In re ALASKA CENTRAL EXPRESS, INC.,

Debtor(s)

Case No. A02-00054-HAR

In Chapter 11

ALASKA CENTRAL EXPRESS, INC.,

Plaintiff(s)

THE UNITED STATES OF AMERICA,

Defendants(s)

ADV PROC NO A02-90012-HAR

REPORT AND RECOMMENDATION FOR WITHDRAWAL OF THE REFERENCE [28 USC � 157(d) and LRB 5011-1]

1. RECOMMENDATION TO WITHDRAW REFERENCE- The bankruptcy court recommends that the district court withdraw its referral of this adversary proceeding to the bankruptcy court pursuant to the mandatory withdrawal provisions of 28 USC � 157(d) because the resolution of the proceeding involves the consideration of substantial and material issues of both

• federal statutes and regulations regulating organizations (the Postal Service and the Department of Transportation) and activities affecting interstate commerce (i.e., the delivery of &"nonpriority mainline bypass mail" and the regulation of air carriers), and

The principal issue in the main case and this adversary proceeding is the determination of whether the debtor is qualified as an air carrier to deliver nonpriority mainline bypass mail in Alaska under the terms of a federal statutory modification in 1995 governing this activity ²

. This is primarily a nonbankruptcy issue of substantial importance in this case, and the main statute in question, 39 USC � 5402(g)(1)(D), has never been judicially interpreted, making this adversary proceeding a prime candidate for mandatory withdrawal of the reference. Congress intended that such issues be determined by an Article III court upon timely request of an interested party.

2. PROCEDURAL BACKGROUND- This is an adversary proceeding brought by the debtor, ACE, against the United States Postal Service (USPS). The USPS moved to withdraw the reference on both mandatory and permissive grounds. ³

Its motion is supported by proposed intervenors, Northern Air Cargo and others. ⁴

ACE opposes the withdrawal. ⁵

All bankruptcy cases and proceedings filed in Alaska have been referred by the district

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court to the bankruptcy court by a general order of the district court ⁶

In the District of Alaska, a motion to withdraw the reference of a bankruptcy case or proceeding is first heard by the bankruptcy court which files a report and recommendation to the district court under the procedures set out in the local bankruptcy rules. ⁷

A hearing was held in the bankruptcy court on the USPS’s motion on April 17, 2002, and, after argument, the bankruptcy court advised the parties that it would recommend mandatory withdrawal of the reference and issue this report and recommendation to the district court.

3. FACTUAL BACKGROUND- ⁸

ACE is an Alaska air carrier whose principal business is delivery of mail tendered to it by the USPS under what is known as the bypass mail program. The program is unique to Alaska. Under it, mail for delivery to larger and smaller bush communities is packaged and delivered to qualified air carriers for delivery directly to bush locations, bypassing certain post offices that normally would handle the mail. Some aspects of the program are regulated by the Department of Transportation (DOT) and others by the USPS. The DOT establishes the rates to be paid to the carriers, ⁹

but the USPS pays the carriers.

The rates payable to carriers for deliver of bypass mail on mainline routes, such as between Anchorage and Bethel, Alaska, is at the "mainline rate," which is less per unit than

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the rate for delivery of the mail to the smaller, outlying bush communities. The mainline rate is generally for use of aircraft having a maximum gross payload of over 7,500 pounds. The bypass nonpriority mail rate to the smaller bush communities (generally serviced by smaller aircraft) is at the "bush rate," which is higher than the mainline rate.

A carrier qualified for delivery to the nonpriority bypass mail under the bush rate could, under prior law, agree to accept the lower mainline rate and be entitled "equitable tender" of a share of the mainline mail on a given route. For example, if there were two air carriers qualified for delivery of nonpriority bypass mail on a mainline route, a third, bush air carrier, otherwise qualified for receipt of the bush rate, could voluntarily agree to accept the lower mainline rate and thus be entitled to one-third of the mainline mail on the route.

The non-priority bypass mail program in Alaska is a substantial money-loser for the USPS.

ACE qualified as a federally certificated air carrier for carriage of nonpriority bypass mail at the bush rate, and from 1990 through 2001 elected to received a share of the mainline mail on certain routes at the lower mainline rate. It was in competition with Northern Air Cargo and other mainline carriers that flew the larger planes on these mainline routes.

In 1995, 39 USC � 5402(g) (which relates to bypass mail in Alaska), was amended to change subsection (1)(D). Sec. 5402(g) now reads (underlined for emphasis):

(g) (1) The Postal Service, in selecting carriers of non-priority bypass mail to any point served by more than one carrier in the State of Alaska, shall, at a minimum, require that any such carrier shall -

(A) hold a certificate of public convenience and necessity issued under section 41102(a) of title 49;

(D) have provided scheduled service within the State of Alaska for at least 12 consecutive months with aircraft-

(i) up to 7,500 pounds payload capacity before being selected as a carrier of nonpriority bypass mail at an applicable intra-Alaska bush service mail rate; and

(ii) over 7,500 pounds payload capacity before being selected as a carrier of nonpriority bypass mail at the intra-Alaska mainline service mail rate.

In the original, 1988, version of 39 USC � 5402(g)(1)(D), it provided only that the carrier have "provided scheduled service within the State of Alaska for at least 12 months before being selected as a carrier of non-priority bypass mail."

ACE alleges that it is qualified to carry nonpriority mainline bypass mail both because it literally qualified under the 1995 amendment and because it is grandfathered by the 1995 statute amending the law. ¹⁰

It also argues that the change in the qualifications of a mainline

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carrier did not per se debar a qualified bush carrier from voluntarily agreeing to accept the lower mainline rate in exchange for the equitable tender of a portion of the nonpriority bypass mail on a mainline route.

With respect to its claim of grandfather status, ACE argues that a literal reading of the enabling statute, that it only applies to air carriers with "pending" applications on the effective date, leads to a ridiculous result: grandfathering a carrier with a pending application, but not one whose application had been previously approved and who was actually engaged in carrying nonpriority mainline bypass mail on the effective date of the 1995 amendment. ACE argues that a reasonable interpretation of the enabling section (i.e., one interpreting it to apply to carriers whose applications had already been approved on the effective date) protects it with grandfather status.

The ACE claim that it literally qualified under the 1995 amendment is based on the fact that it had one aircraft which had a payload capacity of over 7,500 pounds, although it was purposely certificated by ACE to only carry up to 7,500 pounds. ¹¹

For a period after the 1995 amendment was enacted, the USPS treated ACE as qualified for the equitable tender of nonpriority mainline bypass mail, but in the year 2001 it advised ACE that it had reconsidered its position after receiving a protest by Northern Air Cargo. After considering input from ACE and the protestor(s), the USPS determined that ACE did not qualify and that it would terminate the tender of nonpriority mainline bypass mail to ACE in June 2001.

Before the termination occured, ACE filed suit in the Court of Federal Claims to stop the USPS termination, raising many of the arguments that it raises in the current adversary

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proceeding. The Federal Court of Claims did not reach the merits of the dispute, but dismissed on jurisdictional grounds in October 2001. ¹²

The court denied an injunction pending appeal in December 2001. ¹³

The Federal Circuit also denied an injunction on January 15, 2002, and ACE filed a chapter 11 bankruptcy petition in Alaska on January19, 2002.

ACE contends that a cancellation of its nonpriority mainline bypass mail authority would decimate its business and that filing the bankruptcy was the only reasonable way to protect itself.

Judge MacDonald denied the USPS's motion the main case for a determination that the automatic stay does not apply and ordered that the stay remain in effect. Thus, the USPS does not currently have authority to cease tendering nonpriority mainline bypass mail to ACE. ¹⁴

The USPS has appealed that ruling, electing that the appeal to be heard by the district court. ¹⁵

ACE has a pending motion to amend the complaint, ¹⁶

which is opposed by the USPS. ¹⁷

Northern Air Cargo and others have a pending motion to intervene, ¹⁸

which has been opposed by ACE. ¹⁹

The complaint in this adversary proceeding contains six counts. ²⁰

After setting out facts similar to those in this report and recommendation, and citing many federal statutes, regulations and procedures involving interstate commerce as it relates to the delivery of mail or the regulation of the operation of aircraft, the complaint asks for the following relief:

• First Claim for Relief (Violation of 11 U.S.C. � 362(a)) - ACE seeks to have the USPS enjoined from unilaterally cutting off the tender of bypass mail to it in violation of the automatic stay in bankruptcy.

• Second Claim for Relief (Violation of 39 U.S.C. � 5402(g)(1)(D)- ACE alleges that, although it meets the experience and fitness requirements of the applicable statutes, including 39 USC � 5402(g)(1)(D), or, alternatively, is exempted under grandfather rights from the current version of � 5402(g)(1)(D), the USPS is illegally trying to terminate its share of nonpriority mainline bypass mail.

• Third Claim for Relief (Estoppel)- ACE alleges that, in reliance on the USPS or DOT’s assurance that it was in compliance after the 1995 amendment, it expended substantial sums to engage in business. It argues that the USPS should be estopped from now denying that ACE was in compliance with the statutory requirements and terminating its “contractual” relationship with the USPS.

• Fourth Claim for Relief (Violation of Statutes and Regulations for Equitable Distribution of Mail Business)- ACE alleges that the USPS denial of its equitable share of bypass mail violates USPS and DOT statutes, regulations, and orders. ACE claims that under the current statutes, as a bush carrier, it is still entitled to an equitable share of the mainline mail, subject to it accepting the lower mainline rate.

• Fifth Claim for Relief (Breach of Contract)- ACE alleges a contractual relationship with USPS that cannot be unilaterally terminated under existing law.

• Sixth Claim for Relief (Violation of Substantive Due Process)- ACE alleges a private property right pursuant to its compliance with 39 USC � 5402(g)(1)(D)(ii) (the subsection requiring that aircraft be over 7,500 pounds payload capacity) which cannot be taken in violation of the Due Process Clause of the Fifth Amendment. ACE argues that the USPS cessation would be an arbitrary act and a substantive due process violation.

The principal statute at issue, 39 USC � 5402(g)(1)(D), has not been interpreted by

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any court, although it was discussed in passing in the first Federal Court of Claims opinion. ²¹

4. LEGAL ANALYSIS- The statute regarding withdrawal of the reference, 28 USC � 157(d) provides:

The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title and other laws of the United States regulating organizations or activities affecting interstate commerce. (mandatory withdrawal provisions emphasized)

ACE does not contest that the USPS’s motion is timely. Though the USPS moved on the alternative grounds – mandatory or permissive – that the reference be withdrawn, this recommendation is based only on the mandatory withdrawal provision which seems clearly applicable. Consideration of the standards for permissive withdrawal is unnecessary.

The courts universally have read the mandatory withdrawal of reference statute narrowly. Although � 157(d) does not literally require it, virtually ever case that has considered mandatory withdrawal of the reference has held that the nonbankruptcy federal issues involving interstate commerce must be “substantial and material,” ²²

or something of similar import. ²³

So, not every case involving federal law involving interstate commerce should be withdrawn, only those where the federal nonbankruptcy issues involving interstate commerce are substantial and material to the resolution. Applying facts to settled or noncontroversial

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federal law, even if the law involves interstate commerce, is generally not enough to warrant mandatory withdrawal of the reference. ²⁴

Occasionally, courts have also held the law must be unsettled or present novel issues to warrant a mandatory withdrawal. ²⁵

While the touchstone for the interpretation of bankruptcy statutes is to apply the plain meaning of a statute without reference to legislative history where the meaning is discernable from the text, ²⁶

few case have been troubled by interpretations that have “improved” the way � 157(d) works in relation to mandatory withdrawal of the reference by adding the “substantial and material” requirement, or something like it. Without such a practical restriction, which is supported by the legislative history, ²⁷

many matters suitable for determination by a bankruptcy court would be unnecessarily transferred to the district court. As the court said, in the leading In re White Motors Corp. case: ²⁸

Section 157(d) must therefore be read to require withdrawal not simply whenever non-Code federal statutes will be considered but rather only when such consideration is necessary for the resolution of a case or proceeding. The preceding analysis of legislative history and the Code's structure demonstrates the importance of the observations during the House debate that � 157(d) was not intended to become "an escape hatch through which most bankruptcy matters will be removed to the district court", and in the Senate debate that district courts "should not allow a party to use this provision to require withdrawal where such laws are not material to the resolution of the proceeding." Consequently, in light of the congressional goal of having expert bankruptcy judges determine complex Code matters to the greatest extent possible, PBGC's motion to withdraw reference should be granted only if the current proceedings before the Bankruptcy Court cannot be resolved

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without substantial and material consideration of ERISA and IRC provisions.

One area of divergence in the courts is whether a movant must to show that there are substantial and material issues of both bankruptcy law and non-bankruptcy law affecting interstate commerce involved. Although the statute literally states that both are required, the requirement of a substantial bankruptcy issue is an anomaly. It makes no sense to allow, as ACE argues, the withdrawal of the reference where there is both substantial bankruptcy and non-bankruptcy issues, but not where the bankruptcy issues are minor or nonexistent. The latter presents a stronger case for a district court’s expertise since the bankruptcy court’s specialized expertise would not even be needed. ²⁹

As a result of this incongruity, a majority of the district courts have determined that there must only be shown a substantial and material question of nonbankruptcy law involving interstate commerce. ³⁰

Of the district courts in the Ninth Circuit that have discussed the issue, two would require only a material nonbankruptcy law issue be present, ³¹

while one holds that both substantial bankruptcy and nonbankruptcy issues must be shown ³²

(but, its only authority was the Security Farms case ³³

discussed in the next paragraph; Security Farms does not support the district court’s contention that both bankruptcy and nonbankruptcy issues must be present).

There is relatively little circuit level case law interpreting the mandatory withdrawal of the reference provision in depth. In the Ninth Circuit, the court in Security Farms, ³⁴

said in dicta that � 157(d) “mandates withdrawal in cases requiring material consideration of nonbankruptcy law,” without alluding a requirement that there also must be bankruptcy law issues. But, the case was not decided on mandatory withdrawal grounds. ³⁵

Likewise in Vicars Insurance Agency, the presence of bankruptcy law issues was conceded so the court made no ruling about whether a substantial bankruptcy issue was a condition to withdrawing the reference. ³⁶

In this adversary proceeding, the court need not choose between the competing theories since there are sufficient bankruptcy issues involved to comply with the more restrictive requirement that there be both substantial nonbankruptcy federal law involving interstate commerce and bankruptcy issues.

There are substantial and material issues of federal nonbankruptcy law involving organizations (ACE, the USPS, and the DOT) and activities (the regulation of the mail and air carriers) affecting interstate commerce to be resolved, some of which have not been previously addressed by any court. These include:

• the application of federal statutes and regulations involving bypass mail and air carriers, including 39 USC � 5402(g)(1)(D), to the facts of this proceeding;

• the interpretation of the grandfather provision of the 1995 statute and whether ACE meets the requirements for grandfather treatment; ³⁷

• whether the aircraft which could have been certified as over 7,500 pounds, but was not, nonetheless qualified ACE as complying with 39 USC � 5402(g)(1)(D)(ii) (requiring consideration of both DOT and USPS law);

• whether ACE, as a bush carrier, still qualifies to carry mainline nonpriorty bypass mail (i.e., notwithstanding the 1995 amendment, can the law still be interpreted to allow a bush carrier to opt for carrying mainline mail at the lower rate); and,

• whether the prior opinion of DOT agents regarding ACE’s compliance with the bypass mail statute is binding in some manner on the USPS.

In its complaint, ACE raises bankruptcy law issues, such as violation of the automatic stay. Also, there is an issue regarding the jurisdiction of the court to hear what would normally be a Tucker Act ³⁸

matter, though the Ninth Circuit Bankruptcy Appellate Panel has indicated the bankruptcy law trumps the Tucker Act. ³⁹

The USPS also makes a substantial argument about whether the rights of ACE to carry bypass mail are contractual rights worthy of protection as property of the bankruptcy estate, ⁴⁰

a bankruptcy issue, disagreeing with some of the conclusions of the Court of Federal Claims. ⁴¹

While withdrawal of the reference may sometimes be delayed so the case can be worked up in the bankruptcy court for ultimate trial in the district court, ⁴²

such a procedure makes no sense in this case. The material facts in this case are substantially uncontested. The issues will probably be resolved by summary judgment. Any interim or recommended ruling by the bankruptcy court would certainly be appealed or contested, so having the matter one

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rung up the judicial ladder and in the hands of the district court makes sense as a matter of judicial economy.

ACE argues that the bankruptcy court has invested time in this proceeding and starting a new learning curve in the district court is not an effective use of court time. If withdrawal of the reference is mandatory, this does not seem to be a valid consideration. The issues are relatively concise and the facts largely uncontested. It is better that they be addressed by the district court forthwith.

5. CONCLUSION- I recommend to the district court rule that mandatory withdrawal of the reference applies. This proceeding should be before the district court.

If it does withdraw the reference, the district court should note that there are two pending motions: (a) a motion by Northern Air Cargo and others to intervene, and (b) a motion of ACE to amend its complaint. Given my recommendation, I deferred ruling on these in deference to the district court.

One unusual aspect of the bankruptcy is that ACE is not in dire financial condition. Its business of delivering nonpriority mainline bypass mail is very profitable. The USPS, on the other hand, may seek an expedited hearing of the matter due to its federal budgetary concerns. Likewise, Northern Air Cargo indicates it is losing money due to ACE’s continued, illegal in its view, operations. It too will probably seek an expedited relief.

3. United States' Motion to Withdraw the Reference and Memorandum in Support, Docket Entry 20, filed March 1, 2002, and United States' Reply to Plaintiff's Opposition to the United States' Motion to Withdraw the Reference, Docket Entry 37, filed April 2, 2002.

4. Memorandum in Support of the United States' Motion to Withdraw Adversary Proceeding, Docket Entry 22, filed March 8, 2002, and Memorandum in Support of the United States' Motion to Withdraw Adversary Proceeding, Docket Entry 35, filed March 29, 2002, filed by Northern Air Cargo, Inc., Lynden Air Cargo, LLC, and Tatonduk Outfitters, Ltd.

5. Alaska Central's Opposition to United States' Motion to Withdraw the Reference, Docket Entry 28, filed March 22, 2002.

6. Order on July 20, 1984, at Miscellaneous General Orders Page 459 in the United States District Court for the District of Alaska; 28 USC � 157(a).

8. This simplified factual presentation is taken from the factual backgrounds set out in the motion and opposition identified in footnotes 3 and 5 as well as other uncontested facts from papers in the adversary proceeding and main case, and the undisputed facts set out in a Court of Federal Claims case between the same parties, Alaska Central Express, Inc. v United States, 50 FedCl 510 (2001).

9. Alaska Central Express, Inc. v United States, 50 FedCl at 513, citing 49 USC � 41901(b) (1994) and 39 USC � 5402(f) (1994 & Supp V 1999).

10. See, 39 USC � 5402 (2000 Cumulative Annual Pocket Part at page 128, under "Effective Date of 1995 Amendments"); Pub L 104-52 Section 631(b); 109 Statutes at Large 505.

11. See, United States' Motion to Withdraw the Reference and Memorandum in Support, page 3 and fn 4, Docket Entry 20, filed March 1, 2002.

14. Order Granting The Debtor's Motion To Declare Automatic Stay Applicable, And Denying The United States' Motion For Determination Of Inapplicability of Automatic Stay, Main Case Docket Entry 65, filed February 19, 2002.

16. ACE's motion to file an amended complaint is at Docket Entry 26, filed March 19, 2002; the reply at Docket Entry 41, filed on April 12, 2002; and, a supplemental brief is at Docket 44, filed on April 15, 200.

18. The Northern Air Cargo and others motion to intervene and memorandum are at Docket Entries 18 and 19, filed on February 28, 2002. Their reply is at Docket Entry 34, filed on March 29, 2002.

19. ACE's opposition to intervention is at Docket Entry 25, filed March 19, 2002.

22. In the Matter of Vicars Ins. Agency, Inc., 96 F3d 949, 952 (7th Cir 1996)

23. See, In the Matter of Vicars Ins. Agency, Inc., 96 F3d at 952-53, for some of the variations.

24. In re White Motor Corp., 42 BR 693, 704 (ND Ohio 1984); In the Matter of Vicars Ins. Agency, Inc., 96 F3d at 952.

26. United States v Ron Pair Enterprises, Inc., 489 US 235, 242, 109 SCt 1026, 1031 (1989).

29. In the Matter of Vicars Ins. Agency, Inc., 96 F3d at 953 (in dicta, the court called such a reading "anomalus."),

30. Norton Bankruptcy Law and Practice 2d, �8:2, MANDATORY WITHDRAWAL OF THE REFERENCE (WestLaw version, current as of Feb 2002)

31. In re Rannd Resources, Inc., 175 BR 393, 395 (D Nev 1994); United States v One Parcel of Real Estate, 137 BR 802, 806 (D Ore 1992)

33. Security Farms v Int'l Brotherhood of Teamsters (In re International Brotherhood of Teamsters, Warehousemen and Helpers, Union Local 890), 124 F3d 999, 1008 (9th Cir 1997).

34. Security Farms v Int'l Brotherhood of Teamsters (In re International Brotherhood of Teamsters, Warehousemen and Helpers, Union Local 890), 124 F3d at 1008.

36. In the Matter of Vicars Ins. Agency, Inc., 96 F3d 949, 952 (7th Cir 1996)

37. ACE cites as authority for its grandfather argument, 39 USC � 5402 (2000 Cumulative Annual Pocket Part at page 128, under "Effective Date of 1995 Amendments"); Pub L 104-52 Section 631(b); 109 Statutes at Large 505.

39. Town & Country Home Nursing Services, Inc. v Blue Cross of California (In re Town & Country Home Nursing Services, Inc.), 112 BR 329, 335 (9th Cir BAP 1990). See, also, In re Casey Corp., 46 BR 473, 476 (Bankr SD Ind 1985).

40. 11 USC � 541; United States' Reply to Plaintiff's Opposition to the United States' Motion to Withdraw the Reference, at pages 4-6, Docket Entry 37, filed April 2, 2002.