In Re Twin Parks Limited Partnership.n.s.c. Contractors, Inc., Appellee, v. Twin Parks Limited Partnership, Appellant, 720 F.2d 1374 (4th Cir. 1983)

Twin Parks Limited Partnership appeals from the district court's judgment affirming the bankruptcy judge's decision in favor of N.S.C. Contractors, Inc. Twin Parks contends that the bankruptcy judge lacked jurisdiction to decide N.S.C.'s state law claim of breach of contract. Twin Parks also challenges the award of post-bankruptcy petition interest to N.S.C., and assigns numerous other errors. Finding merit in the appellant's challenge to the award of interest but none in its other assignments of error, we affirm the district court's decision except that part awarding post-petition interest. We reverse that part of the decision and reduce the money judgment accordingly.

Twin Parks filed a Chapter XII petition on June 14, 1979, seeking a real property arrangement under the Bankruptcy Code.¹  Pending at the time were two proceedings initiated by N.S.C. Contractors to resolve a contractual dispute with Twin Parks over monies owed for work performed on its residential apartment project. One of the proceedings was before the American Arbitration Association, which was designated by contract to handle disagreements. The other proceeding was pending in the Circuit Court for Worcester County, Maryland, and involved N.S.C.'s claim to a mechanic's lien against buildings it had constructed for Twin Parks. The bankruptcy judge issued a Rule 12-43²  order after Twin Parks' Chapter XII petition was filed, staying both the arbitration and state court proceedings.

N.S.C. subsequently filed a complaint with the bankruptcy court seeking to lift the stay order or, alternatively, asking the court to allow its claim against the debtor. Twin Parks answered, filed a counterclaim and specifically requested the court to take jurisdiction over the dispute. It demanded a jury trial on all issues pertaining to the state law breach of contract claim. This demand was denied and the bankruptcy judge heard and decided the case without a jury. The trial began on July 29, 1980, was delayed several times due to the illness of Twin Parks' major shareholder and was finally concluded in favor of N.S.C. on May 9, 1981. Twin Parks appealed the adverse judgment to the district court which reviewed the record and affirmed the bankruptcy judge's order on April 20, 1982.

* Twin Parks' principal argument for reversal is jurisdictional. It argues that the bankruptcy judge, who was clearly not an Article III judge,³  had no power to adjudicate contract claims arising entirely under state law. It points to Northern Pipeline Constr. Co. v. Marathon Pipeline Co., --- U.S. ----, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982) and to this court's even more recent decision in 1616 Reminc Ltd. Partnership v. Atchinson & Keller Co., 704 F.2d 1313 (4th Cir. 1983) for support.⁴ 

The jurisdictional argument Twin Parks now raises for the first time would have merit if made by a litigant not voluntarily before the court and whose action was not underway on the effective dates of the Northern Pipeline and Reminc decisions. Northern Pipeline and Reminc obviously provide support for its argument that pre-Reform Act bankruptcy judges, acting under the supervision of Article III District Courts, cannot decide claims arising entirely under state law without the consent of the parties. Northern Pipeline, at ----, 102 S. Ct. at 2880, 73 L. Ed. 2d at 625; Reminc, 704 F.2d at 1318. The Reminc Court's discussion was particularly supportive, stressing the point that pre-Reform Act judges are not sufficiently adjunct to the district court to justify their exercise of federal judicial power⁵  over state disputes. Twin Parks, however, cannot benefit from these recently announced decisions because they were intended to operate prospectively. Twin Parks' claims were fully litigated by the bankruptcy judge, affirmed by the district court and pending on appeal well before the effective dates of the Northern Pipeline and Reminc decisions.

The Supreme Court in Northern Pipeline stated:

In the present case, all of these considerations militate against the retroactive application of our holding today. It is plain that Congress' broad grant of judicial power to non-Article III bankruptcy judges presents an unprecedented interpretation of Article III. It is equally clear that retroactive application would not further the operation of our holding, and would surely visit substantial injustice and hardship upon those litigants who relied upon the Act's vesting of jurisdiction in the bankruptcy courts.... We hold, therefore, that our decision shall apply only prospectively.

--- U.S. at ----, 102 S. Ct. at 2880, 73 L. Ed. 2d at 626. (emphasis added) In Reminc, we agreed with the appellant that the bankruptcy judge lacked jurisdiction, but emphasized that the decision must be applied prospectively as to all other litigants.⁶  704 F.2d at 1319.

Twin Parks contends nevertheless that only cases which have exhausted appeals are foreclosed by a "prospective" change in the law. It argues further that an appellate court is bound to apply the law in effect at the time it renders a decision--in this case the jurisdictional rule established by Northern Pipeline.

This argument oversimplifies the controlling rule. It is generally true that "a change in the law will be given effect while a case is on direct review," Linkletter v. Walker, 381 U.S. 618, 627, 85 S. Ct. 1731, 1736, 14 L. Ed. 2d 601, 607 (1965). Tribunals announcing new principles of law, however, qualify their retroactivity in differing ways, and the new principles' effect on cases then existing in various stages of litigation differ accordingly. See United States v. Johnson, 457 U.S. 537, 102 S. Ct. 2579, 73 L. Ed. 2d 202 (1982); Linkletter, 381 U.S. at 628, 85 S. Ct. at 1737; Great Northern Railway Co. v. Sunburst Oil & Refining Co., 287 U.S. 358, 53 S. Ct. 145, 77 L. Ed. 360 (1932); Lester v. McFaddon, 415 F.2d 1101 (4th Cir. 1969).⁷  Ultimately, the prospective or retroactive effects of a new rule depend upon the enunciating court's intention. A court may decide that judicial policy is furthered by making a new principle of law operate completely retroactively, thereby affecting even decisions which were otherwise finalized. See, e.g., Ivan v. City of New York, 407 U.S. 203, 92 S. Ct. 1951, 32 L. Ed. 2d 659 (1972). As an intermediate position, a court may conclude that its decision should be retroactive to all parties on direct appeal, Johnson, 457 U.S. at 562, 102 S. Ct. at 2594, 73 L. Ed. 2d at 222, or it may choose a narrower course and apply its decision only to the case in which the new principle is announced and to those cases initiated in the future. See, e.g., Kirchberg v. Feenstra, 450 U.S. 455, 101 S. Ct. 1195, 67 L. Ed. 2d 428 (1981). Finally, a court may make its decision purely prospective, "denying the benefit of the new rule even to the parties before the court." Johnson, 457 U.S. at 544, 102 S. Ct. at 2584, 73 L. Ed. 2d at 210.

Where the enunciating court fails to identify the limits of its decision, later courts often assume that the new rule applies to cases pending on appeal. See, e.g., United States v. Fitzgerald, 545 F.2d 578, 582 (7th Cir. 1976). Were we faced with this situation, then, Twin Parks' argument concerning Northern Pipeline and Reminc's applicability to its own case probably would succeed. The Supreme Court in Northern Pipeline and this court in Reminc, however, have stated clearly that their decisions are to be applied prospectively. Northern Pipeline, --- U.S. at ----, 102 S. Ct. at 2880, 73 L. Ed. 2d at 626; Reminc, 704 F.2d at 1319. These direct and unqualified expressions mandate that later tribunals should not apply the new jurisdictional rules to claims, such as Twin Parks, which were fully litigated by the bankruptcy judge and the district court and were pending on appeal before the effective date of Northern Pipeline and Reminc.

II

We agree with Twin Parks' argument, however, concerning the award of interest and hold that the bankruptcy court and the district court committed error in allowing N.S.C. Contractors prejudgment interest beyond the time when the Chapter XII petition was filed. The rule concerning the award of interest against a debtor in bankruptcy was summarized by the Supreme Court in Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946):

As a general rule, after property of an insolvent passes into the hands of a receiver or of an assignee in insolvency, interest is not allowed on the claims against the funds. The delay in distribution is the act of the law; it is a necessary incident to the settlement of the estate.

Id. at 163, 67 S. Ct. at 240 (quoting Thomas v. Western Car Co., 149 U.S. 95, 116-17, 13 S. Ct. 824, 833, 37 L. Ed. 663 (1893)). The Vanston court made it clear that while the award of pre-petition interest normally is governed by state law, " [w]hen and under what circumstances federal courts will allow interest on claims against debtors' estates being administered by them has long been decided by federal law." Id.

Vanston's vitality has not diminished.⁸  This court has recognized its guiding principles in ruling that interest should not be awarded past the point a bankruptcy petition is filed, absent exceptional circumstances. See Smith v. Robinson, 343 F.2d 793 (4th Cir. 1965); United States v. Harrington, 269 F.2d 719 (4th Cir. 1959). These exceptional circumstances are limited to cases where: (1) the debtor claiming bankruptcy protection later proves to be solvent, Smith v. Robinson, supra; (2) the property of the debtor continues to earn money, id.; (3) the debt is not one discharged by bankruptcy, Bruning v. United States, 376 U.S. 358, 84 S. Ct. 906, 11 L. Ed. 2d 772 (1964). Other courts have also allowed post-petition interest where the creditor's claim is secured by property of sufficient value to pay both the principal of the debt and accrued interest. See, e.g., In re Walsh Construction Co., 669 F.2d 1325 (9th Cir. 1982).

Neither the district court nor N.S.C. on appeal attempted to justify the award of post-petition interest under any of these exceptions. The award of interest past June 14, 1979, the filing date of Twin Parks' Chapter XII petition, was thus inappropriate.

The district court's award of interest past June 14, 1979, is reversed and the money judgment reduced accordingly. That portion of the interest award attributable to the pre-petition period is governed by state law and remains undisturbed. Finding no error in the other district court actions, all other portions of its judgment are affirmed.

REVERSED IN PART; AFFIRMED IN PART.