to support the view that "judicial district" was intended to include any district in which judicial authority over bankruptcy matters is exercised. We would, of course, be remiss however if we decided this statutory construction issue without considering the purpose of section 155 and its place in the scheme of Chapter 6. Accordingly, we inquire whether the broader or the narrower reading of "judicial district" will best serve Congress's objectives in enacting Chapter 6 and section 155 in particular.

The overall objective of Chapter 6 was to create a reorganized bankruptcy system in which a specialized corps of full-time bankruptcy Judges would assist district court judges in adjudicating bankruptcy matters in a manner consistent with the teachings of Marathon. It is evident from the face of section 155 that its objective was the efficient and effective use of that corps of full-time bankruptcy Judges. Congress was aware from past experience that the demand for bankruptcy services in any given district would ebb and flow in response to the economic conditions in the district, and that the supply of judge power in each district to provide such services would ebb and flow depending on such things as the number of district Judge and bankruptcy Judge vacancies. Moreover, Congress determined not to provide the new system with part-time bankruptcy Judges, and it must have been aware that there would be periods when the bankruptcy workload in a district would be substantial enough to be difficult to service, but nevertheless not yet large enough to warrant the appointment of a full-time bankruptcy Judge. In this context, the new system would be efficient and effective only if someone were given the authority to match demand with Judge power by transferring bankruptcy Judges to districts where the regularly assigned judicial officers were overloaded. This matching authority was appropriately conferred on the judicial councils of the circuits, which had earlier been directed to "make all necessary and appropriate orders for the effective and expeditious administration of Justice within [their circuits]." 28 U.S.C. § 332(d)(1).

Having identified the evident purpose of section 155, we turn to the overall statutory scheme of Chapter 6 to determine if there is any reason Congress might have wished to garner the efficiencies provided by that section for judicial districts having an Article III district court and not for judicial districts having an Article I district court which exercises the jurisdiction of an Article III court by virtue of the legislation that created it. We perceive no such reason. To the contrary, our review of the statutory scheme has convinced us that Congress intended the new bankruptcy system to operate in the Virgin Islands in the same manner it was to operate in an Article III district under comparable circumstances.

Under the new system, the district courts retained their original subject matter jurisdiction in bankruptcy cases. This included both district courts created by Congress under Article III of the Constitution as well as territorial courts created by Congress under Article I which, like the District Court of the Virgin Islands, were authorized to exercise the subject matter jurisdiction of Article III district courts. Thus, the Judges of the District ...

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