Companies weighing bankruptcy face federal quandary

The Supreme Court has placed a time bomb, set for Christmas Eve, inside the nation's bankruptcy courts. And unless Congress can figure out how to disengage it, companies filing for bankruptcy will be running scared.

Dec. 24 is the deadline for Congress to resolve a thorny issue, one that has eluded legislators for 80 years: How much power should a bankruptcy judge have?

A Supreme Court decision in the case of Northern Pipeline Construction Company v. Marathon Pipe Line Company threw the issue into the hands of Congress June 28 by limiting the powers of bankruptcy judges. The court gave Congress an Oct. 4 deadline to legislate bankruptcy court powers, but when Congress failed to meet it, extended it to Dec. 24.

Many observers doubt Congress will meet even this later deadline, because, in the words of Jeffrey Canard, a lawyer with Leva, Hawes, Symington, Martin & Oppenheimer, it ''nonchalantly'' missed the first deadline.

If Congress does not resolve the issue, faltering companies may find their net worth being drained in a years-long delay. They could have difficulty retaining employees and adequate supplies. The problem is especially acute for companies filing for reorganization under Chapter 11 of the Bankruptcy Act. Reorganization gives a company a temporary respite from its creditors and allows it to continue business. In contrast, straight bankruptcy liquidates the company's assets and distributes them to its creditors. Between June 30, 1981 and June 30, 1982, 56,423 companies filed for bankruptcy, according to the Administrative Office of the US Courts.

If Christmas Day arrives and bankruptcy courts are still in limbo, the Judicial Conference's ''proposed local rule'' goes into effect, decreasing their current powers. Under that system, a bankruptcy suit with a related common law case, such as a breach-of-contract suit, must make its way through the following labyrinth: The bankruptcy judge schedules the hearing, tries the case, makes his findings and conclusions, and presents the transcript to all parties, giving debtor and creditors 10 days to object. Because of the common law suit, the case is then rescheduled in federal district court and retried there. At the conclusion of that second trial, the plan for reorganization can be embarked upon.

''A case would take two to three times as long to dispose of,'' Vern Countryman, a professor at Harvard Law School, estimates. Currently, a typical reorganization case takes between two and four years. ''By that time the company would have dangled there'' until it folded, he said.

For the company to have a fighting chance for reorganization, it requires that the judge rule within 48 hours that it can use its assets to pay the most pressing bills, such as payroll, before its creditors.

''If a company can't pay payroll, it has to shut its doors,'' says Richard Levin a lawyer at Stutman, Treister & Glatt, a law firm specializing in bankruptcy cases.''And once a company has shut its doors for a couple of days, it's out of business. Customers go elsewhere.''

Creditors would lose out, too, says Alan Parker, chief counsel of the Senate Judiciary Committee. ''It could be years before (the creditors) get their money. And if a company is dissipated in the process, there will be no company to get money from.''

Some experts contend that law fees would double, because companies would file their cases in both the district court and the bankruptcy court, to play it safe. And those fees can be hefty. For example, in the Westgate California Company case, which took six years, the lawyers received between $6 million and

Although most cases would not require such sums, says Mr. Levin, a heavily contested case could easily cost in the millions of dollars. Multiply by two, and a bankrupt company could have an even more serious law bill on its hands.

If Congress does try to meet its deadline, it has basically two alternatives. It could elevate bankruptcy judges to Article III status, on a par with federal district court judges, so they could hear any case. Or it could try to ink in the line between what a bankruptcy judge may hear and what he must refer to the district courts.

Currently, bankruptcy courts are adjuncts of federal district courts. Under Article III of the Constitution, which concerns the judiciary system, federal court judges receive life tenure and cannot have their salary reduced by Congress. But a bankruptcy judge's 14-year term is only one year shy of the average 15-year tenure of an Article III judge. His salary is about $12,000 less than that of his Article III counterpart - $58,500, compared with $70,300. The real gap, and the major point of contention, is in prestige.

Bankruptcy judges - who are usually former bankruptcy lawyers - typically do not have the academic credentials or acclaimed judicial record that Article III judges have. Furthermore, say those opposing a move to jump them to Article III status, if the number of bankruptcies drops as a recovery progresses, the country would have an extra 241 tenured, highly paid judges on its hands.

The other alternative - defining what is and is not in a bankruptcy judge's jurisdiction by Dec. 24 - is even trickier. Mr. Parker, with the Judicial Committee, commented: ''It took us 10 years to make the changes in the bankruptcy code in 1978 (which increased bankruptcy judges' powers). The changes facing Congress are probably the most far-reaching changes ever asked for.'' Dec. 24 is not far away, he adds.

Professor Countryman wonders about the ability of already overloaded federal district judges to take on even more bankruptcy-related cases. ''I don't think they'd get much of anything settled unless they rubber-stamp whatever their bankruptcy judges recommend. And I'm sure that's not the kind of judicial system Congress wants to establish.''

In the last five years, the number of federal district court cases commenced has increased 39 percent to 238,875, according to the Administrative Office of the US Courts.

To compensate, 117 more Article III judges have been appointed. In the same period, the amount of bankruptcy petitions has risen by 72 percent, from 214,399 to 367,866; today, an estimated 650,000 cases are pending. Two judges have been added to the bankruptcy ranks.