1616 REMINC LTD. PARTNERSHIP v. ATCHISON & KELLER

HARRISON L. WINTER, Chief Judge:

The issue presented by this case is whether Rule 810, Rules of Bankruptcy Procedure, unconstitutionally transfers the exercise of "the judicial power" of the United States from an Article III court to a non-Article III bankruptcy referee1 sitting under the 1898 Bankruptcy Act, by limiting the district court to the "clearly erroneous" standard when reviewing a compulsory breach of contract counterclaim adjudicated in the bankruptcy court. We hold that it does, and therefore remand to permit independent fact-finding by the district court. Because the other issues raised on appeal, with one exception noted below, infra note 10, are intertwined with the district court's reconsideration on remand, we do not reach them. We also conclude that our holding must apply only prospectively.

I.

1616 Reminc Limited Partnership (Reminc) is a debtor-in-possession in a Chapter XII proceeding begun in 1975. Its principal asset is a Rosslyn, Virginia, office building which it commissioned to be built in 1973 by CITCON Corporation. CITCON in turn executed a standard form subcontract with Atchison & Keller Company (A & K) for installation of a heating, ventilation and air conditioning (HVAC) system in the building. A & K's duties included construction of a chamber in which circulating air is heated over electrical elements known as reheat coils before being pumped throughout the building. Reset switches designed to detect overheating of the reheat coils were incorporated into the assembly to prevent irreparable damage to the coils. The subcontract and plans called for A & K to install two reset switches, one automatic and the other manual, and designated four possible approved suppliers of parts for the overall system.

When operating properly, the automatic reset switch would shut off the reheat coils if they began to overheat, allow cooling, then reactivate the coils, so as to provide uninterrupted heating to the building. The manual reset was planned as a back-up safety feature. The system originally installed in Reminc's building, however, failed to work as planned. The major problem was that the manual reset switch consistently activated before the automatic, leaving tenants without heat until maintenance personnel could reset the manual switches in each of the numerous air outlets throughout the system. Reminc lost tenants and eventually sought bankruptcy protection, filing its initial petition in August 1975.

A & K subsequently filed a proof of claim based upon a purported mechanic's lien against the office building. Reminc objected to the claim and, on July 22, 1976, filed a compulsory counterclaim alleging breach of contract2 against A & K, its principals, and its surety Peerless Insurance Company.

After dismissal of A & K's claim, Reminc's contract action proceeded to trial before the bankruptcy referee, who found against Reminc on motion for directed verdict. On appeal, the district court reversed and remanded for additional fact-finding. Further proceedings were conducted on January 27, 1981. The referee again denied Reminc relief, relying primarily on a factual finding that the cause of the reset switches' malfunctioning was another subcontractor's faulty construction of the air-shaft leading to the heating chamber, and not A & K's workmanship nor material selection.3 The district court affirmed on February 17, 1982, deferring to the bankruptcy court's election "not to give full credence to Reminc's evidence" which the district court understood to be the referee's "prerogative in view of the conflict in the evidence."

II.

Before us Reminc ascribes many errors to the proceedings below, among them the district court's adherence to the "clearly erroneous" standard of review found in Rule 810 of the Rules of Bankruptcy Procedure. Essentially, Reminc argues that application of Rule 810 here resulted in its compulsory4 breach of contract counterclaim being fully adjudicated in the first instance by a concededly non-Article III official5 without the possibility of independent fact-finding by the district court. It contends that adjudication of its claim by an Article I judge under these circumstances violates principles of Article III jurisprudence. Reminc does not attack the power of bankruptcy referees under the 1898 Bankruptcy Act6 generally, but only adjudications in cases such as this involving common law contract claims and turning on questions of fact. Because of our disposition of this constitutional challenge to Rule 810, we do not reach the merits of Reminc's other claims.7

A.

We begin by considering the effect of Rule 810 in this case. Rule 810 states:

13 Collier on Bankruptcy 8-77 (14th ed. 1977). The rule requires "`the same effect to be given the referee's findings as Rule 52(a) of the Federal Rules of Civil Procedure accords to the findings of the trial court.'" Id. at ¶ 810.01, quoting Advisory Committee's Note to Rule 810. This limitation on review of referee fact-finding perpetuates the "clearly erroneous" standard of former Gen. Order in Bankruptcy No. 47, 305 U.S. 679 (1935); indeed, when General Order 47 was revised into Rule 810, the provision allowing the district judge to "receive further evidence" was abandoned, strengthening the degree of deference. 2A Collier on Bankruptcy ¶ 39.28 (14th ed. 1978).

We have long given effect to this standard, and we have not hesitated to reverse where a district court too readily substituted its view of the facts for the bankruptcy court's, particularly where witness credibility played a role in the referee's decision. See, e.g., Melichar v. Ost, 661 F.2d 300 (4 Cir.1981), cert. denied, 456 U.S. 927, 102 S.Ct. 1974, 72 L.Ed.2d 442 (1982); Mountain Trust Bank v. Shifflett, 255 F.2d 718, 720 (4 Cir.1958); Mutual Savings & Loan Association v. McCants, 183 F.2d 423, 426-27 (4 Cir.1950).8 Reminc's constitutional challenge to Rule 810 manifestly is an unanticipated one raising issues of first impression.

B.

We consider next if we should address the issue. Reminc suggests that Rule 810's unconstitutionality follows inexorably from the holding and the principles articulated in Northern Pipeline Construction Co. v. Marathon Pipeline Co., ___ U.S. ___, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). But A & K, in arguing that we should not decide the issue, correctly points out that the Marathon Pipeline Court expressly stayed the effect of its decision first until October 4, 1982, ___ U.S. at ___, 102 S.Ct. at 2880, and subsequently until and including December 24, 1982, ___ U.S. ___, 103 S.Ct. 200, 74 L.Ed.2d 160, at which point the decision began to apply only prospectively. ___ U.S. at ___, 102 S.Ct. at 2880. The Court foresaw that general retroactive application of its holding "would surely visit substantial injustice and hardship upon those litigants who relied upon the Act's vesting of jurisdiction in the bankruptcy courts." Id. A & K therefore argues that we should not address this issue.

We do not think that we should decline decision now. First, this case does not present the same issue decided in Marathon. Even though the principles invoked and applied in Marathon are the same which govern decision here, Marathon dealt with only the powers of bankruptcy judges under the 1978 Bankruptcy Act. We are concerned with the validity of a rule promulgated under the 1898 Bankruptcy Act. Second, Reminc's challenge to the validity of the rule was initiated and argued prior to the decision in Marathon.9 Reminc therefore is not now before us claiming a windfall from any change in the law wrought by Marathon. Cf. Ramey v. Harber, 589 F.2d 753 (4 Cir.1978), cert. denied, 442 U.S. 910, 99 S.Ct. 2823, 61 L.Ed.2d 275 (1979). Whatever Marathon may teach with respect to retroactive and prospective application of what we decide, we think that it would be inequitable to deprive Reminc of its prescience in discerning the constitutional infirmity in Rule 810 when the rule is applied in the context of this case.

C.

Turning to the merits, we note first that the degree to which plenary power to adjudicate traditional common law contract claims may be vested in a federal tribunal without full Article III trappings has never been fully defined. In Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966), decided before Rule 810 abrogated General Order 47 and thereby jettisoned district court de novo fact-finding, the Article III issue was not addressed. Instead, the Court at most held that a bankruptcy court could adjudicate in summary fashion the claims of a creditor and counterclaims against the creditor generally without violating the Seventh Amendment's guarantee to a trial by jury. Significantly, the Court characterized the creditor's affirmative assertion of a preference as but "an equitable claim to a pro rata share of the res", 382 U.S. at 336, 86 S.Ct. at 476, a claim shaped by Congressional enactment. By contrast, Reminc's litigation here involves "breach of contract . . . and other counts which are the stuff of the traditional actions at common law tried by the courts at Westminster in 1789." Marathon Pipeline, supra, ___ U.S. at ___, 102 S.Ct. at 2881 (Rehnquist, J., concurring).10

In addition, in conducting a full trial covering all aspects of Reminc's contract claim while shielded by Rule 810, the bankruptcy referee was more than an "adjunct" of the district court.11 Thus, neither Crowell v. Benson, 285 U.S. 22, 52 S.Ct. 285, 76 L.Ed. 598 (1932), nor United States v. Raddatz, 447 U.S. 667, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980), endorsed the extent of control over Reminc's contract action effectively vested in the bankruptcy court by Rule 810. The "judicial power" required by Article III to be exercised by courts possessing certain attributes of political independence from the other branches of government has long been considered to include unprescribed consideration of facts as well as decision of questions of law. Crowell v. Benson, 285 U.S. at 57, 52 S.Ct. at 295; see generally Note, Article III Limits on Article I Courts: The Constitutionality of the Bankruptcy Court and the 1979 Magistrate Act, 80 Colum.L.Rev. 560, 591-92 (1980). And Reminc's contract claim is not included among the many matters over which Congress possesses well-established power to commit to the authority of administrative agencies or legislative courts. See, e.g., Atlas Roofing Company v. Occupational Safety Commission, 430 U.S. 442, 97 S.Ct. 1261, 51 L.Ed.2d 464 (1977); Palmore v. United States, 411 U.S. 389, 93 S.Ct. 1670, 36 L.Ed.2d 342 (1973); American Insurance Co. v. Canter, 26 U.S. (1 Pet.) 511, 7 L.Ed. 242 (1828); Crowell v. Benson, supra; NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 57 S.Ct. 615, 81 L.Ed. 893 (1937).

We therefore decide in part a question frequently reserved, "the extent to which Congress may commit the execution of even `inherently' judicial business to tribunals other than Article III courts." Glidden v. Zdanok, 370 U.S. 530, 549, 82 S.Ct. 1459, 1472, 8 L.Ed.2d 671 (1962) (opinion of Harlan, J.) The issue is not diminished because Rule 810 came into being as an Order of the Supreme Court rather than as an Act of Congress. As the Court has been careful to point out, "The fact that this Court promulgated the rules as formulated and recommended by the Advisory Committee does not foreclose consideration of their validity, meaning or consistency." Mississippi Publishing Corp. v. Murphree, 326 U.S. 438, 444, 66 S.Ct. 242, 245, 90 L.Ed. 185 (1946) (ultimately upholding validity of Rule 4(f), Fed. R.Civ.P.). To be sure, Congress generally enjoys the flexibility to "make a particular allocation to a non-Article III tribunal if functional considerations subserving a valid legislative purpose justify it (and if there is adequate provision for judicial review)." P. Bator, P. Mishkin, D. Shapiro & H. Wechsler, Hart & Wechsler's The Federal Courts and the Federal System 396 (2d ed. 1973) (emphasis original).12 But although Congress may in many instances pursue a valid legislative purpose by establishing a deferential statutory standard of judicial review,13 here a court-adopted rule insulates a non-Article III official without the imperative of a Congressional directive to do so. This lack of Congressionally crafted purpose weakens the rule's stature in the present context.

Under the circumstances of this case, then, we conclude that the application of Rule 810 unconstitutionally vested the non-Article III bankruptcy referee with too great a measure of the judicial power of the United States. Reminc pursued its cause of action in the bankruptcy court not by choice, but by virtue of its position as debtor-in-possession responding by compulsory counterclaim to A & K's prior filing of a claim against it.14 The bankruptcy judge exercised full adjudicative powers in disposing of the breach of contract matter in the first instance. Although the district court properly reviewed on appeal the adequacy of the bankruptcy judge's disposition, remanded once for further proceedings, and again on a second appeal gave careful and searching scrutiny to the record and issues raised prior to affirming, indisputably Rule 810's "clearly erroneous" standard was applied throughout. The challenged Rule thus insured transgression of the narrow but distinct principle that "a `traditional' state common-law action, not made subject to a federal rule of decision, and related only peripherally to an adjudication of bankruptcy under federal law, must, absent the consent of the litigants, be heard by an `Article III court' if it is to be heard by any court or agency of the United States." Marathon Pipeline, ___ U.S. at ___, 102 S.Ct. at 2882 (dissenting opinion of Burger, C.J.).15

III.

We turn now to the effect of our ruling. Although by no means as sweeping a disturbance of the bankruptcy adjudication scheme as that effected in Marathon Pipeline, our decision here nonetheless meets all three parts of the test of prospectivity stated in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971). We decide an issue of first impression, retroactive application of which will do little to further its operation, while instead adding still greater uncertainty to an already unsettled situation. This court has stated previously:

Lester v. McFaddon, 415 F.2d 1101, 1107 (4 Cir.1969) (footnotes omitted).

In holding that our decision regarding Rule 810 applies only prospectively, we do not deprive Reminc of the benefit of its foresight. As we have noted in prior cases, "In the Supreme Court, the prospective rule has usually been applied in the case in which it is first announced." United States v. Allen, 542 F.2d 630, 634 (4 Cir.1976), cert. denied, 430 U.S. 908, 97 S.Ct. 1179, 51 L.Ed.2d 584 (1977). Although "not an inevitable requirement", id., application to the instant case is the better practice so as to avoid rendering a merely advisory opinion.16 To require a remand in this case, we expect, will work only a minimum disruption; we are aware of no other cases involving a like challenge to "clearly erroneous" review actually raised in a bankruptcy proceeding prior to the decision in Marathon Pipeline. In any case reviewed by a district court after December 24, 1982, the standard of review is no longer the "clearly erroneous" standard.17

Accordingly, we remand this case to the district court for reconsideration of its disposition of the appeal from the bankruptcy court. On remand the district court will be free to hear such evidence as it believes necessary for resolution of the issues involved. In its review of the bankruptcy proceedings, the district court will be guided by the provisions of the district court's local rule adopted in compliance with § (e)(2)(B) of Order No. 3 of the Circuit Council of this circuit, at least until such time as Congress may prescribe a different scope of review.

VACATED AND REMANDED.